2023 may not be without its hurdles for global financial markets. That’s what it predicts Jason Xavier, Head of EMEA ETF Capital Markets di Franklin Templeton, according to whom it will be a good year to play defensively, aiming for maximum income and tactically looking for a weakening of the US dollar, in order to switch to a possible allocation to emerging markets. Here are the three predictions outlined by Franklin Templeton’s top manager.
Higher inflows into multi-factor Smart Beta ETFs
Xavier’s first prediction focuses on defensive play. To this end, the report reads, “we are convinced that starting this year the growth of multi-factor smart beta ETFs, especially those focused on quality and income generation, should be higher than that of the related assets under management (AUM), considering that the decade of ‘cheap’ money and interest rates at record lows is now over. The era of such accommodative monetary policy has certainly benefited both ETFs and index funds.
In particular, continues Xavier, “market cap-weighted systems that often significantly overweight growth stocks have proven to be a good ‘buy-and-hold’ strategy, providing solid annualized returns. However, the current new interest rate environment calls for a more tactical approach to asset allocation and equity market exposures. ETF investors may therefore begin to look favorably towards alternative weighting programs, such as multi-factor smart beta ETFs, which also take into account the fundamentals of the securities, rather than limiting themselves to their market capitalization. We are convinced that there will be strong growth in this segment next year”.
Bond and dividend ETFs on the podium in 2023
According to Xavier, “With inflation still high and the cost-of-living impact we are all feeling, consumers are expected to look to cut fixed expenses as much as possible to maintain higher liquidity ahead of the uncertainty of 2023. it’s different from an investment point of view. A more tactical approach is needed to deliver solid returns, however we believe that yield and income optimization will undoubtedly play a greater role in portfolio construction over the coming year. We are therefore convinced that next year they will be able to see good inflows ETFs with global and regional dividend payoutsespecially those that select the best stocks based on fundamentals through a quality and value approach”.
As for fixed income in 2023, explains Xavier, “It will certainly be an important presence in investors’ portfolios, considering that all eyes continue to be on the US Federal Reserve (Fed) in view of an eventual turnaround. With rates expected to fall in 2023, fixed income is a very attractive asset class. We also believe it can offer attractive returns at lower risk than in recent years. Duration is a key factor, and we believe the importance of selecting bond assets that can balance risk and return makes investment grade corporate bonds a strong competitor in the fixed income space. Furthermore, the integration of these fundamentals with the consistently positive elements supporting environmental, social and governance (ESG) investments makes euro green bonds another possible attractive element for 2023”.
The appeal for equity ETFs on individual emerging countries is growing
Finally, Franklin Templeton’s top manager advises “selecting countries that are ‘friends of the United States‘ and that can benefit from sectors that are leaders in innovation, such as technology and healthcare, and expose themselves to markets that could steal market shares manufacturing in China”. These could be two interesting solutions for 2023 but, reads the report, “We therefore prefer to position ourselves on South Korea, Taiwan and India versus an allocation to emerging markets in general”.