Key Highlights from Franklin Templeton’s Latest Mega Trends Accelerate Webcast

Key Highlights from Franklin Templeton’s Latest Mega Trends Accelerate Webcast

What Lies Beneath: Finding Opportunities in a Volatile Environment

San Mateo, CA, June 21, 2022 — Franklin Templeton hosted on June 15, 2021, the latest edition of its Mega Trends Accelerate Webcast Series, an online event that brings together a panel of investment experts to share their diverse views on thematic and topical issues facing investors. The replay can be accessed here.

Moderated by Jeff Schulze, director, investment strategist and architect of ClearBridge Investments’ Anatomy of a Recession program, panelists discussed underlying investment opportunities in today’s volatile market environment. The panel covered topics such as:

• Moves by the U.S. Federal Reserve and other central banks to tackle inflation,
• Asset class behavior and hedges in inflationary environments,
• The likelihood of a recession in light of slowing global growth and rising commodity prices.

Commenting on the likelihood of a recession, Schulze said:

“We expect the Federal Reserve’s tightening schedule to slow down economic activity, but our proprietary Anatomy of a Recession dashboard is still showing a relatively strong expansion. We are starting to see some weakness underneath the surface, particularly in labor market indicators, such as our job sentiment indicator. Overall, we see that the consumer is bending a bit in response to the market headwinds of today, but they are not breaking. I believe that consumers are going to be able to weather this storm. Overall, it comes down to whether or not the Fed feels comfortable with the path of inflation and makes the dovish pivot that we are all hoping for at the end of the year.”

Commenting on interest rates, inflation and the Federal Reserve, John Bellows, Portfolio Manager at Western Asset, said:

“The Fed is making a hawkish pivot to tackle inflation, and at this point, we are pricing in a 3-3.5 percent funds rate by the end of the year. I expect the risks around Fed policy will become more balanced over the second half of the year. Even though inflation prints remain uncomfortably high for the moment, the foundations of a more moderate inflation rate appear to be building. We are seeing more moderate wage growth. Goods prices have moved past their peak and could decline further as inventories are rebuilt and supply chains are unstuck. Overall, 2022 was always going to be a year of deceleration and slowing demand following the extraordinary growth of 2021 with its reopenings and fiscal stimulus.

“Over the coming months, growth is likely to move below trend, which is unlikely to sustain inflation at elevated levels for very long. As a consequence, the deterioration in growth will demand more attention from the Fed. As far as opportunities in this market, we are seeing 5 percent yields on investment-grade corporate bonds, which more than compensates for investment risk, and the default risk of these securities is fairly small.”

Commenting on small cap equities and inflation, Francis Gannon, Co-Chief Investment Officer and Managing Director of Royce Investment Partners, said:

“In a week where the S&P 500 Index entered a bear market, the Russell 2000 Index, a proxy for small caps, has been in a bear market since January. It’s important for investors to remember that bear markets happen, and more importantly, that bear markets end. Bear markets also provide opportunities for patient investors –  tomorrow’s returns are on sale today.

“If investors are looking for a way to play inflation, look no further than small caps. Using history as our guide, small caps are the only major asset class to beat inflation in every decade since the 1930s. Following highly volatile markets, subsequent three-year small-cap returns have been strong on both an absolute and a relative basis. We are holding companies that are well positioned to sidestep the worst of today’s challenges, like those with pricing power, cash generative businesses with low debt, asset-light models and B2B businesses.

“Now, it’s true that the average stock in the Russell 2000 is down 45-50 percent from its 52-week high, and there is a lot of bad news priced into today’s market. Yet, from a bottom-up perspective, the earnings picture for small caps is still healthy. Small caps are trading at 20-year lows compared to large caps. Even with outperformance on the small-cap value side versus small-cap growth, small caps are selling at a 54 percent discount.

“For approaching small caps outside of the U.S., investors should focus on quality and consider companies that have high returns on investment capital and histories of longstanding consumer relationships.”

Commenting on growth in emerging and developed markets and inflation’s impact across multiple asset classes, Gene Podkaminer, head of research for Franklin Templeton Investment Solutions, said:

“The divergence across countries and regions with respect to their growth trajectories, inflationary environments and subsequent monetary policy responses is wide, and it has widened considerably through the war in Ukraine as well as Covid. Developed markets can likely weather the storm better than emerging markets. Emerging markets are hit by various aspects of growth shocks, with commodity producers doing relatively well and commodity importers suffering.

“Inflation hits asset classes differently. Looking at equities and real estate, when the price of money changes, it impacts how we think about the forward-looking earnings from stock markets or rents. Growth has a much bigger impact on asset classes that are not fixed income. Commodities and real assets, such as private real estate and infrastructure, are reasonably effective hedges against today’s high inflation environment.

“Investors are looking for ways to get more inflation exposure within their portfolios. We just experienced many years where inflation was not on the minds of investors or central banks, but maybe it always should have been. Inflation protection is part of a well-balanced and diversified portfolio. Treasury inflation-protected securities (TIPS) and other global inflation-linked bonds do well in inflationary environments. Commodities are almost shorthand for what happens in inflation, and investors can look to more commodity-rich countries for exposure like Canada, Australia and Brazil.”

About Franklin Templeton

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 155 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company offers boutique specialization on a global scale, bringing extensive capabilities in equity, fixed income, multi-asset solutions and alternatives. With offices in more than 30 countries and approximately 1,300 investment professionals, the California-based company has 75 years of investment experience and approximately $1.45 trillion in assets under management as of May 31, 2022. For more information, please visit franklintempleton.com and follow us on LinkedIn, Twitter and Facebook.

About ClearBridge Investments

With $190.7 billion in assets under management (AUM) as of March 31, 2021, ClearBridge Investments is a leading global equity manager committed to delivering long-term results through authentic active management, offering investment solutions that emphasize differentiated, bottom-up stock selection to move clients forward. The firm integrates ESG considerations into its fundamental, bottom up research and stock selection process across all strategies. Owned by Franklin Templeton, ClearBridge operates with investment independence from headquarters in New York and offices in Baltimore, London, San Francisco, Sydney and Wilmington.

ClearBridge focuses on three primary client objectives in its areas of proven expertise: high active share, income solutions and low volatility. Its strategies are available in separately managed accounts, mutual funds, collective investment funds as well as custom solutions, commingled vehicles and offshore funds. See more here.

About Royce Investment Partners

Royce Investment Partners is a small-cap equity specialist offering distinct investment strategies with unique risk/return profiles designed to meet a variety of investors’ needs. For more than 45 years, our strategies have focused on active, risk-conscious investing driven by deep, fundamental company research. Chuck Royce, the firm’s founder and a pioneer of small-cap investing, enjoys one of the longest tenures in the industry. Royce & Associates, LP, primarily conducts its business under the name Royce Investment Partners. Royce & Associates, LP is a subsidiary of Franklin Resources. (NYSE: BEN). Royce Fund Services, LLC, the Fund’s distributor, is a member of FINRA and the SIPC.  Learn more here.

About Western Asset

Western Asset is one of the world’s leading fixed-income managers with 50 years of experience and $449.2 billion in assets under management (AUM) as of March 31, 2022. With a focus on long-term fundamental value investing that employs a top-down and bottom-up approach, the firm has nine offices around the globe and deep experience across the range of fixed-income sectors. Founded in 1971, Western Asset has been recognized for delivering superior levels of client service alongside its approach emphasizing team management and intensive proprietary research, supported by robust risk management. To learn more about Western Asset, please visit www.westernasset.com.

Western Asset is an independent specialist investment manager of Franklin Templeton.

This information does not constitute investment advice. Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.

The information contained in this document has been compiled with considerable care to ensure its accuracy. However, no representation or warranty, express or implied, is made to its accuracy or completeness. Franklin Templeton, ClearBridge Investments, Royce Investment Partners and Western Asset have procured any research or analysis contained in this document for its own use. It is provided to you only incidentally and any opinions expressed are subject to change without notice.

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