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Brace for 5% returns from global stocks

Investors in global equities should expect 4.9% in annualised returns over the next five years, which is lower than historic averages, according to Northern Trust's annual asset class return predictions.

Northern Trust every year publishes its expectations on returns from different asset classes over the next five year.

This year's report, published on August 13, pegs equities returns at mid-single digits. Its forecast for global equities has come down over the period year to 4.9% p.a. on the back of U.S. equities, which it thinks are overvalued even in the low-interest rate environment.

It expects five-year returns from developed markets to range from 3.8% p.a. for Japan to 5.8% p.a. for Australia, all of which are below historical averages it said.

"A mix of elevated valuations, slow global growth, lower profit margins and broader focus on stakeholders versus just shareholders will subdue returns [in equities]," it said in its 2021 edition of the Northern Trust Capital Market Assumptions.

"Emerging markets, carrying attractive valuations but also much uncertainty, will slightly outpace developed markets...Our expectation of 5.4% of emerging market equity returns, driven primarily by China and Asia, is a mere 0.6% return premium to developed markets."

In fixed income, it expects an interest of 1% from 10-year US Treasury Bonds. Global high yield will produce an annualised return of 5.6% p.a. over the period.

"Low but steady interest rates should translate into low but positive returns over next five years [in fixed income]. High yield stands out as an alternative to global equities with its higher yields, higher expected total returns and lower risk profile."

In real estate, it is expecting total returns of 3.6% p.a. from natural resources (down by 1.5% on outlook of slow growth and environmental impact scrutiny), 6.3% p.a. from global real estate (down by 2% on permanent impairment of property types like retail and office) and 5.8% from global listed infrastructure (steady).

Read more: Northern Trust
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