Investors looking for guidance on long-term trends in global markets should take note: While continued growth is on the horizon, itʼs unlikely to be smooth and co-ordinated, according to global asset management firm Franklin Templeton Investments.
“Desynchronized growth” — with some regional economies expanding faster than others — is what investors should expect in the coming decade, according to the investment managerʼs 2019 global market outlook.
The outlook analyzes current economic trends to make projections about the near future and longer term, says William Yun, executive vice-president of multi-asset solutions at Franklin Templeton.
“We expect continued global growth and moderate inflation. At a time when markets have been more volatile and people are increasingly concerned about the risks of recession, we remain confident about growth remaining strong enough to support risk assets over a longer-term horizon,” he says.
Growth is expected to be more tempered, the report says, compared with the robust expansion the world has experienced since the recovery after the 2008 financial crisis. But the overall environment for a continued growth cycle is favourable, it says, even with recent volatility in the markets.
“We assume a return to long-run levels of market volatility rather than the lower levels seen for much of the past 10 years,” Mr. Yun says.
Inflation will remain moderate, the report projects, ranging from about 1 per cent in Japan to about 2 per cent in Canada and the United States, and slightly more than 4 per cent in emerging markets and the BRICs (Brazil, China, India and Russia).
Interest rates are still expected to rise. Although the U.S. Federal Reserve is expected to raise rates for a fourth time this year, the outlook into next year has become more uncertain.
Rate increases are on the agenda because global central banks are attempting to pare the economic stimulus programs they put in place during the recession. This may have a side-effect — near-zero rates helped to accelerate economic growth and suppress market volatility in recent years.
Though gross domestic product should continue to rise both worldwide and among individual countries, the report suggests growth will be slower than the previous 20-year historical average.
This means investors should not fear a repeat of the 1970s or the early 1980s, when economies were hampered by a combination of rising inflation and slow growth.
“In an environment of moderate inflation and lower equilibrium interest rates, we believe that equities can continue to trade at significantly higher multiples than was the case in the 1970s and 80s,” Mr. Yun says.
“The importance of emerging-market economies is expected to continue to increase. These countries comprise a larger share of the global economy and as this trend continues, they will contribute a still larger share of the growth in global GDP.”
Emerging markets are likely to outperform Canadaʼs, even though there will be growth at home, and the Canadian dollar may weaken, says Ian Riach, senior vice-president and portfolio manager of multi-asset solutions at Franklin Templeton and chief investment officer at Fiduciary Trust Co. of Canada, a member of the Franklin Templeton family of companies.
As a result, Mr. Riach says investors may wish to underweight Canadian equities. For fixed income, he says he’s looking to underweight Canadian government bonds, to overweight corporate bonds and to remain neutral on global bonds.
“Even as interest rates climb gradually, short-term rates and government bond term premiums are below their historical average and may remain subdued,” Mr. Riach says.
“This depresses the return potential of government bonds but may help sustain global growth.”
Both Mr. Yun and Mr. Riach stress that the importance of a long-term outlook is not to predict investment returns but to manage risk.
The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
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