Investors are facing a decade of lower growth and subdued returns from traditional asset classes while alternatives are set for a time in the sun, according to the latest Northern Trust long-range outlook.
“We forecast a 2.4% real annualized growth rate for the global economy over the next 10 years, an underwhelming expansion relative to the prior decade,” the Northern Trust paper says. “We project most regions will undershoot prior 10-year growth levels as the forces impeding growth are mostly global.”
The downbeat economic conditions will also spill over into “lower but decent” returns for equities in the coming decade, the report says, with developed markets outperforming emerging countries by a whisker.
Northern Trust expects global developed share market returns to average 6.3 per cent annualised during the next 10 years, down from 10.1 per cent for the previous decade. The analysis identifies Australian equities (7.2 per cent per annum) as the developed high-flyer over the decade followed by Canada (6.9 per cent), the UK (6.8 per cent) and the US (6.3 per cent).
Emerging market shares should offer returns of 5.9 per cent per year over the same period, the study says.
However, just about all of the equity market performance will come via “revenue growth and dividends” rather than capital appreciation, according to Northern Trust, while the premiums over cash “mask a less acceptable return”.
Improved bond returns will also come on the back of higher yields instead of capital growth as interest rates remain “elevated” in the decade ahead.
Meanwhile, investors can look forward to better risk-adjusted returns from real assets, private markets and other alternatives, the report says.
“We think private investments will continue to provide attractive return premiums over public markets, benefiting more recently from increased liquidity options,” the Northern Trust paper says, with the caveat that investors will have to choose alternative assets with greater care.
“High return dispersion across both private investments and hedge funds requires effective manager selection and due diligence processes.”
Northern Trust also highlights a number of themes likely to play out over the following 10 years including entrenched higher inflation (de facto reflected in central bank concessions), a ‘green transition’ and ongoing global political tension.
“Even seemingly stable geopolitical tectonics could shift abruptly – and should be factored into risk-asset valuations,” the report says.
The US-based financial services mega-firm, Northern Trust, held about US$1.4 trillion in assets under management as at the end of June.