Franklin Templeton Solutions: Outlook for risk assets in 2014

Looking back on 2013, it was generally a strong year for “risk assets,” particularly developed-market equities. As major central banks and policymakers across the globe continued to implement expansionary policies, growth expectations increased and consequently so did price-to-earnings multiples. Leading economic indicators rose for most of the year, and their breadth improved as well. Many businesses became healthier and more efficient, in our view, reporting higher cash balances and profit levels. An absence of prolonged periods of volatility also created a generally supportive market environment. Major central banks were successful in easing investor concerns about tail risk—meaning the risk of unusual or extreme events happening more frequently than expected—that had plagued the global economy in previous years, and Europe was a case in point. Since the ECB’s 2012 pledge to take all necessary means to support the euro and the currency union, the Eurozone economy stabilized with no significant crisis events, and Germany’s federal elections in the fall of 2013 concluded without controversy. Moreover, it is important to note that inflation generally remained at or below policy targets, and we believe it is likely to stay at low levels. When quantitative easing was first introduced, worries about inflation were high, but the ample liquidity so far has not translated into broader money and credit growth.