Head of Franklin Templeton Institute Stephen Dover recently moderated a panel of our leading economists and asked this key question: What’s in store for investors in the second half? Here’s a quick take on their answers.
In the first half of 2023, investors faced aggressive Federal Reserve (Fed) tightening, consecutive quarters of falling corporate profits, two of the largest bank failures in US history, a near-default by the US federal government, and universal predictions of US and global recessions.
I moderated a panel of our leading economists that included John Bellows, Portfolio Manager, Western Asset Management; Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income; Michael Hasenstab, Chief Investment Officer, Templeton Global Macro; and Francis Scotland, Director of Research, Brandywine Global. I asked this key question, what’s in store for investors in the second half of 2023?
Below are my key takeaways from the discussion.
- Inflation is going to continue to be an issue for the next 6-12 months. There are some indicators that point to a slowing in inflation and that the economy is entering a period of disinflation, where the rate of inflation is falling as prices are not increasing as rapidly. (This is not deflation where prices are falling.) Failure of inflation to retreat is a risk, and core price inflation has been sticky, but the lagged effects from tighter monetary policy have yet to be fully felt.
- Where will interest rates settle? While the markets generally anticipate another interest-rate hike from the Federal Reserve (Fed), there appears to be a disconnect with how fast rates will drop in the future. The market is pricing rate cuts back to pre-pandemic levels, but we think the 10 years that followed the global financial crisis were an aberration; inflation is likely to revert to pre-GFC levels as the long-term norm.
- Emerging markets can provide diversification. Many emerging market countries showed strength in managing through COVID-19 and subsequent inflation shocks, partially by controlling debt issuance to a greater extent than their developed market counterparts. They also reacted quickly to bring inflation under control, raising rates ahead of the European Central Bank and the Fed. With many emerging market bonds enjoying attractive yields, this provides another source of return that is not necessarily synchronized with the rest of the world.
While the last six months have been extremely volatile in terms of interest rates and changing opportunities, we believe there is still a need to continue to bring inflation more fully under control as we look forward. The growth opportunities vary around the world, and across sectors and maturities. Fixed income is once again showing a low correlation with other risk assets, providing potential diversification and increased portfolio protection.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed-income securities falls.
Equity securities are subject to price fluctuation and possible loss of principal.
Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets, and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay the principal on its sovereign debt. 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. China may be subject to considerable degrees of economic, political, and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political, and economic risks.
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