China’s continuing economic slowdown and its realignment toward consumption and services is bad news for countries that export oil and metals, according to the latest long-term Capital Markets Outlook published by Stephen Lingard and Michael Greenberg, co-lead portfolio managers of Franklin Templeton Solutions.
Furthermore, the Outlook says an aging population in major developed and emerging countries is an even stronger factor depressing the growth outlook. Starting this year, the working-age population will decline in advanced economies, while the share of the population over 65 years of age will skyrocket.
The group that produced the report comprises individuals representing various registered investment advisory entity subsidiaries of Franklin Resources, Inc., a global investment organization operating as Franklin Templeton Investments.
“We think that this demographic change is a powerful force to reckon with,” according to the report. “Japan is an important example of what Europe and the rest of the developed world face in the future. The United States may look better positioned in terms of this demographic crisis, but a stronger US dollar not only adds to emerging-market woes, but also impacts US economic growth adversely.”
The group does not see an environment for commodities to offer returns similar to the last decade given the “continued weaker outlook” on global growth. It believes that while returns overall are likely to be subdued, there are areas that on a relative basis offer more compelling opportunities than others.
“Relative to global bonds, the risk premium of global equities currently still looks attractive to us from a historical standpoint. We also feel that within global equities, there is opportunity in emerging markets relative to developed markets over the long term.”
According to the Outlook, global equities should continue to enjoy tailwinds from easy central bank policies from the European Central Bank and the Bank of Japan and select emerging-market countries. In the short term, there may be headwinds for the United States and emerging-market countries given the Fed’s rate-hike cycle.
“However, given that the plans of these central banks are well anticipated, we think the impact is likely to be manageable. Consequently, we believe global equities can enjoy performance potential over the next seven years.”
The group says oil may continue to be weaker this year in light of the ongoing supply glut and the Fed’s rate-hike cycle but longer term offers opportunity.
“We saw the price-action dip we expected during 2015 and regard current prices as very close to the optimal buying opportunity for us. Oil inventories are expected to have reached a peak, and at these current low prices, we expect further production declines as suppliers move offline due to lack of profits.”