by Stephen H. Dover, CFA, Franklin Templeton Investments
We recently hosted a special edition of our “What Our Managers Think” panel discussion to address the current situation in Ukraine. Participants included Kim Catechis, Investment Strategist for the Franklin Templeton Investment Institute, Scott Glasser, Chief Investment Officer at ClearBridge Investments, Dr. Michael Hasenstab, Chief Investment Officer at Templeton Global Macro, and Dr. Andreas Billmeier, European Economist for Western Asset.
I want to personally acknowledge the loss, grief, and uncertainty being faced by so many in the current situation. In our fiduciary role, we must also fulfill our obligation to our clients. Here are key thoughts from the conversation:
- Expect higher volatility across capital markets in the short term, primarily due to higher commodity prices and uncertainty over sanctions. Energy and food prices will likely continue to see upward pressure on supply concerns, particularly for gas and corn. Sanctions have been more expansive, more coordinated, and have come faster than expectations.
- The impact on Europe is both economic and geopolitical. Slowing gross domestic product growth will force the European Central Bank to carefully consider its path forward on tightening monetary policy. The longer-term implications are less clear as Russia has effectively upended the past 40 years of policy in four days.
- Structural shifts in global supply chains and infrastructure will likely occur. The shift towards renewables will likely accelerate progress on Europe’s Green New Deal. China’s willingness to increase trade with Russia will impact trade patterns in Asia.
- The trajectory for commodities is likely a challenge for inflation, except for producers. In an environment of tighter supply, regions that are commodity exporters, such as Southeast Asia and Latin America, may provide an inflation hedge.
- The risk to US equities has risen, but resilient sectors remain attractive. With growth expectations slowing and the possibility of reduced liquidity due to higher interest rates, selectivity is crucial. This leads to sectors that have tailwinds (energy) or stability (health care).
The situation remains fluid and we are closely monitoring events to understand how any shifts may impact asset values going forward. The perspectives across a variety of asset classes and geographies provide a robust framework to improve our decision making in volatile times such as these.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. 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. 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 foreign securities involve special risks 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. 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.
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This post was first published at the official blog of Franklin Templeton Investments.