Slower Growth–Equity Caution

Positive on the longer-term growth potential of emerging markets in Allocation Views.

Franklin Templeton Multi-Asset Solutions

PREVIEW

We do not hold an apocalyptic view or see a high probability of imminent global recession. We still recognize the longer-term attractions of stocks and the value in certain segments. However, we believe it will require nimble management to navigate the challenges that 2019 present.

Major themes driving our views

  • Slower global growth remains a concern
    Global growth has slowed, reflecting the impact of trade uncertainties. New export orders have been falling sharply for the past year and we should expect a continued period of economic slowdown through the middle of the year. As a result, we have started to scale back riskier assets, reducing our conviction in equities and high-yield corporate bonds, in favor of defensive assets, where diversification benefits might accrue.
  • Subdued inflation in major economies
    Corporate fundamentals remain relatively strong despite the moderation in global growth, but the broad inflationary environment remains benign. This combination of factors may start to weigh on profit margins and is likely to slow the pace of earnings growth.
  • Central bank policy dilemmas
    In addition, a lower oil price that remains below recent peaks has fed into a decline in broad inflation, and core measures remain subdued. While it is too early to rule out further interest rate increases this cycle, the impact on market sentiment, if the US Federal Reserve (Fed) were to return to tightening policy, may be significant.

Practical considerations

  • Transition to a range-trading environment
    A return to long-run levels of market volatility since early 2018, indicates that we have entered a new volatility regime. More generally, we believed a change of mind-set might be required as markets transition from a momentum-driven to a range-trading environment.
  • We are finding the best prospects in emerging markets
    We remain positive on the longer-term growth potential of emerging markets. We are increasingly comfortable in taking solace from the longer-term attractions of these markets.
  • Fewer attractions in Japan
    Japanese stocks are vulnerable to Japan’s position as an open economy and its perceived role as the “canary in the coal mine” of global trade.