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In focus: Health care and policy risks—a brief diagnosis
Patience is virtue when it comes to health care investing, as the sector continues to face a high level of US policy uncertainty. While market bearishness has pushed down valuations, we believe it is prudent to wait for further policy clarity before adopting a more risk-on approach.
On balance, we see no reason to be overly pessimistic about the health care sector. The possibility that policy clarity may emerge in the coming months should not be ruled out, in which case we may see a relatively quick rebound in the sector. Meanwhile, sector fundamentals remain firm, and long-term structural trends continue to support their defensive growth qualities, in our view.
Investment outlook
After years of maintaining an overweight to the US market, many investors are now diversifying away from US equities, reflecting growing concerns over the impact of US trade and fiscal policies. The US market nonetheless remains significant for our portfolios. We are staying invested for now, with a focus on companies undervalued relative to their long-term earnings power. Banks are one of our favored sectors in the United States. In Asia Pacific, we similarly maintain a bottom-up approach anchored by valuation assessment and fundamentals research. One area that interests us is the Hong Kong property market, where signs of recovery are emerging. Meanwhile, European equities continue to offer a significant valuation gap versus their US counterparts. We see compelling opportunities in domestically focused companies, particularly those poised to benefit from regional stimulus and structural reforms.
In North America, the persistent relative strength of the US economy over the past several years led many investors to overweight US holdings relative to their long-term asset allocation strategies. The current trend of diversifying away from the United States reflects, among other factors, growing concerns over the impact of US trade and fiscal policies on the future valuations of US assets. The potential improvement in eurozone growth, the rise of China as one of the world’s largest economies and opportunities in emerging markets have also prompted investors to seek opportunities outside the United States. In these days of waning US-centric investment, we continue to favor sectors such as banking and health care.
In Asia Pacific, having endured the market volatility spurred by US tariff concerns and Middle East conflicts since April, APAC equities wrapped up the first half of 2025 in the black and look to enter the second half on generally firmer sentiment. Investors are encouraged by the progressive trade talks the United States has had with various major economies, including China and Japan in Asia; a ceasefire between Israel and Iran has also helped calm some market jitters. We are nonetheless keeping in mind the unpredictability of the Trump 2.0 policy environment. Market volatility in Asia-Pacific markets may yet flare up again, as the deadline of the 90-day pause on the “Liberation Day” tariffs approaches.
In Europe, despite persistent uncertainty around President Trump’s evolving tariff agenda, European equities have shown resilience in 2025. As of late June, the STOXX Europe 600 Index posted a solid year-to-date gain, supported by improving fundamentals and relatively attractive valuations. However, volatility remains elevated, with investors closely watching US policy developments and their global spillover effects.
Market review: June 2025
Global equity markets collectively rose in June. The MSCI All Country World Index of stocks generated positive returns in US-dollar terms during the month as 10 out of the 11 global equity sectors advanced, with information technology, communication services and energy sectors leading. Emerging market stocks outpaced developed market stocks, while global growth stocks outperformed global value stocks.
In June 2025, global equities continued to rally after the United States delayed planned “reciprocal” tariff hikes that President Donald Trump announced in early April, thus reducing investor fears of a global recession. Investors remained concerned about elevated inflation levels in certain regions, but reduced recession fears helped in improving consumer sentiment. The onset of the Israel-Iran conflict in the Middle East in mid-June, and its tenuous ceasefire at month-end, had minimal impact on global equity markets. Investors largely looked through the risks, although oil price volatility briefly rose due to concerns that a broadening of the conflict could have uneven impacts globally.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods.
Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries. There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.
Diversification does not guarantee a profit or protect against a loss.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
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