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Timely Investment Positioning from FTIS

David Bel, Client Portfolio Manager, outlines Franklin Templeton Investment Solutions’ latest market views.

Timely Investment Positioning

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December 1, 2025: Views reflect a 12-month time horizon for dynamic positioning. Arrows, if included, denote a month-over-month change in a given view.

More Bearish
Neutral
More Bullish

Asset Class

Equities
  • Leading economic indicators remain resilient, amid artificial intelligence (AI) capital expenditures(capex) and high-end consumers. Fears of an AI bubble have fueled recent equity volatility, resulting in pessimistic sentiment, and providing a potentially better entry point. We are watchful of risks, including any potential monetary policy misstep, a cooling labor market, subprime bankruptcies, the sustainability of AI capex spending, and the impact of tariff-induced inflation.

Equities

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Neutral
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Fixed Income
  • The Federal Reserve’s (Fed) quantitative tightening program is planned to end on December 1, which could steepen the yield curve. Investors are concerned uncertainties regarding the independence of the Fed. Furthermore, inflation remains above central-bank targets in most developed economies. Longer-term, elevated public debt levels and fiscal balances are forecasted to worsen, suggesting term premia and yields will face upward pressure.

Fixed Income

More Bearish
Neutral
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Cash
  • Despite the defensive features of cash and attractive yields, we believe reinvestment risk is high.

Cash

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Neutral
More Bullish

Equities

United States
  • Growth has held up well despite some weakness in the labor market. Third-quarter earnings were very strong, while corporate guidance has improved despite lofty expectations. Trade policy remains a key risk, as rising input prices are likely to be further passed onto consumers, in our view. We remain watchful for a potential decay in profit margins due to inflation impacts and corporates consuming a portion of tariffs.

United States

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Neutral
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International Developed
  • Europe ex UK: Manufacturing activity has contracted, impacted by structural weaknesses in Germany. A weaker domestic macro backdrop could weigh on eurozone equities. Europe’s strong links to China leave it vulnerable to slowing Chinese demand, while a strong euro has compounded the earnings drag for exporters.
  • Japan: The new government coalition is providing fiscal policy stimulus, despite elevated inflation. While it’s likely the Bank of Japan is signaling a rate hike in December, markets appear confident that a move will occur by January. Forward earnings revisions, market breadth, and momentum have begun to improve. Corporate governance reform has provided support.

International Developed

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Neutral
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Emerging Markets
  • Emerging markets ex China: The macro backdrop is encouraging; growth is supportive, inflation has been falling, and policy has broadly eased. Earnings expectations are rising rapidly across the region, and we have seen upticks in momentum and breadth. A potential floor is in sight for the non-AI exposed segment of the semiconductor market reinforces our bullish outlook.
  • China: Macro and corporate fundamentals remain weak. In November, Chinese stocks were hit by the technology selloff and slowing retail sales and factory output.

Emerging Markets

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Neutral
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Fixed Income

US Treasuries
  • A rate cut in December may occur, but is not a certainty, as the Fed attempts to keep a lid on inflation and promote employment, which has been soft. We currently prefer the less interest-rate-sensitive portion of the US Treasury curve.

US Treasuries

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Neutral
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US Investment Grade
  • Corporate fundamentals have been resilient, in our view. However, credit spreads remain narrow, making the risk/return profile less attractive to us, despite looser financial conditions.

US Investment Grade

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US High Yield
  • Higher income (carry advantage) and resilient macro indicators are supportive. However, cooling employment and stubborn inflation have put the Fed in a difficult position with limited government data available. While spreads are tight versus history, yields are more in line with average levels, which is attractive to yield-hungry investors.

US High Yield

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Neutral
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International Developed
  • Disinflation has slowed in the eurozone, while leading indicators of growth have improved, making it difficult for the European Central Bank to ease further. German fiscal expansion could add further upward pressure to eurozone yields and present a barrier to monetary policy stimulus. Reallocation from US Treasuries could drive demand for eurozone duration, but momentum has stalled given the potential for increased issuance to fund investment.

International Developed

More Bearish
Neutral
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Emerging Markets
  • Emerging market (EM) debt should benefit from expensive US Treasury valuations and easier monetary policy. One key risk to monitor is that the current balance of resilient US growth but stagnant job creation could tip the wrong way, dampening risk sentiment and capping EM local outperformance. Hard currency EM debt spreads are tight.

Emerging Markets

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US equity and fixed income factors

Market Capitalization

Small
Large
Market Capitalization
  • Equities: Small-cap companies face quality concerns and tariff-related challenges compared to large caps. Furthermore, small caps have little lobbying power, less pricing power, minimal margin capacity to absorb higher input costs, and high exposure to imported intermediate goods.

Style

Value
Growth
Style
  • Equities: We have seen a broadening out of earnings growth, and we expect a lift in earnings expectations across value and growth. Thus, our outlook is for the earnings of both to converge.

Duration

Short
Intermediate
Long
Duration
  • Fixed Income: While the Treasury’s plan to supply short-term issuance could limit demand for longer-dated securities and weigh on yields, we see a steeper yield curve due to the end of quantitative tightening, elevated inflation and tariff pass-throughs in the short-term, and fiscal deficit concerns in the long-term.

Periodic insights on alternative asset classes

Private Equity

Private equity (PE) activity and exits show signs of picking up meaningfully in late 2025, despite lingering macro risks. The backlog of exit candidates will take time to work through and the outlook for large buyouts remains challenged, but opportunities look more attractive to us in the middle market and secondaries including single-asset continuation vehicles.

Private Credit

Tight spreads and a near-term excess of capital available to finance new PE deals lead to a cautious outlook. We continue to watch trends related to borrower health. Opportunities persist in real estate credit and other overlooked sub-sectors.

Real Assets

Private Real Estate: Property prices have stabilized after a multi-year decline, helping returns turn positive for the past few quarters. Transaction volume remains muted by historical standards, and it may take a few more quarters for sentiment to turn decisively positive, but we believe the longer-term outlook remains strong for key real estate sectors based on supply-demand imbalances.

Commodities: We have a constructive outlook, supported by positive roll yields, a weaker US dollar, and a resilient growth backdrop even in the face of tariff uncertainty. Gold retains structural support from elevated central-bank purchases and ongoing geopolitical risks, enhancing its traditional safe-haven role. Industrial metals appear well positioned as supply disruptions and infrastructure demand drive tighter balances. Meanwhile, energy markets face oversupply challenges, but we see this risk as largely priced in. We believe commodities can serve as a valuable allocation amid inflation uncertainty, particularly as goods prices remain sticky.

Hedge Strategies

We are neutral long/short equity, with a preference for select international markets. We are neutral event-driven strategies, with a favorable view toward activism and special situations investing. The outlook for global macro managers appears positive, with central-bank policy changes and divergences taking a lead role in asset class returns. Our outlook for commodity managers is positive, especially for relative value approaches, as commodity relationships and price moves recover from recent bouts of volatility.

Additional Perspectives from Franklin Templeton Investment Solutions

TIP Sheet

Access the latest Timely Investment Positioning (TIP) sheet for more details on FTIS' outlook across asset classes.

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Capital Market Expectations 2025: Slowing but not sinking

The Franklin Templeton Investment Solutions team’s capital market expectations is designed to provide annualized return expectations over a longer-term horizon, typically viewed as 10 years.

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INSIGHTS FROM FTIS MANAGERS

Access Our Latest Thinking on Market Topics

DECEMBER 8, 2025

Allocation Views: Focused on strong fundamentals

In this month’s Allocation Views, Franklin Templeton Investment Solutions suggests a cautious optimism on equities despite recent market volatility.

OCTOBER 13, 2025

Hedge Fund Strategy Outlook: Fourth quarter 2025

In this quarter's Hedge Fund Strategy Outlook, the team explores hedge fund styles and strategies—and which look more or less favorable given the current market environment.

JULY 17, 2025

Hedge Fund Strategy Outlook: Third quarter 2025

While uncertainty gradually eased in the second quarter, the sustained decline in the US dollar and the ongoing changes in the geopolitical order indicate that markets may continue to be dynamic and offer opportunities for a variety of hedge fund strategies, as well as heightened risks.

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Investment perspectives reflect the analysis and opinions of the authors as of the dates on the respective content and may change without notice. It may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton Investments. It is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

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