CONTRIBUTORS
Max Gokhman, CFA
Deputy Chief Investment Officer
Franklin Templeton Investment Solutions
Tom Nelson, CFA, CAIA
Head of Market Strategy
Franklin Templeton Investment Solutions
Miles Sampson, CFA
Head of Asset Allocation Research,
Franklin Templeton Investment Solutions
Preview
March proved to be a volatile month for equity markets, as US policy announcements eventually took a toll on investor sentiment. Optimism around growth gave way to concerns about the inflationary impact of tariffs, particularly in the United States, where extended valuations increased uncertainty.
Against this background, in this month’s Allocation Views, we assess how much of the uncertainty is priced into assets, noting that leading indicators of global growth appear to be resilient.
We conclude that our cross-asset positioning and geographic equity exposure should be neutralized as we assess inconsistent US policy. Within fixed income, we remain neutral on US duration but trim our overweight to European government bonds amid higher term premiums.
Macro themes
Growth remains positive, for now
- Leading economic indicators suggest positive global growth
- Growth reflects ongoing strength in the services sector, while manufacturing activity has also begun to improve
- US trade tariffs are a headwind to global growth as policy uncertainty discourages investment and limits animal spirits
Uncertain inflation outlook
- Significant progress has been made, although it has been bumpy, and inflation is still above targeted levels
- Tariffs have raised short-term inflation expectations, but are more likely to cause a one-off rise in prices rather than have a sustained impact
- Elevated services inflation is normalizing gradually alongside labor market strength, but core goods inflation has firmed amid tariff concerns
Divergent policy outcomes
- We expect a greater divergence of policy outcomes as the Federal Reserve (Fed) recalibrates its interest-rate strategy against a changing US economic backdrop
- Other Western central banks are set to cut rates more quickly, particularly in Europe, where growth remains subdued despite fiscal stimulus
- In major economies such as the United States, Germany and China, fiscal policy is emerging as an influential driver of asset prices
Portfolio positioning themes
Resetting expectations
- Equity positioning and sentiment has weakened materially, creating a more constructive setup moving forward
- However, inconsistent US policy threatens to amplify uncertainty, dampen growth and fuel inflation
- Against this background, we used the recent 90-day pause in reciprocal tariffs announced by President Trump to neutralize our “risk-on” positioning, selling into strength as markets rallied
Equities: Leveling up
- We take a more balanced view of the United States amid heightened uncertainty, despite resilient earnings growth
- Recent US policy has altered the global investment landscape, improving the broad appeal of international equities relative to US stocks
- We neutralize our emerging markets ex China position, influenced by fading US exceptionalism and a weaker US dollar
Convergent bond yields
- We favor global fixed income, remaining slightly long eurozone duration while we monitor the impact of fiscal stimulus on inflation and growth
- Market expectations around the depth and duration of policy cycles have increased significantly
- Financial conditions have weakened and now provide more attractive pricing for corporate bonds, like high yield issues
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.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. 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. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. To the extent a strategy invests in companies in a specific country or region, it may experience greater volatility than a strategy that is more broadly diversified geographically.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
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. 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.
Investing in privately held companies presents certain challenges and involves incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.
Active management does not ensure gains or protect against market declines. Diversification does not guarantee a profit or protect against a loss.