United States
Allocation Views
Growth expectations surge
It is always necessary to search for the flaws in a well-argued investment thesis. Indeed, it is important to continually challenge your assumptions. However, sometimes it is right to just go with the flow, at least for a while. This is perhaps one of those times. The themes that drove markets in the first quarter of 2021 look set to continue into the current period.
Optimism over the reopening of economies is driving global growth expectations. This is occurring even as individual countries or regions are still facing the challenge of rising COVID-19 case counts and are moving back into tighter restrictions or lockdowns to control them—for example, France and Ontario, Canada. However, the logic remains, as we have observed in past issues of Allocation Views, that humans are much better at dealing with known threats. We are exceptionally adaptable at coping with challenges for a second or subsequent time. We all know how to work remotely by now and are adept at continuing to consume through online channels. This confidence is supported by the progressive rollout of vaccines across the globe and the belief that they will be able to repel the expanding list of “variants of concern” or be reengineered to deal with new ones that will likely come along in the future.
This leads to a second reason for optimism, based on riskier asset markets’ willingness to look through near-term uncertainty and remain focused on longer-term prospects that remain favorable. While we continue to anticipate higher-than-normal levels of uncertainty over the path of growth, or the overall pace of the expansion, the market is taking less notice than usual. This is especially so for regional divergences, where the disappointing rollout of vaccines in Europe (see Exhibit 1) and the likelihood of renewed lockdowns cementing a double-dip recession have not held back stocks.
ROLLOUT OF COVID-19 VACCINES HAS BEEN UNEVEN Exhibit 1: Percentage of population that have received one dose of a COVID-19 vaccine As of March 31, 2021
Sources: Franklin Templeton Investment Solutions, Our World in Data, Macrobond. Important data provider notices and terms available at www.franklintempletondatasources.com
As a result, we continue to favor risk assets generally, have increased our preference for lower-rated corporate bonds over the past month, and maintain a strong asset allocation tilt towards stocks over bonds. This reflects the much-improved economic outlook encapsulated in our leading theme that sees a “Strong Cyclical Rebound in Global Growth.”
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. 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.
IMPORTANT LEGAL INFORMATION
This material 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 views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.
Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.
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