Quick Thoughts: The Search for Hidden Opportunities

By:

Chief Market Strategist and Head of Franklin Templeton Investment Institute Franklin Templeton

What are the implications of strategic asset allocation, the dynamics of public and private credit, tech-driven megatrends, and more? Stephen Dover, head of Franklin Templeton Institute, provides some insights gathered from our investment experts.

The Franklin Templeton Institute recently hosted a series of sessions where our specialist investment managers shared their investment insights. Our investment managers broadly agree that 1) recession is likely, but the unique characteristics of the previous pandemic-fueled recession wrung out many excesses. And, it’s likely any recession will be shallow; 2) inflation will come down, but not to the low levels experienced over the past few decades.

Given this global backdrop, our investment experts explored the implications on issues such as strategic asset allocation, the dynamics of public and private credit, tech-driven megatrends impacting society and investing, managing risk in concentrated equity portfolios, and the impact of food security on geopolitical stability.

Here are some of my key takeaways:

  • Both equity and fixed income markets can function in environments of 3%-5% inflation, and alpha opportunities often emerge as interest rates rise and stabilize.
  • With interest rates now elevated, there is room for monetary policy easing in many parts of the world if there are signs of economic stress. This makes fixed income attractive at current yields, particularly in shorter-duration debt and high-quality corporates. There is a possibility of higher volatility in interest rates over the next year, as the Federal Reserve attempts to regain credibility. But there is an equal chance that the rate path will be smoother than expected, as inflation will subside on its own. Because of this uncertainty, focusing on factors such as credit quality may be prudent.
  • Private real estate generally benefits from higher inflation and enjoys tailwinds as the combination of rising e-commerce and supply chain realignment toward “just-in-case” inventory management favors continued growth in industrial warehousing.
  • Higher interest rates have helped lead to a higher US dollar, which is likely to persist if there is uncertainty on the magnitude of the global slowdown. The safe-haven status of the US dollar does not necessarily match the US macroeconomic situation, so any shift in sentiment could allow other currencies to appreciate. The Japanese yen is particularly interesting, as Japan is expected to be the fastest growing country in the G7 in 2023.
  • The direction of the dollar will heavily influence emerging markets. Most global investors under-own, undervalue and underestimate the asset class. The quality of the household, corporate and sovereign balance sheets, combined with accelerating exposure to innovative sectors (i.e., semiconductors and biotechnology), creates potential opportunity.
  • Quality is also a key theme within both private credit and private equity. A focus on better debt covenants and favorable deal structures in private credit reflects this. Secondary Limited Partnership (LP) interests within private equity allow investors to participate in the upside of a private investment with minimal exposure to the risk of the early stages of a company’s life, which is particularly attractive as macroeconomic volatility remains elevated.
  • Looking longer term, the megatrends around the changing face of asset management will lead to more personalized portfolios, an expanded set of manageable assets, and new niche and specialty marketplaces. Experience in building these architectures can be shared through advisory services to clients, including portfolio construction that better incorporates alternative assets.

The impact of sustainability, the influence of early-stage companies on disrupting traditional finance, and the evolution of infrastructure investing, were also key parts of the agenda. The level of complexity in assessing the impact of all these interrelated factors has increased. In trying to absorb the “new normal,” capital markets have re-priced assets in ways that create a more balanced picture between equity, fixed income and alternative options.

I hope these insights from our investment managers help you in better understanding where the best opportunities may lie.

Originally Posted November 3, 2022 – Quick thoughts: The search for hidden opportunities

WHAT ARE THE RISKS?

All investments involve risks, including the 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. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. 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 and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

Private equity investments involve a high degree of risk and is suitable only for investors who can afford to risk the loss of all or substantially all of such investment. Private equity investments may hold illiquid investments and its performance may be volatile. There can be no assurance that any investment will be adequately compensated for risks taken. A loss of an investor’s entire investment is possible. The timing of profit realization, if any, is highly uncertain.

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. ​

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.​

Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

Disclosure: Franklin Templeton

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. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

This information is intended for US residents only.

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Franklin Templeton and is being posted with permission from Franklin Templeton. The views expressed in this material are solely those of the author and/or Franklin Templeton and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

In accordance with EU regulation: The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.

Any trading symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

Disclosure: Forex

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.