Equity markets will deliver returns of between 7 and 9 per cent over the next five years as the global economy expands at a gradual pace, according to US bank Northern Trust in its long-term forecast update.

Equity markets will deliver returns of between 7 and 9 per cent over the next five years as the global economy expands at a gradual pace, according to US bank Northern Trust in its long-term forecast update.

For investors, the macro environment will produce slightly lower equity returns and slightly higher fixed income returns over the next five years, the bank says.

The forecast for developed market equities has fallen to reflect the expansion in valuations over the previous 12 months; though both margins and valuations are expected to remain above longer-term averages, leading to annualized returns of 7.2 per cent.

“The sub-par growth trajectory since the 2008 global financial crisis has prevented excesses in developed market real economies and required central banks to continue monetary policies that have supported equity market valuations,” Northern Trust chief investment strategist Jim McDonald said in the report. “Meanwhile, emerging markets continue to adjust to a maturing growth profile, which weighs on global growth but also reduces inflationary pressures. Effectively, the mediocrity of the current expansion increases its expected longevity,” he said.

 For investors, the macro environment will produce slightly lower equity returns and slightly higher fixed income returns over the next five years, the bank said.

The forecast for developed market equities has fallen to reflect the expansion in valuations over the previous 12 months; though both margins and valuations are expected to remain above longer-term averages, leading to annualized returns of 7.2 per cent.

Emerging market equities will command a premium, with annualized returns of 9 per cent, however maturation reduces growth prospects. Fixed income returns will rise slightly for longer-dated bonds, as the markets price in higher long-term interest rates. Northern Trust’s forecasts for short-term rates set by central banks are lower than the market consensus, it said, adding that the search for yield and low default rates will favour credit investments.

“The robust returns of recent years have reduced the valuation cushion in asset markets, but while nominal returns will likely lag historic averages, we see real returns of 4 to 5 per cent for global stocks and 1 to 2 per cent for global fixed income over the period,” McDonald said.

The bank also considered geopolitical risks, noting that as conflicts are increasingly handled through the financial system - cutting off credit or taking other measures as opposed to military intervention - the risk of geopolitical escalation is reduced. It could also serve as an economic catalyst, such as potential demand from increased military spending and new energy infrastructure development.