US-based Franklin Templeton and its specialist investment managers explore corporate and consumer health from multiple perspectives, the macroeconomic environment and outlook for portfolio allocations.

Despite concerns over the impact of aggressive central bank interest rate hikes and of an impending recession, the resilience of economic growth and corporate earnings has been among the big surprises of 2023.

The US economy looks relatively resilient compared with Europe, which seems to have slipped into recession, while China is on the edge of systemic deflation, Kimberley Strand, head of sustainable investments and portfolio manager at Franklin Templeton Investment Solutions, said at a media briefing yesterday.

Michael Buchanan, CFA , co-chief investment officer at Western Asset Management, highlighted that firms have been holding up surprisingly well. “We’re not seeing evidence that rates are causing headwinds for corporate credit,” he said. This was echoed by Scott Glasser, chief investment officer at ClearBridge Investments, who said corporate and consumer health has been pretty solid.

A big part of this is that labor has been very resilient, he added, with firms more reluctant to let go of employees.

Nevertheless, Glasser said that small caps have been down, compared with large caps. The average stock is flat for the year, he added, with the perception being better than the reality. "Consumers savings from Covid-19, which made things more resilient, have also pretty much gone. Credit card balances are down to pre-Covid-19 levels," he continued. "In the next six to nine months, growth is likely to slow down." 

“We are starting to see companies not meeting their earnings' targets,” Ed Perks, CFA, chief investment officer at Franklin Income Investors, added. “We are seeing cracks in earnings and, if rates stay high in the long term, there will be additional pressure.” 

Fixed income
Looking at asset classes, Buchanan said that both investment grade credit and the high yield market have done reasonably well. This was echoed by Perks who said that yields are at levels we haven’t seen, making fixed income very attractive compared with equities. Other investment managers on both sides of the Atlantic also favor fixed income. Benjamin Melman, global chief investment officer at Paris-based Edmond de Rothschild Asset Management said the firm continues to be overweight in bonds, compared with equities. See more here.

There will also be a slowdown in growth in the coming months, Buchanan continued, which bodes well for a higher quality bias in both the high yield market and investment grade credit. “Valuations look compelling,” he added. He also favors duration.

Meanwhile, Glasser doubts whether the market has taken into account the slowdown and potential recession, saying equity markets have been a bit complacent over what earnings will look like. “The market correction is ongoing,” he added. “If rates stay high in the long term, liquidity is looking restrictive and it will pinch economic activity. A lot of unknowns have crept into the market,” he said. Glasser is not alone in his views. Sonja Laud, CIO at Legal and General Investment Management, expects US recession to land in the first half of 2024, and believes that equity analysts are not buying into the recession outlook, with recession risks not well priced into markets. See more here.  

Perks thought that cash was looking increasingly attractive in view of the geopolitical risks and the recent invasion of Israel by Hamas. “Higher quality assets are also well positioned to do well,” he said. He stressed the benefits of having a diversified portfolio which included alternatives.