California-based investment manager Franklin Templeton has just released its mid-year 2023 global outlook, looking at perspectives for the second half of the year. 

Franklin Templeton continues to focus this year on the attractiveness of investments beyond cash, including fixed income, equities and alternatives.

Stephen Dover, chief market strategist at the Franklin Templeton Institute, thinks fixed income deserves a bit more love this year. 

With valuations in better shape, inflation slowing and volatility down, the firm said that the case for fixed income today is very strong. The highest-quality areas of the credit market have become more attractive, providing higher yields in investment-grade bonds relative to the dividends from equities.

High-yield bonds with stronger ratings' profiles due to better fundamentals are also a potential total return opportunity, the firm continued. Particularly when compared with equities, high-yield debt has a shorter duration profile than other parts of the fixed income market, while at the same time providing equity-like total return potential.

Emerging market debt is another opportunity, the firm said. Attractive yields (double digit in some cases) coupled with US dollar weakness, offer an opportunity to enjoy equity-like returns, but without the degree of downgrade or default risk we see in US high-yield credit markets.

Nevertheless, Dover thinks that equities should benefit from a taming of inflation and earnings optimism. The firm believes that it’s prudent to consider opening or establishing larger positions in non-US equity markets.

“Following consecutive quarters of falling US corporate profits, the outlook for earnings is beginning to brighten,” Dover added. “A US recession remains the overwhelming consensus view and hence is to some extent already accounted for in market prices. It is likely to come later and be shallower than its predecessors. Our risk worry list includes deep recession, geopolitical tensions, energy shocks and soggy returns,” he continued.

Multi-Asset Income
From a multi-asset income perspective, Ed Perks, chief investment officer at Franklin Income Investors, believes that yield is set to remain an important component of total return for investors during the next six months, given his expectation that the Fed will pause its rate-hiking cycle, rather than pivot to an easier monetary policy.

Investment grade credit is his preferred asset class in terms of total return, income and risk management. He believes that these assets offer a better total return setup than equities, while the positive correlation with stocks is also breaking down, allowing fixed income to offset equity market volatility.

“The increased probability of a shallow US recession should limit the negative impact on corporate earnings moving into the second half of 2023,” Perks said. As a result, he believes the high-yield bond sector is more resilient than many investors think.

He doesn’t think spreads are likely to blow out, causing him to be comfortable in the credit space at historically elevated yields. For Perks, it is a relatively straightforward call to add selectively to high-yield credit at the expense of higher volatility equity holdings which, in a recessionary scenario, should underperform credit.

Equities 
From a growth equity perspective, Jonathan Curtis, portfolio manager at the Franklin Equity Group, said: “Year-to-date, as of May 31, 2023, the S&P 500’s positive return can be heavily attributed to seven of the world's largest companies within the information technology, communication services and consumer discretionary sectors.”

Curtis believes that these companies have performed well because of their many attributes, including strong balance sheets, attractive profitability, platform-like dynamics and their increased focus on efficiency in the current post-Covid, higher interest rate and uncertain macroeconomic environment.

As he looks into the second half of the year, he sees the potential for widening market breadth as investors gain confidence that they are closer to the end of the rate-tightening cycle and that fundamental earnings risk may be less than feared if economic conditions show signs of stabilization. In Curtis's view, there are opportunities for many companies to augment their structural long-term growth potential in this era of artificial intelligence (AI) and generative AI.
 
From a global equity perspective, Manraj Sekhon, head at Templeton Global Investments, believes that US inflationary pressures have clearly weakened: “Tighter monetary policy is leading to some slowdown in consumer spending and removing some of the froth in the labor market, as reflected in softer wage growth. This has also been helped by easing supply chain pressures post Covid-19.” 

“This means that the Fed is well-placed to pivot to cutting interest rates if growth slows faster than expected or in response to possible economic or systemic shocks,” he continued. “At the same time, the US economy continues to perform strongly and ahead of expectations with a robust job market and resilient consumer spending. Corporate earnings have also continued to surprise positively,” he added.

Sekhon believes that this backdrop will keep equity markets well supported, as US recession worries diminish and investors focus on the underlying strength of the US economy, alongside a positive policy backdrop.