Global Investment Committee Allocation Views

Transcription

1 Investment Team Update August 1, 2017 Global Investment Committee Allocation Views PERSPECTIVE FROM FRANKLIN TEMPLETON MULTI-ASSET SOLUTIONS This investment team update describes the views of the Franklin Templeton (FT) Multi-Asset Solutions Global Investment Committee (GIC) an experienced team of investment professionals who specialize in equities, fixed income, cross asset and absolute return investments. The committee meets regularly to share multiple viewpoints, debate implications and assess risks. This process generates key investment themes, which can be expressed in a variety of portfolios that FT Multi-Asset Solutions offers to clients. The text below describes the views of the FT Multi-Asset Solutions GIC as of the date of this publication. These views are for general information only, are subject to change, apply solely to FT Multi-Asset Solutions strategies and are not representative of the views or strategies of other Franklin Templeton investment groups. Executive Summary as of August 1, 2017 On a main asset class level, we held a favorable view of global equities and commodities. We have a negative view of developedmarket (DM) government bonds. Our preference is for assets, such as European and Japanese equities, we believe should benefit from investors shifting their focus from regional concerns to improving economic conditions. The persistent momentum for global equity markets and the business cycles in certain countries have suggested to us caution with regard to bond performance potential, and we prefer short duration in global bond markets, particularly outside the United States. Our analysis indicated that we are in the later stages of the credit cycle. In this environment, we prefer emerging-market (EM) bonds relative to high-yield bonds, given historical and relative valuations, the yield advantage of EM debt, more flexible EM central bank policy and fewer headwinds from potential US policy. Asset Class Preference* Major Themes That Frame Our Tactical Asset Allocation 1. Continued Global Growth: Many macro indicators have suggested a positive growth outlook. We see prospects for economic rebalancing in EMs, but would like to see more evidence of long-term structural reform. 2. Inflationary Pressures: We see the overwhelming deflationary pressures in DMs during the past few years subsiding. DM central banks are departing from unconventional operational tools and, in some cases, have reduced support. However, financial conditions remain easy across DM central banks, in our view. *Based on our analysis of market factors. 3. Business Cycle Remains Positive: The output gap, the US Treasury yield curve, negative real short-term interest rates and low recession risk (especially in the United States) suggest to us that the business cycle should remain positive in the medium term. All information presented herein represents solely the general views of the FT Multi-Asset Solutions GIC as of the date of this publication and is for illustrative purposes only. Any statements about strategy positioning are as of August 1, 2017, and are subject to change without notice. The positioning of a specific portfolio may differ from the information presented herein due to various factors, including, but not limited to, allocations from the core portfolio and specific investment objectives, guidelines, strategy and restrictions of a portfolio. Not intended as investment advice or an investment recommendation. There is no assurance any forecast, projection or estimate will be realized.

2 FIXED INCOME SECTORS EQUITY REGIONS MAIN ASSET CLASSES Current Convictions from the FT Multi-Asset Solutions GIC Asset Class Equities Corporate Bonds Government Bonds Commodities Hedge Funds Cash Developed (DM) United States Europe Japan Canada Emerging (EM) US Treasuries Ex-US Govt. Bonds High Yield Investment Grade (IG) EM Debt (-) N (+) Represents month-over-month change Our Viewpoint Macro indicators have remained supportive of risk assets, based on our analysis. We have observed a number of indicators that, despite some deceleration, suggest to us a potential inflection point in improved global growth, stronger corporate fundamentals and encouraging investor sentiment. Second-quarter earnings are off to a strong start. Valuations relative to history present risks to our favorable view. We favor EM debt relative to high yield, given stronger relative valuations and fundamentals, and bank loans due to their highest yield with least amount of duration. Healthy interest-rate coverage ratios and low recession risk are supportive of corporate bonds, but spreads elevated relative to history. Given notably low yields for Treasuries and other DM government bonds, recovered inflation data and improved growth, we have an unfavorable view of DM government bonds broadly. Central bank policy should also be a headwind for government bonds as emergency level policy support is gradually removed. Positive and rising global capital expenditures survey has been historically bearish for US Treasuries. The Citi Economic Surprise Index is in a positive regime, historically bearish for 10-year German Bunds. Expected increases in capital expenditures and an uptick in global manufacturing depict advantageous conditions for commodities. However, technical indicators weak. Valuations at month-end were also attractive to us, given fairly negative sentiment. We also consider a negative roll return. 1 Sector-level dispersion among US equities has continued to widen. For example, the performance spread between the best and worst S&P 500 sectors increased in 2016 after remaining relatively narrow for the previous several years. Historically, hedge funds have demonstrated generally healthy performance when the spread has widened. Hedge fund universe sentiment notably optimistic on equity, which suggests caution on exposure to equity market beta. Macro indicators increasingly supportive of risk assets such as equities, commodities and EM debt. Recovery in earnings, profit margins, productivity and manufacturing all strengthened, leading us to favor risk assets over cash. Elevated DM government bond valuations outside the US with low yields; cash more attractive defensive asset class. Economic indicators attractive relative to history, driven by corporate earnings surprises, improved gross domestic product (GDP) forecasts and strong retail sales. Monetary policy supportive. Corporate fundamentals strong relative to history due to revenue data, earnings data, profit margins. Return on equity (ROE) weak but improving. Valuations elevated, with most metrics over one standard deviation rich relative to 10-year history. Economic indicators are attractive relative to history, with some attractive OECD leading indicators. Revenue, profit margins, earnings momentum strong, but poor ROE presents risk. Valuations elevated, with most metrics over one standard deviation rich relative to 10-year history. Economic indicators, corporate fundamentals favorable relative to history due to industrial production, GDP forecasts, retail sales, corporate earnings surprises, revenue growth, earnings growth, earnings revisions, earnings momentum. European profit margins and Citi Economic Surprise Index both positive and rising historically supportive of European equities. ROE extremely weak. Valuations increasingly expensive, but still attractive compared to DM peers. Geopolitical risks. Economic indicators are attractive relative to history, driven by OECD leading indicators, industrial production. Central bank policy supportive, and money growth strong and attractive relative to history. Corporate fundamentals are strong relative to history, including revenue growth, earnings revisions, attractive ROE. Profit margins are strongest relative to DM peers. Relative valuations attractive compared to DM peers. Positive economic surprises, leading indicators, industrial production supportive. Money growth improved, monetary policy supportive. Revenue growth, earnings growth, earnings revisions and earnings momentum strong. ROE and profit margins weak but improving. Valuations stretched but improving across trailing and forward price-to-earnings (P/E) ratios. Corporate earnings surprises and revenue data attractive. Valuations are high, but more attractive than DMs. Economic fundamentals are mediocre due to weak retail sales, industrial production and GDP forecasts, which are unattractive relative to history. Poor money growth is a large headwind. ROE, profit margins extremely unattractive. But equities are overbought, in our view. The US Federal Reserve s (Fed s) desire to reduce the balance sheet, a tightening labor market and low term premium may cause yields to rise. Growth indicators such as service and composite purchasing managers indexes (PMIs) each strong relative to history and improved. Less certainty now on fiscal policy and inflation achieving Fed s target may keep yields more range bound. Higher relative yields, political uncertainty, geopolitics are upside risks to our unfavorable view. High valuations, improving economic growth outside the US, low term premiums, improved economic data led to unfavorable view. Small rise in yields could quickly wipe out any carry. European political risk scaled down and some expectations for the European Central Bank (ECB) to announce taper in fall. Growth indicators in Europe such as manufacturing, service, and composite PMIs are all strong relative to history. Within Europe s business sector, capacity utilization strong, and IFO capex current conditions, industrial production each improved. Consumer confidence improved and attractive relative to history. Our fair value model indicates high-yield valuations elevated relative to history. Bank loans preferred due to highest yield for least amount of duration. Potential for deregulation, favorable tax reform, increased fiscal spending supportive of sector due to high expectations for corporate earnings to improve. While positive and rising US equity performance has historically supported high yield, positive and rising US equity volatility has been historically bearish for high yield. Healthy interest-rate coverage ratios and low recession risk supportive. Rising rates present risks for IG duration and total return potential. Spreads are elevated relative to history. Relative yields are attractive relative to other fixed income opportunities. Emerging-market growth and economic fundamentals improving and vulnerabilities lower than in past. Of concern are higher US rates and USD crimping global liquidity, but with a go slow Fed less of a risk for now. No arrow = No change from the previous month The graphic reflects the views of the GIC regarding each asset class relative to a neutral portfolio allocation. All viewpoints reflect solely the views and opinions of the GIC. Equity regions and fixed income sector totals roll up to the main asset classes. 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3 Cross Asset Many of the core themes supporting risk assets such as global equities in the first half of 2017 have persisted as we approached August. The pace of global growth has remained on track for marked improvement for the calendar year. Global PMIs remained in expansion territory in recent months, despite a recent decline in the US manufacturing PMI. The trend for a positive and rising (PORI) regime for composite, manufacturing and services PMIs globally suggests favorable global equity performance potential in the near term, following healthy performance in the first half of In addition, inflation pressures appeared to have picked up, based on our analysis. Stronger income statement corporate fundamentals, robust global liquidity and potential inflows into global equities also represented tailwinds. Corporate performance also supported risk assets, in our assessment. Measures of corporate profit margins and earnings momentum have trended upward recently. A significant improvement in the breadth of earnings revisions over the past six months represented to us a notable tailwind for risk assets such as equities. Historically, when earnings revisions have trended up, global equity performance generally has been robust. However, the precipitous climb is a risk to our view and has led us to temper expectations going forward, as we believe this measure may be approaching an extended level. Confidence has been a common theme supporting equity markets. The Fed has expressed continued confidence in the improving US economy, and global financial conditions remained accommodative following the Fed s interest-rate hike in June, which also suggests enhanced performance potential. A measure of sentiment, the IFO Economic Climate Survey, found in the past few months that optimism among national and global organizations improved considerably from earlier in 2017 (see Chart 1). Manufacturing and consumer confidence has also trended up in recent months (see Chart 2). Although the potential for robust US fiscal policy remains somewhat uncertain, the possible upside surprise of successful policy implementation would support risk assets, in our estimation. We also see the possibility for gains in US productivity, should proposed tax changes take effect. In the eurozone, easier credit standards (based on surveys of consumer, business and housing credit markets) appeared to us as supportive of economic growth over the next few quarters. However, some geopolitical risks remain. For example, tensions remained elevated between the United States, along with its allies, and North Korea, Syria and Russia, among others. GIC Asset Class Views Equities Corporate Bonds Government Bonds Commodities Hedge Funds Cash The graphic reflects the views of the GIC regarding each asset class relative to a neutral portfolio allocation. Represents month-over-month change No arrow = No change from the previous month N + Sentiment and certain valuations also appeared less favorable to us. The global equity risk premium was below its rolling fiveyear average and falling as of mid-july. Given the continued uncertainty surrounding political and legislative events, the risk premium did not sufficiently compensate investors for these risks, in our opinion. A further pullback in corporate earnings surprises also suggested a potential headwind. Another cautious indicator for global equities was an environment of high P/E ratios and low volatility. Historically, this environment has been associated with muted performance for the forward threemonth period. Low volatility in global equity markets suggests to us a level of investor complacency but, at the same time, has supported continued global equity strength. However, we see more supportive factors than possible hurdles for global equities. With the Fed s June interest-rate increase and the Bank of England s unexpectedly close decision on the next day to keep interest rates unchanged, we see the potential for more hawkish central bank policy during the remainder of 2017 as DM economies continue to expand. Even with less accommodative central bank policy in select DMs, financial conditions remain supportive. With broad expectations for higher interest rates moving forward, investor cash flows have started to tilt more toward equities as opposed to bonds. This trend may signal a pivotal investor shift away from government bonds following a 30-year period of inflows. Although ECB President Mario Draghi and fellow ECB members kept a dovish tone on monetary policy during July, positive economic reports and low unemployment in Europe may lead to an eventual taper. Global Investment Committee Allocation Views 3

4 Economic Confidence Has Shifted to the Upside Chart 1: IFO Economic Climate Survey June 1997 June Global Equity Statistics Above 1Y Moving Avg. Below 1Y Moving Avg. Regime Agnostic Average 3M Fwd. Return 12.8% 3.3% 8.4% Median 3M Fwd. Return 13.0% 11.8% 12.5% Std. Dev. of Return 13.4% 19.7% 16.7% Count % of Time in Regime 54% 46% 100% IFO World Economic Climate Index One-Year Moving Average Source: Thomson Reuters Datastream, MSCI. Data as of 7/15/17. Data reflects one-month lag. All data is annualized using three-month forward returns (MSCI World). Past performance does not guarantee future results. In an environment where corporate earnings results have raised consensus expectations for global equities, low volatility has remained intact and robust quantitative easing programs from major central banks have continued which has supported equity multiples we maintain a favorable view of global equities. In comparison to global equities, we held an unfavorable view of global bonds. Our analysis of relative valuations between the two asset classes found equities more attractive to us. We also evaluated global bond markets by employing a model that considers factors such as the business cycle, the slope of the yield curve across markets, momentum for 10-year government bonds and price momentum in equity markets (which we view as a contrarian indicator for bonds). We evaluate these indicators to assess the performance potential for global bonds over the next one to two months. While bond price momentum appeared supportive to us in most major markets, other areas suggested caution with regard to duration. For example, we regarded German Bunds as expensive, given their negative term premium. Even a small rise in Bund yields would likely have a pronounced adverse impact on Bund prices. Similarly, the business cycle appeared to be a headwind in countries such as Japan, Australia and the United Kingdom, based on our analysis. The combination of low term premiums for global government bonds and the persistent momentum for global equity markets also has suggested to us caution with regard to bond performance potential. Furthermore, our base case scenarios for monetary policy from major central banks were generally supportive for global equities, and neutral or slightly bearish for global government bonds. The significant asset purchases in recent years from central banks in the United States and the eurozone should shift to tapered levels and a focus on balance sheet normalization, in our estimation. Many investors have been waiting for the ECB meeting on September 7 for possible changes in policy. The potential for expansionary fiscal policy in the United States and Europe, which could bolster interest rates, represents another headwind. After evaluating these factors and weighing related considerations, we maintained a preference for short duration in global bond markets. Elsewhere, commodity prices (including energy) broadly strengthened between mid-june and mid-july, with the exception of precious metals. We continued to observe several areas of support for commodities. Investor sentiment for the asset class has generally declined over the past few years, which we find as a contrarian, bullish sign. Global capital expenditure spending has risen in recent months from low levels. Furthermore, several fundamental indicators remained supportive of commodities. Relative and long-term valuations and China s composite leading indicators appeared to be tailwinds for commodities, according to our analysis. With regard to oil, the supply/demand outlook reflects more normalized conditions, in our opinion. Although technical indicators remained generally weak for commodities in July, fundamentals were more supportive of the asset class. Commodities still face some headwinds. July marked the beginning of a seasonable period that has historically seen constrained performance for commodities. At the same time, we Global Investment Committee Allocation Views 4

5 have observed some contradictory trends. First, the crude oil rig count has been slowing over the past 12 months. Second, shale production, which has been prolific, has been facing rising production costs. Combining these attractive macro growth fundamentals against the recent downturn for certain indicators led us to a favorable view of commodities. We balance the favorable factors with a negative roll return. 1 Manufacturing and Consumer Confidence Were Strong and Trending Higher Chart 2: OECD Global Confidence Aggregate July 2012 May Global Confidence Aggregate Three-Month Moving Average Consumer Manufacturing Global Equity Statistics Above 3M Moving Avg. Below 3M Moving Avg. Regime Agnostic Average 3M Fwd. Return 3.8% 1.6% 2.7% Median 3M Fwd. Return 3.8% 3.0% 3.5% Std. Dev. of Return 6.7% 9.2% 8.1% Level of Confidence 91% 85% N/A Count % of Time in Regime 51% 49% 100% Source: Thomson Reuters Datastream. Data as of 7/15/17. Past performance does not guarantee future results. Equities We continue to see encouraging economic data in the eurozone. Corporate performance in the region was particularly strong over the past few months, as demonstrated by healthy levels of positive surprises for earnings, as well as for revenue growth. Manufacturing activity increased over the three-month period ended in June, and retail sales (see Chart 3) in the eurozone showed marked improvement on a year-over-year basis. These favorable trends appeared more impressive to us when compared to other DMs. We also see the potential for further growth in corporate performance. There was significant potential for the profit margins of European firms to converge with those of their US peers (see Chart 4). Historically, a positive and rising trend for profit margins in Europe has been followed by positive stock performance. GIC Views of Equity Regions N + Developed United States Europe Japan Canada Emerging The graphic reflects the views of the GIC regarding each asset class relative to a neutral portfolio allocation. Represents month-over-month change No arrow = No change from the previous month Global Investment Committee Allocation Views 5

6 Furthermore, we believe investors are likely to focus more on the eurozone s economic growth and emergent inflation as the economic backdrop continues to improve. They also may take a more measured assessment of potential ECB policy moves. Following an extended period of political uncertainty weighing on European stocks, investor concerns surrounding populist politics in the region have largely faded. European equities began a healthy rally following French run-off election results in May and parliamentary election results in June, as well as encouraging economic data. Although a broad range of economic data and developments support eurozone stocks, we remain cognizant of potential headwinds. Greece may encounter future challenges in meeting large debt payments, although the country received approval from the International Monetary Fund in July for a large loan. From an economic standpoint, while we see European demand as the primary driver of the region s economy, deceleration in EM economies, particularly China, could weigh on eurozone growth. The short-term outlook for Europe turned down in late June, based on sentient and technical indicators. However, in our estimation these concerns were already priced into eurozone equities, and we find many more tailwinds than headwinds for the region s bourses. We hold high conviction that the improving business cycle will trump politics, which led us to maintain a favorable view of European stocks. In Japan, corporate earnings-per-share (EPS) revisions, along with ROE and profit margin momentum (see Chart 3), have all been robust in recent months. Japanese profit margins reached an all-time high for the fiscal year ended March 31, 2017, which supported the convergence of the country s ROE with that of other DMs. ROE momentum was higher than in most DMs. Additionally, a tight labor market has been supporting wage growth and lowered deflation concerns. Significant central bank support in Japan and a large rebound in global trade have also served as notable tailwinds. Industrial production in Japan has demonstrated significant expansion over the past two years (see Chart 5). Money growth was robust in Japan, providing what we see as further support for Japanese equity performance potential. Despite the strengths, our analysis indicated to us that analyst expectations and guidance from Japanese corporations have continued to underestimate EPS growth. Valuations also seemed to us to underestimate improved corporate profitability in Japan. As of mid-july, Japanese equities offered lower valuations compared to other DM equities across most measures, including P/E, despite less political risk in Japan. Although we find the supportive factors for Japanese equities far outweigh the risks, we have been monitoring leading indicators for the country, including manufacturing activity, which slowed the past two months (though remaining in expansionary levels). Regional geopolitical risks concerning North Korea also remain. The combination of corporate earnings and profits demonstrating continued strength, tailwinds from the labor market and central bank support, and broadly attractive valuation metrics relative to DM market peers led us to hold a favorable view of Japanese equities. Eurozone and Japanese Retail Sales Were Above Historical Averages Compared to Peers and Exhibited the Strongest Upward Three-Month Change Chart 3: Retail Sales, Year-over-Year July 2007 June 2017 YOY 15% Current Z-SCORES 3M Change 10% 5% 0% United States Japan Eurozone United Kingdom % -10% -15% United States Eurozone United Kingdom Japan Source: Thomson Reuters Datastream. Data as of 7/15/17. Eurozone and Japan data through May A z-score indicates how many standard deviations a data point falls above or below the mean, or expected value. The higher or lower the z-score, the further the data point falls from the normal distribution. It is useful for comparing multiple series of data. Global Investment Committee Allocation Views 6

7 We View Europe s Potential for Profit Margin Convergence as Bullish for European Equities Chart 4: Profit Margins (Last-12-Month Income-to-Sales) July 2007 July % 10% 9% 8% 7% 6% 5% 4% United States European Monetary Union Source: Thomson Reuters Datastream. Data as of 7/25/17. Past performance does not guarantee future results. Industrial Production Has Trended Up in the Eurozone and Remained Strong Relative to History in Japan Despite Recent Deceleration Chart 5: Industrial Production, Year-over-Year July 2007 May 2017 YOY 40% 30% 20% 10% 0% -10% -20% -30% -40% Japan Eurozone Z-SCORES Current 3M Change Japan Eurozone Source: Thomson Reuters Datastream. Data as of 7/1/17. A z-score indicates how many standard deviations a data point falls above or below the mean, or expected value. The higher or lower the z-score, the further the data point falls from the normal distribution. It is useful for comparing multiple series of data. Fixed Income Despite higher expectations for growth and future interest-rate increases, the US Treasury market appears to us to be excessively pricing in sluggish growth and a conservative path of interest-rate hikes, particularly past Strong US economic data across the labor market, as well as business and consumer sectors, suggest the case for interest-rate tightening has strengthened. Employment in the United States has remained strong, with the rise in nonfarm payrolls and the US economy adding a healthy amount of jobs. These improving US employment indicators should continue to bode well for wage gains, in our opinion. Two recent surveys found US companies were planning to raise employee wages in the next several months. In addition, the gap between the unemployment rate and the nonaccelerating inflation rate of unemployment appears to us to have closed. A tighter labor market in the United States supports our view of strengthening inflationary forces, and core inflation has trended higher over the past 12 months. The Fed may also announce a change to its policy of reinvestment of payments of principal for US Treasuries and agency bonds. This potential action could add to upward pressure on US GIC Views of Fixed Income Sectors US Treasuries Ex-US Govt. Bonds High Yield Investment Grade EM Debt N + The graphic reflects the views of the GIC regarding each asset class relative to a neutral portfolio allocation. Represents month-over-month change No arrow = No change from the previous month Treasury yields and spreads for mortgage-backed securities. US GDP accelerated in the second quarter of 2017 from the previous quarter s pace, also indicative to us that US growth was more robust than many recognized. Given the difference between strengthening inflationary factors and market pricing, we viewed term premiums in the US Treasury market as low and unattractive. Global Investment Committee Allocation Views 7

8 Outside of the United States, overall economic data in the eurozone have demonstrated broad and, in many cases, substantial improvement recently. Both manufacturing and services PMIs notably improved in the past few months. With wage growth rising and a lower unemployment rate in the past few months, consumer confidence has climbed, accompanied by higher demand, including rising housing starts and new car registrations. Many of these economic measures were coming off of low levels, which suggest to us significant room for further growth. The strengthening economic picture in the eurozone should dampen demand for eurozone government bonds. In addition, rising consumer demand in the eurozone should support inflation, which could curtail real interest rates and, therefore, the appeal of government bonds. As a result of upward economic trends, fiscal policy in Europe has been turning expansionary, or at least less contractionary. The eurozone s terms of trade have demonstrated its economic strength and demand for exports relative to the region s global peers (see Chart 6). The transmission mechanism of monetary policy is showing gradual improvement. Consequently, we view German Bunds as overvalued, resulting in asymmetrical risk and reward. For example, the term premium is currently quite negative for German Bunds, and a small rise in yields could wipe out years of carry. Given our assessment of improved growth in Europe, low term premiums for Treasuries and other DM government bonds, and the increased potential for major central banks to curtail stimulus, we have an unfavorable view of DM government bonds broadly, especially those outside the United States, and most notably German Bunds. Increasing uncertainty over President Trump s ability to enact proposed trade restriction policies has resulted in less of a headwind for EM debt in recent months, in our opinion. This development has contributed to substantial investor inflows into the asset class in Another reason for inflows into EM debt is the bond sector s yield, which we have regarded as attractive relative to US investment-grade and high-yield bonds. This healthy yield has also supported investor inflows into EM debt year-to-date. Although some investors expressed concern for a substantial slowdown in China, the country s growth indicator suggests real GDP is likely to improve in the medium term (see Chart 7). China s PMIs were trending up in recent months. Leading economic indicators were also positive and strengthening in China and India, and this PORI regime highlights improving economic fundamentals. In Latin America, the headwinds of high inflation have lessened over the past 18 months. Our analysis also weighed considerations such as the absolute valuations and spreads for EM debt, which were around their historical average (see Chart 8). We also regarded yields for the EM bond sector as attractive relative to history. We held a favorable view of EM debt relative to US high-yield debt. Another area of concentrated focus for us is evaluating what stage credit markets have entered. In the US credit market, we found spreads tight across bond sectors, particularly optionadjusted spreads for intermediate-term US Treasuries and investment-grade bonds. Our analysis of consumption expenditures and demand levels led us to conclude US credit markets were somewhat extended, as leverage has risen for many years. This was somewhat atypical and a concern for us, as corporations have historically deleveraged when interest rates were rising. Investor concerns rose late in June surrounding the potential end of accommodative monetary policies from major central banks, particularly the ECB, which weighed on global bonds. However, these concerns somewhat diminished in July. In the United States, the Fed was widely expected to continue with measured increases in interest rates amid a strong labor market and firming inflation. Though some possibility remains that proposed fiscal policies in the United States could extend the credit cycle, our analysis concluded US credit markets lie in the later stage of The Eurozone s Terms of Trade Has Demonstrated Economic Strength Compared to Its Long-Term Average and Global Peers Chart 6: Terms of Trade, One-Year Moving Average July 2007 June 2017 Index Level United States Canada Eurozone United Kingdom Japan Z-SCORES Current 3M Change United States Japan Eurozone United Kingdom Canada Source: Thomson Reuters. Data as of 7/15/17. Eurozone, Canada and United Kingdom data through May The terms of trade compares a country s export prices relative to its import prices. A z-score indicates how many standard deviations a data point falls above or below the mean, or expected value. The higher or lower the z-score, the further the data point falls from the normal distribution. It is useful for comparing multiple series of data. Global Investment Committee Allocation Views 8

9 Hundreds the credit cycle. We also favor bank loans within the corporate bond sector, since they currently offer the highest China s Economic Indicators Suggest Upcoming Improvement in Real GDP Growth Chart 7: China Growth Indicator and Real GDP January 2005 July % 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% -2.0% Growth Indicator Real GDP YOY % Change Source: Calculations by FT Multi-Asset Solutions using data sourced from Bloomberg. Data as of 7/10/17. yield in this sector for the least amount of duration, or sensitivity to interest rates. Option-Adjusted Spread for EM Debt Was in Line with the Asset Class s Historical Average Chart 8: Actual Minus Estimated EM Debt Spread over Time March 2003 July 2017 Deviations from Model Residual (Deviations) 1 Sigma Limit Source: Calculations by FT Multi-Asset Solutions using data sourced from Bloomberg. The full index name is the JP Morgan Emerging Market Bond Index. Indexes are unmanaged and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Data as of 7/15/17. WHAT ARE THE RISKS? All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Value securities may not increase in price as anticipated or may decline further in value. Smaller companies can be particularly sensitive to changes in economic conditions and have less certain growth prospects than larger, more established companies and can be volatile, especially over the short term. Investments in smaller-company securities that may have limited liquidity involves additional risks, such as relatively small revenues, limited product lines and small market share. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds the portfolio s initial investment. A strategy may not achieve the anticipated benefits, and may realize losses, when a counterparty fails to perform as promised. Currency rates may fluctuate significantly over short periods of time and can reduce returns. Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investments in REITs involve additional risks; since REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector prices of such securities can be volatile, particularly over the short term. Investments in hedge funds are speculative investments, entail significant risk and are suitable only for persons who can afford to lose the entire amount of their investment. Global Investment Committee Allocation Views 9

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Box , Dubai, U.A.E., Tel.: Fax: France: Issued by Franklin Templeton France S.A., 20 rue de la Paix, Paris, France. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited, 17/F, Chater House, 8 Connaught Road Central, Hong Kong. Italy: Issued by Franklin Templeton International Services S.à.r.l. Italian Branch, Corso Italia, 1 Milan, 20122, Italy. Japan: Issued by Franklin Templeton Investments Japan Limited. Korea: Issued by Franklin Templeton Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12 Youido-Dong, Youngdungpo-Gu, Seoul, Korea Luxembourg/Benelux: Issued by Franklin Templeton International Services S.à r.l. Supervised by the Commission de Surveillance du Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg - Tel: Fax: Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Poland: Issued by Templeton Asset Management (Poland) TFI S.A., Rondo ONZ 1; Warsaw. Romania: Issued by the Bucharest branch of Franklin Templeton Investment Management Limited, Buzesti Street, Premium Point, 7th-8th Floor, Bucharest 1, Romania. Registered with Romania Financial Supervisory Authority under no. PJM01SFIM/400005/ , authorized and regulated in the UK by the Financial Conduct Authority. Singapore: Issued by Templeton Asset Management Ltd. Registration No. (UEN) E. 7 Temasek Boulevard, #38-03 Suntec Tower One, , Singapore. Spain: Issued by the branch of Franklin Templeton Investment Management, Professional of the Financial Sector under the Supervision of CNMV, José Ortega y Gasset 29, Madrid. South Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which is an authorised Financial Services Provider. Tel: +27 (21) Fax: +27 (21) Switzerland: Issued by Franklin Templeton Switzerland Ltd, Stockerstrasse 38, CH-8002 Zurich. UK: Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. Authorized and regulated in the United Kingdom by the Financial Conduct Authority. Nordic regions: Issued by Franklin Templeton Investment Management Limited (FTIML), Swedish Branch, Blasieholmsgatan 5, SE Stockholm, Sweden. Phone: +46 (0) , Fax: +46 (0) FTIML is authorised and regulated in the United Kingdom by the Financial Conduct Authority and is authorized to conduct certain investment services in Denmark, in Sweden, in Norway and in Finland. Offshore Americas: In the U.S., this publication is made available only to financial intermediaries by Templeton/Franklin Investment Services, 100 Fountain Parkway, St. Petersburg, Florida Tel: (800) (USA Toll- Free), (877) (Canada Toll-Free), and Fax: (727) Investments are not FDIC insured; may lose value; and are not bank guaranteed. Distribution outside the U.S. may be made by Templeton Global Advisors Limited or other sub-distributors, intermediaries, dealers or professional investors that have been engaged by Templeton Global Advisors Limited to distribute shares of Franklin Templeton funds in certain jurisdictions. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so. 1. Roll return refers to the resulting return from rolling a short-term contract into a longer-term contract in a futures market. A negative roll return indicates an investor will lose money when rolling a contract. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at Please visit to be directed to your local Franklin Templeton website. franklintempletoninstitutonal.com Copyright 2017 Franklin Templeton Investments. All rights reserved. 8/17