• Franklin Templeton’s Multi-Asset Solutions team discuss how to play the heightened market volatility from the coronavirus and the oil shock.
• Their base case (60% probability) remains reasonably optimistic with only a mild U-shaped recession, moderate growth in virus cases and peak infections at end Q2. Mortality rate remains around 1% and global growth slows to 2.4% in this scenario.
• The more optimistic scenario (with a 10% probability) is for global growth at 2.7% with a bottoming in activity in early Q2. A pessimistic scenario sees global growth at just 2%.
• Markets are reacting to sentiment shifts and this is exacerbated by stretched valuations. Franklin continues to see a positive medium and long-term outlook for stocks, and more so than rates or cash. Although they do think a few more months of volatility remains ahead.
• Oil price drops are now a mixed blessing for the US given its status as a larger producer.
• Still good for consumers but can mean job losses in production, particularly fracking. Given the sector is largely debt financed stress here could translate into turmoil elsewhere in the credit markets.
• Relative valuation favours equities given low rates and weak inflation, bottom up forecasts also point to still-strong fundamentals.
Why does this matter? Franklin’s relatively upbeat forecasts could represent the consensus of investors. If so, this suggests there could be more downside in markets.
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