CONTRIBUTORS
Wylie Tollette, CFA
Chief Investment Officer,
Franklin Templeton Investment Solutions
Tom Nelson, CFA, CAIA
Head of Market Strategy
Franklin Templeton Investment Solutions
Miles Sampson, CFA
Head of Asset Allocation Research,
Franklin Templeton Investment Solutions
Laurence Linklater
Senior Research Analyst, Franklin Templeton Investment Solutions
Preview
The election of Donald Trump as US president promises to change the global political and economic landscape, ushering in a period of US protectionism that is set to impact most investable assets. The new government’s prospective policies broadly support our current cross-asset positioning and our views on the evolution of markets heading into 2025, but they also increase uncertainty.
Against this background, we retain a cautiously optimistic attitude toward risk assets in this month’s Allocation Views , weighing the continued strength of US macro fundamentals against elevated valuations and a note of caution linked to recent inflation data. We hold a preference for US and Canadian equities over markets outside North America where macro conditions are weaker. Our positive attitude toward risk continues to inform a lower overall fixed income allocation, tilted toward international government bonds given the likelihood of easier monetary policy in these regions.
Macro themes driving our views
Growth remains constructive
- Leading economic indicators suggest positive global growth.
- Growth reflects ongoing strength in the services sector, but manufacturing remains sluggish.
- Global growth patterns are diverging as current and forward-looking data highlights strength in North America, with Europe and Asia lagging somewhat.
Inflation risks are balanced
- Significant progress has been made, although it has been bumpy, and inflation is still above targeted levels.
- Elevated services inflation is normalizing gradually alongside labor market strength, whereas core goods inflation has already normalized.
- The latest data indicates firmer US inflation, illustrating the difficulty in progressing disinflation when the economy is buoyant.
Divergent policy outcomes
- Western central banks continue to cut rates, particularly in Europe where growth is weak.
- We expect a greater divergence of policy outcomes as the pace of Fed rate cuts moderates against a strengthening US economic backdrop.
- Fiscal policy in major economies such as the United States, Germany and China is emerging as an influential driver of asset prices.
Portfolio positioning themes
Growth supports risk assets
- A constructive macro environment is typically associated with strong markets.
- Elevated equity valuations and tight credit spreads reflect strong fundamentals and seasonal tailwinds.
- The Trump administration’s pro-cyclical policies should be broadly positive for US growth, helping to offset risks around inflation and higher rates.
A changing equity landscape
- Stronger earnings growth in the United States influences our enhanced outlook for US equities.
- A weaker macro environment diminishes the broad appeal of international equities relative to US stocks amid slowing price momentum.
- The impact of China’s stimulus measures is difficult to quantify, while we downgrade our view on emerging markets ex China given global manufacturing weakness.
More attractive yields for bonds
- Higher yields enhance the return potential from global fixed income, supporting our neutral duration positioning and our relative preference for international bonds.
- Market expectations around the depth and duration of some policy easing cycles have retraced to more appropriate levels.
- Relatively healthy financial conditions support optimism toward high-yield corporate bonds, which we prefer over investment-grade issues.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. To the extent a strategy invests in companies in a specific country or region, it may experience greater volatility than a strategy that is more broadly diversified geographically.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
Investing in privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.
Active management does not ensure gains or protect against market declines. Diversification does not guarantee a profit or protect against a loss.