Most investments will only generate single-digit positive returns over the next five years, experts at Northern Trust predict, predominantly due to slow economic growth and persistent low interest rates.

Slow growth - one of six key themes profiled in Northern Trust’s annual five year market outlook - is a key driver behind the Chicago-based bank’s return forecasts for global investors of 5.8% for global equities and 2.1% for investment-grade bonds.

“While we expect markets may be volatile at times, we remain convinced the global economy is in a narrow and slow growth channel,” said Northern Trust chief investment strategist Jim McDonald.

“Current regulatory and fiscal policies have greatly restricted the boom-bust cycles and, although the risk of a recession increases, if one does materialize it should be shallow due to a lack of economic excesses and financial system stability.”

Despite these subdued projections, Northern Trust believes the three-month German Bunds and Japanese Government Bonds will turn in negative returns during the next five years.

“Developed economies overall will continue their slow pace, expecting annual real economic growth of 1.4% over the next five years, and the outlook for emerging economies remains similarly subdued,” said Wayne Bowers, chief investment officer for Northern Trust Asset Management in Europe, Middle East and Africa and Asia-Pacific.

“Ultimately, while concerns over slow growth are further impeding global growth, investors need to resist becoming bearish during market weakness or bullish when the economy appears strong and instead scrutinize any future dramatic swings – positive or negative.”

The firm has identified five more themes expected to shape the global markets over the next five years including: Stuckflation (inflation remains “stuck”)  and how current regulatory and fiscal policies have significantly reduced the odds of a boom-bust cycle.

Technological turbulence, the costs of ultra-low rates and uncertainty in the political arena are also themes.

For fixed income, Northern Trust expects cash returns to be low to negative as monetary accommodation is extended. 

"Fixed income returns are hobbled by a low-yield starting point, but low-yield continuation supports prices. Some pressures on fundamentals can be offset by demand for yield, supporting credit," the bank added in its latest report. 

In terms of equities, developed-market equity returns should be modest due to slow global growth, but low inflation and low interest rates will support profit margins and ease valuation contraction.

A better emerging marketing revenue outlook is slightly offset by earnings dilution.

Global real estate will face demand challenges, but returns will be supported by a diversified set of risk exposures. 

When it comes to alternatives the return of the “average” hedge fund will be hurt by lower risk exposure returns and lower alpha, magnifying the importance of manager selection. 

Private equity should see a slight moderation in its illiquidity premium as asset class interest grows.