Single-Country Allocation: Viewing the Opportunity Through Three Lenses

The case for disaggregating international exposure by allocating to single countries remains strong, according to Dina Ting, Head of Global Index Portfolio Management, Franklin Templeton Exchange-Traded Funds. She outlines three investment lenses that shape her team’s views.

With the interplay between the world’s geopolitical, economic and social issues and the complexities of the pandemic and its ongoing recovery, it can be difficult for investors to determine how to move forward. Here are three lenses to consider.

LENS 1: Pandemic Recovery: Back to the New Normal

The spread of COVID-19 has had a lasting impact on individuals, companies and countries alike. As signs of a recovery begin to emerge, such as the approval and early distribution of multiple vaccines, so will new challenges and opportunities. We expect that this will, once again, create dispersion in how quickly countries are able to go back to (the new) normal. Three such examples are outlined below.

Vaccine rollout. Globally, vaccine approvals are providing a much needed light at the end the tunnel, helping both consumers and business envision a return to normal. However, early vaccine rollout is testing each country’s ability to not only source, but effectively distribute and allocate among the population. It is apparent that not all countries will benefit equally as the logistical complexities and how well each country manages to vaccinate its citizens may create further dispersion in when/how each economy will recover. In some countries, this may include first having to convince the population of the benefits of vaccination. Among countries that have more buy-in, those with a more organized approach to the pandemic may also be the ones better positioned for the post-pandemic economic recovery. For example, Taiwan and South Korea have both been a model for handling the pandemic well through systematic and centralized approaches while demonstrating vigilance for continuous enhancements.

Economic impact: The post-pandemic recovery is expected to create a surge in the demand for both intermediate and end goods for consumers and businesses alike. Without proper planning, this can create shortages across certain industry segments and supply chains, such as raw materials, commodities, equipment, labor, etc. These shortages could potentially hold back the speed of economic recovery. For example, an increased demand for semiconductor chips from the consumer electronics and auto industries has created a shortage within the semiconductor chip industry.

Commodities: Extremely low interest rates could be with us for a while as governments around the world struggle from the debt burdens caused by the COVID-19 crisis. Central banks have reduced policy rates to record lows and many developed countries have negative rates far out in their yield curves. Maintaining low interest rates for an extended period could lead to inflation, which may lead to opportunities in commodities due to a potential shortage of materials and equipment to meet increasing demand.