Northern Trust flags “inflation recalibration” era

The latest Capital Market Assumptions (CMA) Report from Northern Trust has forecasted a shift from the “stuckflation” narrative of the past five years to a new era of “inflation recalibration”.

The report, which looks ahead to the next five years and is updated annually, said inflation expectations would become more aligned with current market pricing and bond returns linked to inflation are projected to closely reflect Treasury returns.

It also said global private equity would top five-year annualised returns with 9.6 per cent, with global high yield and U.K. equities expected to top bond and stock returns both at 7.5 per cent.

The report also noted six key “forward-looking” themes, including Slow Growth Transitions, Inflation Recalibration, Monetary Drought, Regional Rebuilding Blocs, Green Transition Still a Go, and Not So Negative.

“We believe that in the next five years investors can expect financial market returns to be modestly below long-term historical averages – per our ‘Slow Growth Transitions’ theme,” Jim McDonald, Northern Trust’s Chief Investment Strategist, said.

“The more exposed a country is to slow transitions and debt and demographic headwinds, the greater the economic pressure they’re likely to endure,” the CMA Report said.

“This puts younger, resource-rich economies in better shape than older, energy-dependent economies.”

The report also said while automation and digitisation have acted as “disinflationary forces”, they have struggled to counteract stressed global supply chains, pressured commodity markets and struggling labour supply.

“While we expect inflation to take time to move back toward central banks’ targets, we do believe the worst has passed,” Wouter Sturkenboom, Northern Trust Asset Management’s Chief Investment Strategist for Europe, the Middle East, Africa, and the Asia-Pacific region, said.

“The ‘Stuckflation’ regime is over, replaced by a period of recalibration back toward target levels which, for the U.S. and Europe stands at 3% and 2.6%, respectively.”