What does ‘new normal’ mean for investors?

Oksana Patron

9 November 2022

The search for hidden opportunities will see markets trying to absorb ‘new normal’ by repricing assets which will lead to more personalised portfolios, with more balance between equity, fixed income and alternative options, according to Franklin Templeton.

Although investors should factor in the implications on issues such as strategic asset allocation and tech-driven megatrends impacting investing, they should also be ready that any recession would be most likely shallow and inflation would eventually come down but to the low levels experienced over the past few years.

At the same time, equity and fixed income markets could function well in environments of 3%-5% inflation, and with elevated interest rates making fixed income attractive at current yields and a chance that the rate path could be smoother than expected, investors should focus more on credit quality.

Another important factor to watch, according to Stephen Dover, head of Franklin Templeton Institute, was higher US dollar, which was helped by rising interest rates, however any shift in sentiment could allow other currencies to appreciate and any movements in the US dollar would be factored in and reflected by the emerging markets.

“Most global investors under-own, undervalue and underestimate the asset class. The quality of the household, corporate and sovereign balance sheets, combined with accelerating exposure to innovative sectors (i.e., semiconductors and biotechnology), creates potential opportunity,” he said.

On top of that, higher inflation typically put private real estate, which was already enjoying tailwinds as the combination of rising e-commerce and supply chain realignment, in a good position.

Dover also pointed to quality as another key theme within both private credit and private equity.

“A focus on better debt covenants and favorable deal structures in private credit reflects this. Secondary Limited Partnership (LP) interests within private equity allow investors to participate in the upside of a private investment with minimal exposure to the risk of the early stages of a company’s life, which is particularly attractive as macroeconomic volatility remains elevated,” he noted.

“Looking longer term, the megatrends around the changing face of asset management will lead to more personalised portfolios, an expanded set of manageable assets, and new niche and specialty marketplaces. Experience in building these architectures can be shared through advisory services to clients, including portfolio construction that better incorporates alternative assets.”