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.