CONTRIBUTORS
Stephen Dover, CFA
Chief Market Strategist,
Head of Franklin Templeton Institute
Preview
Too often, investors are preoccupied with the near term. That can lead to misjudgments, like recency bias, which assigns undue importance to current events. Obsessing over the near term may also obscure arising investment themes. And it can result in an underestimation of the fundamentals that anchor asset prices over time.
When it comes to wealth enhancement, the longer run is decisive. Many studies have shown that the strategic asset allocation decision, and adherence to it, determines the lion’s share of a portfolio returns and risk over time.
It therefore makes sense to step back from current conditions and assess the medium-term outlook for growth, earnings, interest rates and valuations, and to consider secular forces likely to produce solid investment returns over time.
In what follows, we outline our thinking about the next 1–3 years. In ensuing notes, we will delve more deeply into various aspects, examining more closely where medium-term opportunity and risk reside across global capital markets.
We begin by outlining the fundamental backdrop for global economic activity and inflation, which determine the trajectories for short- and long-term interest rates, as well as the sustainable growth of corporate profits. We then consider valuations and how they may impact returns across asset classes. We conclude by identifying themes that we believe could produce superior returns over time, even regardless of the global business cycle.
This paper covers:
- Global growth and inflation
- Risks to the view
- Equity valuations and continuity
- Fixed income valuations
- Secular themes
- Investment conclusions
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. Equity securities are subject to price fluctuation and 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. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Large-capitalization companies may fall out of favor with investors based on market and economic conditions. Securities issued by utility companies have been historically sensitive to interest rate changes. When interest rates fall, utility securities prices, and thus a utilities fund’s share price, tend to rise; when interest rates rise, their prices generally fall.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
Blockchain and cryptocurrency investments are subject to various risks, including inability to develop digital asset applications or to capitalize on those applications, theft, loss, or destruction of cryptographic keys, the possibility that digital asset technologies may never be fully implemented, cybersecurity risk, conflicting intellectual property claims, and inconsistent and changing regulations. Speculative trading in bitcoins and other forms of cryptocurrencies, many of which have exhibited extreme price volatility, carries significant risk; an investor can lose the entire amount of their investment. Blockchain technology is a new and relatively untested technology and may never be implemented to a scale that provides identifiable benefits. If a cryptocurrency is deemed a security, it may be deemed to violate federal securities laws. There may be a limited or no secondary market for cryptocurrencies.
Privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. 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.