2010: Looking for Further Stabilization for Global Markets

John P. Remmert

Senior Vice President and Senior Portfolio Manager
Franklin Global Equity Team
Franklin Global Advisers

We believe that 2009 may be remembered as a year in which equity markets rebounded strongly as a result of global central banks' successful aversion of a severe economic collapse. Global equity markets advanced toward the end of 2009, but gains were muted in comparison to earlier in the year as mixed economic data gave investors pause. Trading volumes remained moderate and equity volatility remained slightly elevated, leading some to conclude that investors were awaiting clarity on the strength of the economic recovery. Unlike the prior quarters, stocks in the financial sector were clear laggards in the fourth quarter as a rebound in commodity prices resulted in materials and mining stocks leading the market advance. Stocks in the consumer and health care sectors outperformed the broader markets as well.

Economic data has indicated to us that a recovery is underway, albeit at a very slow pace. During the second half of 2009, major world economies began stabilizing and emerging market countries began to show signs of renewed growth. The pace of the recovery, however, remains well below those experienced following historical downturns. Overall credit creation remains minimal, indicating that while expenses have been contained, overall corporate and household spending has remained stagnant. It is expected that the first half of 2010 is likely to reflect more of the same, leading some economists to wonder how many years of stabilization and restructuring will be needed before we experience the next economic upturn. A key concern remains that the global economy could mirror the path of the Japanese economy over the past decade—virtually no growth coupled with deflation.

We believe that the longer the economic stabilization lasts, the lower the possibility of a sharp equity market correction. An enduring period of stabilization may help markets to again become more resilient while also possibly enabling economies to isolate and deal with remaining balance sheet issues. Weighing against this, however, is the need for a reasonable pick-up in developed market economies to bolster tax revenues as a means of addressing fiscal issues. We continue to believe the global economy remains at least a year away from putting the credit crisis and ensuing global economic downturn firmly in the rear view mirror.

We look back on 2009 as a strong year for our global and non-U.S. equity strategies. Following the challenges the strategy faced in late 2008 as a result of the disconnect between prices and fundamentals in the equity markets, we remained steadfast in our approach throughout 2009. We focused on in-depth analysis, rigorous team discussion and a high conviction, best-ideas portfolio. Those efforts were rewarded as equity markets reconnected prices and fundamentals in the first quarter. Looking into 2010, our discipline is much the same—we remain focused on our in-depth analysis of companies held in the portfolio, seeking to ensure we are constructing a portfolio of what we believe to be attractive quality companies with sustainable business models, while minimizing the overlap of economic exposures among holdings.

Please click here for more information on the FTIF - Franklin Global Growth Fund.