United States
What Franklin Templeton Thinks
…About VOLATILITY
Hostage to the headlines; uncertainty may persist.
- Trade and tariff headlines may continue to produce short-term volatility, given the numerous battlefronts. US tax cuts and falling interest rates in some countries are likely to be bigger near-term influences on global growth than trade, but we are watching for signs of weaker business sentiment, including export orders and capital expenditure plans.
- The rise of populism globally has made the political landscape far less predictable, with Italy in particular seeming to ratchet up the anti-euro sentiment.
- Fears of oil price spikes are being driven by demand growth from strong economies amid supply disruptions and declines from larger producers, including Iran in the face of renewed US sanctions.
…About US EQUITIES
The positive growth profile remains in place despite headlines dampening investor sentiment.
- Optimistic exuberance has waned slightly, but PMIs and retail sales, while leveling off, have remained positive.
- Rolling 12-month earnings and consensus estimates for the S&P 500 are at record highs going back to 1995.
- Cash flow metrics like dividend yield and free cash flow margin are at similarly strong levels.
- Tax reform should provide a tailwind to earnings.
…About EUROPE, JAPAN and UK EQUITIES
Japan may surprise; political concerns fog the UK and European outlooks.
- Profit margins have trended higher under “Abenomics” in Japan over the last few years. Conservative growth expectations may lead to earnings surprises.
- Sterling weakness has helped short-term UK gains, but the path to Brexit is fraught with potential economic headwinds.
- In Europe, populist concerns have resurfaced and positive economic headlines are slowing, but European equities have traditionally outperformed later in the economic cycle. Banks and energy companies are multiyear restructuring stories with growing earnings.
…About EMERGING MARKETS EQUITIES
Volatility may continue in 2018, but seems unlikely to deter continued growth especially in tech and consumption areas.
- Rising US-China trade tensions are causing jitters in emerging markets.
- Consumer sentiment is rising; retail sales are increasing. Many EM companies are seeing greater earnings power and cash flow.
- We believe intra-emerging market trade has become more important in recent years.
- Emerging markets are not homogenous, and those that are more domestically driven should be more insulated against global shocks.
…About INTEREST RATES & INFLATION
Modestly rising inflation should not be problematic in the US and generally remains below central bank targets globally.
- The markets took the June Fed rate hike in stride.
- We continue to favor risk assets due to continued global economic growth and strong corporate fundamentals.
- The European Central Bank (ECB) successfully executed a dovish taper—announcing the end of QE, while indicating no change in interest rates until the end of summer 2019, at the earliest.
- One caveat: Global and structural forces keeping a lid on inflation are difficult to monitor directly. While we continue to believe these forces will moderate inflation, there is a hard-to-monitor risk here.
…About FIXED INCOME
Opportunities still may be better in risk categories and munis.
- We expect US Treasury yields to continue rising. Tax cuts and the growing fiscal deficit are expected to raise the borrowing needs of the US government, while the Fed simultaneously reduces its ownership of Treasuries.
- While valuations are tight, the economic backdrop remains supportive of riskier fixed income corporate sectors.
- Corporate fundamentals appear stable, but the investment-grade sector has more duration risk than other sectors.
- Muni fundamentals are broadly attractive as we expect lower supply to continue amid resilient investor demand, but discernment is required to avoid issuers lacking fiscal discipline.
- Improving global growth with inflation trending higher leads to valuations remaining expensive despite the rise in yields.
- The impacts of rising rates in the US on emerging markets will vary from country to country. Those with low-rate environments, or large structural imbalances and economic soft spots, could be vulnerable to external rate shocks. Countries with current account surpluses or higher relative yields should be in a stronger position to absorb rate shifts of 100 bps or higher.
Franklin Templeton Investments comprises multiple independent investment teams located around the world. As individual portfolio managers and teams pursue different fund mandates, there will always be different views held on the markets, and we consider that a strength. The insights above represent the current views of senior investment leaders and are subject to change.
Key Themes
| Theme | Rationale |
|---|---|
| Continue to Ride the Secular Trends in Growth and Innovation | Secular shifts in finance, retail, technology and personal leisure, including autonomous driving, online shopping, the need for better internet security, and gaming continue. Individual companies that are innovating in health care are worth watching. |
| Work the Core | Corporate fundamentals remain strong, after the US economy completed what could be one of its strongest quarters of the post-financial crisis expansion. For now, the risk of recession remains low, but it’s important to stay cognizant of where we are in the business cycle. |
| Consider the Value of Europe | Attractive value opportunities in Europe may perform better than the overall market, due to sustained growth, a positive credit cycle, improving pricing power and earnings growth. |
| Think Yield Diversification in a Rising Rate World | Look for risk-adjusted opportunity in corporate sectors, including floating rate loans and dividend-paying stocks. Focus on underlying fundamentals. Be cognizant of rising rates. Select emerging market debt appears attractive. |
| The Muni Choice | Muni fundamentals appear positive, with constrained supply and resilient demand supporting yields. Perform careful scrutiny on funds with exposures to leverage, derivatives or unsustainably highly-indebted municipalities. Also, given the impact of recent tax law changes, be sure to consider investments offering “double” tax-free income. |
1. Source: FactSet. 6/30/18. See www.franklintempletondatasources.com for additional data provider information.
2. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable.
Important Legal Information
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. The opinions and analyses are rendered as of 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 the possible loss of principal. Investments in fast-growing industries like the technology sector (which has historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets 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. Bond prices generally move in the opposite direction of interest rates. As the prices of bonds in a fund adjust to a rise in interest rates, the fund’s share price may decline. High yield bonds carry a greater degree of credit risk relative to investment-grade securities.
ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. There is no guarantee that any strategy will achieve its objective. Franklin LibertySharesETFs are not riskless investments, and investors can lose money.
Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, call us at (800) DIAL BEN®/342-5236 or visit franklintempleton.com.
Investors should read the prospectus carefully before they invest or send money.
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