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CONTRIBUTORS

Stephen Dover, CFA

Chief Investment Strategist
Head of Franklin Templeton Institute

Introduction

During the summer season, markets have defied expectations—performing well in the face of economic challenges. As autumn’s chill starts to settle in, the question for investors is whether the investment climate will likewise begin to turn bleak.

In this Global Investment Outlook, we’ve asked our leading investment teams to provide a visual example and a few talking points on the investment opportunities they are most focused on today. Many of our highlighted investment opportunities from mid-2023 remain in place as we look toward year-end, with some subtle tilts. Here are the ideas we would focus on:

  • Today, we see a much broader opportunity set across asset classes and regions.
  • Fixed income has returned as an effective diversifier, justifying an increasing allocation in a balanced portfolio and extending duration beyond cash.
  • Within the equities space, investors may want to consider moving beyond the “Magnificent Seven” US technology names. Mid-cap and small-cap businesses offer more potential for innovation and disruption than large-cap businesses. In addition, defensive equities with more resilient earnings streams may be poised to rebound as they have become more attractively valued relative to more economically sensitive sectors.
  • Facing both structural and cyclical headwinds, the US office sector has dominated negative headlines in recent months. We see opportunity in other property sectors such as industrial warehouse, self-storage, residential housing and life sciences.
  • Specific to fixed income:
    • Within the credit space, attractive yields across various maturities and instruments offer the most compelling income opportunities we have seen in 15 years.
    • There is an opportunity to rotate from quality dividend-paying companies into higher-quality fixed income, picking up substantial yield from lower-risk assets.
    • Agency mortgage-backed securities are offering similar yields to investment-grade bonds but with less credit risk and lower duration risk. For the first time in 20 years, mortgage bonds have a higher yield than stocks.
    • The current US Treasury yield curve inversion is pricing in substan­tial monetary policy loosening amid a weakening economy, but not all our teams agree on the timing of the first US interest-rate cut.
    • There is more reason to be optimistic about Japan than there has been in years, and the Japanese yen is looking significantly undervalued to us.

In what follows, the Franklin Templeton Institute provides our analysis of today’s investment climate and the opportunities we see.

Stephen Dover, CFA
Chief Market Strategist,
Franklin Templeton Institute

Contributors

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.

Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. 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. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.

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.

To the extent the fund invests in alternative strategies, it may be exposed to potentially significant fluctuations in value.

To the extent the fund invests in privately held companies they present certain challenges and involve incremental risks as opposed to invest­ments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.