Reporting to Adam Spector, Franklin Templeton’s executive vice president and head of global distribution, Stephan (pictured) oversees alternative investments product innovation and investor services and assists with business development, management and operations. He will partner with the firm’s distribution leaders around the world to help drive the overall distribution strategy in addition to advisor education for the alternative investments business in the private wealth channel.

Franklin Templeton is now one of the largest managers in alternative assets globally, amounting to approximately 16% ($264bn) of the firm’s $1.65trn in assets under management as of June 30, 2024.

Its specialist investment managers, each with deep domain expertise, provide a diverse range of alternative asset capabilities including private credit and real estate debt from Benefit Street Partners-Alcentra, real estate equity from Clarion Partners, secondary private equity and co-investments from Lexington Partners, hedged strategies from Franklin Templeton Investment Solutions and pre-IPO growth equity investments from Franklin Venture Partners.

“With more than 40 years of experience in alternatives and 382 alternative investment professionals around the world, we have been deliberate about building our capabilities in multiple ways – through acquisitions of specialists like Benefit Street Partners, Lexington and Clarion and by onboarding our offerings to key advisor platforms to make them more accessible to investors,” Spector said. “The result is that Franklin Templeton is one of the few traditional asset managers to build a successful alternatives business spread across a broad range of strategies and geographies.”

Stephan previously spent five years at Kohlberg Kravis Roberts & Co. (KKR), as the head of strategy and business development for the firm’s global client solutions business. Before that, he was chief operating officer and head of investor relations for KKR’s Global Wealth Solutions business in the Americas. Prior to joining KKR, Stephan spent nine years at Morgan Stanley’s wealth management division.

These include the actively-managed Luxembourg-registered Templeton Emerging Markets Ex-China fund, and two Ireland-domiciled passively managed UCITS ETFs, the Franklin FTSE Emerging ex-China UCITS ETF and the Franklin FTSE Emerging Markets UCITS ETF.

Jaspal Sagger, global head of product, Franklin Templeton, said: “Our market and client research has demonstrated that many clients are looking to customise their allocations to China.

“We are delighted that clients are now able to manage their Chinese equity exposure separately through these two new ex-China funds alongside our dedicated China-only products. We also recognise that not all clients wish to manage their China allocation separately and prefer to simply seek broad emerging markets exposure.

“In this regard, the new Franklin FTSE Emerging Markets UCITS ETF (an indexed ETF) complements the firm’s comprehensive offering of actively managed emerging market products.”

The Templeton Emerging Markets Ex-China fund, which is EU SFDR Article 8 compliant, will aim to invest in emerging markets companies across the world, excluding China, with attractive fundamental characteristics using a valuation aware approach.

The fund will be actively managed and have a high conviction portfolio of 40-60 stocks constructed with a bottom-up approach and long-term outlook. It will be co-managed by Singapore-based Chetan Sehgal and Edinburgh-based Andrew Ness, Portfolio Managers at Franklin Templeton Emerging Markets Equity (FTEME) team.

The fund is registered in France, Germany, Italy, Spain and United Kingdom. This new fund is for clients interested in an actively managed ex-China offering and is in addition to the team’s longstanding flagship emerging markets equity capability.

Andrew Ness, portfolio manager, Franklin Templeton Emerging Markets Equity, said: “We’re currently at an interesting juncture for emerging markets. With China making up a large portion of the MSCI EM Index, we also see a large opportunity set in countries outside of China such as Brazil, India, South Korea and Taiwan, which are producing leading companies benefitting from rising domestic consumption and those that are powering the global economy.

“There are strong investment opportunities such as offline and online consumer companies, banking, rising healthcare players and technology to name a few. These opportunities are underpinned by structural growth drivers such as consumer penetration, demographics and digitalisation.”

Both the Franklin FTSE Emerging ex-China UCITS ETF and Franklin FTSE Emerging Markets UCITS ETF will be offer a cost-effective and flexible way to access broad and diversified exposure to large and mid-capitalisation stocks at a TER of 0.11% at launch.

These passive ETFs will respectively track the performance of FTSE Emerging ex China Index NR (net return) and FTSE Emerging Index NR. They will be managed by Dina Ting, Head of Global Index Portfolio Management, and Lorenzo Crosato, ETF Portfolio Manager.

The ETFs will list on the Deutsche Börse Xetra (XETRA) with tickers EMGM and EXCN on 23 October 2024, London Stock Exchange (LSE) and the Borsa Italiana on 24 October 2024. They are registered in France, Germany, Italy, Luxembourg, Spain and the United Kingdom.

These new products will complement the Emerging Markets ETF suite we currently offer, especially on the single-country side, and will empower investors to custom build their portfolios at a cost-efficient price point.

Matt Harrison, head of Americas (ex-US), Europe & UK, Franklin Templeton, said: “Building on Franklin Templeton’s rich heritage in emerging markets, we are delighted to introduce these three new emerging markets solutions to investors.

“Our goal is to provide our clients with many different tools and precision exposures as they seek to construct diversified portfolios; these tools include the choice of approach, style, and vehicle that best suit their objective. These strategies are a significant addition to our range, enabling Investors to implement their allocation preference on the emerging markets side.”

Markets have been roiled in the past few trading days, marked by sharp declines in global equity indexes, bond yields and commodity prices. The Franklin Templeton Institute is following market conditions and the fundamentals closely. Across all global regions and major asset classes, our teams of strategists and analysts have gathered to assess what all this means for investors. Succinctly, here is our thinking.

Global equities

All year, we have cautioned that US equity market valuations were excessive and left little margin for disappointment. Our standing year-end S&P 500 Index target has been 5250, only slightly above where the index opened yesterday morning. We remain cautious. Based on historical analysis of periods of economic deceleration, we believe that growth styles will outperform value, and that quality is also warranted. We are concerned about earnings disappointments—above all for smaller-capitalization stocks.

That said, we also respect that positioning, momentum and quant-style trading can be decisive when market ructions occur. While implied equity volatility has spiked (the VIX shot up to 65 this morning—the highest in four years1), the market moves may not have yet run their course. Opportunity will eventually present itself, but we think it is too early for all but the most long-term investors to seek value.

Non-US markets have been particularly hard-hit, with Japan’s Nikkei shedding over 12% in its second-worst trading day in history. That is a reminder that it is next-to-impossible to diversify equity risk by region (or by sector or style) during major corrections or bear markets. Opportunity will arise, but in our view, it is premature to step in at this point.

Global fixed income

In recent months we have been strong proponents of extending duration, particularly in US Treasuries. However, as 10-year Treasury yields have plunged to near 3.7% (from near 4.5% earlier this year), it makes sense to us to take some profit. Corporate spreads have not (yet) widened by as much as declines in equity prices might suggest is warranted, but selective engagement into higher-grade and even higher-yield issuers should eventually make sense.

The outlook for non-US fixed income markets depends (for US investors) to a considerable extent on the outlook for the US dollar. The dollar has slumped against other major currencies in recent days, above all against the Japanese yen as carry trades2 have been unwound. To a considerable extent that reflects expectations of significant Federal Reserve (Fed) easing before year-end (futures markets are now pricing in circa 100 basis points3), with an added “push” from risk aversion. We anticipate the dollar will eventually stabilize and even recover, but that could take time. Therefore, for risk-averse, income-oriented investors, we believe non-US fixed income investments offer poor risk/reward trade-offs.

Alternatives

For some time, we have been cautious about private equity, with a preference within that class for secondaries. The lack of visibility, particularly during periods of rising fundamental risk, makes us reiterate our caution. Private credit is slated to be more interesting, particularly if banks become even more reticent to lend. Pricing should improve. Over time, long-term investors should be rewarded by attractive discounts—especially true for investors putting new money to work in this environment. Above all, we emphasize the importance of manager selection. “Alpha dispersion” (the gap between top managers and the rest) is likely to increase significantly as a result of market dislocations.

The fundamentals

US recession risk is clearly on the rise, as reflected by the sharp swing in market pricing. Rising jobless claims, a poor July employment report and signs manufacturing may be contracting have changed the narrative. That said, other indicators are less worrisome, including the latest non-manufacturing Institute for Supply Management survey, the second-quarter US gross domestic product report, and anecdotal evidence from retailers.

It is too soon, in our view, to conclude that the United States is headed toward recession. However, even a more pronounced slowdown can lead to profits disappointments, for which an overvalued equity market was not prepared.

The Fed will surely cut interest rates in September and thereafter. A 50 basis-point cut is now the market expectation for the September meeting, and an inter-meeting (“emergency”) cut cannot be ruled out. Investors will closely follow the Fed’s sessions in August in Jackson Hole, Wyoming, for clues about its policy.

Historically, equity markets have had positive returns in the year after the Fed starts cutting interest rates. This is true whether the economy has dipped into a recession or avoided one. The average return one year after the first rate cut in recessionary periods is 4.98%, versus 16.66% in non-recessionary periods4 . Drawdowns were magnified in recessionary periods after the first rate cut, with the average max drawdown being 20%, versus 5% in non-recessionary periods 5.

Globally, there are no “white knights” in the event a recession unfolds. China has shown little inclination to repeat the kind of stimulus it offered 15 years ago during the global financial crisis. Europe and Japan are similarly unwilling or unable to offer “locomotive support” to the world economy. A US election rules out quick fiscal action. Markets, therefore, may be slower to react to good news via Fed rate cuts, when they happen, in light of those global constraints.

Just how well—or not so well—Mexico’s President-elect Claudia Sheinbaum may be able to tackle the country’s prevailing challenges is still up for debate. Sheinbaum’s commanding margin of victory in the June election discouraged some investors amid fears that her ruling Morena party could potentially push through constitutional reforms that may adversely impact Mexico’s business environment.

Since the outcome of the US presidential election will remain undecided for a month after Sheinbaum takes office in October, we expect Mexico’s equity markets to experience more short-term market volatility. But given Mexico’s ongoing potential to capitalize on nearshoring investments and Sheinbaum’s track record of progress during her time as mayor of Mexico City (beginning in 2018), we think investors should be monitoring opportunities to enter this compelling market.

We believe a continuation of US macro drivers are still poised to drive Mexican exports. Although US appetite for Chinese imports was still high even as recently as 2022, the drop-off in trade with China since then has benefited Mexico, which recently eclipsed both China and Canada to become the biggest US trade partner.

Mexico’s first female president

A protégé of outgoing President López Obrador (or AMLO as he is known), Sheinbaum has pledged to continue along the political course of her predecessor. But as a climate scientist with a Ph.D. in environmental engineering, she appears to us to be more attuned to pressing issues, such as Mexico’s water woes and efforts toward the energy transition. She has demonstrated deep, technical expertise and perspective on vital issues—“not simply as stewardship of natural resources, but also as an issue interconnected with education, social justice, health care, housing and infrastructure,” according to the think tank Atlantic Council.

There is hope that the public-private partnerships that Sheinbaum advanced during her time as Mexico City’s mayor could be a model that she adopts and adapts in her new administration to increase the number of strategic projects. These may include opening natural gas production and transportation to private participants, boosting infrastructure and more renewable energy projects that are critical for Mexico to take advantage of nearshoring-related investment opportunities.

Since renewables like solar and wind currently make up only about 12% of the electricity mix in Mexico (significantly lagging the 16% share for the United States), there is great potential for the country’s clean energy buildout. Sheinbaum has pledged to change course from AMLO in her approach to speeding the promotion of renewable energies with a US$13.6 billion investment plan through 2030 that includes pioneering development of smart grids and other green technologies.

Experts have praised Sheinbaum’s methodical approach to governance, for example, bringing stability and predictability to regulatory frameworks with her technical background and reliance on seasoned advisors.

Among some of the moderate-to-high risks for Mexico is public security and crime. Here again, Sheinbaum’s approach in working with US counterparts during her tenure in Mexico City has been applauded. Her cabinet picks for key positions thus far present an even gender distribution and draw from academia and her mayoral administration—in a bid to repeat the successes in crime-fighting she achieved during her years as mayor. These include veteran politicians Omar Garcia Harfuch for Security Minister, Marcelo Ebrard for Secretary of Economy and Alicia Barcena for Secretary of Foreign Affairs.

Mexico poised for economic growth

Over the near term, Mexico is expected to achieve a 2% growth rate—higher than its 20-year average.

Although Mexico’s headline inflation accelerated beyond analyst expectations in June, its strong trend of domestic demand and high consumer confidence should also offer some economic momentum, in our opinion. For example, June auto sales were up 8.3% from a year earlier, according to government data.

It’s also important to recognize that Mexico is the second-highest receiver of remittances—transfers of money from migrants working abroad—in the world, behind only India. For the decade leading up to 2020, the percentage of households in Mexico that received remittances rose to 5.1% from 3.6% in 2010.5 Last year, remittances to Mexico notched a 7.6% increase, hitting a record US$63 billion, due to a strong US labor market.

2024’s calendar of elections kicked off this weekend with the Taiwanese election, which immediately careered into controversy. However, markets appear to be untroubled by any potential escalation in geopolitical tensions it may bring about. Is this a sign of things to come, where markets largely ignore the outcome in the busiest year for elections in history?

The Taiwanese election demonstrated some of the potential pitfalls for the year ahead, as China condemned global governments for welcoming the pro-independence victor from the Democratic Progressive party. A US State Department spokesperson congratulated the Taiwanese for “demonstrating the strength of their robust democratic system and electoral process”. This drew ire from China’s foreign ministry, which said the comments “seriously violated US promises that it would only maintain cultural, economic and other non-official ties with Taiwan”.

Markets have taken no notice of this exchange, possibly because relations between the US and China were already weak and it does not alter their position significantly. This reinforces the prevailing narrative that elections don’t matter very much for developed markets. Certainly, analysis of stock markets through history seems to support this view.

Dina Ting, head of global index portfolio management at Franklin Templeton ETF, says: “Data for US markets show that over the longer term, presidential election outcomes tend to have very little impact on market moves.”

See also: Momentum: Seven risks for investors to watch for in 2024

Analysis from Brian Levitt, global market strategist at Invesco, shows that in the US, neither party can claim superior economic or market performance. The stock market posted positive returns across most administrations, with the rare exceptions of presidencies that ended in deep recessions. He adds that the S&P 500 index has delivered an average annual return of approximately 10% since it started in 1957 through both Democratic and Republican administrations.

A similar picture emerges in analysis of UK markets. Research by AJ Bell of all 16 of the general elections since the inception of the FTSE All-Share in 1962 shows that the UK stock market is indifferent to a change of government – and may even welcome it: “On average, the FTSE All Share has recorded a double-digit percentage gain in the first year after an election which sees one prime minister ejected from office and another ushered into it. There are also greater average gains when a government changes relative to when it remains the same.”

However, it can create volatility, and this appears more likely this year than in previous election cycles.

Ting adds: “Typically, the widest range of possible market outcomes relative to other periods of the election cycle occur during the uncertain 12 months preceding election day. With current volatility in the low teens, we see the risk of politically induced spikes throughout the year. Historically, the 12 months leading up to elections post average volatility of 17% in years when the same party continues its hold on the White House; in years when the presidency flips, that figure rises to over 20%. Given the fraught political backdrop, we may see a more nervous market than what is currently priced.”

Anthony Willis, investment manager at Columbia Threadneedle, says there is significant potential for politics to influence markets in the year head. He sees an ‘ugly battle for democracy in the US’ adding: “We are likely to see legal processes involved and the Supreme Court will probably have a role. With the election so tight, it may make a difference. This will be a backdrop all year.”

He also believes it may affect economic outcomes for the year ahead: “Incumbent leaders are going to do all they can to stay in power, so expect governments to do what they can on the fiscal side.”

Oxford Economics is expecting major changes to tax policy in 2025 whatever happens in the election: “Republicans will rush to prevent Trump-era tax cuts from expiring at the end of the year, while Democrats will also feel an urgency to prevent a similarly timed expiration of expanded subsidies for health insurance. In a divided government, a grand bargain that permanently extends key tax priorities of both parties would add at least $1trn to deficits through 2033, and even more beyond.”

Under either party, trade policy is likely to remain protectionist, though in different ways. The Democrats may continue to favour industrial subsidies and regulation, while a Republican administration would likely turn to imposing more tariffs on the rest of the world.

In emerging markets, it is possible that a change of government may create specific investment opportunities. In Mexico, for example, there is a view that the incumbent government has not been friendly to companies looking to ‘near-shore’, meaning the country is missing out on an historic opportunity to draw in investment. The elections in June 2024 could bring in a more investment-friendly government and exploit an easy win for the Mexican economy.

Equally, elections around the world may provide an important barometer of the support for democracy. In major countries such as India and the US, democracy is wobbling. EU parliamentary elections may also see the strength of support for far right parties across Europe. It may be destabilising for markets if democracy appears to be under significant threat.

However, in all these cases, there are two problems for investors. The first is that even if they can predict the outcome for an election, and then the economic changes that are likely to stem from it, it is difficult to pick the resulting market outcome. The second is that there is not much they can do about volatility, and the right course of action is usually to stay invested.

Levitt concludes that monetary policy and innovation are likely to be far greater drivers of market returns: “Investors should be less interested in politics and more interested in private sector business leaders who are going to harness artificial intelligence and robotics. They may be able to help cure debilitating diseases, evolve the nation’s energy sources, and develop new technologies and industries that aren’t even on the radar.”

Markets may not be as sanguine over all the election outcomes as they have been over Taiwan and there could be plenty of noise around elections in the year ahead. However, trying to predict investment returns based on an election outcome is tough and investors are likely to be better off riding out market volatility and staying invested.

This article was written for our sister title Portfolio Adviser