Broader opportunity set across asset classes and regions: outlook

Investors will continue to see a much broader opportunity set across asset classes and regions as global equity markets benefited from falling inflation and diminishing recession fears during the first three quarters of the year, however they will need to ‘race against time’, according to Franklin Templeton’s Global Investment Outlook.

The fund manager also reiterated many of its investment highlights from mid-2023 and added “some subtle tilts”.

As far as the equities space is concerned, Franklin Templeton believes there will be opportunities across the US equities, however they would be found more often outside the largest few companies and within selected growth-oriented sectors.

“We believe investors should expand their horizons beyond the “Magnificent Seven” big cap stocks to include attractively valued, quality mid- and small-capitalisation growth businesses,” Stephen Dover, CFA Chief Market Strategist, Head of the Franklin Templeton Institute, said.

“We believe it’s prudent to consider opening or establishing larger positions in non-US markets. We are more optimistic about Japan’s equity market than we have been in years, and the Japanese yen is looking significantly undervalued to us.”

He said he favoured generally emerging markets outside of China as the country’s rising debt in the real estate sector was expected to offset rapid growth in more favoured sectors such as electric transportation, technology and pharmaceuticals.

“While we remain optimistic on the long-term potential for Chinese growth, we also acknowledge its growing pains as new policies to address the debt overhang are rolled out,” he noted.

Another area with ‘historic opportunity’ will be found in private credit which is expected to pick up a larger share of the loan market from the US regional banks and, given these dynamics, private credit managers would be able to more easily negotiate favourable pricing, terms and covenants.

According to Dover, despite the US office sector currently facing structural and cyclical headwinds, there can be still opportunities found in the US property sectors such as industrial warehouse, self-storage, residential housing and life sciences.

On top of that, fixed income has returned as an effective diversifier and will help justify an increasing allocation in a balanced portfolio.

“With inflation rolling over, we believe that the classic diversification benefit of fixed income has largely returned, with the traditional 60/40 investment strategy working again,” Dover said.