Franklin Templeton: Mid-year 2023 outlook: Time to engage more fully

Introduction

For this mid-year outlook, the theme continues to be the attractiveness of investments beyond cash including fixed income, equities and alternatives. We give you our Institute perspective for the second half of 2023, with our ongoing conversations with our investment teams driving the narrative. The major highlights are:

• Fixed income deserves a good deal of attention—delivering income is back.
• Diversification and income may be enough motivation to move some holdings further out the US yield curve.
• Equities should benefit from a taming of inflation and earnings optimism.
• Following consecutive quarters of falling US corporate profits, the outlook for earnings is beginning to brighten.
• A US recession remains the overwhelming consensus view and hence is to some extent already accounted for in market prices—it is likely to come later and be shallower than its predecessors.
• Our risk worry list includes deep recession, geopolitical tensions, energy shocks and soggy returns.

In this issue, we follow our outlook with some useful exhibits from our investment teams as they provide primary points they are making when discussing opportunities for the rest of the year.

Stephen Dover, CFA
Chief Market Strategist,
Franklin Templeton Institute

Contributors

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal.

Equity securities are subject to price fluctuation and possible loss of principal.

Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector.

Growth stock prices may fall dramatically if the company fails to meet projections of earnings or revenue; their prices may be more volatile than other securities, particularly over the short term.

Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks.

Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.

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.

Alternative strategies may be exposed to potentially significant fluctuations in value.

Privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity.

Digital assets are subject to risks relating to immature and rapidly developing technology, security vulnerabilities of this technology, credit risk of digital asset exchanges, regulatory uncertainty, high volatility in their value/price, unclear acceptance by users and global marketplaces, and manipulation or fraud.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Active management does not ensure gains or protect against market declines.