Download 2017 LONG-TERM CAPITAL MARKET EXPECTATIONS

2017
LONG-TERM
CAPITAL MARKET
EXPECTATIONS
“We’ve increased our forecast for developed-market
equities in view of an improving growth outlook and
moderate inflation expectations.”
Contents
THE WORLD FROM OUR PERSPECTIVE
2
OUR STRONGEST CONVICTIONS “FOR”
4
OUR STRONGEST CONVICTIONS “AGAINST”
10
OUR CAPITAL MARKET EXPECTATIONS
12
OUR METHODOLOGY AND MODELS
14
APPENDIX: INDEXES AND PROXIES USED
18
About Franklin Templeton Solutions
Franklin Templeton Solutions (FT Solutions)1 is a team of multi-asset and alternative
investment experts embedded within the global integrated platform of Franklin Templeton—a
trusted partner in asset management with clients in more than 170 countries. Our FT Solutions
team has been dedicated to managing multi-asset portfolios for over 20 years covering both
traditional multi-asset strategies and alternative strategies.
In addition to retail investors around the world, our FT Solutions team serves a variety of client
types in the institutional arena, ranging from sovereign wealth funds to public and private
pension plans. The hallmark of our approach is a disciplined discussion process—with an
80 plus-member global investment forum—that manages assets of over US$40 billion (as at
31 December 2016).
BROOKS RITCHEY
TOM NELSON, CFA, CAIA
CHANDRA SEETHAMRAJU, MBA, PH.D.
Senior Vice President,
Director of Investment Solutions
Senior Vice President,
Director of Investment Solutions
Vice President,
Director of Systematic Modeling
1. Franklin Templeton Solutions is a global investment management group dedicated to multi-strategy solutions and is comprised of individuals representing various
registered investment advisory entity subsidiaries of Franklin Resources, Inc., a global investment organization operating as Franklin Templeton Investments.
February 2017
We believe the global growth outlook is improving,
supported by fiscal stimulus around the world, the
pro-growth policies of the incoming US
administration and stabilized growth in China. We
also see inflation hovering in the moderate zone for
the next five to 10 years.
After our annual review of the data and themes driving capital markets—
current valuation measures, historical risk premiums, economic growth
and inflation prospects—we’re pleased to report on our 2017 Capital
Market Expectations.
Our Strongest Convictions:
For
Against
Global Stocks
Global Government Bonds
Swedish Krona
Swiss Franc
Japanese Equity
US Infrastructure
See appendix for methodology and models used.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
1
THE WORLD FROM OUR PERSPECTIVE
Global Growth. Significant
Uncertainty.
We believe the global growth outlook
is improving, supported by fiscal
stimulus around the world, progrowth policies of the incoming US
administration and stabilized growth
in China.
China’s economic slowdown
appears to have reached its bottom
in 2016. The year-over-year
Producer Price Index finally nudged
into positive territory after almost
four years of negative results. The
Manufacturing Purchasing
• China appears to have navigated
50, which should help to keep the
through another difficult trough,
however the country’s debt
problem has not been solved and
appears to be getting worse.
momentum.2
positive
center stage in 2016 as easy
strong dollar trend is also a boost for
monetary policies around the world
the yuan and Chinese exporters. It’s
lost their effectiveness. For example:
still too early to predict the outcome
stimulus package in August 2016.
• Donald Trump, president of the
United States, seems certain to
introduce significant fiscal stimulus
via a combination of tax cuts and
infrastructure spending.
• European Union (EU) countries are
still bound by Maastricht deficit and
debt limits, but given the anti-EU
populist movement in Europe, it’s
hard to rule out fiscal stimulus
completely.
The new US administration seems
likely to bring in fiscal stimulus and
de-regulation, which could be
another boost for growth. We expect
the financial, energy and health care
sectors (which combined account for
more than a third of the US
economy) to benefit the most.
to be pricing in Trump’s ambitious
plans. Whether his administration
can deliver meaningful change to
the economy is still unknown, but
markets will be disappointed if
results fall short of expectations.
Managers’ Index also tipped over
Stimulus fiscal policies finally arrived
• Japan announced a ¥28 trillion
• In the United States, markets seem
The current
of structural reforms in China, but
the country appears to be making
good progress on moving to a
consumer-driven economy from an
export-oriented economy, which we
also see as a big plus for global
growth.
Finally, we believe aging
population—in China and in
developed markets overall—is a
powerful demographic factor that
may depress global growth. Given
the current anti-globalization and
anti-trade sentiments, it’ll be even
harder to mitigate the impact of
Although we’re becoming more
these long-term changes.
confident about global growth, we
Moderate Inflation Ahead
need to acknowledge that there are
significant uncertainties down the
In 2015 and early 2016, deflation
road. For example:
fears topped the list of risks to the
global economy. That concern has
• Current populist movements could
potentially create strong
headwinds in struggling European
economies. Based on the
outcomes of the Brexit vote and
the recent Italian referendum, the
integrity of the EU seems likely to
face additional challenges ahead
before it stabilizes—if it can
stabilize.
diminished since commodity prices
stabilized. Inflation expectations
around the world started to notch
upward in the middle of 2016, well
before Trump’s victory. We believe
inflation will normalize faster in the
United States than the rest of the
world. However, long-term structural
2. Source: Bloomberg.
2
2017 Long-Term Capital Market Expectations
For Financial Professional Use Only. Not For Public Distribution.
factors such as aging populations
Emerging-market equities are less
and the savings glut should keep
attractive this year primarily because
inflation in the moderate zone for the
they recovered in 2016 and today’s
next five to 10 years.
valuations are therefore less
Currently, US Personal
Consumption Expenditure Core
(PCE Core), a price inflation
measure that the US Federal
Reserve (Fed) emphasizes, is at
attractive. On top of that, a rising
interest-rate cycle in the United
States could make emerging
markets vulnerable to significant
capital outflows.
1.7% year-over-year.3 Trump’s fiscal
After more than a 30-year run-up,
stimulus plan could create jobs and
developed-market bond markets
increase aggregate demand in the
were poised to sell off in the middle
short term, which may bring PCE
of 2016, even before the US
Core back to the Fed’s target of 2%
election. Since then, markets seem
within the next two years.
convinced that the rising-rate cycle
Although we believe that most of the
potential new US policies are
inflationary, if the rest of world does
not follow suit—given the openness
of our global economy—we do not
expect the US inflation rate to differ
significantly from those in the rest of
the world. Japan and Europe are
experiencing an aging population
trend, which we believe suppresses
aggregate demand and growth
potential. Negative interest rates still
exist in Japan and some European
countries. On top of that, the current
account surplus of major exporters
such as Germany, China and Japan
is now back to 2006–2008 levels and
“
in US Treasuries is likely to
accelerate regardless of negative
interest rates in Japan or
quantitative easing (QE) in Europe.
Given the current low yields and
Long-term
structural
factors such
as aging
populations
and the
savings glut
should keep
inflation in the
moderate
zone for the
next five to 10
years.”
high durations, the expected returns
of developed-market bonds are even
lower than our last year’s forecast.
Long-Term Inflation Forecasts
Consensus Economics (10Y)
Breakeven Rate (5Y5Y)
2.2%
2.0%
1.9%
2.0%
1.3%
2.5%
1.9%
1.5%
1.2%
3.0%
0.6%
1.9%
United States
Canada
Eurozone
United Kingdom
Japan
Australia
Source: Consensus Forecasts, October 2016; Bloomberg, November 2016. There is no assurance that any forecast
will be realized.
therefore, the excessive supply of
Export-Driven Economies Nearing 2006–2008 Current Account
Surplus Levels
capital is still a depressing factor for
Current Account Balance of Germany + Japan + China
interest rates and inflation. See chart
1998–2016
Billions USD
$900
to the right.
Developed-Market Equities
Look Attractive, but
Developed-Market Bonds
Are Shaky
$800
$700
$600
$500
$400
We’ve increased our forecast for
$300
developed-market equities in view of
$200
an improving growth outlook and
$100
moderate inflation expectations.
$0
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
Source: Bloomberg, International Monetary Fund (IMF), as at 31/12/16. Past performance does not
guarantee future results.
3. Source: Bloomberg.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
3
OUR STRONGEST CONVICTIONS “FOR”
Global Stocks Could Benefit from Improved Growth and
Moderate Inflation Outlook
We believe global stocks have
believe stocks can benefit more from
From a valuation perspective, price-
greater performance potential than
the expected fiscal stimulus of the
to-earnings (P/E) ratios are currently
other asset classes in anticipation of
new Republican regime in the United
below their long-term average, which
stimulus fiscal policy and a moderate
States. A combination of tax cuts,
is favorable for long-term global
inflation environment in the next five
deficit spending, deregulation and
stock return potential.
to 10 years.
foreign cash repatriation could have
As we expected at the beginning of
2016, markets recovered from the
initial volatility and ended the year in
positive territory. The MSCI World
Index was up 8.16%, and the SPX
Index was up 11.93%. Markets
showed significant resilience given
that two so-called “black-swan”
a broad boost effect on the
economy. At the same time, we
believe the structural problems in
Europe and Japan will keep global
inflation moderate. Although the US
dollar (USD) and the US 10-year
yield moved up significantly after the
election, we expect both markets to
slow down in 2017, and the rate hike
events occurred during the year:
cycle will still be a moderate one.
Brexit and Trump’s election. We
Our average annual return
expectation for global equities is
fairly close to the historical average.
Overall, we expect global equities to
return 7.8% annually over the sevenyear period, with developed markets
returning 7.5%, emerging markets
8.7% and global small caps 9.4%.
By comparison, we expect global
government bonds to return less
than 1%.
P/E Ratios Favor Long-Term Global Equity
Return Potential
We Expect Global Equities to Outperform Many
Other Asset Classes
MSCI All Country World Index P/E Ratio
1988–2016
Comparison of Expected Annualized Returns of Major Stock Indexes
vs. Global Government Bonds
P/E Ratio
35
As at 30 November 2016
Projected Annualized Returns, 1 January 2017–31 December 2023
Expected Return
10%
30
9.4%
8.7%
9%
8%
25
7.5%
7%
Average
20
7.8%
6%
5%
15
4%
3%
10
2%
1%
5
Global
Equity
0
1988
1992
1996
2000
2004
2008
2012
2016
Source: Thomson Reuters, Institutional Broker’s Estimate System (I/B/E/S), MSCI, as at
31/10/16. Past performance does not guarantee future results.
4
0.3%
0%
2017 Long-Term Capital Market Expectations
DevelopedMarket
Equity
EmergingMarket
Equity
Global
Small-Cap
Equity
Global
Developed
Gov't Bonds
Source: FT Solutions. See appendix on page 18 for representative indexes for each
asset class. Opinions and beliefs expressed are those of FT Solutions and are subject
to change without notice. There is no assurance that any forecast or projection
will be realized.
For Financial Professional Use Only. Not For Public Distribution.
Long Swedish Krona vs. US Dollar
We are bullish on the Swedish krona
gross domestic product (GDP)
to extend its bond purchases in
(SEK) from three different
growth is one of the most positive.
order to support the economy. This
perspectives:
The growth differential between
policy has effectively kept SEKUSD
Sweden and the United States has
subdued. Amid strengthening
reached its widest point in five years
economic fundamentals and rising
yet the Riksbank, the Swedish
house prices in Sweden, however,
central bank, maintains its
it’s difficult to see how negative
accommodative policy.
policy rates could continue. The IMF
Unemployment has reached an
expects inflation in Sweden to reach
In our opinion, from a valuation
eight-year low, and the economic
the central bank’s target of 2% in
perspective, the SEK is the most
tendency indicator (a survey of
2018, leaving less room for the
undervalued relative to other
business and consumer views of the
central bank to maintain its easy
developed-market currencies.
economy)4
monetary policy.
• valuation
• growth prospects
• the expected monetary policy
environment
Sweden’s policy rate relative to its
continues to trend higher.
We expect the positive trajectory for
the Swedish economy to continue.
growth trajectory is the most
We believe this policy is unlikely to
hold over the long term, especially if
displaced among developed
The Riksbank remains committed to
inflation starts to pick up. The
markets: While its policy rate is one
its easy monetary policy, pledging
Riksbank will need to begin its
of the most negative, its nominal
not to raise rates from its current
tightening cycle, ultimately boosting
negative level until 2018 and offering
SEKUSD.
Sweden’s Economy Stronger than Normal
Sweden: Economic Tendency
Sweden’s Unemployment Rate at Eight-Year
Low
Indicator4
Sweden: Unemployment Rate
2010–2016
2010–2016
Economic Tendency Indicator
120
Unemployment Rate
9.0%
Index above 110:
Economy is much
stronger than normal
115
110
8.5%
8.0%
105
100
7.5%
95
7.0%
90
Index below 90:
Economy is much
weaker than normal
85
6.5%
80
2010
2011
2012
2013
2014
2015
2016
Source: Bloomberg, National Institute of Economic Research (Sweden), as at 30/11/16.
Past performance does not guarantee future results.
6.0%
2010
2011
2012
2013
2014
2015
2016
Source: Bloomberg, National Institute of Economic Research (Sweden), as at 31/12/16.
Past performance does not guarantee future results.
4. The Economic Tendency Indicator measures overall business and consumer sentiment. It is based on monthly business surveys in the manufacturing, construction, retail trade
and private service sectors, as well as monthly consumer surveys. The indicator has a mean value of 100 and a standard deviation of 10. Values between 100 and 110 are
equivalent to a stronger-than-normal economy, whereas values above 110 represent a much stronger-than-normal economy. Likewise, values between 90 and 100 show a weakerthan-normal economy and values below 90 are equivalent to a much weaker-than-normal economy.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
5
It’s Time to Go Long on Japanese Equity
An improved growth outlook, high
positive impact on growth. Real
profit margins and attractive
GDP increased at an annualized
valuations all support Japanese
rate of 1.6% in the first three
equity.
quarters of 2016.5
An ultra-loose monetary policy—
Exports were very resilient given
massive QE and negative interest
significant yen appreciation. After
rates—combined with three
declining in the first half of 2016,
stimulus fiscal budgets in 2016
exports rebounded sharply in the
alone have finally resulted in a
third quarter.6 After the US election,
Japanese Profit Margins Near 20-Year High
Japanese Valuations Nearer to Historic Lows
TOPIX Profit Margins
TOPIX P/E Ratio
1996–2016
2012–2016
Profit Margin
P/E Ratio
35
6%
4%
30
2%
25
0%
-2%
20
-4%
15
-6%
-8%
1996
2001
2006
2011
2016
Source: Bloomberg, as at 30/11/16. Past performance does not guarantee
future results.
10
2012
2013
2014
2015
2016
Source: Bloomberg, as at 30/11/16. Past performance does not guarantee
future results.
5. Source: Bloomberg.
6. Source: Organisation for Economic Co-operation and Development (OECD) Economic Outlook, Volume 16, Issue 2.
6
2017 Long-Term Capital Market Expectations
For Financial Professional Use Only. Not For Public Distribution.
“
An improved growth outlook, high profit margins and
attractive valuations all support Japanese equity.”
the yen reversed its appreciation
because of an increasing labor
The P/E ratio is around 19, which is
trend. Given the US rising rate cycle,
shortage and subsequent potential
very low compared to its own
we expect there is room for
wage growth.
history.
additional depreciation, which could
be a further boost for Japanese
exports.
The profitability of Japanese firms is
very favorable. The profit margin of
the Tokyo Stock Price Index
We believe private consumption is
(TOPIX) is at a 20-year high. At the
another driver for potential growth
same time, valuations are attractive.
Among Developed-Market Equities, Japan Offers the Greatest Forward-Looking Opportunity
Comparison of Expected Annualized Returns of Various Developed-Market Equities
As at 30 November 2016
Projected Annualized Returns, 1 January 2017–31 December 2023
Expected Return
12%
9.6%
10%
8.1%
8%
7.5%
7.3%
6.9%
6.8%
Europe ex United
Kingdom
United Kingdom
8.3%
8.3%
Pacific ex Japan
Australia
6%
4%
2%
0%
Developed-Market
Equity
United States
Canada
Japan
Source: Calculations by FT Solutions using data sourced from Bloomberg. See appendix on page 18 for representative indexes for each asset class. Opinions and beliefs expressed
are those of FT Solutions and are subject to change without notice. There is no assurance that any forecast or projection will be realized.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
7
US Infrastructure Will Benefit from the Coming Fiscal Stimulus
Public and private spending in US
request is US$98.1 billion, up
infrastructure had already been
significantly from the FY 2016
trending upward before the election.
request of US$72.4 billion (the
Combined with strong interest in
enacted budget ended up being
revamping infrastructure on the part
US$76.0 billion). FY 2017 includes
of the new administration, we
some major expansions of the
believe this should bode well for
budget—extra spending initiatives
investment returns in this category.
on pipeline safety, clean energy
On the public side, the Department
of Transportation’s FY 2017 budget
transport, advanced metropolitan
planning, cybersecurity
Profit Margins for US Infrastructure Higher
than Broad US Equities
US Infrastructure Valuations Favorable
Compared with Broad US Equities
Profit Margins: MSCI US Infrastructure vs. MSCI US Equity
P/E: MSCI US Infrastructure vs. MSCI US Equity
2012–2016
2012–2016
Profit Margin
P/E Ratio
12%
22
10%
20
8%
18
6%
16
4%
14
2%
12
0%
2012
2013
MSCI US Infrastructure
2014
2015
MSCI US Equity
Source: Bloomberg, MSCI as at 30/11/16. Past performance does not
guarantee future results.
8
2017 Long-Term Capital Market Expectations
2016
10
2012
2013
US Infrastructure
2014
2015
2016
US Equity
Source: Bloomberg, MSCI, as at 30/11/16. Past performance does not
guarantee future results.
For Financial Professional Use Only. Not For Public Distribution.
“
Infrastructure, as a real asset, demonstrates
inflation-linked pricing power.”
and others.7 Election campaign
private side valuations and corporate
and GDP to increase, we also expect
proposals included a US$1 trillion
fundamentals also appear to bode
asset classes like US infrastructure
dollar spending plan to update
well for the asset class. Valuations
to protect against erosion in
infrastructure over the coming
are looking more favorable for the
purchasing power and to offer
decade. These plans will kick off new
asset class than US equities, and
favorable risk-adjusted returns
projects and will require buy-in from
corporate profit margins are now
compared to other equity sectors
private financing, creating many
higher than broad US equities. (See
less linked to the real economy.
opportunities for investment in the
charts in this section.)
asset class.
Infrastructure, as a real asset, also
While additional public expenditures
demonstrates inflation-linked pricing
should boost infrastructure, on the
power. As we expect US inflation
We Expect Many Opportunities to Arise in US Infrastructure
Comparison of Expected Annualized Returns of US Equity vs. US Infrastructure
As at 30 November 2016
Projected Annualized Returns, 1 January 2017–31 December 2023
Expected Return
10%
9%
8%
7.9%
7.3%
7%
6%
5%
4%
3%
2%
1%
0%
US Equity
US Infrastructure
Source: FT Solutions. See appendix on page 18 for representative indexes for each asset class. Opinions and beliefs expressed are those of FT Solutions and are subject to change
without notice. There is no assurance that any forecast or projection will be realized.
7. Source: US Department of Transportation, Transforming Communities in the 21st Century: Budget Highlights, Fiscal Year 2017.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
9
OUR STRONGEST CONVICTIONS “AGAINST”
Developed-Market Government Bonds: The Pain Shows No End
in Sight
In spite of a brief improvement after
next three to five years. We believe the
different economies has changed.
the US election, developed-market
rising interest rates will offset the
Even if the new Republican regime
government bond yields remain at
already thin carry benefit from yields.
can deliver the expected stimulus, the
very low levels relative to the last 30
domestic policy changes in the United
We maintain our base-case
years—largely as a result of QE and
expectation of a gradual normalization
zero-interest-rate policies around the
of rates in the United States. Although
world. Given the improved growth
outlook and stabilized commodity
prices, fears of deflation appear to be
diminishing: Inflation is looming in the
United States and in the eurozone,
and it is gradually nearing the
European Central Bank’s 2% target.
We expect moderate inflation to return
and interest rates to normalize in the
States may not be as powerful as
might have occurred 30 years ago.
the pace of rising rates in the United
Overall, given the low starting yields,
States might be faster under Trump’s
our models suggest that the seven-
regime than the market may otherwise
year expectations for developed-
have expected, we think that given the
market government bond returns are
situation in Europe, Japan and China,
well below what we’ve observed in
this is still a gradual shift. We live in a
history.
more integrated world today than 30
years ago and the relative size of
Yields Remain at Historic Lows
Developed Government Bonds Likely to
Underperform
World Government Bond Index Yield to Maturity
Comparison of Expected Annualized Returns of Developed Market
Bonds vs. Other Bond Types
1984–2016
Yield to Maturity
As at 30 November 2016
Projected Annualized Returns, 1 January 2017–31 December 2023
12%
Expected Return
7%
10%
5.6%
6%
5.8%
5%
8%
4%
2.4% 2.6%
3%
6%
Average since 1984
2%
4%
1%
1.5%
0.8%
0.8%
0.6%
0.9%
0.1%
0%
2%
0%
1984
1988
1992
1996
2000
2004
2008
2012
2016
World Government Bond Index
Source: Bloomberg, as at 30/11/16. Past performance does not guarantee
future results.
10
2017 Long-Term Capital Market Expectations
Source: Calculations by FT Solutions using data sourced from Bloomberg. See
appendix on page 18 for representative indexes for each asset class. Opinions and
beliefs expressed are those of FT Solutions and are subject to change without notice.
There is no assurance that any forecast or projection will be realized.
For Financial Professional Use Only. Not For Public Distribution.
Short Swiss Franc vs. US Dollar
All three components of the longterm currency expectations model
are bearish for the Swiss franc
(CHF), including valuation, carry and
real interest-rate parity.
From a valuation perspective, the
Swiss franc continues to be the most
overvalued relative to other
developed-market currencies.
Conventional wisdom says that the
Swiss franc is a safe haven
currency. Recent uncertainties in
Europe—the debt crisis, the Greek
bailout, Brexit and populist uprisings
across the continent—have
combined to rattle confidence in the
eurozone and drive investors to
perceived havens including the
Swiss franc. This overbought
environment has the potential to
reverse with the recent sentiment
shift and prospects of global growth
and reflation in the United States and
Europe.
Carry is the second component of
the model and takes into account the
“
The Swiss franc continues to be the
most overvalued relative to other
developed-market currencies.”
difference in rates between two
respective countries. The theory is
that assets with higher yields tend to
appreciate relative to assets offering
lower yields. We expect policy in
Switzerland to remain
accommodative and the
government’s bond yield curve to
remain depressed relative to the US
yield curve. The Swiss franc is likely
to remain a funding currency relative
to the US dollar and other developed
currencies and therefore we expect
the CHF will likely weaken relative to
the USD.
buoy yields and inflation in the
United States. The IMF expects
long-term inflation in Switzerland to
remain subdued, further allowing the
Swiss central bank to maintain
negative rates. Swiss inflation is only
expected to reach 1% in 2021,
substantially below the central
bank’s 2% target. This inflation and
policy difference will put pressure on
the Swiss franc versus the US dollar.
Real interest-rate parity takes into
account differences in expected
inflation between countries. Because
of the expected inflation differential,
this component of the model
forecasts depreciation of the Swiss
franc versus the US dollar in the long
term.
The prospect of global reflation,
driven in part by the proposed
policies in the United States, may
Thumbs Up Swedish Krona; Thumbs Down Swiss Franc
Long-Term Expected Change vs. USD Based on Purchasing Power
Parity (PPP) Model
Long-Term Expected Change vs. USD Based on Real Interest-Rate
Parity Model
As at 30 November 2016
Projected 1 January 2017–31 December 2023
As at 30 November 2016
Projected 1 January 2017–31 December 2023
Expected Change vs. USD
40%
Expected Change vs. USD
4%
33.2%
30%
19.6% 18.3%
20%
10%
2%
2%
0%
8.4%
7.9%
0%
-2%
2.5%
0%
-4%
-10%
-6%
-1%
-4%
-8.7%
-20%
-20.1%
-20.5%
-30%
2%
-1%
-1%
-4%
-8%
-9%
-10%
GBP
EUR
AUD
CAD
NZD
JPY
NOK
SEK
CHF
GBP EUR AUD CAD NZD
JPY NOK SEK CHF
Source: Bloomberg, FT Solutions. Opinions and beliefs expressed are those of FT Solutions and are subject to change without notice. There is no assurance that any forecast or
projection will be realized.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
11
OUR CAPITAL MARKET EXPECTATIONS
Traditional Beta: Equity
Traditional Beta: Fixed Income
As at 30 November 2016
Seven-Year Annualized Return Capital Market Expectations (in Local
Terms), Projected 1 January 2017–31 December 2023
As at 30 November 2016
Seven-Year Annualized Return Capital Market Expectations (in Local
Terms), Projected 1 January 2017–31 December 2023
Seven-Year Capital
Market Expectations
20-Year Annualized
Return
Global Equity
7.8%
6.8%
0.3%
4.6%
Developed-Market Equity
Global Developed-Market
Government
7.5%
6.8%
US Government
1.3%
4.9%
United States
7.3%
8.3%
Canadian Government
0.5%
5.7%
Canada
8.1%
9.0%
Europe ex UK Government
0.4%
4.7%
Europe ex UK
6.9%
7.6%
UK Government
0.1%
6.7%
United Kingdom
6.8%
6.4%
Japanese Government
-0.7%
2.6%
Japan
9.6%
1.1%
Australian Government
1.7%
6.6%
Pacific ex Japan
8.3%
5.4%
Global Corporate High Yield
4.0%
6.7%
Australia
8.3%
8.6%
US High-Yield USD
4.3%
7.2%
Pan-European EUR
2.4%
5.9%*
Global Natural Resources
8.3%
7.3%
Pan-European GBP
3.9%
11.0%*
Global Gold Miners
3.1%
0.1%
US Listed Infrastructure
7.9%
2.2%*
Global Real Estate Investment
Trusts (REITs)
5.9%
9.8%
Specialty Equity
*Data not available for full 20-year period. Returns calculated using data since inception
of the representative index, beginning 31/12/98.
Seven-Year Capital 20-Year Annualized
Market Expectations
Return
*Data not available for full 20-year period. Returns calculated using data since
inception of the representative index, beginning 31/1/99.
Seven-Year Capital 20-Year Annualized
Market Expectations
Return
Global Investment-Grade Credit
3.0%
Issued in USD
2.7%
5.8%
Issued in GBP
2.1%
5.8%*
5.1%
Seven-Year Capital
Market Expectations
20-Year Annualized
Return
Issued in JPY
0.4%
1.1%*
Emerging-Market (EM) Equity
8.7%
8.9%
Issued in EUR
1.7%
4.9%*
EM Europe, Middle East, Africa
(EMEA)
8.3%
5.1%
Issued in CAD
2.1%
5.7%*
EM Latin America
8.8%
12.1%
Issued in AUD
3.3%
6.6%*
EM Asia
8.8%
3.5%
EM Debt Composite (36% Hard,
39% Local, 25% EM Corp)
3.7%
8.6%
Global Small-Cap Equity
9.4%
7.9%
EM Debt–Government (Hard)
4.2%
10.1%
US Small Cap
9.2%
8.5%
EM Debt–Government (Local)
6.3%
8.5%*
EM Corporate (Hard)
2.9%
6.6%*
Inflation-Linked Bonds
0.7%
5.9%*
US Securitized
1.5%
5.2%
US Mortgage-Backed Securities
1.5%
5.2%
Other Fixed Income
*Data not available for full 20-year period. Returns calculated using data since inception
of the representative indexes: Global Corp IG Credit GBP beginning 31/12/99; Global
Corp IG Credit JPY beginning 31/7/00; Global Corp IG Credit EUR beginning 31/7/98;
Global Corp IG Credit CAD beginning 31/10/02; Global Corp IG Credit AUD beginning
30/6/04; EM Debt Government (Local) beginning 31/12/02; EM Debt Government
(Hard) beginning 31/1/03; Inflation-Linked Bonds beginning 31/1/02.
Expected Return Source: Franklin Templeton Solutions. Past performance does not guarantee future results. There is no assurance any forecast or projection
will be realized. See appendix on page 18 for representative indexes for each asset class.
12
2017 Long-Term Capital Market Expectations
For Financial Professional Use Only. Not For Public Distribution.
Traditional Beta: Commodities
Alternatives
As at 30 November 2016
Seven-Year Annualized Return Capital Market Expectations (in USD),
Projected 1 January 2017–31 December 2023
As at 30 November 2016
Seven-Year Annualized Return Capital Market Expectations (in USD),
Projected 1 January 2017–31 December 2023
Seven-Year Capital
Market Expectations
20-Year Annualized
Return
Commodities
4.0%
1.4%
Alternatives
Oil
6.2%
4.7%
Gold
1.1%
5.2%
Precious Metal
8.9%
5.5%
Agriculture
7.5%
-1.4%
Traditional Beta: Currency
As at 31 December 2016
Seven-Year Forecasts Capital Market Expectations, 31 December 2023
Seven-Year Capital
Market Expectations
Spot
as at 31/12/16
FX Rate
USD CAD
1.34
1.34
EUR USD
1.01
1.05
GBP USD
1.25
1.23
USD JPY
114.69
116.96
AUD USD
0.73
0.72
Seven-Year Capital
Market Expectations
20-Year Annualized
Return
FT Solutions Risk Premia
Composite*
3.2%
7.6%
US Private Equity
9.3%
13.9%**
Hedge Fund
6.0%
7.5%
*Risk premia strategy (and sub-strategy) historic composite returns are simulated
based on third-party data we pull from Bloomberg and aggregate using a proprietary
methodology. See “Risks of Assumptions for Risk Premia and Other Alternatives” on
page 17 for important information about risk premia composite calculation
methodology.
**US Private Equity return calculated through 30/6/16.
Economic
As at 30 November 2016
Seven-Year Annualized Return Capital Market Expectations (in Local
Terms), Projected 1 January 2017–31 December 2023
Seven-Year Capital
Market Expectations
Policy Rate
as at 31/12/16
USD Cash
2.2%
0.5%
CAD Cash
2.1%
0.5%
EUR Cash
1.4%
0.0%
GBP Cash
1.9%
0.3%
JPY Cash
0.5%
0.1%
AUD Cash
2.8%
1.5%
Cash Expected Return
Expected Return Source: Franklin Templeton Solutions. Past performance does not guarantee future results. There is no assurance any forecast or projection
will be realized. See appendix on page 18 for representative indexes for each asset class.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
13
PROCESSES
OUR
METHODOLOGY
AND MODELS
AND MODELS
This section provides an overview of the methodology and models we use to develop
long-term capital market expectations (CMEs) for various asset classes, including
equities, fixed income, commodities and alternatives. In total our 2017 CMEs cover 66
asset classes including 19 in equity, 25 in fixed income, seven in commodities, five
within currency and four in the alternative beta and alpha spaces. In terms of economic
expectations, we deliver six expectations of regional three-month cash returns.
Our CMEs are intended to provide annualized seven-year return expectations. However,
the time horizon can be generalized to the next five to 10 years, and we update our
models annually.
This period coincides with the
model (a form of the dividend
average length of a US business
discount model) as well as
cycle, as defined by the National
regressions on economic scenarios
Bureau of Economic Research.
for equity expectations and stressing
Since 1945, there have been 11 US
the yield curve for fixed income
business cycles with an average
expectations.
duration of 69.5 months. The
timeframe also historically
corresponds to the average duration
of aggregate fixed income indexes
that we use.
We base our CMEs more on
forward-looking assumptions rather
than a long-term historical average
return for an asset class. Using
forward-looking returns is an
Our long-term return expectations
important distinction since past
are driven by current valuations,
performance should not necessarily
analyst expectations, expected
be an indication of future returns,
growth rates and expected economic
especially in times of changing
environments. We use inputs and
macroeconomic environments. We
model techniques specific to each
build our return expectations using
asset class within a process that
informed forward estimates of
blends quantitative analysis with
fundamentals and economic regimes
fundamental research. The process
over the next five to 10 years rather
includes using the residual income
than simply relying on historical
“
Our long-term
return
expectations
are driven by
current
valuations,
analyst
expectations,
expected
growth rates
and expected
economic
environments.”
performance.
14
2017 Long-Term Capital Market Expectations
For Financial Professional Use Only. Not For Public Distribution.
Traditional Equities
Building Blocks Model
We use several models for our
The building blocks model forecasts
equity return expectations. The
returns by summing three forecasts:
benefit of using several different
1. Dividend yield sourced from
models is that we take into account
Bloomberg analyst estimates
both the absolute and relative
forecasts (as in the residual income
2. Earnings-per-share (EPS)
model). To develop our 2017 CMEs
growth rates, which are the
within traditional equities, we used
average of bottom-up analyst
the “residual income” model and the
forecasts from the I/B/E/S and
“building blocks” model.
top-down long-term GDP and
inflation forecasts
Residual Income Model
The residual income model uses the
3. P/E expansion, which assumes
relationship between price-to-book
that P/E will converge to its long-
(P/B) ratios, historical return of
term average.
equity (ROE), and forward-looking
(one-year and two-year) ROE to
Specialty Equities
“
We build our
return
expectations
using informed
forward
estimates of
fundamentals
and economic
regimes over
the next five to
10 years rather
than simply
relying on
historical
performance.”
determine expected returns. A higher
To develop our expectations for
forward ROE tends to contribute to a
specialty equities, we use regression
higher return expectation. A lower
models. The models identify relevant
P/B ratio typically indicates a higher
equity and commodity factors that
return expectation. In addition, we
drive the expected returns for each
found that comparing expected
asset class. Based on the historic
returns relative to their own histories
betas and alphas we construct
miners, we also consider the gold
provides insightful information. The
forward-looking views that determine
price to be a factor in the model. For
percentile of current expected return
our expectations. We believe that
infrastructure, oil prices are a
in relation to historical expectations
within the specialty equity category,
relevant explanatory factor.
indicates major bullishness or
the returns in natural resources, gold
Therefore, main inputs to our
bearishness relative to history. Our
miners, listed infrastructure and real
specialty equity long-term return
analysis shows that rank-adjusted
estate investment trusts (REITs)
models is the relationship between
results provide strong guidance in
should be in line with traditional
those factors and the asset class
forecasting returns.
equity indexes. With regard to gold
indexes.
Risks of Assumptions for Equity Return Expectations
The residual income model relies on the theory that a company’s equity value is equal to the sum of its current book value and its expected future
cash flows. Actual equity returns may deviate from the expected returns if the theory does not hold or if realized return on equity differs
substantially from the analyst estimates used in the modeling. Unforeseen macroeconomic shocks (such as strong shocks to inflation or GDP) or
major changes in the structure of the equity markets could also cause actual returns to differ from the expected returns. In addition, actual returns
may deviate from expected returns if one or more of the forecast components comprising the building blocks model turn out to be different from
actual dividend yields, EPS growth or P/E expansion.
Risks of Assumptions for Specialty Equity Return Expectations
Actual returns may differ from the expected returns for specialty equity if our forward-looking assumptions of the relationships between asset
classes differ from reality.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
15
Fixed Income
Commodities
Interest-Rate Differential
Yield Curve Shift Model
Spot Return and Roll Yield
Currencies in countries with high
The main input to our fixed income
We based our expected returns from
interest rates tend to appreciate
return expectation is our yield curve
commodities on two sources: spot
relative to currencies in countries
shift (YCS) model. Principal
return and roll yield. For spot return,
with lower interest rates. We use our
component analysis (PCA) of
we apply an inflation-adjusted model
own forecast short-term cash rates
historical data has shown that the
to forecast spot price. We first
for given countries as inputs.
expected returns for bonds are
calculate historical real commodity
Real Interest-Rate Parity
mainly driven by current yield level
prices given their historical inflation
Real interest-rate differential
and parallel shift scenarios. Given a
rates, and forecast real commodity
between two countries drives the
parallel shift scenario, the YCS
price targets given the
long-term exchange rate between
model assumes current yield curve
macroeconomic outlook, then add
them. We use our own forecasts for
will shift gradually to the target over
back the inflation expectation to get
long-term inflation for given
seven years. The model also
the final target spot price. For roll
countries.
involves stressing the yield curve on
yield, we estimate historical roll yield
a monthly basis using a random walk
for each commodity and take the
approach. The results include
long-term average for our forecasts.
expected returns and the confidence
intervals of the expected returns for
Currency
the fixed income asset classes.
We base our long-term foreign
Major inputs into the model include:
exchange assumptions on equalweighting forecasts from three well-
1. Term structure (the shape of the
yield curve)
documented theories: purchasing
power parity, interest-rate differential
2. Yield volatilities
and real interest-rate parity.
3. Market structures (weights for
Purchasing Power Parity
different durations)
Exchange rates should change to
create equilibrium ensuring that the
4. Expected shift scenarios
For corporate bonds and emergingmarket debt instruments, we assume
credit spreads will revert to their own
long-term averages over a seven-
same set of goods will cost the same
if purchased with two different
currencies. Inputs include OECD
purchasing power parity and IMF
calculations.
year horizon. We estimate
corresponding default and recovery
rates based on the averages of their
long-term history.
Risks of Assumptions for Fixed Income Return Expectations
Actual fixed income returns may deviate from the expected returns if the actual shift in the yield curve over seven years deviates substantially from
the types of shifts and stresses applied to the yield curve in the model. Unforeseen macroeconomic shocks or major changes in the market
structure or term structure could also cause actual returns to differ from expected returns.
Risks of Assumptions for Commodities
Actual returns may differ from the expected returns if the spot return and roll yield deviate from realized values.
Risks of Assumptions for Currency Expectations
Long-term currency expectations depend on the accuracy of the theories (purchasing power parity, interest-rate differential and real interest-rate
parity) and on the long-term projections for yields and inflation rates. If reality deviates from the theory, or if realized yields and inflation rates differ
significantly from the projections, we may see that actual currency rates differ from the expected rates.
16
2017 Long-Term Capital Market Expectations
For Financial Professional Use Only. Not For Public Distribution.
Alternatives
To determine our expectation for
Economic Forecasts
We base our long-term forecasts for
private equity, we assumed an
We collected GDP and inflation rates
alternatives on efficiency and
illiquidity premium of 200 basis
from multiple sources, including the
illiquidity premium assumptions. We
points, which is generally in line with
World Bank, OECD, IMF and other
consider the historical trend of the
the average of a sample of
third parties. Our portfolio managers
Sharpe ratio on risk premia and
institutional private market forecast
also make their own forecasts. Our
hedge funds. We base all historical
assumptions.
final forecasts comprise all the
data related to the risk premia
For our hedge fund return
external and internal forecasts. To
strategies on data from third parties
expectation, we combined our
determine the short-term (three-
and do not represent the actual
efficiency assumption and multi-
month) cash rate, we build out a
performance of any portfolio or
factor models to forecast long run
forward rate model and use the
index. Using the forward-looking
returns that determine a seven-year
Taylor rule based cash forecast
Sharpe ratio, cash rate and historical
CME for hedge funds.
model. We include the current
risk, we construct our long-term risk
government bond yield curve,
premia return expectations.
current inflation and GDP, long-term
GDP and inflation expectations as
inputs.
Risks of Assumptions for Risk Premia and Other Alternatives
Risk premia strategy (and sub-strategy) historic composite returns are simulated based on third party data sourced from Bloomberg that we
aggregate using a proprietary methodology. We divide the various strategies by type, rank them through a quantitative and qualitative process,
and weight them by risk. Because these composites are determined based on our own assessments and calculations, these composites represent
our own views and analysis and may vary from the methodologies and conclusions of others. Although we believe the composite data is accurate
and reasonable, we cannot guarantee it, nor can we guarantee that implementation of any of the specific strategies would attain the performance
or target of any composite mentioned in this paper. Actual performance of a specific strategy may differ substantially from the composite
performance shown. All composite data is hypothetical and for illustrative purposes only. It does not represent the results of any actual portfolio or
index. We created the composite data with the benefit of hindsight and knowledge of factors that could have positively affected the results. We
have presented all composite and index data gross of fees and expenses. Fees and expenses would lower a managed portfolio’s returns.
Actual returns may differ from the expected returns if our efficiency assumptions or multi-factor models deviate from reality. For example, we have
assumed a decreasing Sharpe ratio trend over the long term. Actual returns may not match expected returns if the Sharpe ratio instead increases
or remains constant over the next seven years.
Risks of Assumptions for Economic Forecasts
The forward cash rate may deviate from the expected cash rate if the yield curve deviates substantially from the one that we applied in the model.
Unforeseen macroeconomic shocks, changing government policies or major changes in the term structure would also cause the actual cash rate
to differ from the expected cash rate.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
17
APPENDIX: INDEXES AND PROXIES USED
Asset Class
Equity
Global Equity
Global Developed
US Equity
Canadian Equity
UK Equity
Europe ex UK Equity
Japanese Equity
Pacific ex Japan Equity
Australia
Global Small Cap
US Small Cap
Emerging Markets
EM EMEA
EM Latin America
EM Asia
Specialty Equity
Global Natural Resources
Global Gold Miners
US Listed Infrastructure
Global REITs
Fixed Income
Global Developed-Market Government
US Government
Canadian Government
Europe ex UK Government
UK Government
Japanese Government
Australian Government
Global Investment-Grade Credit
Issued in USD
Issued in GBP
Issued in JPY
Issued in EUR
Issued in CAD
Issued in AUD
Global Corporate High Yield
US High-Yield USD
Pan-European High-Yield in EUR
Pan-European High-Yield in GBP
Emerging-Market Debt Aggregate
EM Debt–Gov’t (Hard)
EM Debt–Gov’t (Local)
EM Corporate Hard
Other Fixed Income
Inflation-Linked Bonds
US Securitized
US Mortgage-Backed Securities
18
2017 Long-Term Capital Market Expectations
Market Proxy
MSCI All Country World Index TR
MSCI Daily TR Gross World Local
MSCI Daily TR Gross USA Local
MSCI Daily TR Gross Canada Local
MSCI Daily TR Gross UK Local
MSCI Daily TR Gross Europe ex UK Local
MSCI Daily TR Gross Japan Local
MSCI Daily TR Gross Pacific ex Japan Local
MSCI Daily TR Gross Australia Local
MSCI Small Cap All Country World
Russell 2000®
MSCI Daily TR Gross Emerging Markets EM Local
MSCI Emerging Markets Europe Middle East Africa Local
MSCI Daily TR Gross Emerging Markets EM Latin America Local
MSCI Daily TR Gross Emerging Markets EM Asia Local
Morningstar Natural Resources Category (31/12/88–31/8/96)
S&P Natural Resources Sector (31/8/96–30/11/02)
S&P Global Natural Resources (30/11/02–Present)
DJGI World (ALL)/Gold Mining (31/12/91–30/9/98)
FTSE Gold Mines TR (30/9/98–Present)
MSCI US Infrastructure Total Return Index (29/7/11–Present)
S&P Global REIT
Citigroup World Government Bond All
Bloomberg Barclays US Aggregate Government
IMF Canada LT Government Total Return (31/1/75–31/12/84)
Canada Government Bond Index All Maturities (31/12/84–Present)
World Government Bond Index Europe All (31/1/85–31/1/99)
Citigroup Economic and Monetary Union Government Bond Index All
(31/1/99–Present)
Citi Government Bond Index UK Local
Citigroup Japan Government Bond Index All
Citi Government Bond Index Australia Local
Bloomberg Barclays US Aggregate Corporate (31/1/90–31/12/96)
Merrill Global Broad Market Corporate (31/12/96–29/9/00)
Bloomberg Barclays Global Aggregate Credit (29/9/00–Present)
Bloomberg Barclays US Aggregate Corporate
Bloomberg Barclays Aggregate Corporate GBP
Bloomberg Barclays Aggregate Corporate JPY
Bloomberg Barclays Aggregate Corporate EUR
Bloomberg Barclays Aggregate Corporate Canada
Bloomberg Barclays Aggregate Corporate AUD
Bloomberg Barclays Capital US Corporate High Yield (31/12/25–31/12/00)
Bloomberg Barclays Global High Yield Corporate (31/12/00–Present)
Bloomberg Barclays Capital US Corporate High Yield
Bloomberg Barclays Pan-European High Yield EUR
Bloomberg Barclays Pan-European (Non-Euro) High Yield GBP
(36% EMD Hard Currency, 39% EMD Local, 25% EMD Corporate)
JP Morgan Emerging Market Bond Index+
JP Morgan Gov’t Bond Index – Emerging Markets Global Diversified
Composite Local
Bloomberg Barclays Emerging Markets Corporates Total Return Index
Value Unhedged USD
Bloomberg Barclays Global Inflation-Linked Bonds (11/30/97–Present)
Bloomberg Barclays US Securitized: MBS/ABS/CMBS Total Return Index
Value Unhedged USD
Bloomberg Barclays US MBS Index Total Return Value Unhedged USD
For Financial Professional Use Only. Not For Public Distribution.
Asset Class
Market Proxy
Fixed Income (cont’d.)
Commodities
Oil
(57% WTI + 43% Brent Oil)
Precious Metal
GSCI Precious Metals Total Return (31/1/73–31/1/91)
Bloomberg Precious Metals Sub-Index Total Return (1/2/91–Present)
S&P GSCI Gold Index (28/2/78–31/1/91)
Bloomberg Gold Sub-Index Total Return (1/2/91–Present)
Gold
Agriculture
Bloomberg Agriculture Sub-Index Total Return
Alternatives
US Private Equity
FT Solutions Proprietary Monthly Adjusted – Cambridge Associates
US Private Equity Index (31/1/86–30/6/16)
Risk Premia*
HFRI Fund of Fund Composite (31/12/89–30/11/97)
HFRX Global Hedge Fund Index (31/12/97–31/12/09)
FTS Systematic Beta Enhanced Composite (29/1/10–Present)
Hedge Fund
HFRI Fund Weighted Composite Index
Cash
USD
CAD
EUR
Encorr 90-Day T-Bill (31/12/74–31/1/97)
JPM Cash Index USD 3-Month (31/1/97–Present)
Canada DEX 90-Day Bill (31/1/75–1/97)
JPM CAD Cash Index 3-Month (2/97–Present)
IMF Germany Deposit Rate (De-Annualized) (to 31/12/95)
Germany Cash Indexes – Libor Return 3-Month (31/1/96–31/1/99)
JPM Cash Index Euro Currency 3-Month (28/2/99–Present)
GBP
JPM Cash Index GBP 3-Month
JPY
JPM Cash Index JPY 3-Month
Bloomberg AusBond Bank Index (31/3/87–31/1/97)
JP Morgan 3-Month AUD Cash Index (31/1/97–Present)
AUD
*Risk premia strategy (and sub-strategy) historic composite returns are simulated based on third-party data we source from Bloomberg and aggregate using a proprietary
methodology. See “Risks of Assumptions for Risk Premia and Other Alternatives” on page 17 for important information about risk premia composite calculation methodology.
MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or
endorsed by MSCI.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
Important data provider notices and terms available at www.franklintempletondatasources.com.
For Financial Professional Use Only. Not For Public Distribution.
2017 Long-Term Capital Market Expectations
19
WHAT ARE THE RISKS?
conditions. In other words, the future performance and
All investments involve risks, including possible loss of
correlations of risk premia strategies may differ,
principal.
potentially significantly, from historical performance and
Stock prices fluctuate, sometimes rapidly and
dramatically, due to factors affecting individual
companies, particular industries or sectors, or general
market conditions. Bond prices generally move in the
opposite direction of interest rates. Thus, as the prices of
bonds in an investment portfolio adjust to a rise in interest
rates, the value of the portfolio may decline. Special risks
are associated with foreign investing, including currency
fluctuations, economic instability and political
developments. Investments in developing markets involve
heightened risks related to the same factors, in addition to
those associated with their relatively small size, lesser
correlations. In addition, because the risk premia
composites in this paper are determined based on FT
Solutions’ own assessments and calculations, these
composites represent solely the views and analyses of
FT Solutions and may vary from the methodologies and
conclusions of others. Although FT Solutions believes
that the composite data is accurate and reasonable, there
is no guarantee of such, that implementation of any of the
specific strategies would attain the performance, or target
of any composite mentioned in this paper. Actual
performance of a specific strategy may differ substantially
from the composite performance shown.
liquidity and lack of established legal, political, business,
Investing in the natural resources sector involves special
and social frameworks to support securities markets.
risks, including increased susceptibility to adverse
Such investments could experience significant price
economic and regulatory developments affecting the
volatility in any given year. Derivatives, including currency
sector—prices of such securities can be volatile,
management strategies, involve costs and can create
particularly over the short term. Some strategies, such as
economic leverage in a portfolio, which may result in
hedge fund and private equity strategies, are available
significant volatility and cause the portfolio to participate
only to pre-qualified investors, may be speculative and
in losses (as well as enable gains) on an amount that
involve a high degree of risk. An investor could lose all or
exceeds the portfolio’s initial investment.
a substantial amount of his or her investment in such
Because some risk premia strategy signals are built using
historical market events, the risk premia strategies can be
subject to model risk, whereby the strategies perform
differently than the model would expect for various
strategies. Real estate securities involve special risks,
such as declines in the value of real estate and increased
susceptibility to adverse economic or regulatory
developments affecting the sector.
reasons, including but not limited to market and economic
20
2017 Long-Term Capital Market Expectations
For Financial Professional Use Only. Not For Public Distribution.
IMPORTANT LEGAL INFORMATION
This material is intended to be of general interest only and should
not be construed as individual investment advice or a
recommendation or solicitation to buy, sell or hold any security or
to adopt any investment strategy. It does not constitute legal or
tax advice.
The views expressed are those of the investment manager and
the comments, opinions and analyses are rendered as at
publication date and may change without notice. The information
provided in this material is not intended as a complete analysis of
every material fact regarding any country, region or market. All
investments involve risks, including possible loss of
principal.
Data from third party sources may have been used in the
preparation of this material and Franklin Templeton Investments
(“FTI”) has not independently verified, validated or audited such
data. FTI accepts no liability whatsoever for any loss arising from
use of this information and reliance upon the comments opinions
and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all
jurisdictions and are offered outside the U.S. by other FTI
affiliates and/or their distributors as local laws and regulation
permits. Please consult your own professional adviser for further
information on availability of products and services in your
jurisdiction.
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Canada: Issued by Franklin Templeton Investments Corp., 5000 Yonge
Street, Suite 900 Toronto, ON, M2N 0A7, Fax: (416) 364-1163, (800)
387-0830, www.franklintempleton.ca. In Canada, FT Solutions is part of
Fiduciary Trust Company of Canada, a wholly owned subsidiary of
Franklin Templeton Investments Corp. Dubai: Issued by Franklin
Templeton Investments (ME) Limited, authorized and regulated by the
Dubai Financial Services Authority. Dubai office: Franklin Templeton
Investments, The Gate, East Wing, Level 2, Dubai International Financial
Centre, P.O. Box 506613, Dubai, U.A.E., Tel.: +9714-4284100
Fax:+9714-4284140. France: Issued by Franklin Templeton France
S.A., 20 rue de la Paix, 75002 Paris, France. Hong Kong: Issued by
For Financial Professional Use Only. Not For Public Distribution.
Franklin Templeton Investments (Asia) Limited, 17/F, Chater House, 8
Connaught Road Central, Hong Kong. Italy: Issued by Franklin
Templeton International Services S.à.r.l. – Italian Branch, Corso Italia,
1 – Milan, 20122, Italy. Japan: Issued by Franklin Templeton
Investments Japan Limited. Korea: Issued by Franklin Templeton
Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12
Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-968.
Luxembourg/Benelux: Issued by Franklin Templeton International
Services S.à r.l. – Supervised by the Commission de Surveillance du
Secteur Financier - 8A, rue Albert Borschette, L-1246 Luxembourg Tel: +352-46 66 67-1 - Fax: +352-46 66 76. Malaysia: Issued by
Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. &
Franklin Templeton GSC Asset Management Sdn. Bhd. Poland:
Issued by Templeton Asset Management (Poland) TFI S.A., Rondo
ONZ 1; 00-124 Warsaw. Romania: Issued by the Bucharest branch of
Franklin Templeton Investment Management Limited, 78-80 Buzesti
Street, Premium Point, 7th-8th Floor, 011017 Bucharest 1, Romania.
Registered with Romania Financial Supervisory Authority under no.
PJM01SFIM/400005/14.09.2009, authorized and regulated in the UK
by the Financial Conduct Authority. Singapore: Issued by Templeton
Asset Management Ltd. Registration No. (UEN) 199205211E. 7
Temasek Boulevard, #38-03 Suntec Tower One, 038987, Singapore.
Spain: Issued by the branch of Franklin Templeton Investment
Management, Professional of the Financial Sector under the
Supervision of CNMV, José Ortega y Gasset 29, Madrid. South
Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which
is an authorised Financial Services Provider. Tel: +27 (21) 831 7400
Fax: +27 (21) 831 7422. Switzerland: Issued by Franklin Templeton
Switzerland Ltd, Stockerstrasse 38, CH-8002 Zurich. UK: Issued by
Franklin Templeton Investment Management Limited (FTIML),
registered office: Cannon Place, 78 Cannon Street, London EC4N
6HL. Authorized and regulated in the United Kingdom by the Financial
Conduct Authority. Nordic regions: Issued by Franklin Templeton
Investment Management Limited (FTIML), Swedish Branch,
Blasieholmsgatan 5, SE-111 48 Stockholm, Sweden. Phone: +46 (0) 8
545 01230, Fax: +46 (0) 8 545 01239. FTIML is authorised and
regulated in the United Kingdom by the Financial Conduct Authority
and is authorized to conduct certain investment services in Denmark, in
Sweden, in Norway and in Finland. Offshore Americas: In the U.S.,
this publication is made available only to financial intermediaries by
Templeton/Franklin Investment Services, 100 Fountain Parkway, St.
Petersburg, Florida 33716. Tel: (800) 239-3894 (USA Toll-Free), (877)
389-0076 (Canada Toll-Free), and Fax: (727) 299-8736. Investments
are not FDIC insured; may lose value; and are not bank guaranteed.
Distribution outside the U.S. may be made by Templeton Global
Advisors Limited or other sub-distributors, intermediaries, dealers or
professional investors that have been engaged by Templeton Global
Advisors Limited to distribute shares of Franklin Templeton funds in
certain jurisdictions. This is not an offer to sell or a solicitation of an
offer to purchase securities in any jurisdiction where it would be illegal
to do so.
2017 Long-Term Capital Market Expectations
21
Please visit www.franklinresources.com to be
directed to your local Franklin Templeton website.
Copyright © 2017 Franklin Templeton Investments. All rights reserved.
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