"High Possibility of Soft Landing for US Economy... Attractive Emerging Markets and Small Caps"

Franklin Templeton, Global Market Outlook Report
Election and Geopolitical Risk Factors at Play
Focus on Infrastructure Sector Growth Driven by Energy Transition

Global asset management firm Franklin Templeton forecasted in its '2024 Market Outlook Report' that "corporate profits will increase this year as the technology cycles in Korea and Taiwan become more favorable."

Franklin Templeton identified the key factors driving the market this year as ▲whether the U.S. economy achieves a soft landing ▲confidence in the peak of interest rates ▲China's economy reaching historically low points. It pointed out that scheduled elections and various geopolitical factors this year will act as sources of risk for investors. The firm expressed concerns that high interest rates and slowing growth could impact the world and increase earnings uncertainty.

Franklin Templeton expects a high likelihood of a soft landing for the U.S. economy. Supported by rising corporate profits and savings, as well as manageable levels of non-performing loans (NPLs), the U.S. economy is anticipated to maintain its positive momentum.

Manraj Second Templeton Global Investment CIO

Manraj Sekhon, CIO of Franklin Templeton Global Investment, said, "We prefer global equities excluding the U.S., emerging markets, and small-cap stocks." Regarding emerging market equities, he added, "We are going through one of the fastest U.S. interest rate hiking cycles in history," and assessed that "emerging market equities excluding China have shown resilience, stemming from reforms carried out over decades, robust domestic consumption, and strong financial health."

He analyzed that European stock markets remain depressed with valuations below long-term averages, indicating that investor sentiment is still subdued. He forecasted sluggish growth as rising energy costs and the lagging effects of interest rate hikes burden European companies and household finances.

Regarding overseas bond markets, attention was drawn to remarks by Jerome Powell, Chair of the Federal Reserve (Fed). Following the Federal Open Market Committee (FOMC) meeting in December last year, Powell's press conference "led market participants to question why he was supporting an already strong financial market rally," the report analyzed.

Sonali Desai, CIO of Franklin Templeton's Fixed Income division, said, "The U.S. inflation data released before last month's FOMC meeting triggered a stock market rally," adding, "The yield on the 10-year U.S. Treasury bond also fell by about 1 percentage point from nearly 5% in mid-October last year." She further noted, "The very strong market rally during and immediately after the FOMC meeting shows that Powell's remarks were much more dovish than the market had anticipated."

Sonali CIO continued, "With financial conditions already significantly eased, decisions that further support the market rally indicate that the Fed is taking inflation risks less seriously than before," adding, "The final phase of disinflation will be more challenging."

Among bonds, emerging market bonds are expected to offer diverse opportunities by country. Nicholas Hardingham, Franklin Templeton Fixed Income Portfolio Manager, said, "From a valuation perspective, emerging market high-yield bonds show more attractive spreads and lower sensitivity than U.S. Treasuries," and expressed expectations that "as the Fed's rate-cutting cycle progresses next year, funds will flow into emerging market high-yield asset classes." He also emphasized, "For emerging market local currency bonds, attention should be paid to Latin America and Eastern Europe rather than Asia, where yields are lower."

Regarding growth prospects for infrastructure companies this year, the infrastructure sector is trading at historically low levels. As the world builds networks connecting all renewable energy generation facilities, energy transition is underway, which is expected to contribute to the growth of the infrastructure sector.

Nick Langley, Franklin Templeton Specialist Investment Manager and Portfolio Manager at ClearBridge Investments, analyzed, "The current market estimates about a 15% probability of a U.S. recession, which is low at this point in the economic cycle." He also advised, "Last year, the 'Magnificent 7' (Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, Meta) led the market as big tech stocks. Infrastructure assets add stability to portfolios and will provide strong long-term return potential."

This content was produced with the assistance of AI translation services.