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In focus: Global diversification and the way forward
Diversification beyond the US market and taking advantage of attractively priced opportunities in underperforming sectors—these are among the key considerations for portfolio managers at the Templeton Global Equity Group (TGEG), as we navigate a potentially volatile market landscape in the months ahead.
This may entail sharpening the focus on European stocks and exploring oversold sectors such as health care and consumer discretionary. While the latest corporate earnings results were largely positive and global equities may yet grind higher, a selective approach and attention to risk/reward remains pertinent, amid elevated valuations and market complacency on macro risks.
Investment outlook
We maintain our view that US equities stand near fair value. Our stock selection focus is on undervalued US companies with underappreciated long-term earnings potential. The health care sector is of interest; some high-quality cyclicals that may benefit from US rate cuts also look appealing, such as housing-related stocks. In Asia Pacific, stocks have significantly rallied but further upside will be dependent on earnings growth, which was generally weaker than expected in the second quarter. We maintain investments in China and Hong Kong, where valuations remain less demanding compared to the rest of the world. Our Japan conviction also stays firm, although we are less confident on India. In Europe, stocks approach the final months of 2025 with a highly favorable policy and economic backdrop, while earnings expectations improve and valuations remain at a discount to the US market. We expect to see a sustained recovery in flows and performance in European equities.
In North America, US equities rose further in August, as prospects of rate cuts and strong quarterly results from several bellwether companies—particularly in the technology sector—fueled optimism. We maintain our view that US equities stand near fair value, with limited upside potential in the short term. Investors appear somewhat complacent about negative surprises in the rest of 2025, such as a potential slowdown in jobs and economic growth as well as below-expectations earnings. As we enter the seasonally choppy month of September, attention to fundamentals remains critical in navigating the US market.
In Asia Pacific, the regional benchmark MSCI AC Asia Pacific Index has gained some 30% from its early April “Liberation Day” trough1. The rising interest in ex-US diversification has also driven a summer rally in APAC, and we think there may be room for the market to gain further if earnings growth kicks in to support the higher valuations. On this front, the second-quarter earnings season offered mixed signals, with earnings growth generally coming in weaker than expected.
In Europe, equities approach the final months of 2025 with a stronger policy and economic backdrop than in recent years. Large-scale fiscal programs at both national and EU level are now being implemented, targeting infrastructure, defense and energy transition. At the same time, regulatory adjustments, such as the simplification of sustainability reporting, signal a more pragmatic approach to competitiveness.
Market review: August 2025
Global equity markets continued to rise in August 2025, showing mixed but generally resilient performance. The MSCI All Country World Index of stocks generated positive returns in USD terms as 10 of the 11 global equity sectors advanced, led by materials, health care and consumer services stocks. Developed market equities outpaced emerging market stocks, while global value stocks outperformed global growth stocks.
The global market saw volatility early in the month. However, continued strong US corporate earnings reports, central bank policy shifts and a weakening USD buoyed equity markets. Accelerated adoption of AI and fintech drove outperformance in technology sectors globally during the month, with mega-cap stocks continuing to dominate results. The US Fed’s cautious tone at its annual symposium and potential rate cuts positively influenced global sentiment, while the European Central Bank and the Bank of Japan did not meet.
Endnotes:
Source: Bloomberg. As of August 28, 2025. The MSCI AC Asia Pacific Index captures large and mid-cap representation across 5 developed market countries and 8 emerging market countries in the Asia Pacific region. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator of future results.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
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. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods.
Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.
Diversification does not guarantee a profit or protect against a loss.
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.
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