Disruptions Redefine Risk and Opportunity in 2022

Global investment outlook: The ramifications of the pandemic will likely continue to reverberate in 2022, but what does that mean for investors? Our investment teams explore key themes in equity, fixed income and real estate.

    Stephen Dover, CFA

    Stephen Dover, CFAChief Market Strategist, Head of Franklin Templeton Investment Institute

    Link: Podcast - A Tale of Two Real Estate Markets: US and China

    Preview

    The ramifications of the pandemic will continue to influence capital markets in 2022. I gathered eight of our investment managers to discuss investment themes and risks they are focused on. Here are highlights from our conversations:

    • Electric vehicles (EVs) exemplify the roles innovation and technology are playing in equity markets. These “smartphones on wheels” are disrupting the auto industry as EV pioneers capture the interest of growth managers. Our value managers are also finding opportunities in this dynamic market by focusing on how established players are transitioning to keep up with the changes in the industry.
    • The United States and China exemplify the starkly different supply and demand fundamentals across global real estate—while the United States navigates housing shortages and rising prices, China is dealing with the meltdown of one of its largest developers along with housing oversupply.
    • In the search for yield, investors are exploring an expanding universe of fixed income opportunities:
      • Corporate credit has seen balance sheet improvement and a positive ratings trajectory during the pandemic. We still see opportunity for improvement in 2022, with real relative value opportunities in investment-grade credit.
      • The US municipal bond space has seen stronger-than-expected tax revenues, which have trickled down into local governments and various municipal sectors. This bodes well for the asset class, particularly in an environment of strong demand and constrained supply.
      • Emerging market fundamentals are generally in good shape. Fiscal balances have improved as revenues rebounded, and we have seen rebuilding of liquidity buffers. Local emerging market currencies look vulnerable, which we believe favors hard currency.

    We hope you find these views thought-provoking as you chart your investment course in 2022. On behalf of Franklin Templeton and the Investment Institute: Happy New Year!

    Stephen Dover, CFA
    Chief Market Strategist,
    Franklin Templeton Investment Institute

    Key investment themes for 2022

    Looking into 2022, I find myself reflecting on the past two years, marked by disruption and opportunities. COVID-19 upended not only financial markets, but also our daily lives and how we interact with the world. The pandemic has been a catalyst for transformative change in a short period of time. Individuals, communities and institutions proved to be far more adaptable than we could have ever imagined. This pandemic has shown that disruption brings new opportunities as well as new risks.

    Our 2022 investment outlook explores the nature of disruption across equity, fixed income and real estate investments. We gathered investment managers from across Franklin Templeton to look at three major themes:

    1. The growing role innovation and technology are playing in equity markets and how to value them. We examine this through the automobile industry’s evolution into electric and autonomous vehicles.
       
    2. The duality of the US and China real estate markets and how changing ways in which people work, shop and invest drive transformation. This dynamic is impacting investors directly in real estate, as well as those investing in structured real estate-related credit.
       
    3. The global search for yield within fixed income in an era of persistently low interest rates and how this is leading to an expanding universe of opportunities. Here, we look specifically at the changing role of emerging market debt, municipal bonds and corporate credit in investor portfolios.

    Each of these themes played a large role in markets in 2021, and we believe they will continue to drive markets in 2022.



    Global Investment Outlook
    allows the Franklin Templeton Investment Institute strategists to highlight manager’s views on markets across the firm. The mission of the Investment Institute is to deliver research-driven insights, expert views and industry-leading events for clients and investors globally through the diverse expertise of our autonomous investment groups, select academic partners and our unique global footprint.

    Two related Franklin Templeton Thinks publica­tions of note are Allocation Views, produced by Franklin Templeton Investment Solutions, which offers you our best thinking on multi-asset portfolio construction; and, Macro Perspectives, produced by the Investment Institute, featuring economists from across the firm dissecting key macroeconomic themes driving markets.

    Contributors

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    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. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors or general market conditions. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. Growth stock prices may fall dramatically if the company fails to meet projections of earnings or revenue; their prices may be more volatile than other securities, particularly over the short term.

    Small- and mid-capitalization companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt.

    To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks. Because municipal bonds are sensitive to interest rate movements, a municipal bond portfolio’s yield and value will fluctuate with market conditions. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Investments in lower-rated bonds include higher risk of default and loss of principal.

    Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results. Investments in fast-growing industries like the technology and health care sectors (which have historically 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. Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector. 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.