Global investment outlook: Income arrives in many shapes and sizes

The financial landscape is changing dramatically. Inflation is at levels not seen in four decades, pandemic-driven supply and demand imbalances continue to batter global economies, and the Ukrainian crisis threatens geopolitical stability.

Furthermore, central bank policymakers around the world, including the US Federal Reserve (Fed), have taken a decidedly hawkish turn in their rhetoric and actions, as they aim to dampen worrisome inflation. The Fed delivered a surprise 75 basis-point hike in June, and expectations of future rate increases have shifted up sharply, sparking worries about a potential recession.

The first half of 2022 has been challenging for investors across asset classes, and the uncertainties plaguing markets remain – particularly with regard to inflation, interest rates and the possibility of recession. As we look toward the second half of the year, the investment management teams at Franklin Templeton gathered to discuss where income-seeking investors may find opportunities. The following are highlights of these discussions.

Ed Perks, chief investment officer, Franklin Templeton Investment Solutions, said: “This volatile environment has also uncovered opportunities. One of these opportunities is in higher-quality fixed income securities, particularly those with longer duration or more exposure to interest-rate increases. We’ve seen historic selloffs in bond prices, and the yields that investors can buy into now are significantly higher than they were just six to nine months ago.”

Brian Giuliano, client portfolio manager, Brandywine Global, said: “Opportunities exist in the corporate credit space with companies that have pricing power given the inflationary backdrop. We think staying higher in credit quality is sensible given where we are in the cycle and economic headwinds.”

Reema Agarwal, portfolio manager, Franklin Templeton Fixed Income, said: “Bank loans –also known as leveraged, floating-rate or senior secured loans – tend to act as a good hedge against interest-rate risk.”

Michael Clarfeld, portfolio manager, ClearBridge Dividend Strategy, said: “Dividend growth is great in regular periods, but critical during inflationary periods. As inflation erodes the value of a dollar, growing dividends help to maintain purchasing power despite the increasing cost of living.”

Matt Quinlan, portfolio manager, Franklin Equity Group, explained: “In some ways, managing to income is part of managing volatility. Companies that have more predictable cash flows and more resilient dividends are likely to be less volatile. The key is to invest in high-quality, blue-chip companies, which allow for better dividend growth and stronger dividend resilience during difficult times.”

Shane Hurst, portfolio manager, ClearBridge Investments, said, “Infrastructure assets act as an inflation hedge due to the largely pre-programmed way—through regulation and contracts—infrastructure adjusts to inflationary environments.”

Clarion Partners believes that “Historical precedence suggests that private real estate can effectively hedge inflation as a steady income-producing asset. The industrial and multifamily segments merit particular attention now”.

Read more on the midyear Global Investment Outlook here. We hope it inspires you to think strategically as we navigate the rest of the year.

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