FI, equities and alternatives to draw in investors in H2

Oksana Patron

7 July 2023

Despite a number of existing challenges, the mid-year outlook for the second half of year focuses on attractiveness of investments beyond cash including fixed income (FI), equities and alternatives, according to Franklin Templeton’s investment team.

This means that fixed income, as an asset class, will deserve more of investors’ attention as it is predicted to deliver income again while diversification an income may be enough to take holdings further out the US yield curve.

Also, following a number of quarters which saw falling US corporate profits, the outlook for earnings will “begin to brighten” and equities should benefit from a taming of inflation and earnings optimism.

At the same time, the manager said that the US recession remained the consensus view and, to some extent, it has been already accounted for in market prices. The investment team also said it was likely to “come later and be shallower”.

However, the global outlook will still carry some risks and the list includes, next to energy shocks, soggy returns and geopolitical tensions, a possibility of deep recession.

“Persistent inflation and concerted global central-bank tightening accompanied by fiscal restraint (as the debt ceiling compromise is implemented via spending cuts) could tip the US and global economies into recession, perhaps sooner and deeper than we anticipate,” Franklin Templeton said in the report.

“However, if investors have extended duration holdings (as we favor), gains on US Treasuries should at least partially offset prob[1]able losses in global equities and emerging local currency debt markets.”

As far as the greatest potential investment opportunities were concerned, the fund manager pointed to investment-grade credit, selected long-duration bonds as well as high-quality high yield and emerging market debt.

According to Franklin Templeton, investors should also consider both US equities, given this asset class’ ‘bifurcated earnings streams’ which may create new patterns of return dispersion, and establishing larger positions in non-US markets, as after a decade of massive US equity outperformance the past six months saw the Nikkei double the S&P 500’s 7% return and the German DAX trump it by three full percentage points.

Also, historic opportunities could be found across private debt which is now expected to pick up a larger share of the loan market from regional banks given the elevated rates.

“Many of the headwinds for private debt issuers, such as rising rates and inflation and a potential slowing economy, are being offset by tailwinds such as higher credit spreads, lower leverage and stronger loan documentation,” the report notes.

“Top managers in the asset class who have constructed solid, diversified portfolios will likely outperform and take advantage of market dispersion to separate themselves from the competition when deploying new capital.”