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Northern Trust: Global Economy to See 2.4% Annualized Growth over Next Five Years

Despite elevated valuations, investment outlook predicts attractive stocks, no bond bubble.

By Chris Butera

Over the next five years, the global economy is expected to experience a 2.4% real average annualized growth, according to a recent report from Northern Trust.

Although the report, titled “Northern Trust’s Capital Market Assumptions five-year investment outlook,” acknowledges equity valuations are high in developed markets, Northern Trust predicts low inflation and steady economic growth will continue to keep stocks attractive. The report also says the highest regional average annualized return will come from emerging markets at 8.4%; followed by 7.2% for Europe, 6.6% for the UK, 6.0% for Japan, and 5.9% for the US,  

The outlooks also expects rates on three-month bonds from the US, Europe, Japan, and the UK to increase to a range of 0.0% (Japan) to 2.1% (US). The 10-year bond expectation ranges from 0.5% (Japan) to 3% (US). In addition, the firm does not foresee a bond bubble, and expects interest rates to remain low with gradual and modest increases while being less than Bloomberg’s reported general market expectations.

The firm identified six investment themes, including “Waiting for the Monetary Godot,” which refers to the belief among investors that monetary policy will normalize as global growth remains depressed and inflation stays below central bank targets —which the firm believes is unlikely.

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“We may never see central banks return to traditional policies and don’t expect a return to pre-financial crisis levels over our forecast horizon,” Northern Trust’s Chief Investment Officer Bob Browne said in a statement. “A successful unwinding of huge central bank balance sheets, which is likely to remain larger than historical levels, will be the focus.”

In its “Popular Catharsis” theme, the forecast also assured that “populist earthquakes” such as the Brexit and the US presidential election would not derail another of the six themes titled “Entrenched Growth.”

“The rise of global populism has not dramatically changed the global economic outlook,” Northern Trust’s Chief Investment Strategist Jim McDonald said in a statement. “During this political and economic transition, investors will show patience and reward those leaders who drive change.” 

The remaining themes in the report are “Stuckflation,” “Regulation in the Limelight,” and a “Valuation Structure.”

According to Wayne Bowers, CIO and CEO for Northern Trust Asset Management in Europe, Middle East and Africa, the report’s overall theme of “Entrenched (Global) Growth” and relative stability “is based on demand being constrained by natural regulators such as high debt burdens, aging developed market populations, and transitioning emerging market economies,” he said in a statement. “These factors, along with regulatory relief and persistent low inflation, will continue to allow easy monetary policy, and stop global markets from overheating.”

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Home > News > Research > FTSE 350 Pension Deficits Rise £12 Billion in August
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FTSE 350 Pension Deficits Rise £12 Billion in August

Mercer says decline may be due to uncertainty over Brexit negotiations.

By Michael Katz

The accounting deficit of defined benefit pension plans for the UK’s 350 largest listed companies increased to £83 billion at the end of August, from £71 billion at the end of July, according to data from Mercer’s Pensions Risk Survey.

Liability values increased by £27 billion to £855 billion as of Aug. 31, compared to £828 billion at the end of July. Asset values were £772 billion, a £15 billion increase from the end of July.

“Unfortunately, the run of good news ended over August, with the deficits increasing again materially,” said Le Roy van Zyl, a strategic advisor and partner at Mercer, “albeit still far off the painful numbers we saw a year ago in the aftermath of the EU referendum.” 

Mercer said that the recent setback could be partly due to the general uncertainty surrounding the country’s Brexit negotiations currently underway with the EU.

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“Pension scheme trustees and sponsors will need to be prepared for the fluctuating circumstances, not only in terms of scheme finances and risk, but also around the challenges of making effective decisions against this uncertain backdrop,” said Mercer. “A range of outcomes are possible and it is key that schemes work through some scenarios to establish whether there are material dangers under any of them to the scheme. If there are, they need to work together to identify and put in place pragmatic mitigating measures.”

Mercer’s data relates to about 50% of all UK pension plan liabilities, and analyzes pension deficits using the approach companies have to adopt for their corporate accounts. The company said the data underlying the survey is refreshed as companies report their year-end accounts. Mercer’s estimates are based on projections of the reported financial statements of FTSE 350 companies adjusted from each company’s financial year end in line with financial indices.

The estimated aggregate value of pension plan assets of the FTSE 350 companies at the end of 2016 was £737 billion, compared with estimated aggregate liabilities of £821 billion.

A recent report from JLT Employee Benefits found that the total assets for all UK private sector defined benefit pension plans as of the end of August were £1.606 trillion, a £36 billion increase from the £1.57 trillion reported at the end of July. It also reported that the liabilities of all UK private sector plans grew by £52 billion to £1.805 trillion from £1.753 trillion during that same time.

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