A Brighter Year Ahead

In our Allocation Views, we retain a relatively cautious view despite positive headlines on vaccines as the risks to recovery remain tilted to the downside.

    Ed Perks, CFA

    Ed Perks, CFA Chief Investment Officer, Franklin Templeton Investment Solutions

    Gene Podkaminer, CFA

    Gene Podkaminer, CFA Head of Multi-Asset Research Strategies, Chair of Investment Strategy & Research Committee, Franklin Templeton Investment Solutions

    Preview

    The themes we discuss at our Annual Investment Symposium guide our research process. Over a longer-term horizon, we believe global stocks have greater performance potential than global bonds, supported by sustained growth and moderate inflation. With government bond term premia remaining below historical averages, we see a lower performance potential from government bonds, which would drag down asset returns generally.

    We recognize that our longer-term outlook will not be reached along a smooth path and that maintaining a diversified portfolio of risk premia, in addition to the traditional benefits of a balanced portfolio between stocks and bonds, is the most likely path toward stable potential returns.

    Major themes driving our views

    • Ongoing headwinds to global growth
      The coronavirus pushed the global economy into a deep recession, though a rebound appears to be in place. Expectations are for a sharp rebound to continue, but risks to the recovery are tilted to the downside due to the second-wave infection threat. Politics continues to present an ongoing headwind for business investment intentions.

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    • Subdued inflation across economies
      We believe that changes in inflation are driven mainly by demand, but expectations of future inflation that are near to historical lows. While it is premature to call an end to globalized production, its influence might moderate as a result of onshoring.

    • Dovish bias to policy
      In responding to the ongoing COVID-19 crisis, policymakers remain accommodative and will do whatever it takes. The transition from crisis measures to supporting the recovery has kept liquidity flowing, while fiscal policy coordination remains key for markets.

    Practical positioning

    • Nimble management still required
      Stocks have strong return potential, and we believe they should earn their equity risk premium over time. Near-term risks moderate our enthusiasm, but we are prepared to take a more decisive stance, reflecting longer-term optimism. We continue to believe that navigating the challenges presented in the months ahead will require nimble management.

    • Bond valuations are exceptionally stretched
      In a multi-asset portfolio, we seek assets that provide the potential for diversification. Bonds traditionally fulfil that role. While we continue to hold a modestly cautious view of government bonds in developed markets, we have not moved to adopt a bearish stance. However, we have increased our conviction toward corporate bonds.

    • Opportunities in alternative assets
      When looking for alternative assets that might offset “risk-on” exposure to stocks and corporate credit, we are attracted to real assets. Inflation protected bonds are attractive to us as a potential portfolio diversifier, and we believe active management of this asset mix can enhance potential return.


    WHAT ARE THE RISKS?

    All investments involve risks, including possible loss of principal. The positioning of a specific portfolio may differ from the information presented herein due to various factors, including, but not limited to, allocations from the core portfolio and specific investment objectives, guidelines, strategy and restrictions of a portfolio. There is no assurance any forecast, projection or estimate will be realized. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, 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. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds the portfolio’s initial investment. A strategy may not achieve the anticipated benefits, and may realize losses, when a counterparty fails to perform as promised. Currency rates may fluctuate significantly over short periods of time and can reduce returns. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particularly over the short term. Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investments in REITs involve additional risks; since REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.