As we head into 2022, “It’s tough to not be bullish,” says Michael Greenberg, a Toronto-based portfolio manager at Franklin Templeton Investment Solutions (FTIS).
Greenberg foresees growth decelerating but staying above trend. While the goods sector might be leveling off, the services sector is on the rise. Overall, corporate earnings and balance sheets point to a healthy economy.
What are the opportunities for investors in a post-pandemic economy? Looking at the coming year, Greenberg touches on inflation, interest rates, emerging markets, ESG and the importance of balance.
FTIS is a global multi-asset solutions team, managing the Quotential portfolios. Along with holding many legacy Franklin Templeton funds, the portfolios recently added the Franklin Brandywine Global Sustainable Income Optimiser Fund and the Franklin ClearBridge Sustainable International Growth Fund.
These two funds came under the umbrella via Franklin Templeton’s 2020 acquisition of Legg Mason and its investment affiliates. That broadened the firm’s investment capabilities across different asset classes.
A principal strength of FTIS is the all-encompassing nature of its portfolios – diversification across asset classes, geographies and styles. The multi-asset portfolios are an appealing mix of proprietary and third-party holdings, including mutual funds, individual ETFs and derivatives.
Over the next six months at least, Greenberg says that one factor driving the markets will be the inflation debate. Inflation is being spurred largely by pandemic-related supply chain bottlenecks. As we get deeper into 2022, Greenberg expects some of those issues to fade. However, other drivers of inflation could stay elevated, such as energy, food and wages.
“We want to be grounded in the long term with our portfolio and investment strategies, and be nimble in the short term,” says Greenberg.
Fixed income needs finesse
FTIS’ cross-asset mix is moderately overweight on equities. If the team sees volatility and potential downside in the markets, they can take advantage by shifting gears quickly and taking advantage of cheaper valuations.
A challenge in this environment is what to do with fixed income, says Greenberg. In a multi-asset portfolio, fixed income has in the past served as a valuable diversification and risk-mitigation tool. Now, he says, “Fixed income management will require more finesse.”
Greenberg says it’s important to be more selective about where and when you get government bond exposure. FTIS is of the view that inflation will go higher before it starts to fade.
“We prefer to be less exposed to government bonds in our portfolio and have less interest rate sensitivity. That being said, if yields rise, it would be an opportunity to more dynamically add back to those parts of the markets,” Greenberg says.
He adds that it’s prudent to explore other areas to complement what government bonds normally offer, e.g., using currency positions to help “even out” a portfolio.
Going forward, Greenberg says having good active managers will become even more important to get high yields. That’s another reason he’s excited about the Brandywine fund strategies in the Quotential portfolios.
Turning to emerging markets, Greenberg sees strong growth longer term for a few reasons. One, we’re seeing a burgeoning middle-class demographic. Two, the economic management in many of these markets is improving, with serious central banks implementing policies that reduce some risk levels.
Emerging markets is such a blanket term that you need active management here, says Greenberg. FTIS uses investment managers who are specialists in these markets and who have boots on the ground.
ESG strategies can cut risk
Another trend worth watching is the growth of environmental, social and governance (ESG) investing. FTIS has been adding more exposure, with the funds held in the Quotential portfolios having detailed ESG strategies.
Having an ESG focus could potentially help to spur returns and also add some risk reduction characteristics, says Greenberg. He explains that companies with strong ESG commitments tend to be more sustainable and are probably less susceptible to higher carbon prices, heightened regulation and stranded assets.
“From a risk-return perspective, it makes a lot of sense to have a sustainability lens within your investment process,” Greenberg says.
While we’re transitioning to a greener economy, Greenberg says FTIS is a little more positive on the commodity and energy markets as far as pricing. There’s an investor appetite to reduce greenhouse gases, but the demand for energy is going up, not down. “And we’re not at a place where greener sources will make up that gap yet,” he says.
Greenberg says the traditional energy sector, and countries that rely heavily on that energy production, will do quite well with higher prices today. That filters down to analysis and decisions around certain currencies, regions, countries and sectors.
Optimism about the year ahead
Overall, Greenberg says it might be tough to see the same type of market returns in 2022 as what we saw in 2021. But he thinks stocks will outperform bonds.
Inflation remains a risk. If it stays persistently high with no signs of abating, that will force the hands of central banks. But Greenberg feels that they’ll raise interest rates a little less than expected.
Asked to summarize his investment philosophy for 2022 in a few words, he picks balanced and optimistic.
“We’re more balanced in equity risks across regions, allocations across fixed income, and styles of managers,” says Greenberg. “We’re also positioned to capture more performance by being overweight in equities and underweight in government bonds. So we’re optimistic.”
Franklin Templeton Investment Solutions (FTIS).
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