6 Economic Predictions for the Next 5 Years: Northern Trust

3. Monetary Drought

The post-financial crisis “monetary flood,” marked by exceedingly low interest rates, has stopped and much drier financial conditions may dominate in the next five years, according to Northern Trust. Investors will have to adjust for higher interest rates and no longer should count on central banks to rescue the economy.

With new inflation forecasts, the period of “ultra-accommodative” central bank policy is over, Shipley said.

A higher-interest-rate period has implications for investors as well as the economy, he noted. It affects the price-to-earnings ratio investors are willing to pay for stocks, and higher rates mean equities aren’t the only game in town, with fixed income becoming a more viable asset class for positive returns.

4. Regional Building Blocs

Companies are working to bolster their economic and military security by reducing dependence on energy and technology imports, especially from adversary nations. Investors will decide whether or how best to “deglobalize” their portfolios accordingly, the firm said.

Companies may be reluctant to make significant, long-term investments in China, for example, if it will become a strategic problem, Shipley said. So companies and investors may start to position themselves for a potential Chinese conflict in Taiwan, he added.

5. Green Transition Still a Go

The transition to renewable energy may be delayed by Russia’s energy battle with Europe, which has spurred a search for other supplies. High fossil fuel prices and the focus on national energy security, however, creates potential investment opportunities for green energy, according to the firm.

6. Not So Negative

Higher interest rates “bring investors closer to positive real after-inflation cash returns,” Northern Trust said, citing also a move from negative interest rates in Europe and Japan. “This is good for economic functioning and savers but a risk for other investment returns.”

Assets Forecast

The firm’s forecast for below-average equity returns in the next five years and above-average cash “does narrow that gap (and) has implications for how to think about asset classes in a diversified portfolio,” Shipley said.

The firm projects 6.1% annualized global equities returns over the next five years compared with 8.3% in the previous five years.

The forecast includes 6.2% annualized equities growth in developed markets in the next five years compared with 8.8% in the previous five.

Emerging market equities, in contrast, should see slightly higher returns than in the previous five years: 5.8% annualized over the next five years versus 4.7% in the previous half decade, potentially benefiting from higher revenue.

Northern Trust forecasts 6% annualized returns for U.S. stocks over the next five years compared with more than 11% annualized for June 2017 through June 2022.

The firm sees modest fixed income performance compared with long-term standards, with higher yields nonetheless helping bonds rebound from historically high losses. Flat global yield curves, however, will probably mean dependence on coupon payments rather than price appreciation, the firm said.

Among U.S. fixed income securities, Northern Trust forecasts 3.7% annualized returns for investment-grade bonds, 7.4% returns for high-yield bonds and 3.2% for municipal debt, all higher than returns in the previous five years.

Meanwhile, inflation-sensitive real assets play an increasingly important role in diversified portfolios, the firm said. While all real assets should perform well over the next five years, natural resources are particularly attractive because of surging commodity prices, according to Northern Trust.