Franklin Templeton recently hosted an investment forum in Singapore, and much of the dialog pointed to a growing gap in growth outlook emerging between Asia and the West. Given this, we believe the case for active management across asset classes has become more necessary, given the many macro, geopolitical and market related headwinds. Here are some of my key takeaways:
- Fixed income has become more compelling as higher yields allow the asset class to resume its core role as an income producer without excess volatility. As expectations for 2023 US policy rates are approaching 5.25%, the potential for a prolonged period of elevated rates is rising.
- Within equities, we think it’s key to focus on companies with strong balance sheets that can better defend against rising interest rates. Those that have better visibility into their supply chains will be more likely to deliver earnings in an inflationary environment.
- Over the past 10 years, the profitability of the tech sector has risen dramatically. Today, investors can get exposure to a good structural growth story with businesses that have strong balance sheets and reliable recurring revenue streams.
- The use of alternative assets is growing as the democratization of access continues. A trend of investing in partnership interests of companies already backed by private equity allows investors exposure to the asset class while reducing the risk of exposure to the early stage of a company’s life cycle.
- The threat of reduced food security will have wide-ranging implications across the global economy. Solutions will require localizing supply chains to boost resilience, diversifying food sources and adopting new technologies like regenerative agriculture and aquaculture.
- In terms of environmental, social and governance factors, regulators around the world are increasingly focused on addressing greenwashing, particularly by better categorization of funds and enhanced disclosure requirements.
Returning toward traditional mixes between stocks and bonds may become more favored in the current economic climate. This provides a wider opportunity set that could include assets as varied as US municipal bonds, equity/private equity investments in companies focused on healthcare and education, and/or corporate bonds in South Korea and Hong Kong.
WHAT ARE THE RISKS?
All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.
Private equity investments involve a high degree of risk and is suitable only for investors who can afford to risk the loss of all or substantially all of such investment. Private equity investments may hold illiquid investments and its performance may be volatile. There can be no assurance that any investment will be adequately compensated for risks taken. A loss of an investor’s entire investment is possible. The timing of profit realization, if any, is highly uncertain.
The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. Franklin Templeton and our Specialist Investment Managers have certain environmental, sustainability and governance (ESG) goals or capabilities; however, not all strategies are managed to “ESG” oriented objectives.
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