Allocation Views

It’s clear that this is not a normal summer. Allocation Views discusses adapting to a new way of doing things.

Franklin Templeton Multi-Asset Solutions

PREVIEW

As we enter the typically quieter months of the northern-hemisphere summer, we are starting to adapt to a new way of doing things. It is not quite as it was before, but it is better than we faced in the depths of the virus-induced shutdown seen in many economies earlier this year.

Becoming more familiar with what our new world is like, it’s clear that this is not a normal summer. Although we have seen attempts to restart mass tourism, many travelers remain cautious and the sudden reimposition of government-imposed restrictions will dissuade others. Together with the rolling back of some of the easing steps that may have been taken in haste highlights a growing realization that localized flare-ups of the virus are an ongoing threat.

As a result, we are not surprised to see a cooling of the pace of recovery in some of the high-frequency data that are helping investors and policymakers to monitor this fluid and fast-moving environment. Indicators of consumer spending on credit cards and bookings at restaurants— especially in the southern portion of the United States—have rolled over. We have believed the recovery would be uneven since the very start of the crisis. More importantly, we agree with the views of the central bankers, repeated recently by US Federal Reserve Chair Jerome Powell, that the path forward remains extraordinarily uncertain.

With the persistence of recovery foremost in our mind, we continue to focus on the persistence of the virus. We will likely be facing this threat for many quarters to come, even if the news on developing an effective vaccine or improved treatment protocols advances as well as is hoped. Staying the course on fiscal and monetary policy coordination will remain vital as we continue to see the risks to recovery as tilted to the downside.

As we have commented on in Allocation Views over the past two months, the European Union (EU) seems to be making progress on fiscal coordination. With strong persuasion from German Chancellor Angela Merkel, European heads of government agreed to proceed with the Next Generation EU plan.

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What Are the Risks?

All investments involve risks, including possible loss of principal. The positioning of a specific portfolio may differ from the information presented herein due to various factors, including, but not limited to, allocations from the core portfolio and specific investment objectives, guidelines, strategy and restrictions of a portfolio. There is no assurance any forecast, projection or estimate will be realized. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Diversification does not guarantee profit or protect against risk of loss. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds the portfolio’s initial investment. A strategy may not achieve the anticipated benefits, and may realize losses, when a counterparty fails to perform as promised. Currency rates may fluctuate significantly over short periods of time and can reduce returns. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particularly over the short term.