The tug of war between value and growth stocks will almost certainly persist, but there are long-term opportunities in growth stocks globally.
John Remmert
Portfolio Manager, Franklin Equity Group
As we emerge from the pandemic and move past its effects on global supply chains, working environments and business practices, we believe markets will likely continue to exhibit the “one step forward, one step back” behavior that characterized the last two quarters of 2021.
We expect equity markets to remain constrained in early 2022 by the ongoing nature of the COVID-19 pandemic and the incremental waves caused by the highly transmissible Delta variant and the new Omicron strain. However, between higher vaccination rates and the advancement of promising new anti-viral drugs, the pandemic will almost certainly wane, in our view. But, the market has yet to express a view on when that might occur.
In the coming months, we will continue to closely monitor monetary policy globally, particularly the US Federal Reserve’s (Fed) shift toward tightening monetary policy. We anticipate the Fed will reduce its asset purchases sometime over the rest of this year or early 2022, with possible hikes in the discount rate occurring in the middle of 2022. Since June of 2020, the Fed has been buying US$120 billion of bonds per month, which has served to keep the longer end of the yield curve cheaper than it otherwise would be. The short end has been held down by a 0.25% discount rate and a very generous repurchase program.
Markets often begin to wobble on news of monetary tightening, which can cause headwinds for equities. However, well-telegraphed policy moves should help soften the blow.
We will also keep a close eye on rising inflation. One factor complicating the market’s response is a lack of certainty. No consensus has been reached on whether we’re seeing the start of an inflationary spiral or are simply enduring a temporary rise resulting from pandemic-induced supply chain issues. Supply constraints on everything from labor to semiconductor chips have led to wage and price pressure throughout the global supply chain. While bond prices are roughly where they were six months ago, they will likely suffer if higher inflation appears to be more than transitory. Ideally, it will soon start to become clearer whether we’ve entered an inflationary spiral or are simply enduring a temporary rise resulting from pandemic-induced supply chain issues.
The tug of war between value and growth stocks will almost certainly persist, in our view, but we continue to see long-term opportunities in growth stocks globally. We believe our strategy of investing in high-quality companies tied to long-term secular growth trends should continue to perform well over an entire market cycle. As global investors, some of the opportunities we search for are not necessarily regional-based, but rather, trend-based.
We think companies in areas like autonomous driving, cybersecurity, e-commerce, cloud computing and clean technology should remain a bright spot over the longer term. Although brick-and-mortar does appear to be making a comeback, we think e-commerce still has room to grow globally post-pandemic. For example, Latin America is behind the more developed region in e-commerce adoption and so we see opportunity there. And while we are cautious about investing in China amid the recent regulatory crackdown, in the long run, the country holds many potential opportunities that can’t be ignored—particularly with growth there expected to remain stronger than in many other markets in 2022, despite some headwinds. It’s important to be selective, and nimble, as an investor there.
We do think that once the pandemic begins to stabilize, the return to live events, including socializing, traveling, etc. will recover to pre-pandemic levels—and markets should stabilize, too. We have confidence that a focused yet highly diversified portfolio, with an emphasis on well-managed companies that have robust competitive advantages and good growth prospects, can provide investors with excellent outcomes over the longer term.
What Are the Risks?
All investments involve risks, including the 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. 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. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results. Diversification does not guarantee profit or protect against the risk of loss.
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