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Dipping a Toe Back Into the Market

March 2, 2012

Many investors were leery about diving into the market last year, and who can blame them given global debt debacles, job and housing concerns, and a shaky growth outlook. While the market still faces these crosscurrents, the S&P 500’s best January performance in more than a decade 1 and the recent reprieve in a key measure of market volatility are providing  hints that gun-shy investors might be dipping a toe back in.

Easier said than done for some. After the rollercoaster that was 2011, trying to explain why now seems like a good time to venture back in still sounds a little crazy. But for those who are looking for some perspective, you’ve come to the right place. Read on for why Ed Jamieson, president/CIO of Franklin Equity Group®, Peter Langerman, president/CEO of Mutual Series®, Gary Motyl, president/CIO of Templeton Global Equity Group, and Mark Mobius, executive chairman of Templeton Emerging Markets Group, all think it might be time for investors to consider taking the plunge. In brief:

Gary Motyl: “We do expect the global GDP environment to remain challenging—looking for slower global GDP growth but still growth.”

Ed Jamieson: “The market appears more relaxed about world events than one might imagine.”

Peter Langerman: “If you look at one of the commonly referenced measures of volatility, the Chicago Board Options Exchange Market Volatility Index, or the VIX, we are actually at a level which isn’t that far above where we were all the way back in 2007.”

Mark Mobius:  “I don’t believe China’s economy is going to experience a hard landing. I expect the China plane will keep on flying.”

Gary Motyl, President and CIO of Templeton Global Equity Group

Gary Motyl

Investors obviously are concerned with what is going on in Europe these days. We have a particular macro outlook which, frankly, has not changed dramatically over the last 12 to 18 months. We do expect the global GDP environment to remain challenging with slower global GDP growth, but still growth. We expect the inflationary outlook to remain fairly subdued.

There are a lot of crosscurrents out there with the global economy. We think that China should continue to move forward at a pretty good rate. We are not in the hard landing camp there (with respect to a sharp economic slowdown), but obviously the goings-on in Europe are a bit of a negative from the global GDP growth standpoint.

We expect investor sentiment to continue to be volatile. You will have periods when investors get somewhat optimistic, and then you’ll have a couple of headlines come across and they’ll bring that back a few notches.

No question that in my view, there’s likely to be a lot of two-steps-forward, one-step-back here, whether it’s a Greek debt deal, whether it’s just what’s going on with Europe at the basic economic level—kind of skating around at zero growth range.

If the ECB (European Central Bank) and various other global monetary organizations are working to provide liquidity, working to make sure that financial institutions function normally, we think that over time the global economy can grow its way out of this.

Ed Jamieson, President and CIO of Franklin Equity Group®

Ed Jamieson

I think looming large for investors this year are some very real macro risks, but on the flip side, I also see some terrific company and economic fundamentals.

The macro risks are well-known to most investors: the European debt crisis, tensions with Iran, the depressed housing market here in the U.S., our huge budget deficit, too much leverage overall in the developed economies, and, more recently, rising oil prices.

Many of these factors dominated investor mindshare last summer when the market was so weak. But more recently investors have been more focused on some of the positive fundamentals: the fact that U.S. corporations have been generating record earnings and record cash flow; U.S. retail sales at an all-time record high; balance sheets and profitability at historically strong levels; over two million U.S. jobs created last year in the U.S.; 92% of the population is employed; and the U.S. appears to be undergoing a renaissance in oil and gas production, thanks to new drilling and extraction technology. The Wall Street Journal recently reported that according to the U.S. Energy Information Administration, the U.S. is now, for the first time in 62 years, a net exporter of energy products.2 And, finally, one last very positive point is there are signs the U.S. is now experiencing a resurgence in manufacturing activity.

Peter Langerman, President/CEO of Mutual Series®

Peter Langerman

Peter points to a drop in a key measure of market volatility, the CBOE® Volatility Index (VIX®), as evidence that investors appear to be more comfortable stepping back into the equity market. Charts show the index has dropped below 20 in late February, to levels he says have not been seen since 2007.3

You have to put those numbers in context, but basically with all the headwinds that we are facingthat people are still concerned about Europe, the U.S., etc.the market generally appears to have shrugged a lot of that off, and we have seen a huge rally over the past couple of months. So again, there’s headline risk, and I certainly am a subscriber to the fact that we’re not going to see any disappearance of those kinds of concerning headlines. But the reality is that the market generally appears a lot more relaxed about what’s going on in the world than one might even imagine.

Mark Mobius, Executive Chairman of Templeton Emerging Markets Group

Mark Mobius

While a slowdown in China has been potential danger lurking for investors, Mobius believes it’s not likely to sink the global market.

I always tell people I don’t believe China’s economy is going to experience a hard landing. I expect the China plane will keep on flying, simply because the growth rate is at a very high level. Even this year, market expectations are for 7% growth, which is still very high growth, in my view.

The reason for it is that the Chinese have an incredible amount of capital available to them. They have a tremendous amount of foreign exchange reserves. They still have a labor advantage in the sense that they have low-cost labor. They have a lot of technology that they’ve imported from various parts of the world and, of course, they’ve sent people abroad for education, so they’ve got that, too.

In addition, the good news is that, if something goes wrong and they have to stimulate the economy, I don’t think they need to be too worried about inflation, at least in the short term, because inflation actually is relatively low. It’s about 4-5% at this stage.4 So everything seems to be going well.”

What does Sir John Templeton have to say about investing in stocks? “The most costly errors in selecting stocks are made by people whose thinking is dominated by the question of the temporary short-term trend of earnings.”


1 Source: © 2012 Morningstar. S&P 500 Index: STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse, sell or promote any S&P index-based product. Indexes are unmanaged, and one cannot invest directly in an index.

2 Source: Wall Street Journal, November 30, 2011

3 Source: Chicago Board Options Exchange®

4 Source: Quoted from the National Bureau of Statistics of the People’s Republic of China, January 2012

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