Uncertainty is on the minds of investors, in no uncertain terms. The cycle of synchronized global growth is at an advanced stage. Trade tensions pose risks to economic growth, while inflation is back, and short-term interest rates are moving up, which has led to flattening of the yield curve. As interest rates normalize from record lows in countries like Canada and the US, the bond market is adjusting but less so the equity markets, said Heather Arnold, co-lead Portfolio Manager of Templeton Global Balanced Fund. “There’s a bit of confusion from equity markets as to whether or not the flattening of the yield curve will lead to, at some point, an economic downturn and then rates going right back down.”
Since the 2007 financial crisis, many investors are more risk averse. They remember that severe decline and want peace of mind. Now, the world economy could be in transition, which creates more uncertainty, especially from political developments such as US protectionism. The US imposed tariffs on certain goods imported from China, Canada and the European Union, who retaliated with tariffs on specific US imports.
“Markets hate uncertainty and this protectionism is causing great consternation,” said Ms. Arnold. “What concerns us is whether this is a skirmish that will lead to a full-blown trade war. The immediate effect of rising protectionism, should it continue to escalate, would be inflation and further upward pressure on interest rates.”
Ms. Arnold said a retreat from globalization is the real concern because protectionism is not as economically efficient. Closing borders inevitably leads to higher costs that are ultimately absorbed or passed to others. This can be reflected in lower margins for companies, lower shareholder returns and higher, persistent inflation.
Flexibility over Uncertainty
One way to counter feelings of uncertainty among clients is to offer balance as an alternative. A global balanced mutual fund with a flexible investment mandate can manage risk and offer a wide selection of equity and fixed-income opportunities. The asset mix does not have to be a typical 60/40 split between equities and fixed income; it can be managed dynamically, with an approach that looks forward, from a bottom-up view. This allows portfolio managers to adjust the mix to try to capitalize on market opportunities and mitigate downside risk.
“There are times when, as an investor, it’s nice not to have to make too many decisions. One important decision that’s made for people within a balanced fund is the asset mix decision,” says Ms. Arnold.
Global balanced funds can also tap the expertise of both equity and fixed income investment professionals. This combined perspective aims to generate enhanced return potential from both asset classes.
“A global balanced fund is a good flexible strategy. The focus is on capital preservation which is absolutely appropriate in today’s environment,” Ms. Arnold said. “A balanced approach with a thoughtful global macro team that’s positioned defensively with a flexible asset mix can offer clients an interesting, all-weather product.”
Learn more about this approach at franklintempleton.ca.
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