Shaky prospects for economic recovery means growth equities can still shine, says Franklin Templeton PM
Following the recent announcements of effective COVID-19 vaccine candidates, many stock-market commentators have predicted the beginning of a rotation into small caps and value equities. But one portfolio manager from Franklin Templeton maintains that it’s too soon to for global investors to count out the growth factor.
In a newly published outlook, John Remmert, senior vice president and senior portfolio manager at the Franklin Equity Group, noted that the world is entering the new year with much more uncertainty than in years past.
“Despite unprecedented policy support from governments and central banks, the World Bank expects the [COVID-19 induced] recession to be the deepest in decades, with the world economy contracting an estimated 5.2% in 2020,” Remmert said. “The year ahead should be one of recovery—albeit an uneven one.”
The economies likely to get ahead, he said, are the ones that have been successful in limiting the spread of the coronavirus. While major markets such as Australia, China, and Japan have effectively limited the spread of the virus, infection rates in the U.S. and Europe pose a hurdle for the global economic recovery to gain more traction.
“Although the World Bank expects economic growth of 4.2% in 2021,2 the global economy in that year is unlikely to fully recapture the ground lost during the pandemic,” Remmert said, citing an unpredictable outlook for COVID-19 cases across major parts of the world.
Looking at the U.S., he said its economic volatility could be smoothed out by a much-needed stimulus deal. With the outcome of the November election in the rearview mirror, he said there’s still a chance of a comprehensive deal being passed through Congress, though it could be smaller than what would likely have come out of a more decisive Democratic victory. With fiscal stimulus spending still offline, he said aggressively supportive monetary policy from the U.S. Federal Reserve and other central banks will continue to play a critical role in keeping the global economy going.
“Regardless, a vaccine is going to be crucial in fostering a more durable economic recovery, not only in the United States, but also in Europe,” he said. Cautious optimism is the word of the day, as at least two vaccine candidates appear to be safe and effective based on preliminary late-stage clinical data. “We expect vaccine approvals to start to come in early 2021.”
What’s clear, in the end, is how unclear the outlook is at this point for the world’s economy, which remains on life support from central bank actions and fiscal stimulus. Given the likely continued weakness in economic activity around the world, Remmert argued that growth equities – including those embodied by global tech companies – are likely to remain in favour.
“Although we have seen suggestions that a rotation to value is just around the corner, we believe we would need to see sustained improvement in oil prices and higher interest rates first, given the tilt toward the energy and financials sectors in typical value benchmarks,” he said.
