Amid emerging economic headwinds, uneven recovery paths, supply chain frictions and inflationary concerns, investors will need to carefully position their portfolios over the coming months.
“The remainder of 2021 will likely prove challenging with potential key themes of guarding for inflation, searching for income and seeking quality companies, as well as looking beyond stocks and bonds,” said Stephen Dover, chief market strategist of Franklin Templeton Investment Institute.
Fixed income investors, for instance, cannot avoid looking out for inflation and income. Dover believes opportunities across corporate credit markets will be selective and uneven, and that investors should consider sector, duration and quality rotation.
Equity discussions, meanwhile, converge on quality, he added. “Investors across styles and market capitalisation ranges believe the “junk trade” is over and quality is the priority beyond structured definitions of growth and value.”
Yet with different managers offering different definitions of quality companies, investors must navigate the market while analysing supply chain disruptions, economic cycles and growth.
Quality is key
As investors pursue quality, technology – despite recent volatility – is experiencing powerful secular and cyclical tailwinds which are positive for both the near and long terms.
“We believe the sector is likely to grow much faster than inflation, has pricing power owing to its leverage to productivity, is asset light and will enjoy deflationary tailwinds as knowledge workers take advantage of more flexible work arrangements to relocate to lower-cost regions,” explained Jonathan Curtis, a vice president, research analyst and portfolio manager with Franklin Equity Group.
Geographically, European equities look appealing to Alan Bartlett, chief investment officer of Templeton Global Equity Group. This is based on the eurozone being one of cheapest global regions and home to leading industrials and consumer companies with upside to reopening and post-pandemic recovery.
He said Japan is also attractive, as companies are restructuring and improving balance sheets, and driving a focus to improve return on equity.
In terms of emerging market (EM) equities, although the pace has moderated from the momentum of 2020, Manraj Sekhon, chief investment officer for Franklin Templeton Emerging Markets Equity, believes it is worth noting the growing divergence between the perceived challenges surrounding these markets and their demonstrated structural strengths.
“We highlight three key areas that warrant attention – demand, sentiment and inflation,” he added.
ESG and inflation to spur alts
From an alternatives perspective – and specifically real estate – the straightforward mechanism of raising rents under improving economic conditions allows properties to adapt to economic supply and demand, explained Dover.
“This mechanism makes commercial real estate particularly interesting in the second half of this year.”
In infrastructure, there are regional catalysts, plus sustainable investing and ESG will be prominent in investment decisions.
“Significant initiatives around the world are driven from social and government motivations that will allow infrastructure to have diversification benefits beyond the value of the investment,” added Dover. “These benefits will be longer term than the second half of 2021.”
