Companies with stronger brands will deliver profits

Despite recent news of unrest in the Middle East, global inflation fears and
US budget woes, our outlook for the US economy and equity market in
2011 is positive.

Throughout 2010, we saw a strengthening of the US economy as consumer, jobs and housing reports reflected modest improvements. Numerous US companies have been reporting strong profits, with many beating earnings expectations. We believe this should continue in 2011.

We see the US market being buoyed by strong corporate profits that are at all-time highs. US corporations reduced their costs dramatically during the downturn; their balance sheets are now stronger than ever, and many companies have been benefiting from improved spending in the US and strong growth abroad.

This is a trend in growing endmarket demand that is supported by improved consumer sentiment about the economy. Valuations remain reasonable for the US market. Our focus is to invest in high-quality companies that have sustainable long-term growth prospects, superior profitability and meaningful competitive advantages.

Historically, these strong business models have tended to perform well in most markets or economic situations. We have recently been finding opportunities in companies with strong global brands and the ability to leverage those brands into faster-growing global markets. An example is Nike. More than half of the company’s revenues or sales come from outside the US, particularly in faster-growing developing or emerging markets.

Another example is MasterCard. It is experiencing strong growth worldwide as consumers transition from cash to credit or debit-based payments. We continue to see encouraging signs of progress in the US economy and are optimistic in our outlook for 2011. We believe we could see continued good corporate earnings and profit reports, more consumer spending and a general improvement in investor sentiment regarding equities overall.

Grant Bowers is vice president and portfolio manager of Franklin US Opportunities fund

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