THE GREAT REOPENING CONTINUES
IN THIS ISSUE
The great reopening story that has dominated financial market discussions for many months is expected to lead to increasingly synchronized global growth in the second half of this year. This growth, along with inflation that is unlikely to become problematic, supports a stronger medium-term return potential for stocks than bonds. Although policymakers may adjust the parameters of their stimulus programs, their objectives will not change. We continue to expect a supportive policy environment.
We explore the traditional benefits of a balanced portfolio between stocks and bonds and continue to see this as the most likely path toward stable potential returns, even as bonds remain expensive, in our view.
Major themes driving our views
- Strong cyclical rebound in global growth
A fiscal-fueled expansion is well-established, led by the United States. A period of synchronized global growth is anticipated for the remainder of this year, although it may be largely built into investors’ expectations. Regional divergences will be accentuated by access to vaccines and the persistence of policy accommodation.
- Inflation unlikely to become problematic
Global inflation is already moving up, pulled higher by demand. Growing supply bottlenecks are boosting headline inflation, but this is likely to be largely transitory. In the longer term, secular disinflationary forces, such as technology and globalization, remain strong.
- Dovish bias to policy
Central banks remain accommodative and are aware of downside risks to growth. The transition from crisis measures to supporting the recovery has kept liquidity flowing. We see an ongoing need for fiscal policy coordination and a continuation of stimulative policy overall.
- Nimble management still required
Stocks have superior return potential, and we believe they should earn their equity risk premium over time. Despite the continued risk of bumps along the road, we retain our longer-term optimism as the expansion evolves. We continue to believe that navigating the challenges presented in the months ahead will require nimble management.
- High quality bonds remain expensive
The anticipated return from high quality bonds remains modest in comparison to stocks, and it is only for their residual risk-reducing characteristics that they justify a place in a longer-term portfolio in our view. Corporate bonds offer a modest additional yield and some potential diversification benefits from government bonds.
- Continuing to look for alternatives
We continue to find few compelling alternatives to equities when it comes to generating an appealing longer-term return. We believe maintaining a diversified portfolio of risk premia is the most likely path toward stable potential returns. This is especially important in a low-return environment that we continue to foresee.
What Are the Risks?
All investments involve risks, including 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. The positioning of a specific portfolio may differ from the information presented herein due to various factors, including, but not limited to, allocations from the core portfolio and specific investment objectives, guidelines, strategy and restrictions of a portfolio. There is no assurance any forecast, projection or estimate will be realized. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, 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. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds the portfolio’s initial investment. A strategy may not achieve the anticipated benefits, and may realize losses, when a counterparty fails to perform as promised. Currency rates may fluctuate significantly over short periods of time and can reduce returns. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particularly over the short term.
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.
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