Allocation Views: Taking a Nimble Approach to 2020

Although easing US-China trade tensions have renewed investor optimism about global economic growth, Franklin Templeton Multi-Asset Solutions’ Ed Perks and Gene Podkaminer still see some potential geopolitical headwinds on the horizon. In the latest edition of “Allocation Views,” they share their concerns and explain why they continue to believe navigating challenges in the year ahead will require nimble management.

Stabilization Amid Heightened Uncertainties

The new year started with a bout of volatility, driven by tensions in the Middle East. US forces assassinated General Qassem Soleimani, leader of Iran’s Revolutionary Guard Corps, which grabbed headlines and moved markets for several days. However, Iran’s measured response, avoiding the escalation that some had feared, allowed the initial phase of the crisis to blow over quickly.

The price of crude oil returned to levels that were seen before the initial attack on January 3, limiting the likely impact on economic activity. Global equity indexes shrugged off the events and moved to new all-time highs. Overall, it appears that investors remain optimistic about the path of global economic growth, with easing trade tensions between the United States and China offering support.

Economic stabilization seems to be occurring amid supportive effects of accommodative monetary policy in both developed and emerging economies. However, despite our proprietary indicators of growth momentum leveling off more recently, we don’t see evidence of a sharp rebound in activity or a high probability of governments delivering the fiscal measures that would support such a move.

Many of the concerns that we have discussed in our “Allocation Views” over the past year are still on the radar. Business investment faces headwinds from confidence and the lack of a full resolution to the US-China trade dispute. Economies like Germany that are more exposed to manufacturing, which remains in recession, are vulnerable to layoffs spreading pain to the wider economy. Geopolitical flashpoints such as North Korea, as well as the unresolved issues in the Middle East, could flare up.

As a base case, we expect continued global growth and moderate inflation over the long term. With relatively few imbalances, the global economy is less likely to see extreme swings in output. However, reflecting the balance of issues noted above, we are focused on the potential for the risks during 2020 to remain skewed to the downside. Recent equity market performance has been delivered without a matching boost to earnings, stretching valuation metrics. We remain optimistic that the probability of recession in the major economies is moderate, but the potential for a period of disappointment remains. Our dominant investment theme is fundamentally unchanged as “Global Growth Remains a Concern.”