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‘Volatility provides opportunities for income investors: Franklin Templeton


Following two years of volatility, triggered by a global pandemic, supply-chain disruptions and the release of massive stimulus that followed, the financial system is in uncharted territory.

Inflation is at highs not seen in four decades; bonds have fallen with equities, invalidating the traditional 60/40 portfolio; and, to add a spanner in the works, a Federal Reserve hell-bent on curbing inflation at any cost risks sending the US into a hard-landing recession. Irrespective, central bankers have turned ultra-hawkish, preparing us for an avalanche of non-stop rate hikes.

“Volatility provides opportunities for income investors” and should uncover new opportunities created by this historic sell-off in bond prices according to Franklin Templeton’s global research team.

  • Stephen Dover, chief market strategist at the Franklin Templeton Investment Institute, says, “as we look toward the second half of the year, our investment management teams across Franklin Templeton and specialist investment managers gathered to discuss where income-seeking investors may find opportunities.

    “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.”

    Ed Perks, chief investment officer at Franklin Templeton Investment Solutions, says we’ve seen “historic sell-offs in bond prices,” and the yields that investors can buy into now are significantly higher than they were just six to nine months ago. Perks believes investors need to diversify income assets to better manage risks in this new playing field: “Of course, these challenges have uncovered opportunities such as long-duration, higher-quality, fixed-income securities that are exposed to rising interest rates,” he says.

    Brian Giuliano, senior vice-president and client portfolio manager at Brandywine Global, agrees that “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.”

    And as inflation ticks higher, portfolios will require assets that are inflation-proof to help cushion the impact of eroding returns. Michael Clarfeld, managing director and portfolio manager at ClearBridge Dividend Strategy, says, “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.” A prime example of an inflation hedge asset is Infrastructure: these assets act as an inflation hedge because prices are linked to inflation and any increases are passed-on to the consumer.

    This also means that investors will shy away from risk assets such as pre-revenue tech stocks that are yet to turn a profit. Matt Quinlan, vice-president, research analyst and portfolio manager for the Franklin Equity Group, says: “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.”

    To sum it up, the main message here is to invest in a high-quality portfolio of blue-chip companies alongside a mix of assets that diversify risk. Quality companies will deliver dividend growth and income stability.

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