Consumers are still spending, but real incomes are under pressure and discretionary demand is softening.

In its latest macro report, the Franklin Templeton Fixed Income team notes that global markets will face a more stagflationary backdrop as inflation pressures intensify, growth diverges and central banks stay on alert. Tech and artificial intelligence investment will continue to support the United States, as Europe wrestles with a fresh inflation shock, and Japan shows resilience.

But rising costs, supply strains and policy uncertainty cloud the outlook.

The US economy regained some momentum in the first quarter (Q1), led by tech-driven investment and stronger federal spending, but the backdrop is becoming more stagflationary. Higher oil prices, supply-chain disruption tied to the Strait of Hormuz closure, and artificial intelligence (AI)-related demand are adding to inflation pressures that already appear structurally closer to 3% than 2%.

Consumers are still spending, but real incomes are under pressure and discretionary demand is softening, even as the labor market remains broadly stable. Tech and AI investment continue to support growth, although supply bottlenecks pose rising risks.

“Our base case for monetary policy remains a protracted hold, but policy is finely balanced, with meaningful upside risks to interest rates. The key determinants will be whether inflation becomes broader, and the labor market re-tightens or weakens. The US dollar remains trapped in a range, reflecting a balance of opposing forces,” says Sonal Desai, chief investment officer Franklin Templeton Fixed Income.

Europe’s macro narrative since the start of the Middle East conflict resembles a stagflationary shock, but it is not a 2022 déjà vu. Unlike the Europe-specific gas crisis, this is a global shock, and Europe’s improved energy diversification means energy availability is no longer the prominent concern it once was. Still, the eurozone enters this shock from a weaker cyclical starting point, with softer demand, less labor-market tightness, and likely less room for second-round inflation effects. Recent data broadly fit the pattern of higher inflation and weaker growth, though hard data have held up better than surveys suggest so far. Headline inflation rising above 3% supports the view that the European Central Bank (ECB) can no longer look through the shock. After the June hike, another adjustment is coming, likely in September. All things considered, the euro has remained relatively resilient.

Japan’s near-term story remains one of resilience on the surface, with first quarter (Q1) 2026 growth holding up better than expected on the back of strong exports and consumption. Still, the picture is not without strain, as supply constraints, rising prices, declining sentiment, and yen weakness threaten to weigh on activity in the coming quarters, even if fiscal support should cushion the economy near term. Inflation has been more muted in the headline data, largely because policy support is capping energy and education costs, but underlying price pressures remain intact and are likely to build as higher energy costs feed through. Against that backdrop, markets expect the Bank of Japan (BoJ) to hike in June, while the yen may remain range-bound unless policy turns materially more hawkish.

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Felicity Walsh

Franklin Templeton has launched two new active ETFs on the ASX, bringing its local active ETF range to nine products and adding to a global trend that has seen inflows into active ETFs double as a proportion of all ETF assets since 2022.

The new active ETFs are the Franklin Global Systematic Equity Fund – Active ETF (FGSE) and the Western Asset Enhanced Income Fund – Active ETF (FEIF). Unlike traditional index ETFs, both strategies aim to deliver consistent alpha while retaining ETF transparency and liquidity.

Active ETFs have topped $1.8 trillion globally, as both retail and institutional investors seek the accessibility, transparency and affordability of the ETF structure.

“Investors today want more choice in the ETF space,” says Felicity Walsh, Managing Director of Franklin Templeton Australia and New Zealand. “Our range of active ETFs are designed to bring together the liquidity and transparency of a listed structure with an active and intelligent approach to portfolio management.”

“We are leveraging the expertise of our investment groups and harnessing the full strength of Franklin Templeton’s global platform, spanning decades of market expertise and deep research capabilities – making all of that available in a format that suits how Australians want to invest today.”

Western Asset Enhanced Income Fund – Active ETF (FEIF)

“FEIF is designed for investors who want to do more with the fixed income portion of their portfolio,” says Anthony Kirkham, co-chief investment officer and head of Asia Pacific Investment Management at Western Asset Management.

“It offers a short-duration, high-quality credit strategy that seeks to generate meaningful income above the cash rate, while actively managing risk across sectors and individual securities. For investors looking for yield without taking on significant interest rate sensitivity, this fund offers a genuinely differentiated option as an active ETF.”

FEIF gives investors access to a diversified portfolio of Australian and global fixed income securities managed by Western Asset Management. The fund targets returns that exceed the Bloomberg AusBond Bank Bill Index by 1.5 to 2 per cent per annum, measured over rolling three-year periods.

The Western Asset Enhanced Income Fund returned 6.12 per cent over one year and 7.54 per cent per annum over three years (after fees) to 30 April 2026, compared with the benchmark’s 3.79 per cent and 4.16 per cent respectively.

The Western Asset Enhanced Income Fund (the managed fund) has Recommended ratings from both Lonsec and Zenith Investment Partners.

Franklin Global Systematic Equity Fund – Active ETF (FGSE)

“FGSE suits investors who want broad global equity exposure and are seeking an approach that goes beyond tracking an index” says Chris Floyd, Portfolio Manager at Franklin Templeton Investment Solutions. “Our systematic process analyses thousands of companies daily across quality, valuation, sentiment and other factors, seeking to identify those with the strongest return potential.

“The result is a style-neutral, diversified portfolio that aims to deliver consistent outperformance over time, one which we think is a compelling proposition for growth investors.”

FGSE offers a quantitatively driven, benchmark-aware exposure to global equities, managed by the Systematic Equity team within Franklin Templeton Investment Solutions (FTIS). The fund aims to outperform the MSCI World ex-Australia Index (after fees) over rolling three-year periods, with a tracking error of 2 to 3 per cent per annum.

Over one year to 30 April 2026 the Franklin Global Systematic Equity Fund returned 15.16 per cent (after fees), and 19 per cent per annum over three years, compared with benchmark returns of 15.06 per cent and 16.52 per cent. The fund has a long track record of outperforming the benchmark having launched in Australia over 20 years ago.

The Franklin Global Systematic Equity Fund (the managed fund) has Recommended ratings from both Lonsec and Zenith Investment Partners.

These two additions join an existing suite of seven active ETFs: the Betashares Western Asset Australian Bond Active ETF (BNDS), the ClearBridge Global Infrastructure Income Fund (Hedged) Active ETF (CIIH), the ClearBridge Global Infrastructure Value Fund Active ETF (CUIV), the ClearBridge Global Infrastructure Value Fund (Hedged) Active ETF (CIVH), the ClearBridge Real Income Fund Active ETF (R3AL), the Franklin Australian Absolute Return Bond Fund Active ETF (FRAR) and the Franklin Global Growth Fund Active ETF (FRGG).

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Sonal Desai

Franklin Templeton Fixed Income CIO Sonal Desai believes that as AI evolves at a faster pace, it will be a fluid situation, but identifying the industries and companies likely to win or lose in the AI revolution is a key priority for asset allocation.

“Investment strategy is never easy, but we have started this year with a remarkable confluence of shifting factors: technological, economic and geopolitical. Understanding how they will play out and interact becomes crucial to asset allocation,” she noted.

The artificial intelligence (AI) revolution and its potential impact is currently playing a dominant role in asset markets. “It has the potential to reshape our economy and disrupt most industries, but it is subject to profound genuine uncertainty, and it moves at high speed. Even for nimble-footed financial investors, it’s hard to keep up,” said Desai.

Through most of last year, the main story was the massive investment to build AI models and capabilities. Investors quickly bid up the valuations of the companies providing the “picks and shovels” for the AI revolution: Nvidia and the tech giants developing AI models.

“More recently, however, the sheer size of debt issuance underpinning this AI investment wave is becoming an important concern for markets. The focus has also shifted to the companies and industries that might suffer from AI competition, like software. Here there is high uncertainty, and obvious risks of short-term over-reactions.

“The focus on the potential losers comes partly from the fact that it’s hard so far to identify the companies and industries that can reap major efficiency gains thanks to AI. That’s because adoption of AI solutions at scale is likely to require more time. Companies need to identify the right AI models and solutions for their mission-critical areas; they will need to reorganise processes and operations and socialize the adoption. Adoption will also likely be uneven across both companies and industries.

“A second crucial factor is the differential distribution of investment opportunities across the world economy. Here the biggest structural story is the persistent rise of emerging markets. Over the past decade, and especially post-COVID-19, many emerging markets (EMs) have run prudent fiscal and monetary policies—in stark contrast with advanced economies.

“As a result, the EM asset class has already proved resilient to global macro disruption and should now find a more supportive macro environment in 2026. Therefore, on the EM sovereign side I see scope for some further spread tightening, as fiscal policies remain generally prudent and economic reform momentum continues. Meanwhile, I think EM corporate debt is likely to trade range-bound.”

“Europe looks attractive, but whether this is going to be just a cyclical story or turns into a structural one remains to be determined,” according to Desai.

“In the near future, European economies should benefit from a revival of investment policies and defense spending. Geopolitics plays an important role, as European leaders have converged on the need to bolster the continent’s own defense capabilities. For this to turn into a structural story, however, European governments will need to tackle long-overdue structural reforms, including reforms related to public spending. Rationalizing social safety nets seems indispensable to create the fiscal space for a prolonged public investment push. And simplifying regulations could go a long way toward unleashing the innovation and investment potential of the private sector. On both fronts, Europe has consistently disappointed. Courtesy of geopolitics, there is somewhat greater hope that this time might be different.

“I remain more bullish than consensus on the US economy. Households have demonstrated reliable resilience. The AI investment boom continues, and corporate investment seems to be broadening out from just AI. Productivity growth has accelerated. Last but not least, a new bout of fiscal stimulus should provide a boost in the first half of the year.”

Fiscal policy, however, is also the main cause of caution for the longer term. The fiscal deficit is projected to remain at around 6% of gross domestic product (GDP) for years to come. With debt held by the public nearing 100% of GDP and upside risks to interest rates, this is the Achilles’ Heel of the US economy. It can undermine confidence, puts upward pressure on funding costs, and raises the risk of a significant tax hike down the road.

The US dollar has remained under pressure on the back of its still-strong valuation and concerns about political polarization and the strength of US institutions, along with geopolitics. A more aggressive US foreign policy stance, which often relies on financial sanctions, has strengthened incentives for more countries to reduce their reliance on US dollar (USD) foreign currency (FX) reserves and on the dollar-dominated financial system. There are limits to the extent any country can decouple from the dollar, which still has a dominant share in global FX reserves, financial flows and trade payments. But at the margin it does reduce the USD’s attractiveness.

“Therefore, I believe the macro and geopolitical environment will continue to favor some diversification outside the US in sovereign, corporate and currency exposure, with EMs offering some of the most interesting opportunities. I would not take this case too far, however, given the lack of a credible alternative to the depth and liquidity of US asset markets, especially while they are supported by a robust growth story.

“To close, I would also like to reiterate my view that inflation is likely to remain stubbornly above target; with growth robust and the labor market showing signs of stabilisation, this suggests that the Federal Reserve’s easing cycle has already come to an end.”

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Felicity Walsh

Franklin Templeton Australia^[1] is pleased to announce that the Franklin Lexington Private Equity Secondaries Fund has been awarded a ‘Recommended’ rating by Lonsec.

Lonsec cited the manager’s “extensive track record in private equity secondaries and the strength of its global platform” along with a well-resourced investment team, as reasons for the rating.

“We are delighted to receive this second ‘Recommended’ rating demonstrating Lexington’s expertise in private equity secondaries investing. It also highlights Franklin Templeton’s ability to offer a broad range of high-quality public and private market opportunities for our wealth clients,” Felicity Walsh, Managing Director of Franklin Templeton Australia and New Zealand, said.

The fund offers an accessible way to invest in a diversified portfolio of private equity assets, mainly acquired through secondary transactions and co-investments. By focusing on secondary investments, including both limited partner (LP) and general partner (GP) led deals, it gives investors exposure to a type of asset that was once available only to institutions.

In Lonsec’s opinion, the focus on secondaries, particularly LP-led secondaries which involves acquiring LP interests in private equity funds or portfolios, “provides a diversified core exposure to private equity, while allocations to GP-led secondaries and in particular co-investments may increase opportunities for enhanced returns and fee efficiencies.”

“I am also pleased to report that the fund has been added to the major investment platforms HUB24, Praemium, and Netwealth, making this strategy more accessible to a range of wealth advisers and investors,” Walsh said.

In its report, Lonsec said that senior members of the Lexington investment team each brought “decades of experience and strong expertise in the highly specialised areas of secondaries and co-investments.”

“The Partners have overseen successful fund raises and investment outcomes across the firm’s closed-end flagship funds over an extended period. The Investment Committee ultimately responsible for the Fund are viewed as capable of managing the portfolio, while drawing on the expertise of the broader team,” the report said.

It also noted that there are over 80 investment professionals in the Lexington investment team worldwide who are dedicated to private equity and that key person risk was considered low.

“Lexington has a deep and experienced group of Partners, and as such the expertise and intellectual property necessary to manage this Fund is not concentrated to a few select senior staff,” Lonsec said.

———-

Notes:
[1] Franklin Templeton Australia Limited (ABN 76 004 835 849, AFSL 240827) (FTAL) is a part of Franklin Resources, Inc. and the Responsible Entity and issuer of the Franklin Lexington Private Equity Secondaries Fund.

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Felicity Walsh

Franklin Templeton Australia^[1] is pleased to announce that the newly introduced Franklin Lexington Private Equity Secondaries Fund has been awarded a ‘Recommended’ rating by Zenith, which cited its “scale and access to proprietary deal flow from multiple channels is a strength of the process.”

The Franklin Lexington Private Equity Secondaries Fund provides an opportunity to invest in an underlying diversified portfolio of private equity investments acquired through secondary transactions and co-investments within an accessible structure. Its focus on secondary investments, including limited partner (LP) and general partner (GP) led transactions, provides retail investors access to an asset class that was traditionally available only to institutions.

“We are pleased to have received this new rating so soon after the fund’s launch in Australia. This is a strong endorsement of Lexington’s capabilities in this asset class and our ability to deliver long-term growth opportunities to our clients in the wealth channel,” Felicity Walsh, Managing Director, Franklin Templeton Australia and New Zealand, said.

“Lexington has the scale and expertise to provide solutions for complex, multiple GP portfolios and acquire assets at attractive entry prices. This positions the fund as a compelling proposition for advisers and their clients seeking thoughtful exposure in this space,” Walsh said.

In its report, Zenith said “Lexington’s ability to complete due diligence on complex fund portfolios and form a granular view on the attractiveness of underlying companies is a key strength of the process.”

“Further, the team’s precision in modelling the sensitivities between acquisition discounts, future revenue and earnings growth and the forecast investment horizon, ensures that potential return outcomes fall within an acceptable range,” the report said.

Lexington has an 85-person investment team working on its secondaries and co-investment strategies. The firm is headquartered in New York with key personnel based in major regional centres including London and Hong Kong.

The underlying portfolio currently provides exposure to 13 PE sponsors and 38 underlying portfolio companies (as at 30 April 2025). At scale, the underlying fund is managed with a target liquidity sleeve of between 5% and 15%, and comprises money market and short-term debt instruments.

In Zenith’s opinion, “the portfolio construction process is applied consistently, achieving diversification across sponsors, sectors and underlying portfolio companies.”

Zenith said the fund “may be used to complement and diversify an investor’s allocation to global equities and should be funded from the growth allocation of a portfolio.”

Further, Zenith’s report stated that “Investors should consider this Fund with a minimum seven-year investment time frame. Furthermore, we highlight that this Fund is an accumulating share class, with all returns derived from capital growth.”

The fund utilises a feeder fund structure, and the Australian unit trust invests in an underlying fund domiciled in Luxembourg.

Lexington Partners is one of the world’s largest and most successful managers of secondary private equity and co-investment funds. The firm helped pioneer the development of the institutional secondary market over 35 years ago and created one of the first independent, discretionary co-investment programs 27 years ago. Lexington’s 26 partners are among the most experienced and highly regarded in the secondary market today, averaging 19 years together at Lexington.

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Notes:
[1] Franklin Templeton Australia Limited (ABN 76 004 835 849, AFSL 240827) (FTAL) is a part of Franklin Resources, Inc. and the Responsible Entity and issuer of the Franklin Lexington Private Equity Secondaries Fund.

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The US equity market has now corrected by approximately 10%, prompting investors to question whether this downturn presents an attractive buying opportunity or signals deeper underlying risks.^[1]

“To address this question, we shift our focus to technical and sentiment indicators, which form an essential part of our investment decision-making toolkit,” Chris Galipeau, Senior Market Strategist Franklin Templeton Institute notes.

“By analysing market price action, we aim to better understand investor behaviour. Our focus is on asset prices. We begin with an historic perspective. Since 1950, the S&P 500 Index has experienced 38 corrections, defined as declines of 10% or more. Of these, 26 occurred during periods of positive economic growth, while 12 took place during recessions. For each of these corrections, we then calculate the S&P 500’s returns over the subsequent 12 months and classified those outcomes based on whether they occurred during a recession or not. We then constructed average return trajectories to illustrate the typical S&P 500 performance following a 10% (or greater) correction.

“On average, the market rose 13%, on average, from its trough following non-recessionary market corrections.

“Our findings also reveal a key tactical consideration. On average, the market has bottomed within a few days of a 10% drawdown, irrespective of whether recession followed or not. And while market recoveries during recessions have tended to be weaker, during non-recessionary corrections the market typically has rebounded and set fresh highs over the ensuing 12 months.

“Notably, the ongoing correction has been rapid. The S&P 500 has shed 10% of its value in just 16 days, making it the fifth-fastest correction since 1950.”

That is unsettling. But history does not suggest that the speed of the decline impairs the recovery, he says.

“Beyond history, there are other reasons to believe the market may soon regain its footing. The recent market selloff compressed valuation multiples. For example, the forward price-to-earnings (P/E) ratio of the S&P 500 has slipped from 22.5 to 18 during this correction. Similarly, forward P/Es for technology and small-cap indexes have declined to one-year lows. Falling multiples indicate that stock prices are falling faster than earnings expectations. For long-term value-oriented investors, lower valuations present an opportunity to buy fundamentally resilient companies at a discount.

“Moreover, investor sentiment has turned sharply negative, as reflected in recent AAII surveys, where the percentage of bears has climbed to 60%, a level reached only a few times in history, and typically around major market bottoms.

“Interestingly, extreme pessimism is typically only seen in corrections of 20% or greater but is already present after today’s 10% decline. Sentiment is already at extreme levels.

“History suggests that fear often creates opportunities for long-term investors willing to accept near-term volatility in exchange for future price appreciation. With valuations now more attractive and sentiment deeply negative, this may be one of those moments.

“Other measures of sentiment concur. Our proprietary Fear & Greed Index (Exhibit 1) signals that investors are deeply concerned, which is typically a good contrarian indicator. Similar readings in the past have marked attractive entry points to add equity exposure.”

Exhibit1: Fear and Greed: Z-Score Model

Similarly, periods of elevated volatility often create dislocations in and within markets, creating opportunity for long-term investors. This past week volatility spiked, with the CBOE VIX index^[2] reaching an intraday high of 29.57 on consecutive days, a level historically associated with heightened fear and uncertainty. But as history shows, when volatility reaches extremes, it has often marked attractive entry points for investors.

President Trump has recently suggested that he is willing to accept short-term economic pain – even a recession – to achieve longer-term policy goals. As a result, recession fears have become one of the main risks weighing on Wall Street. “However, we believe it is far from clear how a recession would help resolve trade imbalances, nor do we see a recession as a likely near-term outcome,” he says.

“In fact, a snapshot of February’s incoming data paints a very different picture from the increasingly negative sentiment. Remaining data-driven, we note that the most recent employment data confirm that the job market remains on solid footing. Moreover, as the latest Consumer Price Index report showed, consumer prices rose at a slower pace than expected in February, keeping the door open for further rate cuts. Currently, markets are pricing in three cuts in 2025.”

Recoveries have tended to be faster and more substantial following non-recessionary corrections, while corrections that occur during recessions have typically more prolonged. Therefore, we believe it is important to emphasise that the Institute does not expect the US economy to enter a recession.

“Notably, despite the recent market selloff, the distribution of market returns continues to broaden, underscoring our key equity investment thesis of 2025. The equal-weighted S&P 500 Index has outperformed both the market capitalisation-weighted S&P 500 Index and the Nasdaq this year by 2.36% and 4.45%, respectively.^[3]

“Despite noisy headlines and elevated geopolitical uncertainty, value has outperformed growth and there has been a significant rotation across different segments of the market. Going forward, we expect a broadening trend to continue in the United States, as well as globally (e.g., European outperformance).

“In sum, corrections offer opportunity. Moreover, if we assume the US and world economies avoid a recession, the recent market correction and bout of volatility present an ideal opportunity for long-term investors to increase equity exposure to our broadening market theme.”

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Notes:
[1] S&P 500 drawdown from February 19, 2025 to March 13, 2025 was -10.13%. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
[2] VIX is the ticker symbol and the popular name for the Chicago Board Options Exchange’s CBOE Volatility Index, a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. Past performance is not an indicator or a guarantee of future performance. Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
[3] Source: Bloomberg. Analysis by Franklin Templeton Institute. As of March 14, 2025.

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Sonal Desai

Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income believes markets have been excessively worried about stagflation risk and are now too confident that the Fed would rush to support growth even if inflation turns back to a rising path.

“Financial markets saw this week’s Federal Reserve (Fed) policy meeting as dovish. I’m not so sure. The Fed now projects slower growth and higher inflation compared to its December forecasts. The reduction in expected growth is meaningful, by 0.4 percentage point (pp) this year and 0.2 pp next year—though the unemployment forecast is virtually unchanged, with a mere 0.1 pp uptick for this year, probably reflecting tighter immigration policy. Core personal consumption expenditure inflation has been revised higher by 0.3 pp this year, but with no change for 2026 and 2027. In other words, the likely bump in inflation caused by tariffs is expected to be, yes, transitory. Some reporters baited Fed Chair Jerome Powell on the “transitory” label, which became infamous after the persistent inflation of 2021-2024. This time, however, there are solid reasons to expect that an acceleration in inflation would not last. Unlike in the post-pandemic period, the supply shock (from tariffs, in this case) is not expected to be validated by a massive expansion in government expenditures.

“On policy interest rates, the median of the “dots” still signals two rate cuts this year, the same as last December. That’s why most investors saw this as a dovish shift: The Fed projects higher inflation but still intends to cut rates, and by the same amount as previously.

“I disagree with this interpretation. Powell explained that, first, the Fed’s baseline expectation for now is a temporary shock to inflation, which the central bank would rightly look through; but second, more importantly, the main reason why the policy forecast is unchanged is that policy uncertainty is now so high that the Fed cannot yet predict with any confidence whether it will need to keep rates higher or lower. In other words, the Fed is keeping all its options open.

“I would also point out that, while the median of the dots still indicates two rate cuts this year, the mean has shifted clearly in a hawkish direction, toward one rate cut only.

“Several Federal Open Market Committee members clearly acknowledge that it would be especially risky to cut rates given the possibility that inflation might reaccelerate. Moreover, the Fed does not think that a significant growth slowdown should be taken for granted yet, for two reasons.

“First, that while surveys have recorded weaker consumer confidence, hard data show the US economy is still in good shape, with a solid pace of economic activity and the labor market in a “low hiring, low firing” equilibrium with a still low unemployment rate.

“Second, that the macro outlook will depend on the administration’s entire economic policy package, including not just tariffs and immigration, but also fiscal policy and deregulation.

“Unsrprisingly, I agree on both counts, as I have pointed out earlier that, while tariffs and immigration have come up-front, concrete action on deregulation and tax policy is expected to follow, and these are the two elements that should help lift growth and contain inflation.

“The key issue right now is that “uncertainty is remarkably high,” as Powell put it—the fog of trade war. The question is how to handle it.

“For the Fed, as for private companies, the key question is how long to wait before taking action. The Fed is, in a way, forced to wait longer, even at the risk of finding itself behind the curve. Not knowing yet whether the risks will be skewed toward significantly lower growth or sharply higher inflation makes it much harder for the Fed to act pre-emptively on rates.

“For companies, the defensive strategy is to cut back on investment first, and then on employment. As long as there is a good prospect of pro-growth policies kicking in, companies have reason to wait, so as not to miss out on the upside. The longer we go with volatile threats of tariffs and no concrete progress on deregulation and taxes, the more companies will need to worry about the slower growth scenario and will be tempted to pull back.

“Equity markets rallied after the Fed’s press conference, but perhaps for the wrong reason. I don’t see the Fed as turning more dovish. I have argued for some time that inflation pressures are set to remain elevated above the Fed’s comfort zone. If higher tariffs compound these pressures, the Fed will have to think twice about any further rate cuts. And if growth slows significantly at the same time, the Fed might find it has run out of silver bullets.

“Downside risks and flagging sentiment bear watching; the longer the uncertainty, the higher the risk. But the reason to be more optimistic on the outlook is that growth is still solid and pro-growth policy measures are still in the cards. Therefore, I am still sticking to my call for at most one rate cut this year, with some probability of none.”

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Sonal Desai

Franklin Templeton processes the signals

The new US administration has started off with a whirlwind of actions, plans and ideas, which in turn have generated a frenzy of reactions both at home and abroad. All this has resulted in a lot of information to process and a lot of noise to filter out. As a consequence, assessing the balance of risks to the macroeconomic environment has become especially hard.

Franklin Templeton Fixed Income CIO Sonal Desai shifts through the noise and reflects on the new US administration’s plans, ideas and actions so far, and what they might mean for the US economy and fixed income investors.

“Two of the administration’s early lines of action have the potential to cause significant disruption, and this in turn has fuelled fears of an adverse impact on economic activity. Tariff threats are the most obvious example, as they could lead companies to postpone investment while they figure out how they might need to reconfigure their supply chains or absorb higher input costs. The second is cuts in public expenditure and employment driven by the new Department of Government Efficiency (DOGE). These have raised the fear of curtailments in public services as well as a direct negative hit to overall employment.

“We have seen some signs of weakness in recent data. Of particular concern is the decline in January consumer confidence recorded by both the University of Michigan and the Conference Board,” notes Desai.

A deceleration in consumer spending has accompanied the drop in confidence, and it contributed to a downgrade in expected first quarter growth by the Atlanta Federal Reserve (Fed), although the main driver by far was an acceleration in imports. The disappointing February ISM manufacturing data also suggests a weaker start in the new year.

“The key underlying issue, in my view, is the sequencing of policy measures. Most of the action so far has been focused on tariffs and on DOGE. We have seen less concrete progress on deregulation and tax cuts, the two areas that hold the key to boosting economic growth while containing inflation.

“As a consequence, for the moment, households and businesses are feeling heightened uncertainty (predictably played up by the media), little relief on price pressures, since inflation remains elevated, and no definite good news on taxes.

“But we must remember that it’s early days; this administration has been in office for barely over a month. The immediate focus on cost cuts and personnel changes throughout government agencies in itself makes it hard to simultaneously move forward with deregulation. It is disrupting the very same agencies responsible for reforming the regulatory frameworks in their respective areas. This delay in deregulation efforts is disappointing, but we do not yet have reason to doubt the administration’s commitment in this regard. President Trump has often emphasised that lightening the regulatory burden is a priority, and the track record of his first term confirms it. Also, the decisive approach of DOGE to making the bureaucracy leaner and more efficient seems to portend a similar attitude toward regulation.”

Meanwhile, the House and Senate have recently passed two different budget bills that include substantial tax cuts as well as planned spending reductions. Progress on this front will be harder and will need more time. Congress and the administration need to reconcile ambitious tax-cut goals with the need to reduce the budget deficit to more manageable proportions than the 6%‒7% of gross domestic product average of the last several years. Since cuts to Social Security and Medicare seem to be off the table, achieving appropriate spending cuts will be hard, so that agreement on a new fiscal framework will require a lot more work.

“Some help will come from DOGE, which appears to be making steady progress in identifying government expenditures of questionable value. This is hardly surprising. Last year, the Government Accountability Office estimated about US $240 billion in improper payments in fiscal year 2023, and a cumulative US $2.7 trillion over the past ten years. (Improper payments are defined as overpayments, payments made to ineligible people or entities, and, in some cases, fraud.) There is definitely room for savings. However, what we’ve seen so far does not change my view that it’s going to be hard to put US fiscal policy on a sounder long-term trajectory without addressing entitlements. DOGE can help the budget and support stronger growth through a more efficient public sector, but it won’t solve the long-term fiscal challenge, which remains a crucial policy issue for both the president and Congress to tackle.

“On balance, the new US administration is still moving in the direction of growth-enhancing policy changes. The accompanying uncertainty poses some risks, and we need to keep a close eye on both confidence measures and activity indicators. I mentioned above the recent drop in consumer confidence, which causes some concern. On the other hand, the Conference Board also recorded a sharp increase in CEO confidence, which remains a strong show of optimism in the economic outlook. And while personal consumption decelerated in January, we saw a similar deceleration in January last year, and it was followed by a healthy rise through 2024.

“Overall, economic activity remains resilient, and the labor market is still in very good shape. Concerns about the potential negative impact of tariffs on growth are reasonable but should not be exaggerated: the United States is a large and mostly closed economy, and trade has a limited effect on growth. We need to be watchful, but pessimism would be very premature, in my view.

“I still expect that the US economy will grow above its potential this year.

“I also still expect inflation pressures to remain resilient, with headline inflation to end the year around current levels. And as the Fed has already signaled caution and identified tariffs as a potential inflation risk, I still believe the current easing cycle might be over or nearly over, even if markets have recently moved to price two additional rate cuts instead of just one.

“A slowdown in economic activity might mitigate at the margin the upward pressures on bond yields, but not by much, especially if fiscal policy remains as loose as it currently is. I still expect the 10-year US Treasury yield to be in the 4.75%-5% range by year-end, but lack of progress on deregulation could keep us closer to the lower end of my narrow range. Conversely, a significant further expansion in the budget deficit could push yields above the 5% threshold.

“We can expect noise and volatility to remain elevated. But the one thing we should be watching closely in the coming weeks is progress on tax reform and on deregulation, with its attendant positive jolt to confidence, because these are the keys to a sustainably strong growth outlook,” noted Desai.

Ends

Please contact Simrita Virk (simrita@capitaloutcomes.co) for any media queries.

About Franklin Templeton

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organisation with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company offers specialisation on a global scale, bringing extensive capabilities in fixed income, equity, alternatives and multi-asset solutions. With more than 1,500 investment professionals, and offices in major financial markets around the world, the California-based company has over 75 years of investment experience and A$2.5 trillion in assets under management as of September 30, 2024.

For more information, please visit www.franklinresources.com and follow us on LinkedIn, Twitter and Facebook.

This publication is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Any views expressed are the views of the fund manager as of the date of this document and do not constitute investment advice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole.

There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein.

The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance.

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Reece Birtles

Franklin Templeton has announced the launch of the Martin Currie Real Income Fund – Active ETF, an active ETF now available on the ASX under the ticker R3AL, further expanding its suite of exchange-traded investment solutions for Australian investors.

The Martin Currie Real Income Fund has a proven 15-year track record, delivering higher income from reliable dividends alongside capital growth.

With an ETF structure, R3AL provides Australian investors with convenient access to the same long-term growth and attractive income characteristics as the Fund.

Key features include:

• Investments in essential building blocks of society have low economic sensitivity which typically exhibit lower total volatility than the broader market;
• High-quality assets with pricing power and inflation protection;
• Multi-sector blend offers broad and diverse opportunity set while avoiding concentration risks; and
• High transparency of listed pricing and liquidity benefits not typically found in direct or unlisted funds.

The Fund is managed by Portfolio Managers Ashton Reid and Andrew Chambers, in collaboration with the broader Martin Currie Australia investment team led by Chief Investment Officer Reece Birtles.

Reid highlighted, “With ongoing equity market volatility, investors are seeking stable and growing income streams. Real Assets are the backbone of society, so even in slower growth periods they offer a compelling, lower-risk income exposure.

“With positive earnings and dividend revisions now improving for quality Real Assets, the portfolio fundamentals look good. Unlike the unlisted world, listed Real Assets have now priced in higher interest rates so our portfolio offers attractive valuations.

“The investment universe includes diversified exposures to three listed Real Asset sectors – Real Estate Investment Trusts (REITs), infrastructure and utilities – from Australia and global developed markets that are driven by three secular megatrends. They include population growth which means more customers every day to maintain pricing power, energy demand that supports renewable generation, grid enhancements and electrification initiatives and the explosive technology and data driven by AI boosts demand for data centres, fibre networks and telco towers.

We see consistent yield and rising income growth, which makes for an appealing total return in an uncertain market.”

Chambers added, “Our diversification focus makes us highly differentiated from typical real asset offerings.  Concentrations in single sleeve global portfolios, especially towards the US, mean they are Global in name only, while Japan and Europe’s population peaks are Real Asset red flags that shouldn’t be ignored.”

“This launch underscores our ongoing commitment to deliver sophisticated yet accessible investment options to Australian investors,” said Felicity Walsh, Managing Director of Franklin Templeton Australia. “R3AL complements our existing range of active ETFs, including the Franklin Australian Absolute Return Bond Fund (Managed Fund) (ASX: FRAR) and the Franklin Global Growth Fund (Managed Fund) (ASX: FRGG).

“ETFs are increasingly being added to asset allocations across investment portfolios due to their flexibility, cost efficiency and ease of access. By bringing the Martin Currie Real Income Fund into an ETF structure, we are aligning with the evolving preferences of investors who want simple, transparent and scalable solutions to grow their wealth.

“The delivery of this income enhancing ETF reflects the firm’s ongoing dedication to empower investors with innovative tools to help them achieve their financial goals, backed by global expertise and deep local market insights,” said Walsh.

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“We are pleased to announce five new internal promotions of Franklin Templeton team members in recognition of their valuable contributions to the business and its growth trajectory,” Franklin Templeton’s Managing Director and Head of Australia and New Zealand, Felicity Walsh, said.

“These promotions recognise the important and positive contributions of these individuals, while highlighting our continued commitment to providing opportunities for ongoing employee growth and development,” she added.

Louise Thompson, previously Head of Research and Consultants for the past four years, has been promoted to lead the business’s retail distribution efforts.

“As the industry landscape continues to shift, Louise’s experience and strong relationships with the research and consultant businesses in this market position her well to lead our incredibly talented distribution team in identifying solutions aligning to the needs of our clients,” Walsh said.

“Louise joined Franklin Templeton nearly two decades ago as Senior Manager, Distribution and her career has developed in tandem with the growth of our Australian business. This promotion recognises her incredible leadership skills and is a testament to her years of dedication in building the Australian retail business,” Walsh shared.

“I am delighted to take on this new role. I have enjoyed my years at Franklin Templeton in a variety of roles covering both retail and institutional clients and look forward to contributing to its further growth in the Australian market. This organisation has provided me with many challenges and opportunities to further my career,” Thompson added.

In other promotions, Jenine Hayman will be promoted to the position of Senior Director, Research and Consultants, Aimee Corsiglia will be promoted to Marketing Director and Oliver Britton will be promoted to Sales Director. James Cummane has also been promoted to the position of Business Development Manager.

“These promotions will help the business extend our reach to service to our clients via multiple channels in an evolving digital-first environment and strengthen our relationships with consultants as the industry landscape continues to consolidate,” Walsh said.

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