Key Takeaways
- The prospect of US interest-rate cuts continues to drive markets. The Federal Reserve (Fed), in its recent policy meeting, guided for three quarter-point rate cuts by the end of 2024.
- Lower US and global interest rates—coupled with a likely US soft landing and moderating inflation—may bode well for selected markets, sectors and companies.
- In North America rate cuts may catalyze further multiple expansion, but we are mindful of valuations. In Europe, we are keen on quality opportunities particularly in the United Kingdom, as well as undervalued small-cap stocks.
- In Asia, we look to capture mispriced opportunities amid the volatility and low valuations in China and Hong Kong, as well as beneficiaries of Japan’s economic normalization.
- Growth sectors with larger capital expenditures (capex), such as information technology and health care, may feel a lessened financial burden amid lower interest rates.
Fundamentals and valuations still matter
In our view, prudent stock selection and portfolio positioning remain critical as investors navigate the push-and-pull effects of lower interest rates. Despite impending rate cuts, interest rates are unlikely to return to the near-zero level during the COVID-19 pandemic. As such, companies with weak balance sheets should not be expected to see improved financial health and sustained earnings growth just on rate cuts alone. While the excitement over rate cuts may give certain stocks a short-term performance boost, stock selection based on bottom-up fundamentals—especially in terms of free cash flow generation and future earnings power—and valuations should continue to underpin investment decisions.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.