Franklin Templeton Insights: Living on “COVID” Time

The coronavirus has forced a number of behaviour changes throughout societies across the globe, including how we work, shop and interact with others. Head of Equities at Franklin Templeton, Stephen Dover discusses how it has impacted investor decisions, too.

We are all globally on “COVID time” now as we have never seen as swift a change in our society, culture and economy as that caused by the coronavirus. Here are some points for investors to ponder.

  • Investors are experiencing uncertainty more than risk in their portfolios: The markets have shown record daily volatility. At the same time, price movements in different asset classes (except US Treasuries) have been highly correlated  because the markets are dealing with uncertainty. Market volatility will likely abate once COVID-19’s length and magnitude are understood.
  • It’s bad, but not The Great Depression (TGD): During TGD, policymakers tightened monetary policy, misdirected fiscal aid, raised trade barriers, tried to reduce fiscal spending and increased the regulatory burden on banks and industry. Policymakers have learned from those mistakes; the current global response to the coronavirus is at least less likely to make matters worse.
  • Cash is king for companies and investors: Investments of all kinds are being indiscriminately sold to raise cash. Money-market fund assets and flows are at all-time highs. To survive the freefall in their incomes and cash flow, companies are strengthening their balance sheets. Companies will need stronger balance sheets and individual investors will need larger “rainy day” accounts.
  • Company earnings forecasting in the fog of war: Most companies cannot predict earnings in this volatile environment. Current earnings projections for a least the next two quarters are overstated and will be revised downward. Investors should look past this and base company valuations on a longer-term earnings outlook, balance sheet strength and cash flow quality.
  • Stock buybacks will slow in the United States: Buying back stock increases a company’s earnings-per-share (EPS), because there are fewer shares. So, we will likely see reduced EPS growth rates as well as flows into equity markets for the next few years; stock buybacks averaged about 40% of the flow into the US equity market in 2019. I anticipate there will also be a slowdown in dividend growth, and we will likely see cuts in some dividends.
  • Fiscal deficits as far as the eye can see: Globally, the COVID-19 serves as a catalyst for Modern Monetary Theory (MMT)-style policies that are not concerned about the size of fiscal deficits. The risk is that once these “temporary” policies are introduced, they may become permanent. When the economy starts to recover, there likely will be increases in taxes, including on capital gains. Investors should take into consideration the current low tax rates and likely future higher tax rates into their portfolio decisions.

In a world where bond yields are at or below zero and there is massive fiscal spending, equities should outperform dramatically in relative terms. The recent indiscriminate equity selloff has left pockets of relative value for investors.

Asian equities, especially Chinese equities, have outperformed many other markets this year, and the recent rise in the US dollar has also made foreign stocks relatively less expensive. Global technology companies and Chinese internet companies should see their competitive market position further strengthened by the current shutdown as the entire world learns to both work and live remotely.

 


 

Franklin Templeton Key risks & Disclaimers:

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 of 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.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT 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 FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Interest rate movements may affect the share price and yield. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Liontrust Insights: What is the outlook of US dividends?

George Boyd-Bowman, fund manager at Liontrust, shares his views in a short article below.

Investors should be braced for companies suspending dividends in the US during the current crisis. But we believe that the extent of dividend cuts in the US may be less severe than in the UK, and companies on the other side of the Atlantic could play a more important role in providing portfolio diversification for income investors in the future. 

We have seen a slew of announcements in the UK which have led some analysts to suggest dividends for the UK market as a whole could fall by as much as 50%, or possibly more if the dividend futures markets are to be believed.

Secondly, US companies tend to pay dividends on a quarterly rather than half-yearly basis, so each quarterly payment is a smaller chunk of increasingly stretched working capital.

Finally, US companies have typically chosen to have a more balanced method of returning capital to shareholders, with buybacks the more variable tool on top of a steadier dividend.

Thus, it will be buybacks that will be foregone first. We have seen this already with the largest banks suspending buybacks for the time being.

There is an interesting debate about whether companies which, on most normal metrics, wouldn’t need to suspend dividends should indeed do so. In a “normal” environment, the signalling effect of not continuing to pay a dividend, which shareholders typically feel is either implicitly or explicitly promised, would be extremely damaging.

We are not convinced that companies (and their share prices) will be punished in the same way during this crisis. In a world where corporate social responsibility is increasingly important, witness the substantial rise of investor interest in ESG and sustainability, companies could well be seen to be doing their bit by conserving cash flows and preserving employment.

Should some US companies choose to temporarily suspend dividend payments, we don’t believe this alters the medium and long-term potential for the US to become an increasingly important source of dividend income for UK investors. The lower pay-out ratios will allow future dividend growth rates to be sustainably much higher.

While suspended dividend payments are likely to be transitory, perhaps one more structural outcome of the COVID-19 crisis will be that UK investors will reduce their over-reliance on UK companies to produce their ever-important dividend income. The US has a big(ger) part to play in this. 

 


Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies – these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Franklin Templeton Insights: Living on “COVID” Time

The coronavirus has forced a number of behaviour changes throughout societies across the globe, including how we work, shop and interact with others. Head of Equities at Franklin Templeton, Stephen Dover discusses how it has impacted investor decisions, too.

We are all globally on “COVID time” now as we have never seen as swift a change in our society, culture and economy as that caused by the coronavirus. Here are some points for investors to ponder.

  • Investors are experiencing uncertainty more than risk in their portfolios: The markets have shown record daily volatility. At the same time, price movements in different asset classes (except US Treasuries) have been highly correlated  because the markets are dealing with uncertainty. Market volatility will likely abate once COVID-19’s length and magnitude are understood.
  • It’s bad, but not The Great Depression (TGD): During TGD, policymakers tightened monetary policy, misdirected fiscal aid, raised trade barriers, tried to reduce fiscal spending and increased the regulatory burden on banks and industry. Policymakers have learned from those mistakes; the current global response to the coronavirus is at least less likely to make matters worse.
  • Cash is king for companies and investors: Investments of all kinds are being indiscriminately sold to raise cash. Money-market fund assets and flows are at all-time highs. To survive the freefall in their incomes and cash flow, companies are strengthening their balance sheets. Companies will need stronger balance sheets and individual investors will need larger “rainy day” accounts.
  • Company earnings forecasting in the fog of war: Most companies cannot predict earnings in this volatile environment. Current earnings projections for a least the next two quarters are overstated and will be revised downward. Investors should look past this and base company valuations on a longer-term earnings outlook, balance sheet strength and cash flow quality.
  • Stock buybacks will slow in the United States: Buying back stock increases a company’s earnings-per-share (EPS), because there are fewer shares. So, we will likely see reduced EPS growth rates as well as flows into equity markets for the next few years; stock buybacks averaged about 40% of the flow into the US equity market in 2019. I anticipate there will also be a slowdown in dividend growth, and we will likely see cuts in some dividends.
  • Fiscal deficits as far as the eye can see: Globally, the COVID-19 serves as a catalyst for Modern Monetary Theory (MMT)-style policies that are not concerned about the size of fiscal deficits. The risk is that once these “temporary” policies are introduced, they may become permanent. When the economy starts to recover, there likely will be increases in taxes, including on capital gains. Investors should take into consideration the current low tax rates and likely future higher tax rates into their portfolio decisions.

In a world where bond yields are at or below zero and there is massive fiscal spending, equities should outperform dramatically in relative terms. The recent indiscriminate equity selloff has left pockets of relative value for investors.

Asian equities, especially Chinese equities, have outperformed many other markets this year, and the recent rise in the US dollar has also made foreign stocks relatively less expensive. Global technology companies and Chinese internet companies should see their competitive market position further strengthened by the current shutdown as the entire world learns to both work and live remotely.

 


 

Franklin Templeton Key risks & Disclaimers:

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 of 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.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT 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 FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What are the risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Interest rate movements may affect the share price and yield. Treasuries, if held to maturity, offer a fixed rate of return and fixed principal value; their interest payments and principal are guaranteed. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year.



MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Liontrust Insights: What is the outlook of US dividends?

George Boyd-Bowman, fund manager at Liontrust, shares his views in a short article below.

Investors should be braced for companies suspending dividends in the US during the current crisis. But we believe that the extent of dividend cuts in the US may be less severe than in the UK, and companies on the other side of the Atlantic could play a more important role in providing portfolio diversification for income investors in the future. 

We have seen a slew of announcements in the UK which have led some analysts to suggest dividends for the UK market as a whole could fall by as much as 50%, or possibly more if the dividend futures markets are to be believed.

Secondly, US companies tend to pay dividends on a quarterly rather than half-yearly basis, so each quarterly payment is a smaller chunk of increasingly stretched working capital.

Finally, US companies have typically chosen to have a more balanced method of returning capital to shareholders, with buybacks the more variable tool on top of a steadier dividend.

Thus, it will be buybacks that will be foregone first. We have seen this already with the largest banks suspending buybacks for the time being.

There is an interesting debate about whether companies which, on most normal metrics, wouldn’t need to suspend dividends should indeed do so. In a “normal” environment, the signalling effect of not continuing to pay a dividend, which shareholders typically feel is either implicitly or explicitly promised, would be extremely damaging.

We are not convinced that companies (and their share prices) will be punished in the same way during this crisis. In a world where corporate social responsibility is increasingly important, witness the substantial rise of investor interest in ESG and sustainability, companies could well be seen to be doing their bit by conserving cash flows and preserving employment.

Should some US companies choose to temporarily suspend dividend payments, we don’t believe this alters the medium and long-term potential for the US to become an increasingly important source of dividend income for UK investors. The lower pay-out ratios will allow future dividend growth rates to be sustainably much higher.

While suspended dividend payments are likely to be transitory, perhaps one more structural outcome of the COVID-19 crisis will be that UK investors will reduce their over-reliance on UK companies to produce their ever-important dividend income. The US has a big(ger) part to play in this. 

 


Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies – these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing. 


MeDirect Disclaimers:

This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment and may be deducted from the invested amount therefore lowering the size of your investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

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