Distortion, Divergence and Diversification

Was 2018 as Good as It Gets? Our View of What May Lie Ahead

Ed Perks: The global economy holds the potential to maintain solid momentum in 2019, in our view, underpinned by the strength of US fundamentals and demand. Volatility returned to global financial markets in 2018 as the narrative around synchronized global growth became more pessimistic. However, growth trends remain broadly positive and desynchronization might not be the headwind that markets may have feared at times

Stephen Dover: The year ahead looks to be one of restrained global equity market performance. As the benefits of substantial fiscal stimulus from US tax cuts and greater public spending wane, US earnings and the broader global economy may have a hard time keeping pace with 2018 levels. However, we see opportunities outside the United States as earnings and economic disparities with the United States narrow.

Michael Hasenstab: Overall, we think it’s important to recognize that the state of the world that investors have become accustomed to for the last decade is not going to continue indefinitely. In 2019, we expect US Treasury yields to rise and various asset classes to endure price corrections as monetary accommodation unwinds.

Our take: In the United States, the current combination of above-trend growth, benign inflation and near-full employment could continue for some time, in our view. We believe the prospects for a US recession are still several quarters away. Learn more in our topic paper.

The Easy Gains Appear Over, but Unloved Stocks May Draw New Interest

Stephen Dover: We see opportunities beginning to emerge in many unloved areas of the global equity markets. While headline rhetoric about the trade war’s impact on the Chinese economy has made many investors wary of Chinese equities, we believe growth in China is driven more by domestic consumption than trade these days.

Latin America also offers new promise. The election of Jair Bolsonaro as Brazil’s new president suggests to us a return to more orthodox economic policies, despite some of his more extreme political rhetoric.

Our take: While the easy gains for global equities look to be over as growth rates in the United States moderate and geopolitical and trade issues persist, a rising-rate environment can lead to a shift in leadership as unloved stocks and regions begin to draw renewed interest. Learn more in our topic paper.

Diversifying Against Rising Rates in the Post-QE Era

Michael Hasenstab: A decade after the global financial crisis peaked in 2008, financial markets have only just begun to correct the asset price distortions that were created by the US Federal Reserve’s (Fed’s) massive quantitative easing (QE) program. QE was originally deployed to stabilize financial markets during the crisis, but instead of being a limited intervention to restore markets over a few years, it expanded and became an ongoing endeavor.

It succeeded in pushing down bond yields and pushing up asset prices, steering many investors toward riskier assets while also keeping the costs of capital artificially suppressed. But continuous QE also led to ongoing price distortions in bonds and equities, while incentivizing leverage and rewarding complacency among investors who appeared to view persistently low yields and the Fed’s “buyer of last resort” role as a permanent arrangement. 

Our take: Investors that are not prepared for concurrent price corrections in US Treasuries (USTs) and other asset classes in 2019 may be exposed to unintended risks. Learn more in our topic paper.

OUTLOOK CONTRIBUTORS

Stephen Dover, CFA

Head of Equities

Michael Hasenstab, Ph.D.

Chief Investment Officer,
Templeton Global Macro

Ed Perks, CFA

Chief Investment Officer,
Franklin Templeton Multi-Asset Solutions

Resources

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