18 INVESTMENT ADVISOR OCTOBER 2020 | ThinkAdvisor.combroadly, and it’s not a ‘winner take all’environment,” which he doesn’t see aspolitically or socially sustainable.
However, this change also meansthe “power dynamic for stakeholdersshifts,” Browne says, which hasn’t “beenappreciated by the market yet.”
4. MASSIVE MONETARY TOOLKIT
The central banks have “proved to the
markets they weren’t out of ammuni-
tion, 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 lim-
ited 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 mone-
tary-fiscal policy coordination will
prevent exogenous shock-driven reces-
sions from becoming depressions,” the
5. ONE WORLD, TWO SYSTEMS
The U.S. and China will have to learnto “live on the same planet with theiropposing views on economic policy.Collaboration won’t be absent, but won’tbe optimal either — leading to ineffi-ciencies,” the report states.
“Globalization is the biggest loser,”
Browne says. ”Arguably the world ben-
efited from bringing hundreds of mil-
lions 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 establish-
ment and they turned out to be wrong.
“…We’re kind of at a standstill lookingfor areas where we can agree to cohabi-tate … we haven’t figured out what thatequilibrium is. But it will be suboptimalrelative to what all thought was theoperating model just a few years ago. It’llbe more costly. It’ll cause more volatilityin the world. … China and the U.S. willcooperate where it makes sense for bothsides. It’s going to be a very transactionaltype of relationship going forward.”
6. STAY FOCUSED ON CLIMATE RISK
“[Sustainable] investing is on the top ofminds 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 con-
front the challenge, according to the
report, which adds that “even cen-
tral banks are getting into the discus-
sion. 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
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 toreturn around 2.3%. Though NorthernTrust continues to be a big believerin high-yield bonds, they have takensome profits and moved a bit more intoemerging market equities.
Other strong(er) asset classes are private equity at 7.9% and global realestate at 6.3%.
Northern Trust has practiced whatit preaches since the inception in 1993of its $112 million Global TacticalAsset Allocation Fund, which is builtaround the forecast, and has a four-starMorningstar rating.
Ginger Szala is executive managing editor ofInvestment Advisor. She can be reached email@example.com.
FINANCIAL MARKET RETURNS TO BE CHALLENGED
In a low interest rate, low growth and increased risk environment, high-yield fixed income looks attractive
2. 3 2. 8
4. 9 5. 6
5. 4 5. 5 5. 4
Source: Northern Trust Asset Management, Bloomberg, Annualized return data in local currency from 6/30/2015 to 6/30/2020. Past performance does not guarantee future results.
Total Annualized Return (%)
Last 5 years Northern Trust 5-year forecast