Distortion, Divergence and Diversification: 2019 Global Investment Outlook
Volatility has plagued equity markets globally in 2018—most notably emerging markets and US equity markets. As the US economic expansion officially crossed the nine-year mark in 2018, many investors started to wonder when the cycle would change—and what the catalyst might be. Our senior investment leaders see plenty of reasons to be optimistic about the year ahead, but recognize investment opportunities may be more divergent, with some previously overlooked countries or asset classes potentially taking the spotlight.
Following is a summary of each of their views. For more detail on the team’s views, check out our Global Investment Outlook website.
Addressing Desynchronized Global Economic Growth and Late-Cycle Volatility
Edward D. Perks, CFA
Chief Investment Officer
Franklin Templeton Multi-Asset Solutions
The global economy holds the potential to maintain solid momentum in 2019, in our view, underpinned by the strength of US fundamentals and demand. Volatility returned to global financial markets in 2018 as the narrative around synchronized global growth became more pessimistic.
However, growth trends remain broadly positive and desynchronization might not be the headwind that markets may have feared at times. Of keen interest to us is how countries’ economic divergences and policy differences will ultimately be reconciled, given their prospective impacts on trade, currencies and the normalization of monetary policy in the advanced world.
We see few signs of emerging-market volatility affecting other markets as yet, and believe the widening relative performance dispersion between markets we witnessed throughout most of 2018 may be sustained. Consequently, we see little reason for the leading central banks to deviate significantly from the monetary policy trajectories they have currently laid out. In the United States, the current combination of above-trend growth, benign inflation and near-full employment could continue for some time, in our view. We believe the prospects for a US recession are still several quarters away.
As we head toward 2019, we recognize there are reasonably full valuations in certain parts of both the equity and fixed income markets, and while favorable corporate fundamentals remain in place, we have become incrementally more cautious. We have grown concerned about elevated government debt levels (focused on some major eurozone countries, Japan, the United States, China and other emerging markets).
Inflation remains moderate globally; however, we are mindful of the risks of increasing inflation.
Thus, while equities and fixed income typically remain the largest asset class exposures in our multi-asset portfolios, we also hold a constructive view of real assets, including commodities. We favor assets that typically perform well during the latter stages of a business cycle or offer explicit inflation protection such as inflation-linked bonds. Additionally, alternative assets could provide diversification against potential weakness in stocks and bonds if an unexpected uptick in inflation occurs.
“In the United States, the current combination of above-trend growth, benign inflation and near-full employment could continue for some time, in our view. We believe the prospects for a US recession are still several quarters away.”Ed Perks, Franklin Templeton Multi-Asset Solutions CIO