Ed Perks and Gene Podkaminer of Franklin Templeton’s Multi-Asset Solutions team discuss the attractions of alternative assets that can offer natural portfolio diversification. Over a longer-term horizon, they continue to believe global stocks have greater performance potential than global bonds, or alternatives, but this outlook will not be reached along a smooth path.

Major Themes Driving Our Views

The Global Economy Is Healing

Global economic activity is expanding after having passed through the trough in 2020’s second quarter and entered the recovery phase of the most severe hard-stop recession the world has ever seen. The nadir for business activity is behind us in most economies, although global trade is proving slower to recover than domestic consumption of goods.

The services sector of the economy has lagged, and we see signs that the pace of the rebound may have slowed. Efforts to return to normality have been incomplete. Attempts to restart mass tourism show that travelers remain cautious and the sudden reimposition of government restrictions will dissuade others. Although the locations have and will change, the growing realization is that localized flare-ups of the virus are an ongoing threat.

As a result, we are not surprised to see a cooling of the pace of recovery in some of the high-frequency data that are helping investors and policymakers monitor this fluid and fast-moving environment. Indicators of consumer spending on credit cards and bookings at restaurants have rolled over. We believed the recovery would be uneven since the very start of the COVID-19 crisis. Although the global economy is healing, we agree with the views of the central bankers, repeated recently by Bank of England (BoE) Governor Andrew Bailey, that the path forward remains extraordinarily uncertain.

Looking at the behavior of consumers, they seem to reflect this uncertainty by building up precautionary savings. We expect lingering impacts from the coronavirus crisis on unemployment to determine how quickly these savings are spent. Expectations of a sharp rebound have become well-established and are increasingly discounted in current market levels for risk assets. Political uncertainty may also contribute to an outlook that remains less clear than usual and presents an ongoing drag on business investment intentions. We see the risks to recovery as tilted to the downside, in part due to the second-wave infection threat. As a result, this leaves us with a relatively cautious view, encapsulated in our theme that sees “ongoing headwinds to global growth.”