Signs of stablisation as financial markets wobble

InvestingMarketsMarket TrendsMarket InsightsGlobal Market OutlookGlobalGlobal Economy
Author: Franklin Templeton

The Franklin Templeton Investment Solutions team see recession risks moderating for the developed economies, led by the United States, but still anticipate a period of below-trend growth to continue.


27 November 2023

Download full PDF

We saw the nervous investment environment that characterized 2023’s third quarter continue for most of October—sharply higher US Treasury yields and weaker stock markets. This was driven by surprisingly strong economic activity in the United States, which prompted fears that this would prolong the US Federal Reserve’s (Fed’s) period of restrictive monetary policy, or even call into question the ongoing process of disinflation, as discussed in Allocation Views last month. However, with increased confidence that global growth is showing signs of stabilisation, we have taken advantage of this period of asset market weakness to eliminate our moderately cautious view of equities and return to a truly neutral allocation stance overall at the cross-asset level.

When we look at the progression of a range of leading economic indicators that we monitor, developments globally are not universally upbeat, but given the relative importance of the United States in broader measures, they point toward a period of stabilisation at least. Notably weaker prospects in the Eurozone reflect the greater burden that higher interest rates place on consumers and companies in this region, and its greater dependence on international trade and manufacturing. Reflecting this, we continue to hold a more cautious position on stocks in this region, finding more appealing prospects in the emerging markets outside of China.

China still faces a challenge due to weakness in the local property market and an unwillingness of policymakers to stimulate the broad economy due to high levels of debt. Recent changes to public financing arrangements may show some progress, but we see this policy dilemma as likely to persist and act as a drag on global growth. We continue to express our general emerging market preference while not favouring China’s stocks.

In summary, we see recession risks moderating for the developed economies, led by the United States, but still anticipate a period of below-trend growth to continue. Risks related to the lagged effects of monetary policy and tight bank lending standards temper our optimism. The ongoing resilience of consumer demand—as well as the service sector of the economy more broadly relative to manufacturing (which has been weak)—is expected to wane. Financial markets’ corporate earnings expectations remain exposed to ongoing margin pressures, especially where real wage growth continues to feed through. However, our growth theme continues to show “Growth Is Stabilizing” even as recession risks remain somewhat elevated globally.


Learn more

For more information, please visit Franklin Templeton's website.

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.

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.

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.

Active management does not ensure gains or protect against market declines.

Disclaimer
Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton ("FT") has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued by Franklin Templeton Investment Management Limited (FTIML). Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.

Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.