Still Looking For Alternatives? How About Real Assets

Franklin Templeton Multi-Asset Solutions

PREVIEW

We focus on signs that the global economy is healing after the COVID-induced recession but that the outlook remains extraordinarily uncertain. We review inflationary pressures that are part of a new market narrative that has seen real assets rebound, but point to the need for policymakers to provide ongoing coordinated support.

We discuss the attractions of alternative assets that can offer natural portfolio diversification. Over a longer-term horizon, we continue to believe global stocks have greater performance potential than global bonds, or alternatives, but that this outlook will not be reached along a smooth path.

Major themes driving our views

  • Ongoing headwinds to global growth
    The coronavirus has pushed the global economy into a deep recession, though growth momentum has improved. Risks to the recovery are tilted to the downside in part due to the second-wave infection threat. Political uncertainty contributes to the outlook remaining less clear than usual and presents headwinds for business investment intentions.

  • Subdued inflation across economies
    We believe that changes in inflation are driven mainly by demand, but expectations 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 current virus crisis, policymakers remain accommodative and will do whatever it takes. Emergency measures have exceeded expectations, but the easy wins may already have been delivered, while the need for fiscal policy coordination is increasing.

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Practical positioning

  • Nimble management required
    Although we recognize the longer-term return potential for stocks, we believe politics may have a growing impact on financial markets and see shorter-term concerns that temper our enthusiasm. We have taken a neutral stance on risk assets and believe the challenges that current markets present will require nimble management.

  • Seeking natural diversification
    In a multi-asset portfolio, we seek assets that provide the potential for diversification. Ample liquidity has propelled many markets to elevated levels, and we look for alternatives to both stocks and bonds. Exposures to investments that offer natural diversification and protection against unanticipated inflation are top of our wish list.

  • Real assets could be the alternative
    Investments such as Treasury Inflation-Protected Securities (TIPS) can help to provide resilience against an unexpected rise in inflation. Holding such assets might notably enhance return potential and lower portfolio volatility during market “shock” scenarios. Certain commodities such as gold may also offer alternative diversification benefits, in our view.

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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.