Actively Navigating a Dynamic World

The theme of our 2017 Global Investment Outlook is “Actively Navigating a Dynamic World,” a concept that has perhaps never been more relevant than it is today. Global markets have undoubtedly been volatile over the short term, as a host of global macroeconomic and political factors increase investors' anxiety.

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Macro View

From the Templeton Global Macro Team
Views as of Q1, 2017

The Reversal of Yen Appreciation Should Improve the Inflation Outlook, but Inflation Likely to Remain Far from the Bank of Japan’s (BOJ’s) 2% Target

  • Japan grew somewhat faster than trend in 2016, partly due to a pickup in growth from a subpar 0.5% 2015 growth.
  • Medium-term growth requires an investment recovery, in our team’s view.
  • We believe that Japan’s policymakers have the right strategy in place and appear fully committed to carrying it out.
  • We expect monetary policy to remain very loose for an extended period of time, as we expect the country’s domestic demand to remain soft and inflation to stay low for extended time. Rightly in our view, the BOJ is committed to its new policy of yield-curve control which, in conjunction with US Treasury moves, has proved to be a powerful driver of recent reversal of yen appreciation when US rates rise.
  • As the US Federal Reserve continues to raise its monetary policy rates and the BOJ keeps its yield curve stable, we expect the two countries’ monetary policy to diverge even further. Accordingly, we think the yen should weaken further.

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China: The Economy Improves While Medium-Term Risks Rise

  • Economic conditions in China improved significantly through 2016, helped by a pickup in housing construction activity and state-owned enterprise-led investment. China avoided a hard landing but financial and over-capacity challenges persist.
  • The stimulus in 2016 was successful in stabilizing industrial performance and keeping headline growth within the 6%–7% target, and we expect fiscal support for the economy to continue into 2017. The Chinese economy is rebalancing toward consumption and services, but the government’s intermittent use of stimulus means that rebalancing will likely be a long and complicated process, in our view.
  • China’s trade sectors are competitive and capital outflows remain at manageable levels, given current foreign exchange reserves. However, outflows have accelerated in recent months due to the yuan’s depreciation against the dollar, leading the authorities to intensify capital controls. The People’s Bank of China’s shift to manage the exchange rate against a basket of currencies, which was recently expanded, provides additional flexibility to help counter external financial pressures.
  • A possible shift toward more protectionist policies by the new US Trump administration poses risks to China, though the country has become less dependent on trade over the past decade.

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Emerging Markets Continue to Show Resilience in the Face of External Shocks

  • Investors reacted negatively toward a number of emerging markets in the wake of the US presidential election results, on fears that protectionist US policies could have a negative impact on growth prospects. However, we have already seen some shift in the incoming administration’s rhetoric from warnings of enormous tariffs to more of a balance of free and fair trade.
  • We do not believe there is a broad-based crisis in emerging markets.
  • Some emerging markets are being forced to adjust to lower commodity prices after years of unsustainable growth. We believe others, such as Nigeria and Turkey, are paying the price for mismanaging their economies and look vulnerable to us.
  • We see profound value in select emerging-market currencies. Some countries with solid fundamentals and healthy buffers are being priced as if they were in a crisis.
  • The Mexican peso is close to the weakest level it’s been in its history, despite reasonably robust economic fundamentals. We believe protectionist measures by the incoming Trump administration will likely be tempered by a more trade-friendly, Republican-dominated US Congress. Free trade restrictions would not end trade between the United States and Mexico; they would just raise the costs—an impact that we believe has already been more than priced in, given the extent of the peso’s depreciation.
  • The Malaysian ringgit and the Indonesian rupiah are close to levels we have not seen since the Asian financial crisis in 1998. While these two countries have been impacted by the slowdown in China, their economies don’t appear to be anywhere near the crisis that their exchange rates might suggest.
  • The situation in Brazil remains delicate, although we are beginning to see signs that the economic contraction is finding a floor. We expect the policy mix to continue to improve.

Europe Faces Political Uncertainty as Populism Spreads

  • We expect monetary accommodation from the European Central Bank (ECB) to continue to support growth. The ECB extended by six months its asset-purchase program, including its corporate bond-buying program
  • Inflation remains low, partly as a reflection of economic slack. A rise in commodity prices will likely boost headline inflation, particularly due to base effects—the influence of inflation in the corresponding period of the previous year.
  • We are concerned about political uncertainty and rising populism in Europe and elsewhere. The “No” vote in the Italian referendum increases the probability that the country will face early elections. The vote also puts the path of structural reforms on hold.
  • In France, presidential elections are coming up in May. The full roster of candidates has yet to be finalized. Current polls show a close first-round race between the more traditionally conservative Republican candidate, Francois Fillon, and the populist anti-immigration National Front candidate, Marine Le Pen.
  • The UK Brexit vote will likely be a slight headwind for European growth. The largest impact will be on the United Kingdom itself, in our view. While consumer and business confidence had a significant drop in the aftermath of the Brexit vote in June of last year, both confidence indexes rebounded shortly thereafter. Nonetheless, in September, the Organisation for Economic Co-operation and Development (OECD) cut its forecast for 2017 UK gross domestic product (GDP) growth to 1.2% from 2.0%.1

Loose Fiscal and Monetary Policies and Trade Restriction to Stoke Further Inflationary Pressures

  • We expect the Trump administration to have notable implications for existing free trade agreements, fiscal spending and inflation pressures. However, checks and balances across the US government should rein back some of the claims made during the election campaign.
  • We expect an escalation in government spending from the incoming administration, notably in the form of increased infrastructure development. A strong fiscal expenditure program, while boosting near-term growth, would also push inflation higher, given the limited slack in the economy.
  • Regarding free trade, we anticipate some divergence between what was proposed during the campaign and what would be implemented through a Republican Congress that has traditionally defended NAFTA (North American Free Trade Agreement) and existing trade agreements. In any event, a rise in US protectionism that restricts trade and imposes tariffs would increase the costs of trade and ultimately the price of goods, further adding to inflation.
  • We remain more constructive on the US economic outlook versus market consensus, which often predicts deflation and recession. While economic growth in the first half of 2016 was soft, it rebounded in the third quarter and appeared healthy in the fourth quarter as well. Economic slack has been worked off, and the underlying economic activity level appears to be above potential.
  • The US labor market remains at full employment. Employment growth remains healthy, averaging about 180,000 in nonfarm payroll gains over the past year. In December, average hourly earnings annual growth accelerated to 2.9% year-over-year, the fastest annual increase of the recent expansion.
  • Inflationary pressures continue to strengthen and several indicators of underlying inflation show annual rates above 2%. As the temporary effects of lower crude oil prices fade, we expect headline inflation to rise well above the Federal Reserve’s (Fed’s) 2% target over the next several months.
  • The Fed hiked the federal funds target rate by 25 basis points in December, and we continue to believe that the Fed needs to continue to increase the federal funds target in 2017. We recognize its dovish bias may limit the number of interest rate hikes this year, although rhetoric from the Federal Open Market Committee (FOMC) turned slightly more conservative at the beginning of 2017.

Spotlight: Latin America: The Rise and Fall of Populism

Populism has been on the rise across a number of advanced economies, while key Latin American economies, ironically, are moving away from populist economic policies to embrace free-market and pro-business reforms. Templeton Global Macro explains how Latin America’s experience with populism has important lessons and warnings for the developed world at a time when orthodox economic policymaking appears to be at risk of falling out of favor.

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Sector View

From Templeton Global Equity Group and Franklin Equity Group
Views as of Q1, 2017

Financials

Trump Victory Hints at More Favorable Regulatory Environment

We believe that fundamentals for the financials sector will improve significantly following the November 2016 elections in the United States. We expect a stronger economy, lower taxes, higher interest rates and a more favorable regulatory environment to improve earnings power. Banks should see faster loan growth, higher net interest margins and sustained low credit costs. Capital market firms should benefit from increased activity levels, and asset managers are seeing early signs of improved active equity performance that could improve flows. Higher interest rates are considered a net positive for insurers’ portfolio yields, particularly life insurers; however, an associated increase in claims inflation would be an adverse development for property and casualty insurers.

From a value-investing perspective, the European banking sector remains attractive in our assessment. With little fanfare, economic conditions in Europe are improving, with year-on-year gross GDP growth in 2016 exceeding that of the United States in real terms for the first time since 2009. Private loan growth has turned positive, loan-loss provisions are continuing to come down and a steepening yield curve should lead to net interest margin expansion. We have also seen the beginnings of self-help measures at European banks, including tighter cost control and more fee- and commission-based profit streams.

We are also finding attractive opportunities in undervalued Asian banks with scope for return on equity improvement as organic growth opportunities unfold.

Energy

Demand Expectations Remain Solid as OPEC Cuts Production

Energy-linked equities continued to receive support through year-end 2016 from a combination of expected production reductions following the Organization of the Petroleum Exporting Countries (OPEC) agreement and healthy demand indicators.

As the new year began, initial signs of compliance have been constructive with several producers apparently following through on agreements to reduce production. Meanwhile, demand expectations also remain supportive.

With the price of oil up more than 100% from its February 2016 low, we have seen the most anticipatory parts of the energy sector—namely, the early cycle oilfield services firms and exploration and production companies—outperform the integrated oil producers and the market more broadly. This is particularly the case in North America, now the world’s marginal oil producer and the region that has benefited most strongly from OPEC supply cuts, as well as from the election of an administration with a light environmental regulatory touch. From a value perspective, our current strategy therefore involves selectively reducing exposure to some of the earlier-cycle energy stocks with fuller valuations and rotating into more modestly valued opportunities among global oil majors, as well as a few exploration and production (E&P) and service providers outside of North America.

From a growth perspective, although many energy stocks have appreciated significantly over the past year, we still see good upside potential for select stocks that have lagged the performance of companies investors have favored as the recovery broadens in scope.

Health Care

Political Rhetoric Concern Eases, but Sector Challenges Remain

Despite resilient corporate fundamentals, pharmaceuticals stocks declined sharply in 2016. Weakness was primarily attributable to political criticism of drug-pricing and corporate tax strategy.

While we expect investor concerns over political rhetoric, government intervention in corporate structures, drug pricing and reimbursement to decrease with Trump now officially in office, the Republican Party’s focus on repealing the Affordable Care Act potentially creates new uncertainties, opportunities and challenges.

We have seen some early signs of M&A (merger and acquisition) activity and expect an acceleration of the trend for several reasons. Advances in genetic information and cell biology, generated primarily by smaller and more focused companies, have led to improvements in the science; there is a greater willingness for acquisitive companies to take on financial leverage; investors are rewarding companies for growth; and now with the election behind us, we are seeing an improved political backdrop for acquisitions.

However, offsetting some of this optimism are governments and private payers moving to limit the growing share of health care costs in their budgets. We expect to continue to see health care systems migrate from volume-based systems to value-based ones, a scenario that creates opportunities and challenges for both providers and suppliers.

We continue to favor firms with sound business models, solid product portfolios, attractive research and development pipelines, and the ability to grow revenues, increase cash flows and generate high capital returns for shareholders through dividends and buybacks.

Industrials

Tax and Infrastructure Expectations Offer an Improved View for Industrials

From a growth perspective, our outlook for the industrial sector has improved over the last three months. The prospect of lower tax rates, infrastructure spending and accelerated depreciation of capital expenditures all bode well for increased industrial activity, in our view. However, we remain cautious that valuations have expanded into early 2017, while none of these initiatives are yet in place, and a border-adjusted tax with unpredictable consequences could be used to offset the revenue reduction from some of these proposals.

It is possible that the economic cycle could lengthen, supporting cyclical industries such as vehicle manufacturing, construction and aerospace/defense.

However, we remain wary of reacting by increasing related exposures across the board. Rather, we remain focused on specific themes including industrial digitization, the electrification of the transportation network and a recovery in agriculture. We also continue to look for company-specific situations where self-help initiatives such as acquisitions or turnarounds could yield better-than-expected results.

Telecommunications

Improving Regulatory Prospects and M&A Activity on the Horizon

We are more positive on the telecommunications industry, given what appears to be a more benign US regulatory environment. We expect M&A to be a major theme within the industry as companies test out the Federal Communication Commission’s leniency on major deals. We believe consolidation within the industry may result in a more disciplined pricing environment, but may also lead to cable’s entrance into wireless, which would likely have mixed results for incumbents. We also continue to prefer companies that are secular growers benefiting from strong competitive positions, disciplined industry structures, and adequate pricing power that can grow regardless of M&A outcomes.

US corporate tax policy may have a disproportionate impact on the telecom sector given the domestic-based, high-capital intensity, low-leverage characteristics of the industry. However, a rising-rate environment may dull the effect of these regulatory tailwinds. As such, we expect to see significant volatility as the markets sort through the impact of President Trump’s policies.

While excess capacity remains an issue in developed markets, an improving regulatory environment and continuing trends toward consolidation should help improve industry economics, as should the roll out of 4G wireless and fiber optic broadband. Asian and emerging markets are less saturated and still offer another significant leg of growth as rising smartphone adoption leads to increasing data usage and higher average revenues per user. Across the sector globally, earnings appear to have troughed and look poised to recover, although that expectation is widely held and currently reflected in fuller valuations, particularly in developed markets. In our view, this remains a stock-picker’s sector and not a source of wholesale value.

Information Technology

Strong Economy and Tax Reform Underpin Optimism

We believe the US economy will perform well in 2017, which should be positive for technology spending throughout the year, especially in structural growth segments.

In software, continued migration to cloud computing will allow select firms to post strong growth and capture revenue and profit-sharing opportunities from other parts of the technology sector. The technology hardware space has been more challenging as smartphones and tablets take market share from traditional products; margins may improve as costs are removed, but top-line growth will likely remain elusive, and bargains are limited in our view. In semiconductor and semiconductor equipment manufacturing, demand has been weak, inventories elevated and valuations unattractive, according to our analysis. More generally, every major tier in the IT “stack”—computers, data storage, networking, database, apps—are being disrupted by a new set of technologies.

We are optimistic for potential US corporate tax reform and cash repatriation incentives, which if they were to come to pass, would be positive for capital return and M&A activity at some of the world’s largest, most influential technology companies. That said, given valuation metrics at the outset of 2017, significant currency movements and near-term enterprise spending volatility linked to heightened political uncertainty, we are cautious in the near term and expect increased market volatility.

Our approach is to identify both mature IT companies that offer value in their ability to adapt to change as well as new tech entrants likely to emerge as winners.

Materials

Strengthening Demand Suggests Potential Earnings Improvements

Although many materials prices are likely to moderate from their 2016 highs, more robust global demand should help prices to remain at profitable levels.

High prices have helped companies to rapidly pay down debt, leaving room for potentially higher dividend payouts in 2017. Trade protection activity remains a theme that may create some regional opportunities for materials producers, especially in the United States.

Gold prices fell over 12% in the fourth quarter 2016 on the back of the US dollar strength, higher interest rate expectations and selling after the US election. Rising inflation expectations, US dollar weakness and increasing market uncertainty are just a few of the potential catalysts for gold. Although we expect prices to remain volatile, we still see compelling portfolio diversification benefits from having some exposure to gold equities in the current environment.

Construction materials firms have begun to reflect expected earnings improvements. Chemicals stocks look generally expensive to us, with margins near cyclical peaks and new capacity negatively impacting industry pricing. After a strong rally in industrial commodities, major mining firms have now experienced a full valuation and profit cycle in less than a year.

Consumer Staples

Headwinds from Slowing End-Market Growth

Fundamental trends for consumer staples have been weak lately, and we do not expect these trends to reverse in the near term. Organic sales growth for the sector has faded to a multi-decade low. Slowing end-market growth in both developed and developing markets is a headwind, but mounting share losses for leading brands that dominate the portfolios of large publically listed companies is equally problematic as barriers to entry shrink (e.g., distribution and brand building in an increasingly digital world).

Input cost tailwinds that have supported margin expansion are fading, and the stronger trade-weighted US dollar has re-emerged as a headwind for multinationals.

Rising interest rates have historically led to sector underperformance due to the opportunity for yield that begins to arise outside the sector. During the fourth-quarter of 2016, staples valuation multiples compressed from historical highs to levels closer to long-term historical averages. We see further potential downside risk to valuation multiples given weak fundamentals trends, foreign exchange headwinds and likely rising rates. We expect continued sales pressure for the group while the appetite for M&A and cost-cutting is likely to remain high.

Utilities

Fundamental Outlook for Regulated Utilities Appears Positive

Investors rotated toward cyclical sectors in the latter half of 2016, and most utilities declined. However, the fundamental outlook for regulated utilities, from a growth-investing perspective, appears positive to us, as the sector has benefited from the high level of capital spending needed to meet ongoing system reliability and stricter environmental standards.

Regulatory pressure remains low despite higher capital budgets, given the offsetting impact of lower commodity prices on customers’ bills. Equity valuations on regulated utilities look appropriate given the current bond-yield environment, while long-term interest rates will continue to have a correlating effect on regulated utility stock prices.

From a value-investing perspective, we think utilities have become broadly expensive considering the potential impacts of weaker economic growth and increasing regulatory interference on power demand and industry pricing. Our view is further constrained by oversupply concerns in developed markets.

Consumer Discretionary

US Consumer Spending Underpins our Confidence in Discretionary Sector

The outlook for consumer spending appears to be moderately better in 2017 driven by the likelihood for faster economic growth, wage increases, and the possibility of lower personal income taxes. There are some potential headwinds with inflation rising and the consensus forecast for interest rates now projecting multiple increases in 2017. Benefits from lower energy costs, which have generally been helpful to consumer spending over the past few years, appear to be abating.

While nearly all rumored tax change proposals being discussed are positive for consumer spending and consumer stocks, the possibility of a border-tax adjustment on imported goods sold in the US is a negative for many companies, particularly those in the apparel retail sector. Companies with a high percentage of imported products and a high mix of US sales tend to be most impacted.

We remain positive on housing-related companies, automotive parts, discounters and those making a successful transition to an omni-channel business model. From a value-investing perspective, we have observed some valuation opportunities among retail and media stocks following recent weakness.

Spotlight: Actively Navigating a Dynamic World

The theme of our 2017 Global Investment Outlook is “Actively Navigating a Dynamic World,” a concept that has perhaps never been more relevant than it is today. Global markets have undoubtedly been volatile over the short term, as a host of global macroeconomic and political factors increase investors' anxiety.

Read More



Tactical View

From Franklin Templeton Solutions (FT Solutions) Global Investment Committee2
Views as of January 1, 2017

Cross Asset

We upgraded our view on global equities to neutral during December. We favor inflation-protected assets, hedge funds and oil-related commodities. We have a modestly negative view of corporate bonds and cash.

  • Equities: Macro indicators signal positive growth outlook, with improved corporate earnings, profit margins and productivity. Credit surveys in the United States and the eurozone seem to us to be supportive. Technical indicators suggest potential flows into equities. Valuations appear elevated relative to history with tax cuts and fiscal spending reflected in asset prices. Less accommodative central bank policy and geopolitics may present risks.
  • Corporate bonds: Poor corporate fundamentals, less central bank support and rising hedging costs for overseas investors point to excessive valuations for investment grade and high yield. But carryover US Treasuries may support healthy performance potential. We prefer bank loans. In our view, a revised simpler, lower tax code would support corporates.
  • Government bonds: We think developed market sovereign bonds offer little value. We prefer Treasury Inflation-Protected Securities (TIPS) due to strong technical indicators we see. An excessively bearish market inflation outlook, employment indicators and potential wage gains should support TIPS. However, increased valuations temper our view.
  • Alternatives: Hedge funds historically have seen strong, positive recoveries following periods of underperformance. We also view hedge funds favorably due to relative performance momentum versus the S&P 500 Index. We have a favorable outlook on commodities due to a broad improvement in fundamentals.
  • Cash: Macro indicators appear increasingly supportive of risk assets such as equities, commodities and hedge funds. Recovery in earnings, profit margins, productivity and manufacturing all strengthened, leading us to favor risk assets over cash.
GIC Asset Class Views
Equities        
Corporate Bonds          
Government Bonds          
Alternatives          
Cash        

The graphic reflects the views of the Franklin Templeton Solutions (FT Solutions) Global Investment Committee (GIC) regarding each asset class relative to a neutral portfolio allocation.

← / → Represents month-over-month change
No arrow = No change from the previous month

Fixed Income

US inflation-protected assets have remained attractive to us, primarily due to favorable valuations and employment data.

  • Low yields in developed market sovereign bonds offer little value potential, and a rising inflation trend may provide a catalyst for higher rates, especially if stabilization in growth continues. Demand for US Treasuries could continue in the back end of the yield curve, driven by technical support from participants such as liability-driven investors. German Bunds appear most overvalued to us, relative to other fixed income investments.
  • Performance in the investment-grade sector may be vulnerable due to tightening lending standards. Corporate fundamentals have deteriorated recently. Valuations have increased, and yields seem rich compared to the 10-year average. Increased foreign exchange hedging and less central bank support may decrease foreign demand.
  • Our fair value model suggests notably high valuations in the high-yield sector. Poor corporate fundamentals, potential volatility spikes and vulnerable retail flows present risks. Over the long term, the high-yield sector could have performance potential; a revised simpler, lower tax code could be supportive.
  • Inflation-protected securities have seen increased valuations but TIPS remain attractive to us. We have observed tight labor markets, firming average hourly earnings and signs of higher inflation. Both headline and core inflation seem to be picking up. Deficit spending at full employment should raise inflationary pressures. Inflation breadth appears stronger than last month and expectations seem excessively pessimistic. Treasuries currently seem to be pricing sluggish growth and a conservative path of rate hikes. The US economy is near the US Federal Reserve’s goals for maximum employment and price stability.
  • Emerging market economic fundamentals were stronger in 2016, both on an absolute and a relative basis. However, the decline in global trade in 2010 was one of the key drivers of the decline in emerging market growth. Emerging market current account deficits appear to be improving, but due to imports falling, rather than exports improving.
GIC Views of Fixed Income Sectors
DM Sovereign Bonds          
Investment Grade        
High Yield          
Inflation Protected          
EM Debt          

DM: Developed Market; EM: Emerging Market
The graphic reflects the views of the Franklin Templeton Solutions (FT Solutions) Global Investment Committee (GIC) regarding each asset class relative to a neutral portfolio allocation.

← / → Represents month-over-month change
No arrow = No change from the previous month

Equities

We adopted a favorable view of Japanese equities and held an unfavorable view of European equities in December.

  • Developed markets: Economic indicators have been neutral. Low gross domestic product (GDP) growth has been expected and moderate economic surprises have been offsetting poor retail sales. Slightly attractive next-12-month (NTM) sales, earnings-per-share (EPS) momentum and profit margins helped offset poor return on equity (ROE). We have a neutral outlook compared to emerging market equities. We favor health care, financials, industrials and materials.
  • United States: Rising inflation is offsetting poor economic indicators. Revenue and profit margins appear strong, but poor return on equity (ROE) presents risks. Valuations remain elevated in our eyes. We think the market may start to focus on President Donald Trump’s policy implementation over rhetoric.
  • Eurozone: Economic indicators have improved recently and appear attractive relative to history due to improving industrial production and GDP forecasts. Corporate forward expectations are stabilizing with positive earnings revisions. Valuations seem to us moderately expensive, with the ECB continuing to be quite accommodative. Upcoming elections and negotiations over the United Kingdom’s withdrawal from the European Union present geopolitical risks to the region, in our view.
  • Emerging markets: Economic fundamentals have deteriorated recently due to industrial production and retail sales, which are unattractive relative to history. Valuations were neutral in the fourth quarter of 2016 with regional discrepancies. Forward earnings expectations have improved in Asia.
  • Emerging-markets Asia: Industrial production and retail sales have been negatively impacting GDP forecasts. Corporate fundamentals seem to be improving due to forward earnings expectations and profit margins, while valuations look slightly attractive and central bank policy supportive.
  • Emerging-markets Latin America: Optimism regarding structural reform in Brazil has been supporting equity performance over the past year. However, revenue and earnings data both appear to be deteriorating and unattractive relative to history. Liquidity conditions are improving due to more central bank flexibility with subsiding inflation. Equities also appear to us to be oversold.

Emerging-markets EMEA: Economic fundamentals were weak in the fourth quarter of 2016 due to downside surprises and mediocre retail sales. Earnings growth expectation for the next 12 months is above average3 and valuations appear attractive to us. Limited central bank support and weak money growth could be creating unfavorable liquidity.

GIC Views of Equity Regions
Developed        
United States        
EMU          
Japan        
United Kingdom          
Canada          
Pacific ex Japan          
Emerging        
Asia        
Latin America          
EMEA          

EMU: European Monetary Union; EMEA: Europe, the Middle East and Africa
The graphic reflects the views of the Franklin Templeton Solutions (FT Solutions) Global Investment Committee (GIC) regarding each asset class relative to a neutral portfolio allocation.

← / → Represents month-over-month change
No arrow = No change from the previous month

Alternatives

We have a favorable view of commodities, with broad improvement in global manufacturing and behavioral indicators, as well as a strong US dollar.

  • Hedge funds:4 With performance trending higher, we believe that the sector has potential for continued strength. We believe equity sector dispersion—the degree to which the components of a market index perform similarly—could be supportive of hedge funds.
  • Commodities: We have a favorable view of commodities. There has been a broad improvement in fundamentals. Manufacturing data have improved recently. Global economic indicators, stabilization in Chinese growth and valuations seem supportive to us.
  • Real estate investment trusts: Revenue growth, earnings growth and earnings momentum all weakened last month and seem to us unattractive relative to history. ROE and profit margins slightly improved. Valuations still appear expensive to us.