CONTRIBUTORS
Stephen Dover, CFA
Chief Investment Strategist
Head of Franklin Templeton Institute
Tony Davidow, CIMA®
Senior Alternatives Investment Strategist
Franklin Templeton Institute
Taylor Topousis, CFA
Market Strategist
Franklin Templeton Institute
Priya Thakur, CFA
Analyst
Franklin Templeton Institute
As advisors consider allocating capital, we think it is important to draw a distinction between putting capital to work in 2024, versus capital that was committed prior to 2021 when private markets were near peak valuations."
Key takeaways
- Secondaries represent a growing a vital part of the private equity ecosystem, providing liquidity, diversification, and potentially shortening the distribution period.
- Commercial real estate debt may be an appealing way to take advantage of some of the challenges impacting real estate.
- While the office sector has been generating the headlines, private real estate represents a diverse set of options, and sectors like industrials, multifamily, and life sciences look attractive today.
Executive summary
Global markets have had a strong start to 2024. The S&P 500 Index was up 14.5% through the first six months of the year, led by technology and growth companies. Global equity markets have also exhibited strong returns. Developed markets, as exhibited by the MSCI EAFE Index, finished up 3.5%, measured in USD, while the MSCI Emerging Markets Index was up 6.2%. Performance within fixed income markets is more subdued, with the Bloomberg US Aggregate Bond Index flat through June. Bond investor optimism that the Federal Reserve (Fed) would cut interest rates multiple times in 2024 has been tempered. As a result, yields have moved higher over the course of 2024.
Stronger than expected global growth, robust earnings reports, and enthusiasm about Artificial Intelligence (AI) have helped drive markets. Global risks and tensions remain, however. While signs of disinflation have emerged, the inflation rate remains above the Fed’s target. Ongoing wars in the Middle East, Eastern Europe, and growing tensions in Asia, have provided reasons for caution. Political uncertainty remains, with dozens of national elections slated to occur in the back half of 2024, most notably in the United States.
2024 economic outlook
We expect the economy will continue to slow in 2024 but avoid a global recession. While growth will be slower in the US than last year, real GDP growth above 2% is possible, and that will help the US and other major economies avoid a hard landing. Inflation should continue to moderate but it is unlikely to reach the Fed’s 2% target this year. The Fed is likely to begin easing monetary policy towards the end of this year by reducing the Federal Funds Rate, potentially three cuts before year-end. While the Fed may move rates lower over the next twelve months, we believe that rates will not revert to the near-zero levels of the post-GFC period, but rather stay relatively elevated.
US and global economies have been resilient in the face of the tightest monetary policy in decades. This is partly due to many having taken advantage of low interest rates in the years preceding the recent rise. Fiscal stimulus launched by governments across the globe to counter pandemic slowdowns helped sustain consumption levels. At some point, higher borrowing costs and diminishing consumer savings may lead to softening demand. A key risk is that the Fed may be slow to recognize this softening, and thus will keep rates too high for too long, leading to a harder landing than many currently expect.
For equities, positive real economic growth can help buoy earnings, but investors must keep an eye on how those earnings compare to the high expectations set today. We believe softening in consumer spending and in the labor market are likely, and inflation should show progress in moving closer to the Fed’s 2% target. In this environment of slow growth and slowing demand, we favor high quality securities in public markets, and look to take advantage of opportunities we see in the private markets as well.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
To the extent the fund invests in alternative strategies, it may be exposed to potentially significant fluctuations in value.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. An investment strategy focused primarily on privately held companies presents certain challenges and involves 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. Diversification does not guarantee a profit or protect against a loss.
Risks of investing in real estate investments include but are not limited to fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by local, state, national or international economic conditions. Such conditions may be impacted by the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, and environmental laws. Furthermore, investments in real estate are also impacted by market disruptions caused by regional concerns, political upheaval, sovereign debt crises, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars). Investments in real estate related securities, such as asset-backed or mortgage-backed securities are subject to prepayment and extension risks.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price.
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. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.