MARKET COMMENTARY

Investment Impact of the US Election:

Asset Allocation and Volatility

11.05.2020 - Gene Podkaminer, CFA Head of Research Franklin Templeton Investment Solutions

Transcript:

SPEAKERS:

Gene Podkaminer, CFA
SVP, Head of Research
Franklin Templeton Investment Solutions


Stephen H. Dover, CFA
EVP, Head of Equities
Franklin Templeton

Stephen Dover:  Welcome, Gene.

Gene Podkaminer: Thank you, Stephen. It's a pleasure to be here today.

Stephen Dover: The election is quite close, but there is no blue wave. And that means there's likely to be less stimulus than had there been one. There is likely to be not the big tax changes that there were thought to be. No big, large green infrastructure plan and probably fewer changes in health care. The markets have reacted quite positively to what's going on at this point. But Gene, what's your take on the current investment environment?

Gene Podkaminer: Yes, there is a lot going on, like you said, and you've only really touched on part of it, which is the global implications of the US election. There's also, of course, the elephant in the room, which is the Coronavirus situation, which continues to evolve. In addition to everything else that you mentioned earlier, I believe that now everybody, including myself, is an amateur constitutional scholar and amateur epidemiologist. And so, I'll certainly weave that into some of the commentary here. As we think about portfolios writ large, and as we think about a time horizon that extends beyond the next month or two, but really encompasses a year or longer, we're trying to build durable portfolios based on a couple of macro factors, including what happens to global growth, global inflation, and of course the efficacy of monetary and fiscal policy. So as we put all of that together, it's a lot less about who wins the top of the ticket, but much more about what are the global ramifications of a divided US government. What does that mean for stimulus and how does stimulus translate to future growth? Does that growth necessarily drive up inflation and how do policymakers react and respond to new conditions as they see them on the ground that may be, of course, caused by coronavirus. It may be caused by a partial recovery to the trough that we've seen before. So there's a lot to process here. And of course not all of it is immediately knowable, but as you mentioned, the market has sent some pretty clear signals and it seems like the implication is that there is some degree of certainty, and maybe certainty isn't exactly the right word to use, but we can certainly rule out some scenarios that aren't happening. As you mentioned, the blue wave is not happening and that has serious implications for the level of stimulus that we expect. It also has implications for the way that that stimulus gets to the economy, how much of it we get and ultimately what that means for our future growth rate, not just from here until inauguration day, but really through calendar year 2021.

Stephen Dover:  So it's been interesting if a lot of analysts, when they look at the market the last few weeks, you know, the argument is that because of stimulus going to happen or not happen, there's less likelihood of stimulus. But the market has actually rallied the last few days. I'd argue part of that is because there's more clarity, like you said, actually in terms of the outer dimensions of what might happen politically and also interest rates have weakened a little bit, so there's more fuel for the economy, but what is your outlook particularly for stimulus? How important is that to your asset allocation decisions?

Gene Podkaminer: Stimulus is becoming increasingly important. Over the last couple of years, as we've hit the lower bounds for the efficacy of monetary policy. So as interest rates really crept down pretty low to the point that policymakers like the Federal Reserve and other central banks don't have a ton of firepower left. There's been a passing of the baton from that monetary policy to fiscal policy, which is, of course, guided by government. And it allows government to infuse cash into the economy, preferably to individuals and to sectors that need that cash to continue functioning and to continue to grow. So the importance of fiscal policy at this point really can't be understated. It is hugely important. And I think what's also interesting is that everybody's doing it in a slightly different way. So if you look at the way that the US is talking about fiscal policy, it's different than the UK, it's different than Europe. But what remains the same is that it is hugely important in providing a lifeline to the economy and stimulating growth so that we can get past the current issues and move on to a time where that growth will really start paying dividends. Up through January or February, global markets, for the most part, we're on a tear as you know, and that has changed materially. The question now is not, how do we deal with the next recession? We're certainly in that next recession or that next trough, but how do we get out of it in a way that makes sense for a lot of the industries that are at risk?

Stephen Dover: What's your thinking in terms of adding risk or not, given the election and the path of the COVID.

Gene Podkaminer: And so the way that we're thinking about risk this year is maybe a little bit different from the way that we normally do. It depends on the time horizon, there's a really strong dependence on, do you view your portfolio out through the next year or two or three, or are you fixated on a point in time that is date certain? And as we came through the beginning of this year, clearly coronavirus was an unknown-unknown, started to really send ripples through the entire global ecosystem. And there did come a time that it did make sense to lean into risk through August. And once we got to August, there were two things that were on our minds. One was, of course, the US election and the implications of it. And the second one was what happens to COVID from here. So what do treatments and therapies look like? What does the spread look like? What does the economic impact look like? And arguably, the COVID situation is more serious than the election situation because the election will have an end. I think a lot of participants in the voting process really wanted that end to be on election day. Today's Thursday and we haven't quite hit the end of that yet. But the point is that when you shrink your time horizon, typically that means less opportunity to take risks now that we're through the election and we can snap back to a time horizon that's more like a year in length, we think that there is the opportunity to start adding risk.  And part of that is because the alternatives to equity are relatively scarce.

Stephen Dover: Gene, thank you very much

Gene Podkaminer: Thank you, my pleasure.




What Are the Risks?

All investments involve risks, including possible loss of principal. Investments in fast-growing industries like the technology sector (which has historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement. Value securities may not increase in price as anticipated or may decline further in value. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets 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. Smaller company stocks have historically had more price volatility than large-company stocks, particularly over the short term. Bond prices generally move in the opposite direction of interest rates. As the prices of bonds in a fund adjust to a rise in interest rates, the fund’s share price may decline. High yield bonds carry a greater degree of credit risk relative to investment-grade securities. The risks associated with a real estate strategy include, but are not limited to various risks inherent in the ownership of real estate property, such as fluctuations in lease occupancy rates and operating expenses, variations in rental schedules, which in turn may be adversely affected by general and local economic conditions, the supply and demand for real estate properties, zoning laws, rent control laws, real property taxes, the availability and costs of financing, environmental laws, and uninsured losses (generally from catastrophic events such as earthquakes, floods and wars).

Investments in alternative investment strategies are complex and speculative investments, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative investments may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment.

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.

Diversification does not guarantee a profit or protect against a loss. 

 

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Gene Podkaminer, CFA Head of Research Franklin Templeton Investment Solutions

Stephen Dover, EVP, Head of Equities Franklin Templeton

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