Beyond Bulls & Bears

Equity

How Our Investment Assumptions Colour Our Mid-Cap Strategy

In a year filled with economic and political uncertainty, it remains difficult to predict what the future holds. While Paul Spencer, vice president, portfolio manager, Franklin UK Equity team, shuns the crystal ball, he presents some base-case expectations in the United Kingdom to underpin his investment approach.

Geopolitical surprises over the last year or so have highlighted the pitfalls for investors who try to predict the future. While crystal ball gazing is not how we like to manage our portfolios, we strive to ensure we have a robust enough investment discipline to cope with so-called “black-swan” events.

We like to base our investment strategies in the UK mid-cap space on a number of carefully thought-through assumptions on the way the local and global landscape is likely to pan out.

In particular we’re presently focused on three themes: The UK’s housing shortage, the UK’s ageing, wealthy population and the recovery in global industrial production.

Each of these themes colour our mid-cap investment approach.

UK Housing Shortage

A multi-decade shortfall in UK housing production has led to a tight demand-supply situation for new housing. More latterly, buoyed by the cheap availability of mortgage finance, supply of suitable land, high levels of employment and the government-assisted Help to Buy scheme, housing production has been on an upwards path.1

And despite the political turmoil that we saw with the UK snap election and negative media reports on the impact of Brexit negotiations on housing, we expect demand to stay robust and think housebuilders and brick suppliers should benefit from this situation.

The Silver Economy

The UK’s ageing population forms another one of our investment themes. The percentage of people aged 65 and over is projected to grow and make up nearly a quarter of the population by 2045.2

As a result, companies in the private health care space, assisted living, home emergencies and repairs and financial services should be set to reap the benefits of this growing part of the population.

A Global Influence

Our third investment theme is the recovery we’ve seen in global industrial production, particularly in the United States.3

As mid-cap investors, we’re conscious that it’s not just large-cap stocks that are exposed to international earnings.

The mid-cap market is diverse in comparison to the large-cap space, and some companies in production facilities and services with a focus on the United States, could do particularly well on the back of international exposure.

We look for well-financed mid-cap opportunities in a robust economic position. We also look for strong management teams that we judge should be able to ride out the volatility that plagues the geopolitical landscape.

The comments, opinions and analyses are the personal views expressed by the investment manager and are intended to be for informational purposes and 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 information provided in this material is rendered as at publication date and may change without notice, and it is not intended as a complete analysis of every material fact regarding any country, region market or investment.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI 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 by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

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What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

1. Source: Office for National Statistics, House Building; New Build Dwellings, England: March Quarter 2017.

2. Source: Office for National Statistics, March 2017.

3. Source: Industrial Production and Capacity Utilization – G.17, US Federal Reserve, July 2017.