Flexibility is key to survive 2024: Franklin Templeton

Franklin Templeton’s latest global investment outlook has emphasised the importance of flexibility and resilience for portfolios to weather the expected market “storms” in 2024.

The Franklin Templeton Institute and its various investment teams generally believe the global economy will suffer a slowdown in 2024 but will narrowly avoid a recession as inflation continues to even.

“Our insistence on caution about the economy and markets may strike… as odd. After all, in the course of 2023, global equity markets have roared back from the 2022 setbacks. More recently, bond performance has also improved as interest rates fell from their peak,” Stephen Dover, CFA, Chief Market Strategist and Head of Franklin Templeton Institute, said.

“In both cases, a key driver of strong performance has been painless disinflation—the ability of the United States and many other economies to witness falling rates of inflation without having to endure recession.

“However, prevailing assets are already pricing in the current good news as well as the expectation for more good news to follow. When good news is priced in, investors should take note rather than merely be swept up by the euphoria.

“Investor cheer also owes to another form of resilience, namely the ability of the United States and world economies to largely shrug off monetary policy tightening and continue to grow. That growth, in turn, has made equity analysts more upbeat, as reflected in upward consensus earnings revisions into the double-digits for 2024. However, we think corporate earnings are unlikely to grow at such an aggressive rate.”

The investment manager’s outlook also cautioned investors not to buy into the ongoing hype surrounding high-performing tech companies.

“A small number of high-performing companies continue to lead broad US indexes. The promise of artificial intelligence (AI), among other digital transformations in the economy, continues to propel these high-performing stocks. However, we believe the best future investment opportunities are likely to come from outside this small group as the earnings power across the rest of the market is being undervalued.

“Across markets, we prefer stocks with sustainable growth and dividends. Our preference is for dividend quality. Quality companies—ones that consistently grow dividends based on sustainable and less volatile sources of profitability—can provide better stability and downside protection in challenging markets.

“To provide stability through the ups and downs in the economy, quality companies often have less cyclical exposure and are exposed to attractive secular themes, which can in turn provide growth participation throughout the expansion phase of a market cycle.”

Franklin Templeton’s outlook also highlighted 2024’s pivot from the inflationary pressure felt in 2022 and 2023.

“The key takeaway from 2022 is that an inflation shock and the need for central banks to hike short-term interest rates rapidly undermined stocks and bonds. In that environment, neither asset class can offer refuge and, as a result, diversification via a blend of stocks and bonds proved impossible.

“But that is not the scenario we envisage for the coming year. Instead, weaker growth, or even a recession, will cause inflation to retreat. If so, earnings disappointments may drag many stocks and corporate bonds lower. However, rising bond prices will act as an offset as yields decline in anticipation of central bank easing.

“2024 is likely to be a year in which balance and diversification are rewarded.”