According to Franklin Templeton global stocks' performance may be better than global bonds

British pound to US dollar - trend analysis and what can we expect this week

In this Allocation Views, our Franklin Templeton Investment Solutions team believe growth momentum is decelerating, and the risks are skewed to the downside, accentuated by the impact of policy tightening and a squeeze on real incomes.

Preview

The themes we discuss at our Annual Investment Symposium guide our research process. Over a longer-term horizon, we believe global stocks have greater performance potential than global bonds, despite slightly slower growth expectations. With interest rates starting from relatively elevated levels in developed markets, overall return expectations from all fixed income assets have become more attractive than has been the case in recent years.

We recognize that our longer-term outlook will not be reached along a smooth path and that maintaining a diversified portfolio of risk premia, in addition to the traditional benefits of a balanced portfolio between stocks and bonds, should be the most likely path toward stable potential returns.

Major themes driving our views

Growth is slowing to below trend

Growth momentum is decelerating, and the risks are skewed to the downside, accentuated by the impact of policy tightening and a squeeze on real incomes. Leading indicators of growth suggest further weakness to come, even where current activity levels have held up reasonably well. Recession risks are meaningful and rising across developed economies.

A challenging inflation environment

Inflation remains well above targeted levels. Supply pressures have boosted inflation, but signs of a peak are in place despite the challenge of commodity shocks and the ongoing Russia-Ukraine war. These supply concerns are being balanced by demand destruction as the economic cycle slows.

Policy to remain restrictive

Most central banks have adopted a singular focus on inflation and are accepting the consequences for growth. Fiscal policy is responding to energy costs in some economies but will be slow to sway dovish in others. Expected central bank hikes will moderate negative real rates and sustain restrictive conditions.

Practical positioning

Nimble management still required

Having started to trim our allocation preference for equities at the start of this year, we retain a more cautious view of stocks. We continue to believe that a nimble investment style remains appropriate and have recently established an allocation preference away from equities. The levels of anticipated earnings per share remain close to their peak, which underplays concerns around economic growth.

Bond valuations have improved

Our longer-term analysis shows that the return potential from global bonds, including lower-risk government bonds, has improved. Once the current policy-tightening environment starts to moderate, it is likely that government bonds will again exhibit more of a risk-dampening effect. Until then, we believe bonds still make a more compelling case than they have for many years.

Opportunities in alternative assets

We are attracted to naturally diversifying “alternatives” such as private assets, which offer the potential to earn an incremental return linked to their relative illiquidity. These assets reflect trends in public markets, notably a higher risk-free rate environment. Private credit and private equity also include a healthy prospective return premium over public markets.


British pound to US dollar - trend analysis and what can we expect this week

Franklin Templeton

The company was founded in 1947 in New York by Rupert H. Johnson, Sr., who ran a successful retail brokerage firm from an office on Wall Street. He named the company for US founding father Benjamin Franklin because Franklin epitomized the ideas of frugality and prudence when it came to saving and investing. The company's first line of mutual funds, Franklin Custodian Funds, was a series of conservatively managed equity and bond funds designed to appeal to most investors.