United States
2018 was the year when volatility returned to global financial markets. Nonetheless, US economic growth managed to hit a four-year high in the second quarter, and the US equity market marched along to its longest bull run in post-WWII history. Our panel of senior investment leaders examine the evidence and offer their take on what and who might influence markets in the short and longer term.
Is Synchronized Global Growth Coming to an End?
Q: Global growth still seems to be quite synchronized and high. What do you see as the primary drivers for US and global growth?
Ed Perks: Global recovery is still supported by rising corporate earnings and profit margins, although we are monitoring growth momentum as we are seeing more desynchronization throughout the world. Monetary policy is becoming less accommodative, but fiscal policy looks set to pick up the slack.
Michael Hasenstab: We believe growth has peaked in Europe and is decelerating, Japan is kind of still soft as well. Although some of the major emerging markets have run into pretty big headwinds, we think many emerging markets should be fundamentally stable.
Stephen Dover: There is an incredible amount of stimulus in the US economy now, including a reduction in regulations as well as tax cuts. The United States came out of a very long recession in the wake of the 2007-2008 global financial crisis (GFC). We are still seeing the rebound show up in US corporate earnings.
Our take: Generally, we expect continuation of positive global economic growth for the near term led by the United States. Learn more in our topic paper.
What’s Driving the Most Unloved US Bull Market in History?
Date Recorded: August 28, 2018
Trade Tensions: Bark or Bite?
Q: There have been questions about whether we are in the midst of a trade war, and what a trade war even means. What do you make of the current tension in international trade conversations?
Michael Hasenstab: I would say it is more of a tit-for-tat trade dispute, as opposed to a full-out trade war. In my view, the real risk would be something between the United States and China. That’s obviously the highest probability, but I still put it at a low probability at this point.
Chris Molumphy: It is noteworthy that the US equity market has largely looked past the trade-related headlines. I agree we will probably see more of back-and-forth in this regard, but in our view, it doesn’t seem like these issues will have a significant impact on global growth. Our baseline is that trade tensions probably increase volatility, but likely won’t impact fundamentals all that much.
Stephen Dover: I think there is too much fear around the issue of trade. There are a lot of political issues and even defense issues involved in this—particularly with China. Ultimately, I think reform is probably going to be good for China; it should be more stable.
Manraj Sekhon: Undoubtedly trade tariffs upon China have come at a challenging time, when its labor-cost advantage is fading. Indeed, China is seeing jobs “offshored” to cheaper locales such as Vietnam, and the country is embarking upon the process of deleveraging. However, China is also investing in the future.
Our take: Our baseline is that trade tensions probably increase volatility, but likely won't impact fundamentals all that much. Learn more in our topic paper.
Don’t Underestimate China.
Date Recorded: August 28, 2018
A Healthy Market Skepticism
Q: US equity markets have been hitting new highs, but it seems that many investors are quite concerned about investment opportunities and the global outlook. What do you think investors need to be preparing for?
Chris Molumphy: We think it is healthy that there is a lot of investor skepticism out there. As soon as you lose that skepticism, that’s when you have to really start worrying. But we focus on fundamentals, US economic fundamentals in the near- and even intermediate-term look pretty good to us.
Stephen Dover: I think in the equity markets you have to be prepared for the risks that are out there. That said, I think it probably is not the best time to for investors to completely pull in risk exposure.
Michael Hasenstab: We have been focusing more on idiosyncratic alpha opportunities and not just getting this broad market beta. I think it’s pretty hard to argue that broad market beta is cheap, in fact it’s probably pretty expensive, and so the danger in passive investing is you get a lot of index beta without focusing on the smaller subset of alpha.
Our take: We think market skepticism is healthy as it balances out overexuberance in the market. And what worked in the last decade probably is not going to work going forward. We think it’s about applying research to find opportunities best suited for growth in the current market conditions. Learn more in our topic paper.
OUTLOOK CONTRIBUTORS
Head of Equities
Chief Investment Officer,
Templeton Global Macro
Chief Investment Officer,
Franklin Templeton Fixed Income Group
Chief Investment Officer,
Franklin Templeton Multi-Asset Solutions
Chief Investment Officer,
Franklin Templeton Emerging Markets Equity
What Are the Risks?
All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year.
Important Legal Information
The information provided is not a complete analysis of every material fact regarding any country, region, or market. Comments, opinions and analyses contained herein are those of the speaker and are for informational purposes only. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of August 28, 2018, and may change without notice. The analysis and opinions expressed herein may differ or be contrary to those expressed by other business areas, portfolio managers or investment management teams at Franklin Templeton Investments. Opinions are intended to provide insight on macroeconomic issues and commentary is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy.
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