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FRANKLIN TEMPLETON THINKSTM GLOBAL INVESTMENT OUTLOOK

How much further can global growth fly?

Q3 2018

Is Synchronized Global Growth Coming to an End?

Trade Tensions: Bark or Bite?

A Healthy Market Skepticism

WHAT ARE THE RISKS?

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The information provided is not a complete analysis of every material fact regarding any country, region, or market. Comments, opinions and analyses contained herein are those of the speaker and are for informational purposes only. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of August 28, 2018, and may change without notice. The analysis and opinions expressed herein may differ or be contrary to those expressed by other business areas, portfolio managers or investment management teams at Franklin Templeton Investments. Opinions are intended to provide insight on macroeconomic issues and commentary is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy.

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franklintempleton.com/outlook2018 How much further can global growth fly? 1

A number of market headwinds, including trade

tensions, rising interest rates and a general fear the

long-running US economic expansion may be facing

fatigue have cast a shadow over the markets in the

first half of the year. Nonetheless, US economic growth

managed to hit a four-year high in the second quarter,

and the US equity market marched along to what

many regard as its longest bull run in post-WWII history.

Franklin Templeton’s senior investment leaders weigh

in on whether synchronized global growth can continue,

why worries about trade wars may be overblown and

why opportunities for investors may be more idiosyn-

cratic or divergent moving forward.

Stephen H. Dover, CFA Head of Equities

Michael Hasenstab, Ph.D. Chief Investment OfficerTempleton Global Macro

Christopher J. Molumphy, CFA Chief Investment OfficerFranklin Templeton Fixed Income Group®

Edward D. Perks, CFA Chief Investment OfficerFranklin Templeton Multi-Asset Solutions

Manraj Sekhon, CFAChief Investment OfficerFranklin Templeton Emerging Markets Equity

Featured senior investment leaders

Key Takeaways• Generally, we expect positive global economic growth to continue for the

near-term, led by the United States and supported by continued profit and earnings growth.

• We believe growth has peaked in Europe and is decelerating, while economic data in Japan continues to look soft. The US economy is bene-fiting from stimulus measures including a reduction in regulations as well as tax cuts.

• The case can be made for continued strength in emerging markets on the heels of favorable demographics and technological advancements. While some emerging markets have been experiencing significant challenges, broadly we think many emerging markets should be funda-mentally stable and offer opportunity for selective investors.

• China continues to de-leverage the shadow banking sector which we believe has positive long-term implications. We will probably see more of a US and China tit-for-tat trade dispute, as opposed to a full-out trade war. Our baseline is trade tensions probably increase volatility but likely will not impact fundamentals much.

• We think market skepticism is healthy as it balances out overexuberance in the market. And what worked in the last decade probably is not necessarily going to work going forward. We think it’s about applying research to find opportunities best suited for growth in the current market conditions.

2 How much further can global growth fly? franklintempleton.com/outlook2018

Is Synchronized Global Growth Coming to an End?

do not foresee a broader emerging-market crisis, or major slowdown in global growth.

Michael HasenstabI think the United States is going to lead the pack in the growth cycle among developed countries. The other major economies outside of the United States are showing less potential. Growth has peaked in Europe and is decelerating–it’s not a collapse, but it’s decelerating. Arguably, Japan is still kind of soft as well, and some of the major emerging markets have run into some pretty big headwinds, but broadly I think many emerging markets should be fundamen-tally stable.

Stephen DoverThere is an incredible amount of stim-ulus in the US economy now, including a reduction in regulations as well as tax cuts. The United States came out of a very long recession in the wake of the GFC. We are still seeing the rebound show up in US corporate earnings, which grew 25% year-on-year in the second quarter, the most growth we have had since the GFC started.1 Investment seems to be driving some of this growth, which is encouraging. It is primarily focused in technology and in a few industries, but it is encouraging in that growth hasn’t been dependent on just the consumer.

Ed PerksSince the 2007–2008 global financial crisis (GFC), rising corporate earnings and profit margins have supported the global recovery, although we are monitoring growth momentum as we are seeing more desynchronization throughout the world at this time.

In the United States, monetary policy is becoming less accommodative, but fiscal policy looks set to pick up the slack. We are carefully monitoring infla-tion and the potential for increased market volatility. Generally, we expect continuation of positive global economic growth led by the United States. We still expect a small uptick in capital spending as the “America First” Trump campaign continues. The increased spending has helped fuel a modest rise in US productivity, which has offset any wage gains and supporting margins. Lastly, the US consumer remains on solid footing given the strong US employment backdrop.

Meanwhile, the eurozone growth slump appears to be moderating, according to the most recent leading economic indicators. China continues to de-leverage the shadow banking sector, which we believe has positive long-term implications. Furthermore, China’s leading growth indicators have been stable after a very strong first half of the year. We see some evidence of weakness throughout other emerging markets, but believe most of the volatility stems from idiosyncratic shocks; we therefore

Q: Global growth still seems to be quite synchronized and relatively strong. What do you see as the primary drivers for global growth now?

US CORPORATE EARNINGS CONTINUE TO GROWYear-Over-Year US Corporate Earnings-Per-Share (EPS) Growth (%)As of August 31, 2018

130%

110%

90%

70%

50%

30%

10%

-10%

-30%

S&P

500

Ener

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Disc

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271%

Indu

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Fina

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ls

Mat

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Info

. Tec

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Tele

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are

Real

Est

ate

Utili

ties

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AEarnings growth (%)

Next 12 months, year-over-year EPS growth Last 12 months, year-over-year EPS growth

Source: Franklin Templeton Capital Market Insights Group, S&P, Dow Jones, Bloomberg.

1. Source: Franklin Templeton Capital Market Insights Group, S&P, Dow Jones, Bloomberg.


Impact of US Tax Reform

Q: How do you think fiscal stimulus, including recent US tax reform, is affecting the outlook for the United States right now?

Michael HasenstabI think fiscal stimulus at the margin is a positive. I think the tax reform is probably more significant because that has allowed companies to finally get some clarity and make investment deci-sions. And I think in terms of growth, the most important has actually been deregulation. Deregulation is really the trigger for investment growth.

Ed PerksWe believe fiscal stimulus was one of many factors driving US economic growth, along with steady monetary policy, reduced regulation and a broadly supportive corporate environment. Amid a strong growth environment, the inflation backdrop continues to firm but remains relatively modest. We continue to believe that global forces—such as supply chains, technology, and labor supply—are putting downward pressure on core-goods inflation, which in turn is keeping inflation in check. Monetary policy is able to gradually tighten, which remains supportive for corporate America.

Stephen DoverIn the US equity market, I would note we’ve seen the biggest earnings impact within companies whose tax rates were cut the most. They tend to be

smaller companies and tend to be domestic companies. There has also been some positive movement with regard to capital spending. Changes in the regulatory environment, and more certainty therein, are clearly very stimulative. As such, we have seen a positive outlook going forward within the business community generally.

I think the old US tax law favored importers over exporters, so that has changed. We have a more equal playing field, and also, earnings that are over-seas can come back to the United States. In addition, we have seen the benefits of tax reform materialize in the form of acquisitions, stock buybacks and more new investments.

Chris MolumphyDeregulation is an issue that has not received much press. But frankly, it has probably had as much of a positive impact on the corporate sector broadly over the past couple of years as anything else. With respect to US tax reform, it was really all about corporate tax reform and putting US companies on an equal playing field globally. Frankly, prior to that, the United States was just not competitive from a corporate-tax standpoint. Tax reform has been beneficial and these benefits should be sustainable, in our view. And as noted, we have seen early signs of growing corporate investment and capital expenditures, and that’s some-thing we think will likely sustain itself as well in coming quarters.

Despite this healthy backdrop, the US equity bull market seems to be one of the most unloved bull markets that we have ever had—some have even called it the most hated bull market.

Manraj SekhonThe data is very clear on this: in 2017 emerging markets accounted for 59% of global gross domestic product (GDP) growth in US dollar real terms; China alone contributed 27%, while the United States contributed only 16%.2 Admittedly, 2018 may be rather different given the strengthening of the US dollar but the long-term trend is evident.

We’re not only witnessing a shift in the geographic epicenter of GDP growth to the East, but even within emerging markets there has been a transformation in the drivers of growth. For instance, several years ago China overtook the United States and Japan in terms of total patents filed, and this is but one of many indicators of the shift towards innovation, technology and more broadly the “new economy” that is taking place. The much-vaunted demographics of emerging countries are at play too, both in terms of consumer penetration as well as “premiumization,” whereby demand is rising not just for cars, but even luxury brands.

The commodity story has been losing its relevance for a decade. State-owned enterprises digging coal out of the ground, for example, are no longer the only driver of earnings. Today, it’s also private sector e-commerce and gaming giants. While China has led this shift, we see similar trends across the asset class as a whole.

2. Source: The World Bank, GDP (constant 2010 US$), from 2016 to 2017.


There are pockets of emerging markets that we think have been very responsible.”— Michael Hasenstab‘‘Monetary Policy Around

the World

Q: Let’s spend some more time on monetary policy. Where do you see us in the US credit cycle?

Chris Molumphy Clearly, the United States is pretty far along in the economic cycle. US GDP growth of 4%+3 is likely unsustainable in our view, but even if it normalizes to 2.5% to 3%, that still represents a good pace of growth. US fundamentals appear pretty solid right now. Consumer savings rates look healthy and consumer confi-dence is near record highs. In our view, the health of the consumer, combined with a solid corporate sector, bodes well for the foreseeable future.

Corporate credit is by and large expen-sive on a historical basis, but despite that, we think the credit cycle still has legs. We think market fundamentals remain very good. As an investor, if you are doing your due diligence in the corporate arena and staying on top of your credit research, you typically find lead indicators of credit deterioration. We haven’t seen worrisome signs of deterioration yet, so we are bullish on a shorter-term basis. That said, we are clearly aware of the age of the US cycle and watching for initial signs a turn may be coming.

The Federal Reserve (Fed) seems likely to continue raising its benchmark interest rate this year and next but I think the important point to emphasize is that the Fed is moving toward a more neutral rate, which it has communicated as roughly 2.75%–3%. The neutral rate represents the balance between managing the risk of inflation while not

dampening economic growth. In our view, that’s a pretty healthy place to be. Quite frankly, the US economy has a lot of momentum, so we think the Fed should be raising interest rates. It should be getting its benchmark rate back up to neutral so it has some ammunition for the next economic cycle if needed.

The Fed has communicated it will likely have to raise rates up to 3% and possibly beyond to keep the economy from overheating and triggering a raise in inflation. Meanwhile, the market seems to be thinking rates may move up a bit this year and next, but should peak around 2.50%–2.75%, so there’s a bit of a disconnect in terms of where the peak in rates should be. Ultimately, the Fed’s decisions will be data dependent—so it can change its view—but we think it’s a healthy sign for the Fed to remain on its tightening path for now.

Michael HasenstabMarkets have appeared to place a lot of focus on the speed and extent of rate hikes, but not placed enough attention on balance-sheet unwinding. The Fed’s balance sheet has tremendous implica-tions for asset prices. I think the Fed can anchor front-end rates, but mid-to-longer-term rates have to do with inflation expectations and balance sheet adjustment. It’s difficult to find any new major deflationary dynamics: recent trade disputes are somewhat inflationary, wage pressures are starting to pick up, the United States is at full employment, and economic activity is certainly growing above potential. Overall, dimin-ished bond-buying from the Fed and inflationary pressures should push US Treasury yields higher.

Meanwhile, the European Central Bank (ECB) and Bank of Japan (BOJ) obviously have been very dovish. But there are pockets in emerging markets where we have seen them actually lead the pack from a policy standpoint. And I think that’s a lot of what’s behind currency performance in emerging markets. If a country’s policy-makers lead, then there is protection. In Turkey’s case, the theory was that high rates caused inflation, so they kept rates low, which obviously created a problem. But, it’s a lot more variant among other countries—there are pockets of emerging markets we think have been very responsible.

Mexico, for example, has done what a central bank should do—buy insurance. They have hiked rates, so that if and when there is a shock, they have an ability to react. And I think you have seen a few emerging markets, when faced with a shock, pursue responsible monetary policy.

Eurozone’s TrajectoryQ: What do you think is the trajectory right now for the European Union (EU), economically and politically?

Michael HasenstabEconomically, there has been a moderate deterioration in the eurozone. We have seen a pretty big spike in Italian govern-ment bond yields over the course of the

3. Source: Bureau of Economic Analysis, as of June 30, 2018.


for example. The location where shares of companies are listed and where their economic exposure lies are often quite different.

Italy is also one of our worries, and to some degree, Turkey. Turkey has been the stop for a flood of immigration. There is an agreement between Germany, the EU, and Turkey to stop immigration and if that were to turn bad, I think there could be an increase in immigration problems in Europe again.

Chris MolumphyWe would tend to agree that slow growth seems likely in Europe over the next couple of years. From a fixed-income standpoint we really don’t see tremendous values there, but we are looking at individual situations where there may be some disarray for potential opportunities. Overall, we see the region as being pretty stable, but likely a lower-return environment.

Ed PerksOur Franklin Templeton Multi-Asset Solutions team holds a less-favorable view on Europe than some other regions amid political concerns that remain at play; the far-right movement has increased in both popularity and individual-country impact. Positive economic headlines are slowing in pace, although we note that leading economic indicators (purchasing managers indexes, for example), appear to have stabilized at solid levels. Furthermore, equity valuations appear reasonable to us relative to potential reward.

Regarding fixed income, European government bond valuations appear especially full in our view, where term premiums are the lowest among other government bonds. The ECB’s quantita-tive easing program is scheduled to end in December and we worry about the potential impact it may have on the corporate bond market. Lastly, some headline risk remains due to Italy’s new government budget proposition.

year, reflective of a very populist and fragmented regime. Populism leads to and is often tied with nationalism and tends to look inward, but the eurozone politically only works if countries are integrated and act as a common community. I think the exact reverse is happening now. As long as economic activity is okay and there are no real big shocks, the political system won’t likely be tested. The question will be when we see the next economic downturn, or if there is a shock in Italy, or some other type of shock, will Europe as a community come together like they did in 2011? Or, will countries decide to sort of shut their borders and turn inward?

Stephen DoverIn Europe, there is a very big difference between the economies and the equity markets. There are a lot of global companies that have very little domestic exposure—this is what we found in many cases in the United Kingdom,


4. Source: Word Trade Organization, “Strong trade growth in 2018 rests on policy choices,” April 12, 2018.

accept TPP policies under the terms of NAFTA. I think Mexico is an encouraging case study of how there can be a lot of bluster and then at the end there’s a reasonable solution.

Chris MolumphyIt is noteworthy that the US equity market has by and large looked past the trade-related headlines. I agree we will probably see more of back-and-forth in this regard, but in our view, it doesn’t seem like these issues will have a significant impact on global growth. Our baseline is it probably increases market volatility but doesn’t impact fundamen-tals all that much.

Stephen DoverI think there is too much fear around the issue of trade. There are a lot of political issues and even defense issues involved in this—particularly with China. Just to give you an idea how important trade is, trade growth has outpaced GDP growth over the last 20 years or so.4 If one were to examine one factor, trade is the single most important one in driving global GDP growth. Perhaps it is less important in the United States, but if you look at what has driven the amazing growth in emerging markets over the decades, it is trade. Trade has literally pulled more people out from poverty than anything else. So, it is extremely important.

The United States had led the world in trade since World War II and had been willing to have lower tariffs than other countries, but probably it is time to relook at some of the older trade deals. China is one of those countries where, when it was starting to emerge, was the beneficiary of some very favorable trade deals. But China doesn’t need that support in the same way anymore. China has a lot of very big projects that are quite competitive with developed economies.

Ultimately, I think trade reform is prob-ably going to be good for China; it should be more stable. The hope is that we end up with freer and fairer trade. Since US growth has been so strong, the United States is in a position where it can be more forceful right now. But that can change, so from an equity point of view, I would be very careful about overplaying this issue as an invest-ment theme.

Manraj SekhonThe reality is that we have no special insights when it comes to predicting the trade policies of the current US administration, so instead we aim to focus on our area of expertise—the changing dynamics on the ground in emerging markets.

Undoubtedly trade tariffs upon China have come at a challenging time, when

Michael HasenstabI would say it is more of a tit-for-tat trade dispute, as opposed to a full-out trade war. In my view, the real risk would be a full-scale retaliatory trade war between the United States and China. But I still put this at a low proba-bility at this point. So far, every action the United States has made, China has responded pretty much with a measured, equal reaction, so we haven’t seen a huge escalation. The United States has one of the lowest import tariffs in the world. Probably what we are going to see is US tariffs go higher, US goods prices go higher and some of the tariffs in a place like South Korea go lower and their goods prices go lower. There is a risk these things can spiral, but I think we have seen some positive steps, for example, in recent trade negotiations between Mexico and the United States.

Mexico has been affected adversely by US trade disputes, but leaders of the two countries seem to have recently come to an understanding. I think it tells us there is a way through this, by updating treaties instead of just tearing them up. The irony is that most of the terms that are going to be put in the new version of North American Free Trade Agreement (NAFTA) were basically from the Trans-Pacific Partnership (TPP). President Trump had wanted to get rid of the TPP but is now going to

Trade Tensions: Bark or Bite?

Q: There have been questions about whether we are in the midst of a trade war, and what a trade war even means. What do you make of the current tension in international trade conversations?


Opportunities in Emerging Markets Q: Can you give us an example of how the trajectory for various emerging market economies differs, and where you are seeing opportunities?

Michael Hasenstab We think Asia is pretty stable. Latin America is more of a turn-around story where policies were really bad, and they are now either getting better or trying to get better. There are probably more alpha opportunities in Latin America, in our view.

Africa is really idiosyncratic, country by country, and the variance is quite high. In Central and Eastern Europe, we’re a bit more concerned. Countries that had policies which used to be very credible and orthodox, are now moving 180 degrees in the other direction. We have seen a takeover of the press or the judiciary system in some countries that used to be leaders of market-based democracies. I think this could be a concern, and their linkages with the rest of Europe on certain issues are also a concern. Stephen Dover It is probably not the best time to be contrarian in regard to emerging markets overall, in our view. Economies that are

having a really difficult time may not have hit their bottom at this point. That said, emerging markets vary. Countries that have been more responsible regarding their economic situa-tions have not fallen as much as the others, and if you look at which emerging markets and economies have performed well, they have been in the countries that have been more responsibly managed. Manraj Sekhon Argentina and Turkey have been at the forefront of equity-market volatility during 2018, underpinning our very cautious outlook for these markets. However, headlines may over-emphasize their significance; more than 10 companies in the MSCI EM Index are individually larger than the combined country weights of Turkey and Argentina (once the latter is added to the index). So, we do not believe these countries’ travails are representative of the broader emerging-market asset class.

Look Long-Term Across Emerging Markets (EM) For OpportunitiesTotal Annualized Returns by EMAs of August 31, 2018

Source: Franklin Templeton Capital Market Insights Group, MSCI, Morningstar.Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at www.franklintempletondatasources.com.

18%

16%

14%

12%

10%

8%

6%

4%

2%0%

MSCIBrazil

MSCIChina

MSCIIndia

MSCIIndonesia

MSCIKorea

MSCIMexico

MSCIRussia

MSCIS. Africa

Annualized 15 Year Returns (%)

11.14

13.12 12.96

16.23

10.04 10.23

5.71

10.03


Don’t Underestimate China

Q: We have been talking about how the biggest trade conflict could potentially be between the United States and China. Let’s talk about what’s going on in China. What is your perspective?

Stephen DoverI think one shouldn’t underplay China at this point. For a long time, many people have called for the end of China. However, that hasn’t been our view. There are two huge initiatives China is working on right now that I think are worth mentioning. The first is the “Made in China” campaign, also known as the “2025 China” campaign, where China is aiming to be a global leader in a lot of different industries. It is mainly focused on technology but also encompasses environmental industries too—which isn’t really surprising. China’s push into some of these indus-tries has caused concern within the developed countries which aren’t as strong in these areas. The “Made in China” policy is really an industrial policy pushed by the government, and foreign companies aren’t allowed to compete in these areas. So I think this issue is all tied to the trade tensions with the United States, but technology is of big importance for China.

The other big initiative in China is its “Belt and Road” initiative, which is a little confusing because the “road” actually represents the seaways. Nonetheless, it is a plan to expand the

infrastructure across all of the countries that at least touch China and then all the way into Europe. It’s a multi-trillion-dollar capital initiative that is very much in China’s interest. The project is seen as likely to be very stimulative to the countries outside of China that are impacted by it, and we think there is a lot of potential opportunity there from an investment standpoint.

Michael HasenstabPeople should also bear in mind that China’s government has a lot of leverage and control over the economy. It can take over the banks if necessary and recapitalize them if there are problems. However, in and of itself, I think the longer-term risk is that the country becomes increasingly reliant upon government-organized plans. Throughout history, those have tended to be unsus-tainable and they have crowded out the private sector. I think those are the longer-term questions, but in the short term I think all the analysis that points to China heading into a credit crisis is wrong because the government has so much control, it has so many levers and it’s a closed economy.

its labor-cost advantage is fading. Indeed, China is seeing jobs “offshored” to cheaper locales such as Vietnam, and the country is embarking upon the process of deleveraging. However, China is also investing in the future—mass automation is evident in China, which is by far the world’s largest market for robots. Its world-class infra-structure and integrated supply chains result in considerable cost and logistical advantages.

In the last decade, China has shot past the United States to become a far more important export market for most large emerging economies—not least due to its burgeoning consumer market—and accordingly, trade growth now predominantly comes from intra-emerging-market demand. Rising protectionism in the West may further pivot focus towards regional agreements; indeed, China appears eager to replace US leadership in Asia in this area.

More generally it is also worth empha-sizing that emerging economies have become much less dependent on devel-oped markets as a driver of growth; this is in part illustrated by the increased weight of the consumer sectors in many larger markets in which we invest. For the MSCI China Index, 93% of corporate revenues are generated domestically, and only 2% are generated in the United States.5 By contrast, the equivalent for US corporates is 62% generated domestically and 5% from China,6 demonstrating China’s downside expo-sure to US tariffs is perhaps less than assumed, while means of retaliation may be higher.

5. Source: FactSet. The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. See www.franklintempletondatasources.com for additional data provider information.

6. Source: FactSet, MSCI USA Index. The MSCI USA Index is designed to measure the performance of the large- and mid-cap segments of the US markeIndexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. See www.franklintempletondatasources.com for additional data provider information.


Ed PerksWe have seen what we consider to be full valuations in certain parts of both the equity and fixed income markets. We have taken the opportunity this presented to us to reduce select hold-ings and increase holdings in other areas with less perceived risk. We have been more selective about our risk exposures, preferring to focus our investments—taking more targeted and concentrated position sizes—which is consistent with our view of a market offering attractive opportunities, though in less abundance than we have seen in years past. Essentially, our efforts are now focused on shedding asset-class allocation risk for more idiosyncratic risk, with targeted and concentrated exposures to specific investment opportunities.

Michael HasenstabWe have been focusing more on idiosyn-cratic alpha opportunities and not just getting this broad market beta. I think it’s pretty hard to argue that broad market beta is cheap; in fact, it is prob-ably pretty expensive. The danger with passive investing is that you get a lot of

index beta without focusing on the smaller subset of alpha. Certainly, there is risk in those subsets, because it’s more concentrated and it’s idiosyncratic, but we also see the greatest value in those specific selections. I think the other thing investors should look at is uncorrelated assets. When there’s a drop in the equity market, or a drop in the bond market, what happens to your other positions? If they are all moving in the same way when you have a shock, that’s not very effective portfolio construction. And, what worked in the last decade probably is not going to work going forward. So, I think the opportunity is in identifying idiosyn-cratic, isolated alpha and trying to hedge out the broad market beta.

Stephen DoverMichael makes a really interesting point saying that beta is actually expensive right now because there is such a focus on trying to keep beta cheap. However, if you are in the wrong beta, it can be really, really expensive. Investors should look under the hood to see sources of return and remember that even cheap beta may not be as cheap as you think.

Chris MolumphyWe think it is healthy there is a lot of investor skepticism out there. As soon as you lose that skepticism, that’s when you have to really start worrying, and that’s usually the beginning of the end. Right now, there is a fair amount of skepticism not only in the equity markets, but in risk markets in general. We are now in the 10th year of a growth cycle in the United States, so clearly in the back of our mind we have to acknowledge we are going to be in unchartered waters. But we focus on fundamentals, and US economic fundamentals in the near- and even intermediate-term look pretty good to us. We currently have a pretty positive outlook overall and we think the skepti-cism we see right now is actually healthy. If you put those together, it should be a pretty good backdrop for financial markets.

Stephen DoverI think in the equity markets, particularly in the United States or even globally, you have to be prepared for the risks that are out there. That said, I think it probably is not the best time for inves-tors to completely pull in risk exposure. One might want to be a little bit more conservative perhaps, but I think it is very hard to predict exactly when a pullback or correction in the market will happen. I’m still quite positive on equity markets in general.

A Healthy Market Skepticism

Q: US equity markets have been hitting new highs, but it seems that many investors are quite concerned about investment opportunities and the global outlook. What do you think investors should be preparing for?

If you are in the wrong beta, it can be really, really expensive.”—Stephen Dover‘‘

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Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI 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.

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Issued in the US 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 Investments’ US registered products, which are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

Investors should carefully consider a fund’s investment goals, risks, sales charges and expenses before investing. To obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial advisor, call us at (800) DIAL BEN®/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money.Australia: Issued by Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (Australian Financial Services License Holder No. 225328), Level 19, 101 Collins Street, Melbourne, Victoria, 3000. Austria/Germany: Issued by Franklin Templeton Investment Services GmbH, Mainzer Landstraße 16, D-60325 Frankfurt am Main, Germany. Authorized in Germany by IHK Frankfurt M., Reg. no. D-F-125-TMX1-08. Canada: Issued by Franklin Templeton Investments Corp., 5000 Yonge Street, Suite 900 Toronto, ON, M2N 0A7, Fax: (416) 364-1163, (800) 387-0830, www.franklintempleton.ca. Dubai: Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority. Dubai office: Franklin Templeton Investments, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box 506613, Dubai, U.A.E., Tel.: +9714-4284100, Fax: +9714-4284140. France: Issued by Franklin Templeton France S.A., 20 rue de la Paix, 75002 Paris, France. Hong Kong: Issued by Franklin Templeton Investments (Asia) Limited, 17/F, Chater House, 8 Connaught Road Central, Hong Kong. Italy: Issued by Franklin Templeton International Services S.à r.l.—Italian Branch, Corso Italia, 1—Milan, 20122, Italy. Japan: Issued by Franklin Templeton Investments Japan Limited. Korea: Issued by Franklin Templeton Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12 Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-968. Luxembourg/Benelux: Issued by Franklin Templeton International Services S.à r.l.—Supervised by the Commission de Surveillance du Secteur Financier—8A, rue Albert Borschette, L-1246 Luxembourg—Tel: +352-46 66 67-1, Fax: +352- 46 66 76. Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. Poland: Issued by Templeton Asset Management (Poland) TFI S.A., Rondo ONZ 1; 00-124 Warsaw. Romania: Issued by the Bucharest branch of Franklin Templeton Investment Management Limited, 78-80 Buzesti Street, Premium Point, 7th–8th Floor, 011017 Bucharest 1, Romania. Registered with Romania Financial Supervisory Authority under no. PJM01SFIM/400005/14.09.2009, authorized and regulated in the UK by the Financial Conduct Authority. Singapore: Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E. 7 Temasek Boulevard, #38-03 Suntec Tower One, 038987, Singapore. Spain: Issued by the branch of Franklin Templeton Investment Management, Professional of the Financial Sector under the Supervision of CNMV, José Ortega y Gasset 29, Madrid. South Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which is an authorized Financial Services Provider. Tel: +27 (21) 831 7400 Fax: +27 (21) 831 7422. Switzerland: Issued by Franklin Templeton Switzerland Ltd, Stockerstrasse 38, CH-8002 Zurich. UK: Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. Authorized and regulated in the United Kingdom by the Financial Conduct Authority. Nordic regions: Issued by Franklin Templeton Investment Management Limited (FTIML), Swedish Branch, Blasieholmsgatan 5, SE-111 48 Stockholm, Sweden. Phone: +46 (0) 8 545 01230, Fax: +46 (0) 8 545 01239. FTIML is authorized and regulated in the United Kingdom by the Financial Conduct Authority and is authorized to conduct certain investment services in Denmark, in Sweden, in Norway and in Finland. Offshore Americas: In the US, this publication is made available only to financial intermediaries by Templeton/Franklin Investment Services, 100 Fountain Parkway, St. Petersburg, Florida 33716. Tel: (800) 239-3894 (USA Toll-Free), (877) 389-0076 (Canada Toll-Free), and Fax: (727) 299-8736. Investments are not FDIC insured; may lose value; and are not bank guaranteed. Distribution outside the US may be made by Templeton Global Advisors Limited or other sub-distributors, intermediaries, dealers or professional investors that have been engaged by Templeton Global Advisors Limited to distribute shares of Franklin Templeton funds in certain jurisdictions. This is not an offer to sell or a solicitation of an offer to purchase securities in any jurisdiction where it would be illegal to do so.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI.Important data provider notices and terms available at www.franklintempletondatasources.com.

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