Host: Welcome to Talking Markets with Franklin Templeton. We are here in the studio today with Chris Galipeau, senior market strategist from the Franklin Templeton Institute. The Institute is a research- centric organization at Franklin Templeton. Our focus for today’s conversation is the 2024 mid-year release of Franklin Templeton’s Global Investment Management Survey. Chris, good afternoon and thank you for joining me today in the studio. Let’s start today’s conversation by highlighting the objective of the Global Investment Management survey.
Transcript:
Chris Galipeau: We survey all Franklin Templeton portfolio managers twice a year. We do it once in January and then again in May. And our goal is to really harness the collective wisdom of Franklin Templeton’s investment teams and to share the key takeaways with our clients around the world.
Host: So Chris, what are Franklin Templeton’s portfolio management teams currently thinking about the health of the global economy?
Chris Galipeau: Let’s start here in the United States. So, here in the US we expect real GDP to decline from the 3% level that we saw in 2023 to somewhere around 2.3% this year. So we are in the soft landing camp, and we remain in the soft landing camp here in the United States. Over in Europe, we expect real GDP to come in somewhere in the vicinity of 1.3%, which actually is an improvement from 2023. And in emerging markets, we expect roughly 4% real GDP there.
Host: So, Chris, any insight on inflation and labor in the US in the survey?
Chris Galipeau: There is. So, in the US, our best guess around core PCE for the year is to settle somewhere around 2.8%, which actually is the most recent reading. So our best guess is inflation remains sticky through the balance of the year. And then with regard to labor, we expect the US unemployment rate to tick up to something just over 4%. It’s just under 4% now. So a slight bias up there.
Host: Okay. So let’s turn specifically to the large asset classes in the capital markets. How about the impact on equities, using the S&P 500 [Index] as a proxy for US equities?
Chris Galipeau: Yeah, so our year-end target for the S&P 500 is 5,250, which is a little lower than where we are today. Today we’re about 5,400. The S&P has rallied 33% from the lows of last October and today trades at 22 times forward earnings. That is rich to history. And if you compare it to the last 50 years, the median forward multiple on the S&P 500 is 16.8. So, the market’s about five turns rich to history. We would expect the market to consolidate a little bit here.
Host: Chris, any view on equity markets outside of the United States?
Chris Galipeau: Franklin Templeton’s portfolio managers are bullish Japan due to structural reforms that are geared toward improving metrics—fundamental metrics like return on equity, like return on invested capital. And we think that change is very significant and frankly, in the early innings. We’re also bullish India, and we have a more favorable view of Europe today as GDP looks set to improve going forward.
Host: How about any specific concerns that could impact equity returns as we move through the year?
Chris Galipeau: Yep. So our portfolio managers identified three general areas of concern. They’re centered on geopolitics, earnings and then the election. So if we break those down a little bit, we’ve got two conflicts going on overseas. And of course any increase in hostilities there would probably pose a problem to equities. But I think our biggest fundamental concern is centered around earnings growth. And so, our best guess is that the consensus estimates for the S&P 500 are too high, considering we think the US economy will slow a bit this year, as we talked about prior. So, the combination of a high multiple—22 times—and the risk of a potential earnings shortfall is something to be mindful of. And then finally we have the election coming. And, considering the situation, that could be a catalyst for volatility here as we move into the fall.
Host: Okay. How about a quick pivot with the survey as related to fixed income?
Chris Galipeau: So let’s start with rates here first. So, our expectation is for US 10-year-note yields to finish the year in a range of say 4-4.5%. And that’s essentially where we’ve been toggling around here so far this year. The average view of the firm is somewhere around 4.20, which is about where we are today. In credit space, we’re bullish IG corporates and munis. And we think current yields are attractive, but we acknowledge that there’ll likely be no additional return from credit spread tightening at this point as spreads are near historic tights. But I think probably the most common question that we get from our clients is how to handle the reinvestment risk associated with peak cash yields. So, we have peak cash yields today, and history tells us that IG corporates, core bond funds, core plus funds and muni funds significantly outperform money markets and CDs in the 12-month period following peak cash rates. So we like the idea of dollar cost averaging into quality fixed income here, and certainly would continue that at higher yield levels. And then finally, I’d say, with regard to the Fed [US Federal Reserve], we’re in the one- to two-rate-cut camp. And it looks like that will likely start in September and carry on probably through 2025.
Host: Same question here. Any areas, maybe of specific concern related to the fixed income asset class?
Chris Galipeau: So, in fixed income, one of the concerns that came up in the survey was the potential for default rates in high-yield corporates to rise a little bit as the economy slows. But the reality is the credit quality in high yield today is strong and you’re being well paid in yield terms, I think, for the risk there.
Host: Chris, does the survey address the alternative asset class?
Chris Galipeau: It does. Franklin Templeton’s alternative managers were included in the survey. And they’re bullish private equity, specifically in the secondary space. They’re bullish private credit as well, considering the fact that traditional lenders have pulled back.
Host: How about any specific insight on the real estate market?
Chris Galipeau: Real estate. So, selective here. We think there are opportunities away from the commercial office space, which I think is pretty well known at this point. We’re bullish on certain sectors: life sciences, warehouse space, et cetera. So we think there’s some opportunity there, but need a seasoned manager to flush those opportunities out.
Host: Okay. Chris, as we wrap up today’s conversation, any final thoughts? Maybe keys that the Institute will be watching as we move into the third quarter?
Chris Galipeau: Sure. I think we need to be mindful of how far the tape has run here, combined with the expectation of slowing GDP through the balance of the year. The real question in my mind is centered around earnings power, as we spoke to earlier. Now, the reality is Q1 earnings on a year-on-year basis, were up 8%, 8% earnings growth. And if we hold that level, I think we should be fine. If earnings come under pressure from here, it probably will cause a retrenchment in equities.
Host: Okay. Chris, one last question. If our listeners would like to review the Global Investment Management Survey from the Franklin Templeton Institute, where can they find it?
Chris Galipeau: Investors can find the survey results on Franklin Templeton’s website under the Institute tab, and financial advisors can also access the survey directly from their Franklin Templeton wholesaler.
Host: Thank you, Chris, for your time and a terrific summary of the Franklin Templeton Global Investment Management Survey. To all of our listeners, thank you for spending your valuable time with us for today’s update. Check out the survey and additional insights from our thought leaders. If you would like to hear more Talking Markets with Franklin Templeton, visit our archive of previous episodes and subscribe on Apple Podcasts, Google Podcasts, Spotify, or just about any other major podcast provider.
Survey methodology
Bi-annual survey: This bi-annual outlook survey is designed to give a view across our investment teams. The Franklin Templeton Institute identifies the average across answers and develops commentary on the year ahead.
Investment professionals across all asset classes: The Franklin Templeton Global Investment Management Survey received responses from more than 250 portfolio managers, directors of research and chief investment officers. This represents a participation across equity, private equity, fixed income, private debt, real estate, digital assets, hedge funds and secondary private markets.
Aggregate views: This survey gives an aggregate view by taking the average of the answers. Questions included macroeconomic, equity and fixed income views.
Independent views: Each of our investment teams are independent and have their own views. This survey serves as a starting point to their best ideas.
This material reflects the analysis and opinions of the speakers as of June 14, 2024, and may differ from the opinions of portfolio managers, investment teams or platforms at Franklin Templeton. It 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 speakers and the comments, opinions and analyses are rendered as of the date of this podcast 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, market, industry, security or strategy. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy.
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Alternative strategies may be exposed to potentially significant fluctuations in value.
Privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.
Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector.
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