CONTRIBUTORS
Stephen Dover, CFA
Chief Market Strategist, Head of Franklin Templeton Investment Institute
Kim Catechis
Investment Strategist,
Franklin Templeton Investment Institute
Preview
An introduction to Deep Water Waves: Long-term drivers that face investors
Deep Water Waves represent the powerful long-term drivers that face investors; fundamentally altering the economic, political and public policy foundations for asset prices. Accelerated by COVID-19 and intensified by socioeconomic pressures, climate change and geopolitics, these forces will exert themselves on every facet of investment portfolios for years to come. The Franklin Templeton Investment Institute serves as a catalyst both inside and outside of our investment organization to provide a forum for investment insights and their practical application. This paper, Deep Water Waves, reflects that mission of our strategists to drive the conversations with our clients and our specialist investment teams. We expect the conversation we will have in the coming months will build on these waves and continue to expand our understanding.
- THE DEMOGRAPHIC WAVE - Global growth is set to slow to below its long-term trend over the next generation. The countries that have driven global economic growth over the past two decades are growing older. National borders will continue to harden as anti-immigration sentiment persists or grows in many countries, leading to significant negative implications for lower-income countries that depend on remittances.
- THE TECHNOLOGY WAVE - The next decade will see an urgent and widespread boom in investment in innovation across all economic sectors. It will be in both private and public sectors, with much of it driven by geopolitical imperative, not just economic value.
- THE DEBT WAVE - The tension between inflation and deflation will continue, but the calculus has changed. Longer term, control of inflation trumps economic growth, but the resolution will vary by country or region. COVID-19 has exacerbated socioeconomic inequality in many countries; progressive and redistributive taxation will be prioritised globally, unorthodox economic experiments will be attempted, and Big Government is back.
- THE GEOPOLITICAL WAVE - Geopolitics is set to increase its influence on investment outcomes over the next decade, as the confrontation between the US and China plays out, with asymmetric cyberwarfare the most likely scenario. Economic polarisation between nations and regions will likely increase. After the pandemic, wealthy countries may feel compelled to renew their commitments to multilateral organization like the World Bank and the International Finance Corporation as mechanisms to help low-income countries. But the development gap remains and is growing, so migration pressures continue.
- THE CLIMATE CHANGE WAVE - Climate change will increasingly exacerbate border tensions, threaten agricultural production and heighten social stresses in many regions. This process also heightens the existing divide within countries: e.g., rural/urban; coal region vs. solar region.
Deep Waves in Practice
Learn how some of our managers are thinking about specific long-term drivers
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. 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 realised. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. 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 associ¬ated 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 realise 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. Impact investing and/or Environmental, Social and Governance (ESG) managers may take into consideration factors beyond traditional financial information to select securities, which could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favour in the market. Further, ESG strategies may rely on certain values-based criteria to eliminate exposures found in similar strategies or broad market benchmarks, which could also result in relative investment performance deviating.