(Pictured: Jim McDonald)
The five-year outlook for global capital markets, published By the Northern Trust group in Hong Kong early this morning (Monday) paints a reasonably benign picture for investors, but with expected changes in relative returns between asset classes and geographical markets.
The annual report from the fund management and securities servicing group, entitled “Enduring and Maturing Global Growth”, looks at key themes for the next five years based on assessments based on assessments from the firm’s “capital market assumptions working group”. This year, key themes are:
> The forecast for developed market equities has fallen to reflect the expansion in valuations over the previous 12 months; though both margins and valuations are expected to remain above longer-term averages, leading to annualized returns of 7.2 per cent.
> Emerging market equities will command a premium, with annualized returns of 9 per cent, however maturation reduces growth prospects.
> Fixed income returns will rise slightly for longer-dated bonds, as the markets price in higher long-term interest rates. Northern Trust’s forecasts for short-term rates set by central banks are lower than the market consensus. The continuing search for yield and low default rates will favor credit investments.
> Real assets provide protection against unanticipated inflation; global real estate and global listed infrastructure are the strongest asset classes.
> Private equity and hedge funds also play important roles in investor portfolios, with the potential to outperform public equities and provide diversified exposure, but manager selection is critical.
Jim McDonald, Northern Trust’s chief investment strategist, said: “The robust returns of recent years have reduced the valuation cushion in asset markets, but while nominal returns will likely lag historic averages, we see real returns of 4 to5 per cent for global stocks and 1 to 2 percent for global fixed income over the period… This means that bonds can continue to serve as an important diversifier and source of liquidity while equities and alternative investments provide capital appreciation potential.”
In another theme, the report says that emerging markets will become more of a value, rather than growth, play as the differences between and their specific profiles them become more pronounced.
View the full report.