by Stephen Dover, Chief Market Strategist, Head of Franklin Templeton Institute
Too often, investors are preoccupied with the near term. That can lead to misjudgments, like recency bias, which assigns undue importance to current events. Obsessing over the near term may also obscure arising investment themes. And it can result in an underestimation of the fundamentals that anchor asset prices over time.
When it comes to wealth enhancement, the longer run is decisive. Many studies have shown that the strategic asset allocation decision, and adherence to it, determines the lion’s share of a portfolio returns and risk over time.
It therefore makes sense to step back from current conditions and assess the medium-term outlook for growth, earnings, interest rates and valuations, and to consider secular forces likely to produce solid investment returns over time.
In what follows, we outline our thinking about the next 1–3 years. In ensuing notes, we will delve more deeply into various aspects, examining more closely where medium-term opportunity and risk reside across global capital markets.
We begin by outlining the fundamental backdrop for global economic activity and inflation, which determine the trajectories for short- and long-term interest rates, as well as the sustainable growth of corporate profits. We then consider valuations and how they may impact returns across asset classes. We conclude by identifying themes that we believe could produce superior returns over time, even regardless of the global business cycle.
Download the full paper
