What Franklin Templeton Thinks...

The thoughts of our investment managers on current market topics and key themes.

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What Franklin Templeton Thinks


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.


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.


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.


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.


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.


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.

Key Themes

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.