Updated with correction
Emerging markets equities are expected to outperform developed markets equities over the next five years due in part to an expansion in developed markets valuations over the past year, said a report from Northern Trust's capital market assumptions working group.
Overall, stocks should return between 7% and 9% over the next five years and interest rates should rise gradually, thanks to a reasonable, slow global growth since the financial crisis, the report said.
“I think that the major conclusion from our work was that the slow recovery that we have experienced since the financial crisis actually extends how long the global expansion will continue,” said Jim McDonald, Northern Trust's chief investment strategist, in a telephone interview. “That has made a more hospitable investment environment than you might have expected otherwise, because we haven't built up much excess in the real economy.”
The return forecast for developed markets for the next five years is an annualized 7.2%, down slightly from the 7.4% in last year's outlook report.
“That's primarily because of valuations higher this year than last,” Mr. McDonald said.
Emerging markets equities, meanwhile, have an expected five-year annualized return of 9%.
“I think relative to developed markets, we still see them earning a risk premium because of the higher volatility, but also because of better starting valuations than developed markets,” said Mr. McDonald.
The full Investment Strategy Commentary: Five-Year Outlook is available on Northern Trust's website.