We’re not even a month in, but it looks like the global economy, Europe and earnings may be the big attention getters in 2012. The equity markets have been off to what could be called a mild rally during the first half of January, but they’re still reacting to eurozone worries like a baby with a jack-in-the-box; they know something big is coming, but they’re not sure when, and when it does, they jump. It’s a fair enough reaction. Last year’s rough and tumble volatility wasn’t exactly a cake walk.
That wild ride doesn’t appear to be over, as hopeful outlooks for smooth sailing were noticeably absent from the early slate of 2012 market predictions. But if you can’t wrap yourself up in a warm blanket of false promises, at least you can pull up a chair to the grown-up’s table and take a practical survey of the landscape. Doing just that, Franklin Growth Opportunities Fund Portfolio Manager Grant Bowers suggests heading into 2012 with realistic expectations:
“When we look ahead to 2012, what we see is a year that we think will be very similar to 2011. Global macro issues will, we think, dominate the headlines. Concerns about European sovereign debt issues or a slowdown in emerging market growth may be the big headlines. And what we think that will probably lead to is continued volatility, much like 2011.”
Probably a sage perspective, though at the moment the U.S. market is demonstrating some remarkable resilience despite S&P downgrades for a host of EU countries, some disappointing earnings projections and a stubbornly snail-paced reduction in unemployment. While volatility still looms large, and we’ve already seen a couple of triple-digit dives on the Dow, the market has—so far—recovered quickly and seems to be exhibiting a different personality compared with last summer and fall. Among stocks starting the year in a big way, Bowers cites energy exploration as particularly robust:
“Some areas where we see some really interesting growth here in the U.S. are in the energy sector. And you would never know from all the noise in the global headlines, but what’s really going on here in the U.S. is a mini energy boom in the exploration of oil and gas. We’ve seen new technologies being employed to discover significant untapped reserves in North America. Many of the companies that are benefiting from this are in the service sector where we’re invested, and we see continued strong sector growth potential, not only in 2012, but in the years ahead.”
That said, Bowers points out that while the stock market has seen a healthy start to 2012, only time will tell whether investors are ready to withstand the stresses that come with reports on housing, unemployment, inflation and manufacturing, the ongoing headache of Europe’s debt crisis and the U.S. presidential election. Any of these factors could set the roller coaster back in motion:
“Managing through uncertainty is always a challenge. We do it here at Franklin by focusing on our research discipline. Our 35 equity research analysts are often out in the field meeting with their companies, following their industries, and working to uncover the best long-term growth opportunities they can find in the market. We think that is the best way to manage through uncertainty.”
Certainly sounds a lot like one of Sir John Templeton’s 16 rules for investment success:
“Do your homework or hire wise experts to help you.”
Do you know the case for equities in the decade ahead? See our “2020 Vision” on franklintempleton.com.
What Are the Risks?
The fund may be more volatile than a more conservative equity fund and may be best suited for long-term investors. The fund’s investments in smaller and mid-sized-company stocks involve special risks such as relatively smaller revenues, limited product lines and smaller market share. Smaller- and mid-sized company stocks historically have exhibited greater price volatility than larger-company stocks, particularly over the short term. The fund’s portfolio includes technology stocks, a sector which has been one of the most volatile and involves special risks. These and other risks are described more fully in the fund’s prospectus.