What Franklin Templeton Thinks...

The thoughts of our investment managers on current market topics and key themes.

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What Franklin Templeton Thinks

…About TRADE DISPUTES & TARIFFS

The Biggest “Know Unknowns”

  • The escalating trade rhetoric between the US and China, as well as questions over Brexit, are arguably the biggest “known unknowns” facing investors.
  • Will companies pass any tariff-based price increases through to consumers or absorb it via profit margin? It will probably be a mix of the two; risk assets won’t like either outcome.
  • We continue to monitor the situation and look for attractive opportunities in sectors related to health care, consumption and manufacturing upgrades. Over the long-term these tend to be less directly impacted by tariff regime changes.

…About EMERGING MARKETS

EM “Weaknesses” Represent Strengths

  • We expect EM earnings growth to resume momentum in 2019, as fundamentals remain strong and many EM currencies have adjusted significantly in 2018.
  • Overall, Indonesia has demonstrated continued resilience to external shocks, benefiting from ongoing reforms over the last decade and accelerate domestic development.
  • We are very excited about the prospects for the EM pharmaceutical industry, particularly smaller companies. The sector looks promising to us due to three primary drivers: demographics, environmental & lifestyle changes, and innovation.

…About VOLATILITY

Emphasis on Diversification in a “RoRo” Environment

  • Risk on, Risk off (RoRo) or Risk Uncertain? Today’s markets present a challenge for investors. Increased market volatility, in particular the recent drawdowns in equity markets, create uncertainty.
  • Global equity market losses in the fourth quarter of 2018 were led by growth stocks. The value factor rebounded having been out of favour, demonstrating that style trends do not persist indefinitely.
  • In addition, rising interest rates are bringing duration risk into focus.
  • We view alternatives as excellent portfolio diversifiers against this backdrop. Alternatives are by design intended to provide a different risk/return profile to traditional stocks and bonds.
  • This can include real estate, real assets (e.g. commodities, infrastructure), private equity and hedge strategies.

…About INTEREST RATES

Decoupling of Global Central Bank Policies Creating Opportunity

  • We continue to have a positive outlook for US growth and, we expect the US Federal Reserve (Fed) to continue raising rates this year.
  • There is a concern about slowing global growth – particularly in China – that will cause the US to slow down as well. However, the US is a largely insulated economy and its monetary and fiscal policy is significantly different than China and Europe.
  • The impact of rising rates in the US on emerging markets should vary from country to country. Countries with low rate environments, or large structural imbalances and economic soft spots, could be vulnerable to external rate shocks. But countries with current account surpluses or relatively higher yields should be in a stronger position to absorb rate shifts.

…About US EQUITIES

Fundamentals Remain Solid, Despite Market Sentiment

  • Despite elevated geopolitical headlines and trade tensions, growth fundamentals continue to be positive, with tax reforms still providing a tailwind for earnings and margins.
  • With increased volatility and lower valuations, the market’s attention will focus on both corporate earnings growth and the US Federal Reserve’s (Fed’s) hiking cycle.

…About TECH DISRUPTIONS

US Tech vs EM Tech, It’s A Global Industry Afterall

  • The business models of US and EM tech companies are different due to data privacy and data protection regulations differences, among others.
  • EMs are leapfrogging established models in innovation and technology. Several EMs have seized the lead in innovation in areas such as e-commence, digital payment, mobile banking and electric vehicles.
  • There is a transformation of artificial intelligence (AI) and data analytics taking place in the US and China. The real value within the technology world is in engineering talent and semiconductor manufacturing, where the US still has a significant edge. That said, China has great ambition to build a 5G network and scale up its AI capability, which has its government backing.
  • We view data as the real differentiating factor. Those companies with proprietary datasets or privileged access to unique data sets will be the winners in the long-run.
  • A more likely outcome is an increasing parity of the large global technology platforms.

Key Investment Ideas

PREVAILING THEMESRationaleWAYS TO GAIN EXPOSURE
Attractive EM Valuations Supported by Long-Term Growth Trends EM valuations have become increasingly attractive due to Templeton Asian Smaller Companies Fund weakened confidence, despite having higher expected economic growth than developed markets. Not all EM are hurt by the same factors, and this presents a buying opportunity for companies with strong fundamentals. Templeton Asian Smaller Companies Fund
Templeton Emerging Markets Fund
Templeton Emerging Markets Smaller Companies Fund
Selectivity Needed for EM Bonds and
Currencies
Not all EM bonds and currencies are worth investing in, especially in the current environment, where US rates are rising and the greenback is strong. Selective positioning is crucial to achieve outperformance in EM assets due to a myriad of idiosyncratic risks and opportunities. Templeton Global Bond Fund
Templeton Global Total Return Fund
Continued Strong US Growth  The positive economic growth in the United States remains intact. Corporate fundamentals are currently on par with historical norms, with above-average margins and return-on-equity ratios. Franklin US Opportunities Fund
Benefiting from Tech Innovations and Disruptions Digital transformation initiatives such as cloud computing and the advancement of artificial intelligence will power the technology sector and create disruptions in industries. Franklin Technology Fund
Ride the Long-Term Growth Potential of Biotechnology Despite political pressure for US drug price legislations, the long-term growth prospects of biotechnology— supported by cutting edge research and innovations, and medical breakthroughs—continue to look healthy. Franklin Biotechnology Discovery Fund