Three Value Equity Themes for the End of 2023

Christian Correa, Chief Investment Officer of Franklin Mutual Series, discusses his team’s top three themes for the back half of 2023: a less-gloomy US macroeconomic outlook, real asset investment and Japan’s rising sun.

It’s been an eventful year so far. Investors are navigating geopolitical and economic challenges in the United States and abroad. Some investors and economists believe the specter of a US recession still lurks on the horizon. Regardless of the market environment, we believe there are three main themes emerging for the final months of 2023. We believe strong underlying forces carrying the US economy forward, continued investment in real assets and growth in Japan can provide a beacon for investors in the back half of the year.

The US macroeconomy

Inflationary pressures may not be the death blow for the US economy that many expected. A tight labor market, strong consumer spending and economic strength across several industries have driven inflation but are also generally positive for economic activity. However, we expect the consumer to pull back on spending if we start to see job losses or deteriorating confidence, which in turn might dampen pricing pressures.

An Employed Consumer Continues to Spend

The prospect of higher interest rates leading to a recession has made investors nervous, causing volatility and market dislocations. But as US inflation continues to subside and labor markets remain strong, we continue to see opportunities at reasonable prices.

Meanwhile, valuations for growth stocks have inflated again to historically high levels, which are correlated with historically low forward returns. Moreover, long-term interest rates have a greater bearing on economic strength than short-term rates, in our view. And through the rate hiking cycle, long rates have responded more slowly and have remained near historic lows.

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