Franklin Templeton hosted its flagship APAC Investor Forum 2023, to discuss the evolving investment landscape marked by geopolitical shifts, technological innovation, and changing demographics, and their investment perspectives for the new environment.
Commenting on recession risk and opportunities in 2024, Stephen Dover, Chief Market Strategist and Head of the Franklin Templeton Institute said: “While the likelihood of a least a mild of recession in the U.S. remains high, emerging markets, in particular Asia, may be more resilient. A weakening US dollar should support emerging markets, particularly those that will benefit from shifting supply chain dynamics. Lower debt levels, inflation, interest rates, and solid fiscal policy put many Asian countries in a more favorable position. We see the greatest opportunities in Japan which is seeing a reversal of
multi decade trends that are now showing positive momentum. We also see opportunities in Southern Asia. From an asset class perspective, fixed income globally is attractive as interest rates are at 10-year highs and are likely near peak levels in most regions. In terms of equities, we do not think U.S. earnings expectations are priced for an earnings slowdown. We prefer equity markets outside of the US.”
Commenting on inflation and rates outlook, Dr. Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income, believes it is very possible that the Federal Reserve will not start easing at least until the end of 2024. There are a few factors behind this: 1) Supply issues (expected massive US fiscal deficits over the next several years); 2) Demand issues (Japan and China – two major holders of US treasuries – are likely to show less interest in US debt going forward); 3) Fundamental factors (inflation is likely stickier than markets expect as getting back to 2% inflation is challenging). All of this, combined with the market pricing in the return of a healthier level of term premia and a real rate closer to pre-global
financial crisis averages is pushing long-term rates higher.
This process, supported by the short-end rates rallying, has helped steepen the US yield curve which is what we have been
positioned for he added.
As the financial market adjustment to the ‘’old normal’’ of higher rates takes time and brings about more volatility, Franklin encourages investors to look for investment opportunities in fixed income which delivers attractive income while acting as a reliable diversifier to equities again. Preference is to position in higher quality sectors while slowly moving further out the curve. Investment grade credit bonds with their all-in yield at 6%+, high-quality mortgages and select opportunities in the high yield all look attractive.’
For income investors, higher interest rates are widening the fixed income opportunity set for achieving yield, and investment-grade corporate bonds stand out to us in the current environment as they offer attractive income, total return, and risk management potential.
Looking ahead, the investment group does see the US economy start to decelerate and the Fed progresses closer to its inflation target and gains comfort with lowering rates in the second half of 2024 into 2025, which would provide a nice tailwind for total returns in fixed-income.
Franklin believes the mid-cap and small-cap growth businesses are generally undervalued at the moment compared to their large growth counterparts. The price-to-earnings multiple on the market cap-weighted S&P500 hasn’t been this elevated vs the S&P500 equal-weighted index for at least the past 13 years.
Commenting on the outlook for global and emerging market equities, Manraj Sekhon, Chief Investment Officer, Templeton Global Investments, said: “The current environment for global equity investors is unique. It offers a balance of near-term
uncertainties and attractive long-term growth drivers. The short-term risks to the global economy include slower growth due to high-interest rates and elevated geopolitical challenges. This contrasts with the longer-term potential of breakthroughs in technology and healthcare alongside other secular trends. This environment provides fertile opportunities for long-term bottom-up investors, including Franklin Templeton.”
