Northern Trust: Moderate global returns expected amid slow global growth
Northern Trust 2020 Outlook favors risk assets; expects no recessions and warns not to count out the Fed
Northern Trust, a leading global asset manager with US $1.2 trillion in assets under management, believes moderation, not fear, will be rewarded in 2020. The firm is currently moderately overweight risk assets and particularly favors exposure to developed market equities and high yield bonds. This is driven by the fact that growth, inflation and monetary policy have moderated. “While growth will be slow, it will be good enough,” said Bob Browne, Northern Trust chief investment officer.
These views are expressed in the firm’s recently released 2020 Outlook. It builds on Northern Trust’s long-term Capital Market Assumptions report, a forward-looking, historically aware five-year forecast that guides the firm’s strategic asset allocation recommendations.
U.S. Equities Favored
The Northern Trust forecast predicts more moderate returns on equities (7.5% for U.S., 8.6% for developed ex-U.S) and bonds (3.7% for investment grade, 7.3% for high yield) after the strong market rally in 2019. While the forecast calls for greater returns from ex-U.S. equity markets – particularly Europe – the firm continues to favor the U.S., which it regards as less risky. This is in keeping with a fundamental investment tenet of Northern Trust: investors should get paid for the risks they take, in all asset classes and market environments.
This favorable view on equities and risk taking is further supported by the current return to earnings growth, which has been fueled by increased global demand, the result of reduced trade tensions and accommodative monetary policy. Browne warned, “Investors who believe that markets should automatically revert to the mean after a strong run should think back just six years, when following a 30% plus return by the S&P 500 in 2013, it returned more than 14% in 2014.”
Steady Bond Returns
Northern Trust expects global bond returns to remain steady based on its belief that interest rates will remain low and credit spreads will remain tight. And, in a view that sharply deviates from industry consensus, the firm believes that there it is fairly likely that the U.S. Federal Reserve will ease, even more than once. “It’s far too premature to have confidence that the Fed won’t cut,” said Browne.
In anticipation of strong demand and manageable default rates, Northern Trust is maintaining a tactical 5% overweight to high yield bonds (relative to long-term strategic asset allocation levels) within its global policy model portfolio. It is funding this overweight high yield position with a corresponding 5% underweight in investment grade bonds. This does not reflect a negative view on investment grade, but rather a belief that high yield is more attractive from a risk/reward perspective. The firm still believes that investment grade is the best risk asset for diversification in periods of market stress.
No Recession, No Yield Curve Inversion
“We expect low yields to keep central banks accommodative, as we believe it would be irresponsible for them to allow the yield curve to invert without either any real inflationary pressures or irrational exuberance on the part of investors,” said Browne. “In fact, we don’t foresee a U.S. recession at least for several years; a main reason why we expect the Fed will be forced into rate cuts in 2020, as they’ll want to avoid yield curve inversion. Amid these conditions, we recommend investors take on duration risk where appropriate.”
Positive Environment for Global Real Estate/Infrastructure
Outside of equities and bonds, Browne noted that the firm’s global policy model portfolio has a 5% overweight to global real estate/infrastructure because of the high income and diversified risk exposure they offer. “We are a bit more enthusiastic on global real estate, as we expect it to perform better in a moderately risk-on environment.”
“Ultimately, we believe 2020 will be another year of slow global growth – durable enough to avoid recession in EMEA and APAC, but disappointing to those looking for improvement,” said Wouter Sturkenboom, chief investment strategist for Europe, Middle East, Africa and Asia-Pacific at Northern Trust Asset Management. “Our outlook captures our recommendation of a moderate overweight to risk in an environment where growth, inflation, and monetary policy have been moderated. Whilst we expect muted returns, we still expect real returns sufficient to justify risk taking.”