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      Capital Market Assumptions: 5-Year Outlook

      Chief Investment Strategist Jim McDonald gives an inside look into our new Capital Market Assumptions research, which identifies the key investment themes to watch and how they translate into asset class returns for the next five years.

      • Find out what to expect in the years ahead



      [MUSIC PLAYING] Each year, we undertake a comprehensive review of our 5-year outlook, culminating in investment themes and asset class forecasts that underpin our portfolio construction process. Following the remarkable gains of the past year with the pandemic recovery, we expect a reversion to subdued economic growth and market returns.

      Against this backdrop, six key themes have emerged. Let's explore three of those themes here. The first key theme is reversion to mediocrity. While the length of economic and financial market cycles vary, asset class returns have always reverted to their means. After a brief break, global economic growth also will revert to its longer-term mean.

      The US has seen most of its debt-fueled boost and will revert most quickly. Europe will revert to lower growth than the US, but it will take longer to get there, thanks to its delayed recovery and deployment of fiscal stimulus. Finally, China's secular growth story is nearing its final chapters as its labor force shrinks.

      Lower demand and continued automation will keep inflation low, a second key theme we're calling sticking to stuckflation. Pandemic created supply-demand imbalances and the resulting recent high inflation we've seen is testing this theme. However, we expect these to pass. Unless we see a truly coordinated policy response, future inflation will reflect the past decade more than the past year, supporting returns.

      Our third key theme is monetary activism. Central banks have expanded their missions. They have learned to leverage the funding they provide to target systemic risks to growth in inflation, such as climate change and income inequality. The European Central Bank is at the forefront of this change, with other banks following suit, as inflation fears subside. As a result, central banks will stay on the dovish side of market expectations.

      Here's how we see these themes translating into asset class returns. We expect low but positive returns over the next 5 years in fixed income as subdued yields stay steady and credit spreads remain tight. Longer dated and lower credit bonds look relatively attractive. Subdued global economic growth may mean that mediocre global equity returns lie ahead.

      Nowhere were valuations more elevated than the US. High US valuations are mostly justified but will still weigh on longer-term returns. We forecast the highest equity returns for the UK as it finds its post-Brexit bearings. China looks intriguing because recent regulatory scrutiny has depressed its valuations.

      Continued pressure on the supply of commodities will support natural resources returns. Demand for global real estate is lower than before the pandemic but is helped by favorable financing conditions. Listed infrastructures, higher yields, and historical downside protection properties make it attractive in a slow-growth environment. Private investments are providing attractive premiums to public market counterparts. However, private investments have a wide range of strategies and broad performance dispersion, so manager selection is extremely important.

      Our 5-year forecasts call for a 3.7% annualized return for a portfolio invested 60% global equities and 40% of US investment-grade bonds versus a realized 10.3% annual return over the last 5 years. The forecast beats inflation, but investors will need to revert their sights lower from the outsized gains during the recovery. To get our full set of forecasts and insights across asset classes, download our 5-year outlook at


      Jim McDonald

      Chief Investment Strategist
      Jim McDonald is an executive vice president and the chief investment strategist for Northern Trust. He is responsible for overseeing the strategic and tactical asset allocation policy for our institutional and wealth management clients globally.