3 things portfolio managers should watch for heading into the summer

June 28, 2023 8:39 PM

Global markets have staged a recovery from last year's doldrums, but investment managers and advisors looking to nudge clients back into action shouldn't let their guards down.

That's the takeaway from a virtual panel on Wednesday held by giant asset manager Franklin Templeton, where in-house experts discussed the state of global markets so far in 2023 and reviewed major risks and opportunities for investors going into the second half of the year.

"We've had this recovery in global growth at a time when many investors were positioned for recession," said Paul Mielczarski, head of global macro strategy at Brandywine Global Investment Management, a specialist investment unit of Franklin Templeton. "Risky assets have actually delivered pretty solid returns in the first half of the year. So if you look at global stocks, they're up 10 to 15%."

Mielczarski said the removal of COVID-19 restrictions in China, the "reversal of the energy shock in Europe," and the start of a "decline in headline inflation" had contributed.

The other panelists included Sonal Desai, portfolio manager and chief investment officer at Franklin Templeton Fixed Income, and Rich Byrne, president of Benefit Street Partners, which is a part of Franklin Templeton. Katie Klingensmith, senior vice president and investment specialist at Brandywine, moderated.

Franklin Templeton, which is known for its wide array of mutual fund offerings, announced plans in May to buy rival Putnam Investments from Great-West Lifeco. Below are three takeaways from the panel for investment managers.

Be fearfully greedy

The panelists said inflation would not immediately cool, and the wide-ranging effects of the recent rapid hikes in interest rates would likely linger and continue to unfold.

"The truth is, the iceberg already hit the ship," Byrne said of the interest rate hikes.

"We think inflation is going to be sticky," Byrne said, adding that he would "really emphasize companies with stable, predictable, non cyclical earnings. Those are like finding needles in a haystack sometimes."

Tech as a sector is out, and momentum businesses generally, but industries like healthcare could provide more of that safety for investors, he said. Retail and businesses related to labor are also a no for Byrne.

"I think that's one of the Achilles heels in the market," he said, citing high labor costs in the restaurant business.

On the other hand, while Byrne wasn't optimistic about commercial office real estate, he believes multifamily homes could be a strong opportunity area.

"Because people's offices are their homes now, in many cases, there's been a strong bid for good multifamily (properties)."

Consider fixed income

"For the last 15 years, it's not been very fixed and, wow, did it give you no income," Desai said of the fixed income markets.

As investors have chased many hot investment areas, including private and alternative markets, "areas like traditional boring fixed income have been somewhat underrepresented," she said.

"But over the next few months, and maybe already, the move toward adding more duration makes a lot of sense, adding duration and in a very, very, very studied and careful way."

Stay on recession watch

There is still an elevated risk of corporate defaults and recession — though likely a mild one — around the corner, the panelists said.

"It's hard for me to put an exact number, but I would say it is meaningful, somewhere between 30% to 50% chance," Mielczarski said, noting that "we've already seen a pretty sharp slowdown in corporate profits. We've already seen a pretty sharp slowdown in investment. And on top of that, we are going to see potentially a pretty significant tightening in financial conditions on credit conditions."

On top of that, the resumption of student loan payments in the fall will likely add to consumer stress and "potentially be a drag" upon the economy, he said.