6 Economic Predictions for the Next 5 Years: Northern Trust, 2021
The economy will likely bounce back this year, but 2021 and beyond is more uncertain, CIO Bob Browne tells ThinkAdvisor.
September 03, 2020 at 05:06 PM
6 minute read
Trust PlanningThe original version of this story was published on Law.com
In February, Northern Trust Chief Investment Officer Bob Browne told ThinkAdvisor that the coronavirus wouldn't be just a "blip" in the global market, and in fact, would have a major impact.
He was proven right as global markets crashed, companies shuttered, jobs disappeared and massive government stimulus packages were enacted.
Although the pandemic brought global economies to their knees, Browne does see at least the U.S. economy bouncing back for the rest of this year, largely due to government stimulus. It's 2021 and beyond we have to plan for, he says.
Here are the firm's six key capital market assumptions and outlook:
1. A Big Restructuring
Northern Trust predicts a "positive yet subdued growth environment," Browne says. The trillion-dollar stimulus pumped into the U.S. economy means growth should be fine for the rest of 2020, but going forward, he sees U.S. growth just under 2%, while globally it will be around 2.6%.
Due to the pandemic, companies will prioritize stability over profitability by rerouting supply chains, moving production inside their home countries and building healthier balance sheets.
That means the United States will have to cut its reliance on products from China, Browne says. But U.S. strength in technology and biotechnology should "shield" it from the downside this will cause.
Although many jobs are coming back due to reopening of businesses in parts of the country, "There'll be a restructuring of high unemployment for some period of time. Lots of jobs will be permanently destroyed," Browne says, such in the retail sector and tourism industry. "That means a cautious consumer and the experience of COVID-19 won't disappear too quickly."
2. Stuckflation Tested
Trillions of dollars of stimulus money has been pumped into the global economy, but because most of it was used to prop up people and businesses hurt by the pandemic, the threat of a money surge causing higher inflation is low. Further, central banks will allow "somewhat higher" inflation to make up for a decade of low inflation, Browne says.
For the next five years, the bank sees 2% inflation for the United States, 1.4% for Europe and 0.3% for Japan.
"I still believe that lower inflation, or even deflation, is a bigger risk for policymakers … maybe at some point bond investors will think they aren't getting compensated … but for now they're willing to accept negative real rates because they want stable income with principal stability in a world of uncertainty," Browne says.
2. Reimagining Capitalism
"The pandemic has not only altered economic growth trajectories, it also highlighted flaws in the capitalist economic system itself," the Northern Trust report states. Specifically, it has forced companies to focus more on stakeholders — employees, customers and community — than shareholders.
"But one societal aim — reducing inequality — has only gotten worse over the past 40 years," the report states, noting that today the top 1% of earners in the United States have 20.5% of pretax national income, up from roughly 11% in 1980.
But change is happening, Browne says, and every large company is "thinking about its obligations to create a more [diverse workforce], to invest back in the community, that we all have a stake in making sure society succeeds broadly, and it's not a 'winner take all' environment," which he doesn't see as politically or socially sustainable.
However, this change also means the "power dynamic for stakeholders shifts," Browne says, which hasn't "been appreciated by the market yet."
4. Massive Monetary Toolkit
The central banks have "proved to the markets they weren't out of ammunition, and began coordinating with the fiscal side," Browne says. "When you think about those $1,000 payments that were sent to the majority of American households, [it was] by the Fed, [which also] made a commitment to buy a limited amount of Treasuries. … That's a massive new tool."
Northern Trust sees U.S. inflation staying at or below 2% over the next five years, and "the de facto monetary-fiscal policy coordination will prevent exogenous shock-driven recessions from becoming depressions," the report states.
5. One World, Two Systems
The U.S. and China will have to learn to "live on the same planet with their opposing views on economic policy. Collaboration won't be absent, but won't be optimal either — leading to inefficiencies," the report states.
"Globalization is the biggest loser," Browne says. "Arguably the world benefited from bringing hundreds of millions of people out of poverty, but it did not lead to a relinquishing of power by the communist party. China is not going to become a South Korea [or] Taiwan. It's not going to go from a totalitarian state to a democracy. I think that was the hope and expectation of the establishment and they turned out to be wrong.
"…We're kind of at a standstill looking for areas where we can agree to cohabitate … we haven't figured out what that equilibrium is. But it will be suboptimal relative to what all thought was the operating model just a few years ago. It'll be more costly. It'll cause more volatility in the world. … China and the U.S. will cooperate where it makes sense for both sides. It's going to be a very transactional type of relationship going forward."
6. Stay Focused on Climate Risk
"[Sustainable] investing is on the top of minds for all investors and shareholders. And so this issue is not going to go away, but there will be winners and losers," Browne says.
Government will be forced to confront the challenge, according to the report, which adds that "even central banks are getting into the discussion. The European Central Bank has started to address how it will include climate risk in its monetary policy, viewing climate risk as integral to the economic outlook."
Notes Browne: "It doesn't take a lot of imagination to see the issues that drove it in Europe will eventually make its way into the U.S.; maybe not to the same degree of pervasiveness, but certainly more than what we have today."
Asset Class Forecasts
U.S equities are forecast to grow at a five-year annualized rate of 4.7% (versus 10.8% the last five years). Don't expect much more for 2020, Browne says, as Northern Trust believes, especially for U.S. equities, that "we've realized all the year's gains."
He emphasizes that the firm thinks earnings will drive stock prices over the five-year period, not valuation expansion.
U.S. aggregate bonds are forecast to return around 2.3%. Though Northern Trust continues to be a big believer in high-yield bonds, they have taken some profits and moved a bit more into emerging market equities.
Other strong(er) asset classes are private equity at 7.9% and global real estate at 6.3%.
Northern Trust has practiced what it preaches since the inception in 1993 of its $112 million Global Tactical Asset Allocation Fund, which is built around the forecast, and has a four-star Morningstar rating.
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllTrending Stories
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250