Inflation to Recede While Growth Normalizes

Northern Trust, a leading global asset manager with $1.5 trillion in assets under management, expects strong earnings growth and continued low interest rates to lead to slowing but sustainable economic growth in 2022.

“Given our favorable economic growth outlook for 2022, we are overweight risk assets in our Global Policy Model, although we expect next year’s returns for these asset classes to be less than this year’s,” Northern Trust Chief Investment Officer Angelo Manioudakis said. “Amid the recent market volatility and growing concerns about inflation, it’s important for investors to realize that corporate earnings and interest rates are key underpinnings of stock and bond prices,” Manioudakis said. “They support our overweight positions on three risk asset classes, as signs point to continued strong earnings growth alongside stable, albeit perhaps slightly higher, long-term interest rates.”

Northern Trust foresees 2022 as a year of transitions. Central bank fiscal policy might become less accommodative or stimulative through a reduction in bond purchases. After years of virtually no inflation, investors are becoming more aware of the importance of hedging against it, given its recent sharp emergence. While there are indications of inflationary pressures decreasing in key supply chain bottlenecks, this is countered by strong housing and labor markets. As always, Northern Trust has hedged against inflation in its Global Policy Model, but for the sixth consecutive year, it has “Stuckflation” as one of its investment themes driving markets and believes that the current spike in inflation will prove transitory.

These views are part of Northern Trust’s 2022 Outlook. It builds off the firm’s long-term Capital Market Assumptions report, a forward-looking, historically aware five-year forecast that guides the firm’s strategic asset allocation recommendations.

Northern Trust’s tactical asset allocation recommendations in its Global Policy Model include three overweight positions, all in risk-asset classes: developed market equities, high yield bonds, and natural resources.

Uniformity Among Equities

Northern Trust expects equity returns to be similar among the major regions across the world, driven by strong earnings growth. Japan leads with an expected return of 11%, followed by emerging markets and the United States at 9%, and Europe at 8%. Given this uniformity, Northern Trust favors less-risky developed markets, hence its overweight position, over emerging markets, which are neutrally weighted in the Global Policy Model.

High Expectations for High Yield

Among bond asset classes, Northern Trust’s most favorable view is of high yield bonds, another of its overweight positions. This is driven by a belief that high yield bonds could produce returns comparable to that of equities. “Given this and the facts that they are less risky than equities, offer strong liquidity, and are experiencing a historically low rate of default of close to 1%, led us to make high yield the largest overweight in our Global Policy Model,” Northern Trust Chief Investment Strategist Jim McDonald said. “We regard their credit risk as much more compelling than the interest rate risk of investment grade bonds.” Northern Trust’s 2022 Outlook calls for high yield to return 9% vs 4% for investment grade bonds and 0% for cash.

Natural Resources Stand Out Among Real Assets

Northern Trust has long included real assets – natural resources, global real estate, and global listed infrastructure – in its global policy model in recognition of their effectiveness in enhancing investment diversification. Respective return forecasts for 2022 are: 5%, 7%, and 3%. “While all three asset classes have significant equity exposure and are therefore supported by our favorable market outlook, we elected to overweight natural resources based on our view of their reasonable valuations and inflation hedging ability, as well as our expectation that earnings growth will continue,” said Wouter Sturkenboom, Chief Investment Strategist for Europe, the Middle East, Africa, and the Asia-Pacific region.

The full Northern Trust 2022 Outlook is available at capitalmarketassumptions.com/1year.

Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

Capital Market Assumption (CMA) model expected returns do not show actual performance and are for illustrative purposes only. They do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. Stated return expectations may differ from an investor’s actual result. The assumptions, views, techniques and forecasts noted are subject to change without notice. All forecasts are rounded to the nearest whole number.

This material is directed to professional clients only and is not intended for retail clients. For European and Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. This material is provided for informational purposes only. Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice.

About Northern Trust Asset Management

Northern Trust Asset Management is a global investment manager that helps investors navigate changing market environments, so they can confidently realize their long-term objectives. Entrusted with US$1.2 trillion of investor assets as of September 30, 2021, we understand that investing ultimately serves a greater purpose and believe investors should be compensated for the risks they take — in all market environments and any investment strategy. That’s why we combine robust capital markets research, expert portfolio construction and comprehensive risk management to craft innovative and efficient solutions that deliver targeted investment outcomes. As engaged contributors to our communities, we consider it a great privilege to serve our investors and our communities with integrity, respect, and transparency.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Belvedere Advisors LLC and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, asset servicing, asset management and banking to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 22 U.S. states and Washington, D.C., and across 23 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2021, Northern Trust had assets under custody/administration of US$15.8 trillion, and assets under management of US$1.5 trillion. For more than 130 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Please visit our website or follow us on Twitter.

Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Please read our global and regulatory information.

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