Northern Trust Forecasts Slow Economic Growth and Moderating Inflation Over the Next 10 Years

Northern Trust's Capital Market Assumptions (CMA) Report, an annual report of long-term average annualized return expectations for a wide range of asset classes, forecasts below-trend global growth at an annualized rate of 2.4% over the next 10 years, moderating developed-market inflation of 2.4%, and a lower global equity return of 6.3% a year on average.

Rooted in the firm's deep capital market analysis, the CMA Report informs the investment decisions and asset allocation recommendations made by Northern Trust, which as of June 30, 2023, had US$1.4 trillion in assets under management. Forecasts are created with a "forward-looking, historically aware" approach, analyzing the past drivers of returns across asset classes and developing investment themes that inform how those return drivers may evolve in the future.

For fixed income, Northern Trust expects higher yields to improve returns while defaults remain near the long-term average. The report forecasts global high yield bonds to return 7.2% annualized over the next 10 years, compared to 3.5% during the last 10 years. The global investment grade bond return forecast is 3.7% annualized, up from 2.1% in the past decade.

For equities, elevated inflation will likely support solid sales growth but may also cause falling profit margins from higher input and financing costs, muddying the outlook. Northern Trust expects global equities to return 6.3% annualized over the next decade, down from 10.4% in the previous decade. In developed markets, the report forecasts the highest annualized returns from Australia (7.2%) and Canada (6.9%) and the lowest returns from Japan and Europe, both at 6%. The forecast for emerging markets is 5.9% annualized, down from 6.1% in the past 10 years as China's economy struggles.

"While we expect the strong market momentum to continue in the short-term, we see headwinds on the horizon," said Northern Trust Asset Management Global Chief Investment Officer Angelo Manioudakis. "Over the next 10 years, we think certain factors ? including increased geopolitical risk, elevated debt levels with higher financing costs and demographic shifts in most of the developed world ? will constrain long-term growth."

The report features Northern Trust's expectations for long-term asset class returns and informs the recommended strategic asset allocations for all Northern Trust managed portfolios and multi-asset class products.

The CMA Report's asset class forecasts are driven by six key themes that Northern Trust investment experts see affecting markets and the economy over the next 10 years:

• Growth Restraints: Costly investments for regionalization and climate change may handcuff economic growth ? and investment returns ? already restrained by high government debt and aging populations. Artificial intelligence may unshackle growth but needs large investments (and time) before it can support the global economy.
  
  "We expect to see a transition over the next 10 years from recent economic disruptions to longer-term structural restraints on growth," said Chris Shipley, Northern Trust Asset Management Chief Investment Strategist for North America. "Admittedly, our global growth forecast averaging 2.4% a year seems anemic relative to the previous decade. Rapidly advancing technologies like AI could contribute to growth, but probably not be enough to overcome increasingly difficult economic challenges."
   
• Geopolitical Fault Lines: The deepening U.S.-China strategic rivalry has elevated global political risks, enough to alter fundamentals for investors. Even historically stable political dynamics could shift abruptly and impact equity valuations.
   
• Inflation Adaptation: While we expect global economic growth to backtrack, inflation should persist. Tight labor markets, regionalization and higher commodity prices will likely more than offset technology's disinflationary promise. Investors, consumers and policymakers must adapt.
   
• Central Bank Concessions: New, more permanent inflationary forces complicate central banks' abilities to reach their objectives. Over time, we think central banks will ultimately concede inflation modestly higher than their targets rather than create undue economic harm.
  
  "We believe central bank rates are close to peaking and will start to decline in 2024, but the developed-market annualized rate of inflation will likely remain above their 2% targets for the next 10 years," said Wouter Sturkenboom, Northern Trust Asset Management's Chief Investment Strategist for Europe, Middle East, Africa, and Asia-Pacific regions. "We anticipate an environment in which investors and central banks will have to adapt to prices settling slightly above target levels. We forecast annualized inflation at 2.2% in Europe, lower than our forecast of 2.6% for the U.S. We anticipate more downside risk to prices in Europe given more direct exposure to China, where we expect inflation to be softer at 2.2% because of a soft economic growth outlook."
   
• A Sustainable Green Transition: Countries want to cut emissions and improve energy security, so the green energy transition is still a go. But it requires vast amounts of financing and natural resources. Investors must navigate environmental and economic priorities.
   
• Private Matters: Private markets continue to grow, backed by improving liquidity supported by strengthening market infrastructure. Private investments are primed to play an increasingly important role in the economy and investors' portfolios.

The full report, which outlines the firm's long-term asset class return expectations and forecasts for the next 10 years, is available at CapitalMarketAssumptions.com.

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The information contained herein is for use with current or prospective clients of Northern Trust Investments, Inc. and not for distribution. The information is not for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTI and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. While this information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of NTI and are subject to change without notice.

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Forward-looking statements and assumptions are NTAM's current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

Capital Market Assumption (CMA) model expected returns do not show actual performance. CMA model expected returns are based on IPC Forecasted Returns and reflect Northern Trust's Investment Policy Committee's (IPC) forward-looking annual capital market assumptions. The Capital Market Assumptions Working Group (CMAWG), a subset of IPC members, publishes its assumptions as a white paper report. Forecasted returns are for average annual returns (geometric basis). Ten-year forecasts are developed annually; most recent forecasts released August 9, 2023. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment strategy. Model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only. References to expected returns are not promises or even estimates of actual returns an investor may achieve. The assumptions, views, techniques and estimates set out are provided for illustrative purposes only. Forecasts of financial market trends that are based on current market conditions constitute CMAWG judgment and are subject to change without notice. "Expected" or "alpha" return estimates are subject to uncertainty and error. The ability to achieve similar outcomes is subject to risk factors over which Northern Trust may have no or limited control.

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Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments in efforts to realize their long-term objectives. Entrusted with $1.1 trillion in assets under management as of June 30, 2023, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take ? in all market environments and any investment strategy. That's why we combine robust capital markets research, expert portfolio construction and comprehensive risk management in an effort to craft innovative and efficient solutions that seek to deliver targeted investment outcomes. As engaged contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect and transparency.

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