Three portfolio managers said Wednesday they are not convinced that the worst of the economic problems are over, as they predicted continued interest rate increases and high inflation.

It has been a tumultuous economy this past year with record-high inflation and the Federal Reserve raising interest rates in historic ways in an attempt to curb that inflation. While many believe these actions will lead to a recession, some say it has already occurred.

Economists were optimistic that inflation had topped out and would start to normalize. However, three portfolio managers speaking at San Mateo, Calif.-based Franklin Templeton Investments’ Megatrends Webinar this week expressed reservations about what could be happening in the months to come.

“Rates could have to go higher than we expected and inflation could be here longer, and if so we think that has continued ramifications for asset prices and volatility given the environment we are coming out of, which was a period of low volatility and very low interest rates,” said Michael Clarfeld, portfolio manager for New York-based ClearBridge Investments. 

Matt Quinlan, a portfolio manager for Franklin Equity Group, echoed those sentiments, saying continued inflation and interest rates could lead to continued struggles. 

“What makes us cautious is earning estimates, which are in some sectors too high in our view, and slowing growth, and those numbers need to come down,” he said. “What makes you nervous is when you see a rally—when numbers need to come down in some cases—[and] maybe there isn’t quite an appreciation for that element.”

While he stopped short of predicting a recession, Quinlan said that companies continue to struggle to increase profits and emphasized that estimates must come down. That specifically needs to happen in parts of the industrial sector and its subsets, he said.

Thanh Bui, a portfolio manager at New York-based Clarion Partners, agreed that there was still a lot of uncertainty in the markets over inflation and interest rates. Her focus is real estate, and she said there are areas in that space that will serve as opportunities for investors. In particular, she pointed to real estate debt as a potential opportunity.

“As rates have increased, proceeds from conventional senior lenders have tightened,” she said. “This has created a financing gap where … debt investors can come in and fill this financing gap at very attractive returns at moderate levels.”

The other portfolio managers agreed that while the situation may look dark, there are opportunities for advisors and investors. Clarfeld pointed to dividend-paying stocks as vehicles that serve as a reliable option during high inflationary times.

“Dividends are critical as an offset to inflation in a client portfolio,” he said. “If you can invest in companies with pricing power … they can grow their earnings and then their dividends.”

Quinlan said the status of a dividend will indicate the health of a firm.

“We view the dividend profile as a way to look at the quality of a company, and oftentimes it’s a signal about their future,” he said. “A reduction in a dividend would be perhaps [a signal of] some financial stress while consistently increasing the dividend over time can signal a management team that is confident in results in a company that is performing well.”

He added that divided-paying stocks tend to come from larger and more established companies. Those looking to invest in these types of stocks will do it for their reliability.

When looking for the right investments, Quinlan said that there are options even in the current market. 

“We are looking for companies that can perform well through a cycle, not just in good times, but in bad times as well,” he said.

Clarfeld said dividend funds make the most sense in certain areas such as the energy and financial services sectors. Investors and advisors should look for those companies with pricing power and the ability to monitor their profit margins, he said.

Quinlan offered up his suggestions for smart chances in dividend stocks.

“We see opportunities for dividend-paying stocks across all sectors,” he said.

Having said that, there are certain areas that his firm is looking at, in particular the healthcare industry, the energy sector and a few subsets of defense.