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In focus: Software investing amid AI disruptions
Mixed performance among software-as-a-service (SaaS) companies calls for a closer look at how the artificial intelligence (AI) theme is playing out in the sector. While some companies are clear and long-term beneficiaries of AI tailwinds, others may be at risk of being disrupted or displaced by AI’s fast-coding capabilities.
At Templeton Global Investments (TGI), we maintain our conviction in providers of business-critical enterprise software or systems of record (SORs) that are difficult to replace and hence are better positioned to harness AI-driven growth amid a rapidly evolving technology ecosystem.
Investment outlook
The US economy remains resilient and the US Federal Reserve (Fed) has resumed its policy easing cycle after a lengthy pause, creating positive macro conditions for risk assets, in our view. However, policy uncertainties remain a market overhang. We remain selective and underweight the US equity market, with financials and health care among our preferred sectors. In the Asia Pacific (APAC) region, we similarly maintain a bottom-up selective approach even as our outlook potentially improves. While not yet expensive, regional valuations have gained and risk/reward adjustments remain key. Potential venues for mispricing opportunities that we see include underappreciated non-AI technology companies in Taiwan, and South Korean stocks. In Europe, the combination of policy support, structural investment and attractive valuations underpin a constructive outlook. Market breadth is another key feature, offering a more diversified potential opportunity set across sectors such as luxury, health care, industrials and electrification technologies.
In North America, policy decisions have been erratic this year to say the least, and we expect this to continue. However, the economy appears to remain resilient, and the Fed is cutting interest rates in the middle of an economic expansion. Historically, such conditions have been bullish for risk assets.
The Trump Administration, supported by Republican majorities in Congress, has introduced various business-friendly deregulation and tax policies. Those policies are likely to underpin higher rising business investment, which typically foreshadows rising productivity and profitability. But there are negative developments: Tariffs are taxes, which may slow demand via lost purchasing power and compress profit margins. They reshore production, shifting and temporarily disrupting supply lines. It takes time and investment expense to onshore production so that it does not impair long-term profitability.
In Asia Pacific, with the Fed kicking off its policy easing cycle in the United States, Asian central banks—except the Bank of Japan—look likely to continue cutting rates in the coming months. Accommodative monetary conditions should be positive for APAC equities. The weakening of the US dollar may also prove accretive to regional corporates, which are already expected to see normalized earnings growth entering 2026. While we acknowledge the potentially improving macro backdrop, uncertainties remain, and near-term market volatility should not be ruled out. For instance, incessant US policy disruptions—such as the drug import tariffs announced on October 1—could remain a market overhang and may yet lead to downward earnings revisions. China’s growth outlook also bears watching, and we will seek policy signals emerging from the five-year plan discussion later this month.
In Europe, the region has long been associated with structural stagnation. Its share of global gross domestic product (GDP) has fallen from 35% in 1980 to around 15% today, reinforcing a narrative of relative underperformance. After the global financial crisis, the region faced a series of setbacks including sovereign debt turmoil, Brexit and an energy shock. Many indexes only surpassed pre-2008 peaks in 2020, leaving Europe often viewed as a tactical allocation rather than a growth engine.
Market review: September 2025
Global equity markets advanced firmly in September 2025. The MSCI All Country World Index (ACWI) rose in USD terms, with growth stocks continuing to outpace value. Global sector performance was broadly positive, led by information technology and communication services; consumer staples, energy, and real estate were the only laggards.
Market performance in September was supported by a more accommodative stance from the US Fed, resilient corporate earnings, and renewed strength in technology shares. The US Fed’s first rate cut of the year, trimming its target rate by 25 basis points to 4.00–4.25%, bolstered investor confidence amid signs of softening labor markets. The European Central Bank and the Bank of England, by contrast, left rates on hold, though the BoE slowed its pace of quantitative tightening. Meanwhile, the Bank of Japan maintained policy but took further steps toward normalization by preparing to unwind ETF holdings.
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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