june 2020 are there realistic alternatives to stocks?€¦ · the past few weeks have seen the...

Are there realistic alternatives to stocks?

FRANKLIN TEMPLETON THINKSTM ALLOCATION VIEWS

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JUNE 2020

Major themes driving our views • Significant headwinds to global growth

The coronavirus has pushed the global economy into a deep recession, though growth momentum is stabilizing. Risks to the recovery are tilted to the downside due to fears about a second wave of infection. Political uncertainty contributes to the outlook remaining less clear than usual and presents an ongoing headwind for business investment intentions.

• Subdued inflation across economies We believe that changes in inflation are driven mainly by demand, but expectations have already fallen to historical lows. While it is premature to call an end to globalized production, its influence might moderate as a result of onshoring.

• Dovish bias to policy In responding to the current virus crisis, policymakers remain accommodative and will do whatever it takes. Emergency measures have exceeded consensus expecta-tions, but the easy wins may already have been delivered, while the need for fiscal policy coordination is increasing.

Practical positioning• Government bonds remain expensive

In a multi-asset portfolio, we seek assets that provide the potential for diversification. Bonds traditionally fulfill that role. Global bonds—especially long-duration issues—appear vulnerable due to low term premia. However, slower growth and subdued inflation balance this, leaving us only modestly defensive in our overall levels of conviction.

• Corporate bonds are more attractive to us The yield spread on corporate bonds is somewhat higher than average, reflecting market concerns over the economic environment. The attractions of corporate bonds lie in this modest additional yield and some potential diversifica-tion benefits from government bonds, but not as a long-term return generating alternative to stocks.

• Emerging market bonds Emerging market investments can be a very attractive addition to a broadly diversified portfolio. However, we always believe that a selective approach is particularly appropriate in these less-developed markets. However, right now, emerging market bonds do not represent compelling alternatives to stocks, in our view.

In this issue

In this issue, we focus on notable steps toward fiscal cooperation in Europe that were

prompted by the current COVID-induced recession. We review the reasons that progress is

being made now, the potential risks to the recovery and the view that policymakers believe

“there is no alternative.”

We discuss whether bonds can provide a realistic alternative to stocks, and look at the

prospects of different sectors of the global bond market. Over a longer-term horizon,

we continue to believe global stocks have greater performance potential than global bonds,

but that this outcome will not be reached along a smooth path.

3Are there realistic alternatives to stocks?

Global growth needs some supportOne of the phrases we hear most often today is “TINA: There Is No Alternative.” It is used regularly to explain why otherwise rational investors seem to be blind to risks in a particular investment or asset class. But, reflecting on the last few months, perhaps it is equally applicable to the policy imperatives of governments in the major economies.

Last month we talked in Allocation Views of the need to hold the course. Specifically, we highlighted the ongoing commitment of central bankers to do “whatever it takes” and of calls for the coordination of monetary and fiscal policy that have become a new normal. We also worried about whether the political will to deliver might ease with the passing of peak pandemic.

During May, some of these fears were put to rest. Emmanuel Macron, presi-dent of France, and his German counterpart, Chancellor Angela Merkel, took the lead in driving forward a coor-dinated European Union (EU) response to the COVID-19 crisis. Where previous French proposals for closer coordination were met with a cool response in Berlin, the two leaders demonstrated a new-found common purpose. The proposed recovery fund, offering signifi-cant levels of support in the form of grants, rather than loans, is a notable step toward greater fiscal cooperation. Funding some part of this through the issuance of joint liability bonds would be ground-breaking. Why is it happening now? Perhaps the answer is TINA.

Similarly, at home in Germany, Merkel is facing up to the reality of this current crisis. Even in one of the less severely hit economies, rising unemployment and concerns over business investment intentions require dramatic action.

Temporary reductions in VAT (consump-tion tax) may help to offset natural caution when it comes to spending deci-sions. Infrastructure investment will be accelerated to offset any retrench-ment by businesses. But, by committing a further €130 billion to stimulus measures, Germany’s government is reflecting the need to make use of the fiscal headroom provided by previous frugality. Again, perhaps there is no alternative. In showing a willingness to share some part of that fiscal strength with countries less well placed than itself, Germany highlights the strength of the European project…or perhaps its vulnerability to current events.

The past few weeks have seen the initial publication of data that confirms the depth of the recession that the global economy is already experiencing. It is notable that financial markets have become inured to these releases. Previously, analysts would pore over the details and investors might respond to movements in the second decimal place of key indicators. Today, extraordinary data is often ignored. This is perhaps an indication of some form of post- traumatic stress disorder. It boils down to saying, “We know we are in a hole;

its depth is irrelevant.” Despite a heightened level of uncertainty, we believe that expectations have largely caught up with the true depth of economic damage that had been suffered. However, the pace of recovery remains more uncertain than usual.

When we look at indicators of future activity, the outlook has not cleared. A year ago, we were entering a deep-ening trade war between the United States and China. This prompted us to monitor data such as new export orders, which had been falling sharply. They typically foretell the level of trade activity in the following three to six months. The weakness in orders that started last year has still not abated, and relations between Washington and Beijing are again a concern. As a result, we expect a continued period of trade weakness into the second half of this year, notably in China and its regional trading partners. Japan has suffered a sharp deterioration in exports, and a closely watched indicator of new orders for industrial machinery has continued to decline (Exhibit 1). This only empha-sizes the importance of supporting domestic consumers through this period of adjustment.

Major themes driving our views

190

170

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90

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Total (Billions JPY)

BUSINESS INVESTMENT IS VULNERABLE TO TRADE CONCERNS Exhibit 1: Japan machine tool orders, volumeJanuary 2012–April 2020

Source: Franklin Templeton Capital Market Insights Group, Macrobond, Japan Machine Tool Builders' Association.

Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16 Apr-17 Jan-18 Oct-18 Jul-19 Apr-20

Are there realistic alternatives to stocks?4

The compressed nature of the slowdown may result in a rapid rebound. Historical relationships may not hold. But, reflecting the balance of issues noted above, we see policy makers having no alternative but to continue their support. The next question we ask is “for how long?” Like them, we are focused on the potential for the risks around the recovery to be skewed to the downside. As a result, this leaves us with a relatively cautious view, encapsu-lated in our theme that sees “Significant Headwinds to Global Growth.”

Inflation is a two-way pullGlobal central banks are struggling to revive inflation expectations, which have been depressed by the current economic shock. We believe that infla-tion expectations form part of a feedback loop that helps determine actual inflation, through the actions of wage bargaining and company pricing power. Fear of a downward spiral, as expectations become “un-anchored,” is the number one concern of monetary policymakers.

However, even as current headline inflation is being undermined by broad- based commodity price declines (Exhibit 2), some market commentators are becoming worried about the risks of resurgent inflation down the road. These concerns tend to focus on deglo-balization rolling back the disinflationary benefits of optimized supply chains. Anecdotal evidence supports the idea that some outsourced production will be brought back onshore, aiding resilience of supply, but at a cost. Equally, national security reasons might drive other changes in procurement. However, we do not see a wholesale reconfiguration of supply chains, given the lead times and costs involved in doing so. Profit maximizing forces remain strong, and it is premature, in our opinion, to call an end to global-ized production.

We continue to believe that inflation will be driven mainly by changes in demand. Recent supply shocks may have lowered productive capacity, but the deceleration in global activity that we saw in 2019, and the further

interruption to growth that is occurring now, will be much more powerful. This effect has been felt broadly, including in emerging markets, rein-forcing our theme that sees “Subdued Inflation Across Economies.”

Policymakers response is “whatever it takes”The US Federal Reserve (Fed) is emphasizing the need for further fiscal stimulus while continuing to buy US Treasury and mortgage-backed securities in whatever amounts are needed to support market functioning. It promises to do so until the United States is well on track to attaining the Fed’s inflation and employment goals, and will roll out additional lending programs if necessary. All the major central banks share similar concerns over the outlook and have acted accordingly (see Exhibit 3 on next page). Perhaps they see no alternative.

The extreme illiquidity and volatility conditions seen in March have continued to moderate. Market expecta-tions of further policy easing, if needed, are embedded within them. We continue to believe that policy-makers will offer ample support to limit the pain associated with the hard stop that many economies have experi-enced. This is reflected in our final theme of a “Dovish Bias to Policy.”

Indeed, such emergency measures have exceeded consensus expectations so far, but the easy wins have been delivered. It is easier to promise to do “whatever it takes” when you are in the teeth of the storm. As the imme-diate crisis passes, helping to rebuild damaged economies will require continued support. However, it may well be that the low-hanging fruit has already been picked.

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2

1

0

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-2

Year-over-year change (%)

COMMODITY PRICES HIT HEADLINE INFLATION Exhibit 2: US Consumer Price Index (CPI) in�ation vs. Core CPI, year-over-year changeOctober 2008–April 2020

Sources: Franklin Templeton Capital Market Insights Group, U.S. Bureau of Labor Statistics (BLS), Macrobond. Important data provider notices and terms available at www.franklintempletondatasources.com.

Oct’08

Oct’10

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CPI Core Headline


CENTRAL BANKS AROUND THE WORLD ARE PROVIDING MONETARY STIMULUS IN 2020 Exhibit 3: Countries providing monetary stimulus in 2020 As of May 31, 2020

Countries Reducing Policy Rates

ArgentinaAustraliaAustriaBelgiumBotswanaBrazilBulgariaCanada

ChileChinaColombiaCroatiaCzech RepublicDenmarkEgyptEstonia

FinlandFranceGermanyGhanaGreeceHong KongHungaryIceland

IndiaIndonesiaIrelandIsraelItalyJapanKenyaKuwait

LatviaLithuaniaLuxembourgMalawiMalaysiaMauritiusMexicoMongolia

NamibiaNetherlandsNew ZealandNigeriaNorwayPakistanPeruPhilippines

PolandPortugalQatarRomaniaRussiaSlovakiaSloveniaSouth Africa

South KoreaSpainSwedenTaiwanThailandTurkeyUgandaUkraine

United Arab EmiratesUnited KingdomUnited StatesVietnamZimbabwe

Source: Franklin Templeton Capital Market Insights Group, Bloomberg.


Are bonds the alternative?Our investment approach continues to look through the shorter-term noise and retain a clarity of focus. We believe it is important to maintain diversified portfolios, particularly in times of increasing investment uncertainty. We also need to recognize that our longer-term outlook may not be reached along a smooth path, and that the current environment is more uncertain than usual.

It is these basic elements of our multi-asset approach that necessitate us looking for alternatives to the long-term attractions of stocks. Traditionally, government and corporate bonds have provided a measure of diversification from the higher volatility that stocks usually bring.

Today, some might argue that bonds are too expensive to offer diversification.

Government bonds remain expensiveAfter more than three decades of a broad bull market in bonds, it is hardly surprising that many investors express the view that government bonds are expensive. This largely reflects the fact that current yields are close to historical lows. However, we note that depressed yields also reflect demographics and demand for matching assets, which are likely to persist. This shows up in the “term premium,” the difference between the current bond yield and the antici-pated average level for short-term interest rates over the life of the bond (Exhibit 4).

As a result, global bonds—especially high credit quality and long-duration issues—appear vulnerable due to low term premia. However, slower growth and subdued inflation balance this in our overall view of the asset

class, leaving us only modestly defen-sive in our overall levels of conviction. However, they do not come close to matching the anticipated return from stocks, and currently it is only for their residual risk reducing characteris-tics that they justify a place in a longer-term portfolio.

We continue to hold a neutral view on the return potential from real assets such as inflation-linked bonds (Treasury Inflation-Protected Securities [TIPS]) despite their having become cheaper. We will write more extensively in coming months about the potential for these and other alternative asset classes.

Corporate bonds are more attractive to usBonds issued by companies in devel-oped markets provide an additional yield on top of that offered by similar maturity government bonds. They typically trade at a positive spread to so-called risk-free yields. This additional yield reflects the increased risk from these lower-rated assets. However,

in the long term, the yield spread typically over-compensates for the default-loss experience.

Today, the yield spread on corporate bonds is somewhat higher than average, reflecting market concerns over the economic environment. Central banks have offered direct liquidity support to companies and are signaling that they will provide a back-stop to this market. As a result, the extra yield has dropped and is not as high is typical in the depths of a recession, let alone one as severe as the current COVID-19 crisis.

The prospects for lower-rated, so-called high-yield bonds, are also bolstered by central bank support. But in this case, the inability of the likes of the Fed to protect the solvency of companies makes a rise in defaults highly probable. In our opinion, the most attractive balance of risk and reward is found in higher-rated invest-ment-grade corporate bonds. This is reflected in us maintaining a moderately constructive view on this segment of the corporate bond market.

Practical positioning

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-1

Yield spread

US TREASURY YIELDS REMAIN EXPENSIVE Exhibit 4: 10-Year US Treasury term premiumJanuary 2008–May 2020

Sources: Franklin Templeton Capital Market Insights Group, Federal Reserve Bank of New York, Bloomberg. Important data provider notices and terms available at www.franklintempletondatasources.com.

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However, the concerns about depressed government bond yields extend to the higher-quality parts of the corporate bond market. If government bond yields rise sharply, prices of most high-quality bonds will drop, even though invest-ment-grade bonds would likely prove to have a lower sensitivity to this move. The attractions of corporate bonds probably lie in offering a modest addi-tional yield and some potential diversification benefits from government bonds, but not as a long-term return generating alternative to stocks.

Emerging market bondsThe conclusions that we shared in Allocation Views in December 2019, focusing on the longer-term outlook, noted that “within both bonds and equities, we continue to forecast stronger return potential for emerging markets.” For now, the headwinds to growth that the current crisis presents have tempered our enthusiasm for these markets.

Specifically, for emerging market bonds, the risk of broad-based pressures leading to individual countries struggling to repay their hard-currency debt has increased. As an asset class these countries have improved their resilience to contagion from their peers. But they do not compensate adequately for the risk of even a few isolated defaults, in our analysis. For bonds issued in the country’s own currency (local-currency emerging market debt), the level of yield is insufficient to offset the inherent risk of currency devaluation.

Emerging market investments can be a very attractive addition to a broadly diversified portfolio. However, we always believe that a selective approach is particularly appropriate in these less- developed markets. However, right now, emerging market bonds do not repre-sent compelling alternatives to stocks in our view.

Perhaps there is no alterna-tive to stocksAs we focus on the longer-term return potential for stocks, and believe that they should earn their equity risk

premium over time, we continue to balance this with shorter-term concerns that have tempered our enthusiasm. We maintain a modestly higher convic-tion toward global equities than bonds, reflecting relatively more attractive valuations over the longer term. In broad terms, bonds have become more highly valued and equity prospects have improved relative to them, but we do not view them as cheap in a historical context (Exhibit 5.)

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Index price

GLOBAL EQUITY VALUATIONS ARE NOT CHEAP, BUT ARE ATTRACTIVE RELATIVE TO BONDS Exhibit 5: MSCI All Country World Index price and valuation bands (based on 10 Year Average P/E and Current EPS Estimate [Forward 12 Months]) As of May 31, 2020

Source: Franklin Templeton Capital Market Insights Group, MSCI, Macrobond. Important data provider notices and terms available at www.franklintempletondatasources.com

Mar’98

May’96

Jul’94

Nov’01

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May’07

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May’20

Jan’00

Jul’05

Mar’09

Nov’12

Price Standard Deviation: +2 +1 –1 –2


Asset class Conviction Our viewpoint

Allocation settings—June 2020

In broad terms, corporate earnings will dip, and eventual economic recovery will be needed to

support global equities, as profit margins have peaked. Concerns remain about downside risk to

capital investment plans that reflect general uncertainty. However, we anticipate an easing of

market volatility and supportive liquidity conditions to offset these concerns. And we think longer-

term prospects have improved, which is reflected in our more optimistic bias.

Weak global growth, and a bias toward easier monetary policy, contrast with long-term valuations

that have become more expensive, reflecting low term premiums. Further widening of corporate

bond spreads may occur as growth slows and financial conditions tighten. We maintain a more

cautious view of bonds at the asset-allocation level, reflecting valuation concerns.

The inflation that was feared as the economic cycle entered its later stages has not appeared, and

commodity price declines will weigh on headline inflation. We see better prospects in naturally

diversifying assets. We hold a neutral view, reflecting the balance between reasons for optimism

and market-driven concerns that we continue to monitor.

The defensive features of cash remain attractive to us, despite its drag on portfolio yield.

Short-term US Treasury bill yields reflect falling policy rates rather than greater supply. Cash has

attractions as a means of diversification from low-yielding government bonds.

We expect a sharp contraction in global growth—especially in the second quarter—and moderate

inflation over the long term. COVID-19 presents a significant and evolving headwind that is

pushing the global economy into recession. As a result, we retain a broadly neutral stance toward

riskier assets. Our view balances caution regarding growth with optimism that a broad policy

response will be supportive.

Equities

Risk off/on

HIGH LEVEL ALLOCATION TIER

Bonds

Alternatives

Cash

Understanding the pendulum graphic

Bearish

Moderately bearish

Neutral reason for concern

Bullish

Moderately bullish

Neutral reason for optimism

Neutral

Arrows represent any change since the last quarter end.

RISK TIER



Equity regionsUnited States

Despite significant headwinds, trend US growth remains stronger than in other developed

markets, and technology exposure sustains the market opportunity. The market’s attention will

likely focus on valuations, the 2020 presidential election cycle, and whether Fed policy programs

are effective in stimulating demand.

Canada We see modest opportunities in Canada, with earnings growth slowing and commodities a notable

headwind. Canadian banks remain burdened by domestic housing concerns and low net interest

margins. We are not especially bearish, though we see reasons for caution.

Europe ex UK Economic activity had stabilized before recent virus concerns, but weak manufacturing sentiment

persists. The ECB has made efforts to offset the effect of lower rates, but we see banks

remaining a drag. We maintain a more cautious view, which reflects a lower outlook for earnings,

and valuations that remain expensive relative to history.

United Kingdom Domestic political tensions have eased, but uncertainties over Brexit and UK economic prospects

remain. Earnings per share were improving prior to the spread of the coronavirus. This defensive

market appears historically cheap, so long as corporate profits are not too severely impacted.

We reflect these opportunities in a more constructive view on this market, tempered by caution

over remaining uncertainties.

Japan Equity valuations, particularly on a price-to-book-value basis, have been attractive relative to other

markets, in our view. However, weaker economic activity following a consumption tax rise and

growth vulnerabilities due to COVID-19 are unfavorable for the Japanese market. Earnings per

share and return on equity are weakening relative to peers. We retain a lower level of conviction in

this market.

Pacific

ex Japan

With banks and related financial companies representing heavier weights in the region, concerns

about banks in Australia and Hong Kong persist. The region is vulnerable due to local tensions

in Hong Kong and subdued global trade flows. However, at valuations we regard as supportive, we

are not bearish, though we see reasons for concern.

Emerging

ex China

Risks to global growth highlight emerging markets’ idiosyncratic risks and underlying cyclicality.

However, valuations remain attractive to us relative to developed market peers, and return on

equity is improving. We see a balance of near-term growth concerns and optimism regarding the

longer-term structural attractions of emerging markets.

China China’s economy faces a longer-term impact from COVID-19, weak global demand and heightened

geopolitical tensions. Further support from fiscal or monetary measures may be required.

Trade disputes remain unresolved in the longer term and are a symptom of broader tensions.

Although valuations remain attractive to us, we see reasons for caution and maintain a neutral

view of this market.

Fixed income sectorsUS Treasuries

The Fed has delivered a sequence of interest-rate cuts in response to the coronavirus threat,

easing toward zero. However, the Fed remains biased to provide more stimulus as needed and to

maintain a stable US Treasury yield curve as it moves beyond the crisis response phase. Stretched

valuations and supply dynamics balance slower growth and subdued inflation expectations, and

we maintain a broadly neutral position.

Eurozone

Government

Bonds

Valuations appear full in the eurozone, where term premiums are the lowest among government

bonds. However, in response to growth concerns, the ECB will continue to provide stimulus,

including additional asset purchases. European yields have followed US equivalents, but to a

more muted extent, and we maintain a cautious stance and neutral position.

UK Government

Bonds

Continued uncertainty over Brexit was weighing on sentiment before the virus threat increased,

and weak productivity growth was holding back activity. The Bank of England has cut interest

rates to their lower bound but remains biased to provide more stimulus as required. We remain

broadly neutral overall, in line with other developed markets.

ALLOCATION TIER



Fixed income sectors continuedCanada Government

Bonds

Canada is vulnerable to a hit in business confidence from oil-price volatility. Expectations for the

Bank of Canada mirror those for the Fed. Canada has seen bond yields fall, but they now

broadly match those in the United States. We maintain a broadly neutral view overall, in line with

other developed markets.

Japan Government

Bonds

The Bank of Japan has maintained its monetary policy stance, which targets low 10-year govern-

ment bond yields. It has also provided guidance that policy will remain stimulative for an

“extended period” but seems less likely to ease in the near term, with fiscal policy taking a larger

role in providing stimulus. Low sensitivity to global yields is likely to continue.

Investment Grade The investment-grade sector has weakened on coronavirus concerns, reflecting deteriorating

corporate liquidity and high leverage. Yield spreads had widened dramatically, as the market has

focused on the risk of rising defaults. However, Fed support has calmed markets significantly.

Renewed widening of yield spreads is possible as growth slows and financial conditions tighten,

but valuations have become more attractive to us in a global context. As such we have moved

to a more constructive view.

High Yield Pressure on energy companies and fears of recession lead us to maintain a more cautious stance

on the outlook for lower-rated fixed income sectors such as high yield. Default rates appear

to be rising toward historical averages. Overall, we maintain a tactical preference away from these

riskier assets, while Fed support is more focused on investment-grade issuers. Longer term, we

have adopted a somewhat more constructive view on this market, tempered by caution over

remaining fundamental uncertainties.

Emerging

Market Debt

We regard emerging market bond valuations as fair among local- and hard-currency bonds, but

fundamental pressures due to global economic weakness offset these. Concerns over exchange-

rate risks in local-currency bonds remain prominent. With continued fears regarding global

growth, we maintain a more cautious view on these markets, and we continue to think selective

positioning is important.

Alternative assetsInflation-Linked

Bonds

The inflation that was expected—and feared—as the economic cycle entered its later stages has

not appeared, and the level of inflation discounted in inflation-linked securities has fallen sharply.

We believe that these expectations may start to normalize, even as overall inflation remains

subdued. However, we maintain a broadly neutral view of assets that benefit directly from rising

prices, such as inflation-linked bonds.

Commodities Risks to economic growth create a less supportive environment for broad commodities. We believe

that fiscal stimulus measures are likely to be focused on supporting consumers and preserving

jobs rather than on major projects. However, prices had fallen dramatically, which balanced infla-

tion pressures remaining subdued, and saw us move to a neutral overall view.

Risk Premia In an environment of slower growth but ample liquidity, we see mixed prospects across asset

classes and in market-neutral or naturally diversifying assets. We hold a neutral view of risk

premia, reflecting a balance between concerns over the reversal of established trends and the

prospect of valuations becoming more attractive.

ALLOCATION TIER


Editorial review

Ed Perks, CFAChief Investment Officer

Franklin Templeton Multi-Asset Solutions

Gene Podkaminer, CFAHead of Multi-Asset Research Strategies

Chair of Investment Strategy & Research Committee

Franklin Templeton Multi-Asset Solutions

Franklin Templeton Thinks: Allocation Views Our research process monitors a consistent set of objective indicators and screens them to identify signals that help our analysts to make better recommendations. By doing this we aim to filter out the daily noise to reveal the underlying trend.

Our macro-economic research group aims to challenge the consensus forecasts for growth and inflation by digging deeper into the data. Just as important, we aim not to be swayed unduly by topics that are dominating current market debate.

Stephanie Chan, CFA Senior Research Analyst

Michael Dayan, CFALead Portfolio Analyst

Mike Greenberg, CFA, CAIAPortfolio Manager

Dominik HoffmannResearch Analyst

Matthias HoppePortfolio Manager

Richard Hsu, CFAPortfolio Manager, Research Analyst

Michael Kerwin, CFASenior Research Analyst

Laurence LinklaterSenior Research Analyst

Hao Li, CFASenior Portfolio Analyst

Melissa Mayorga Senior Research Analyst

Chris Ratkovsky, CFASenior Research Analyst

Miles Sampson, CFASenior Research Analyst

Chandra Seethamraju, Ph.D.Head of Quantitative Strategies

Kent Shepherd, CFA, CIC Senior Client Portfolio Manager

Kim Strand, CFAPortfolio Manager, Research Analyst

Participation in this committee may change periodically and without notice.


Notes


WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. The positioning of a specific portfolio may differ from the information presented herein due to various factors, including, but not limited to, allocations from the core portfolio and specific investment objectives, guidelines, strategy and restrictions of a portfolio. There is no assurance any fore-cast, projection or estimate will be realized. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Derivatives, including currency management strategies, involve costs and can create economic leverage in a portfolio which may result in significant volatility and cause the portfolio to participate in losses (as well as enable gains) on an amount that exceeds the portfolio’s initial investment. A strategy may not achieve the anticipated benefits, and may realize losses, when a coun-terparty fails to perform as promised. Currency rates may fluctuate significantly over short periods of time and can reduce returns. Investing in the natural resources sector involves special risks, including increased susceptibility to adverse economic and regulatory developments affecting the sector—prices of such securities can be volatile, particu-larly over the short term. Real estate securities involve special risks, such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. Investments in REITs involve additional risks; since REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Actively managed strategies could experience losses if the investment manager’s judg-ment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results.

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Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FTI affi liates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. 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’ U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

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. Authorised in Germany by IHK Frankfurt M., Reg. no. D-F-125-TMX1-08. Tel. 08 00/0 73 80 01 (Germany), 08 00/29 59 11 (Austria), Fax: +49(0)69/2 72 23-120, [email protected], [email protected] / 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 / Netherlands: FTIS Branch Amsterdam, World Trade Center Amsterdam, H-Toren, 5e verdieping, Zuidplein 36, 1077 XV Amsterdam, Netherlands. Tel +31 (0) 20 575 2890 / United Arab Emirates: 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 150-68 / 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 Bucharest branch of Franklin Templeton Investment Management Limited (“FTIML”) registered with the Romania Financial Supervisory Authority under no. PJM01SFIM/400005/14.09.2009, and 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: Franklin Templeton International Services S.à r.l.—Spanish Branch, Professional of the Financial Sector under the Supervision of CNMV, José Ortega y Gasset 29, Madrid, Spain. Tel +34 91 426 3600, Fax +34 91 577 1857 / South Africa: Issued by Franklin Templeton Investments SA (PTY) Ltd which is an authorised 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 Tel +44 (0)20 7073 8500. Authorized and regulated in the United Kingdom by the Financial Conduct Authority / Nordic regions: Issued by Franklin Templeton International Services S.à r.l., Contact details: Franklin Templeton International Services S.à r.l., Swedish Branch, filial, Blasieholmsgatan 5, SE-111 48, Stockholm, Sweden. Tel +46 (0)8 545 012 30, [email protected], authorised in the Luxembourg by the Commission de Surveillance du Secteur Financier to conduct certain financial activities in Denmark, in Sweden, in Norway, in Iceland and in Finland. Franklin Templeton International Services S.à r.l., Swedish Branch, filial conducts activities under supervision of Finansinspektionen in Sweden / Offshore Americas: In the U.S., this publication is made available only to financial inter-mediaries 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 U.S. 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.

Please visit www.franklinresources.com to be directed to your local Franklin Templeton website.

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