Download Finding Value in Fixed Income - Jan 13

Video Transcript:
Finding Value in Fixed Income
January 2013
Michael Hasenstab, Ph.D.
Senior Vice President, Portfolio Manager
Co-Director, International Bond Department
Franklin Templeton Fixed Income Group®
This is a transcript of a video recorded in January 2013.
Jack Bailey: Welcome to Franklin Templeton’s Global Investment
Perspectives. I’m Jack Bailey, and joining me in the studio today is
the co-director of our International Bond Department, Dr. Michael
Hasenstab, thanks for being here.
Michael Hasenstab: My pleasure. Thank you.
Jack Bailey: Happy New Year. 2012 ended with quite a few loose
ends still dangling out there; the fiscal cliff conversation in the US
was still open and has only been partially resolved. There are a lot
of question marks hanging over the eurozone throughout 2012.
We are now into 2013. What’s the biggest concern on your mind
as we look ahead into this next year?
Michael Hasenstab: First off, happy New Year to you as well.
Well, it’s true. Politicians did what they do best in most cases —
particularly in the US — they kicked the can down the road, as we
have been talking about for a long time, and they did it once again
with the fiscal cliff. So they haven’t really addressed the
fundamental financing issues that the US faces. They avoided a
short-term problem, but have pushed it down in the future.
However, I think in both the US and Europe and globally, we have
seen progress towards a more sustainable global economic
picture. The “Armageddon” scenario in Europe didn’t materialise
and it looks even less likely that that is a probable outcome. The
US economy has shown signs of stabilisation, albeit at a fairly
weak level, but it is stabilising. China didn’t face the hard landing
that everyone was afraid of and shows signs of growth stabilisation
and even some slight uptick. So, I think we’re starting 2013 on
decent economic footing, which is the good news.
Now the risks are probably more on the political policy side.
Politicians in Europe need to move forward with fiscal union, with
banking union, with more political cohesion. In the US, we have to
deal with our deficit issue. So those are still on the horizon and do
present some risk events, but they tend to be longer-term issues.
The good news is we are starting with at least some decent footing
in terms of the economic environment that we’re in.
Global Fixed Income Investing
Michael Hasenstab discusses finding value in countries and currencies
outside of the US, Europe and Japan and how fundamentals in Ireland
continue to improve.
Jack Bailey: Michael, can you share with us any specific countries
or sectors where you’re particularly optimistic?
Michael Hasenstab: Well, the good news about the currencies is
that the worse one country does in terms of managing the value of
their currency, the better for another country. And so as the US
and Europe and Japan increasingly follow excessively easy
monetary policy and debase the value of those currencies, the
offset is that a number of countries, our trading partners, look
increasingly like they have good value.
So places in Asia, whether it be Korea, Malaysia, Singapore;
places in Europe such as Sweden or Poland; there are a lot of
countries both in the developed and in the emerging who are
running more responsible fiscal policy, their growth is stronger,
they are offering us higher interest rates and the currencies are not
being debased. So while we see some problems in terms of
currency valuations in the G3 economies [US, Europe and Japan],
that actually presents a good investment opportunity elsewhere.
The other area specifically we are finding value is in emerging
markets. These countries have come a long way over the last
decade: Their debt levels are lower, their growth is stronger, they
have better policies in place in terms of the institutions and the
level of corporate governance has improved dramatically. So we’re
finding a lot of investment opportunities in emerging markets.
The US economic activity is important. Our central scenario is that
US economic activity will range around the 2% level, which is not
great but it’s certainly not a collapse. And so that will provide some
bedrock of global stability.
In terms of valuations in US Treasuries, we would need to see
much higher yields combined with a lot better fiscal policy for us to
find value in US Treasuries. Right now, US Treasuries in our view
are being artificially suppressed in terms of their yield, artificially
inflated in terms of their price, because our own government,
through the Federal Reserve Bank, is buying a lot of those assets
and there was a panic about Europe that forced a lot of buyers into
the market.
ofessional Investor Use Only. Not For Distribution to Retail Investors
Franklin Templeton Fixed Income
| January 2013
We think both of those sources of buyers eventually dissipate. The
Fed can’t go on buying forever, and eventually they have to stop
buying, and eventually they have to actually sell. And things in
Europe, while troubling in terms of entering a protracted period of
slow growth, don’t look near the type of critical condition that we
saw a year or two years ago. So that buyer base seems like it will
increasingly be absent; that makes US Treasuries vulnerable.
Jack Bailey: And you have been very vocal in your support for the
actions being taken in Ireland as they get their fiscal house in
order. Can you update us on your views on Ireland? Do those hold
going forward into 2013?
Michael Hasenstab: Ireland, as we have talked in the past, I think
really embodies the Franklin Templeton Investment philosophy —
do a lot of fundamental research, identify good value and buy
something when everyone else hates it. And that was the Irish
story. I think it attracted so much attention because most of the
market disliked it and, frankly, it was a good sign that we are doing
our job, that we were out of consensus.
The fundamentals there continue to improve in terms of economic
activity. They are nowhere back to where they can be and
probably will be, but they are either arguably the fastest or the
second fastest growing economy in Europe, sort of close with
Germany in terms of their economic performance. Their finances
are increasingly getting back on track. The country is showing full
commitment to their programme.
Jack Bailey: In terms of emerging Europe, how important is
Germany’s economic growth to the investment case there?
Michael Hasenstab: Germany is quite important. People often
think of Eastern Europe and Central Europe as tied to European
growth. The reality is actually it’s more tied to German growth and
the reality beyond that is actually it’s more tied to German exports
because the sourcing of German exports or the supply chain for
German exports, a lot of that is actually in Poland, in Slovakia, in
Hungary. So the German export machine remains quite strong,
and, as a result, the rest of Central and Eastern Europe benefit
from feeding into that chain. So Germany’s competitiveness as an
exporter as well as a domestic economy really benefits Central
and Eastern Europe.
Jack Bailey: Michael, really appreciate you taking the time to be
with us. It’s always a pleasure.
Michael Hasenstab: My pleasure. Thank you.
Jack Bailey: And thank you for watching. This has been Global
Investment Perspectives from Franklin Templeton Investments.
Copyright © 2013 Franklin Templeton Investments. All rights reserved
All investments involve risks, including loss of principle. Special risks are associated with foreign investing, including currency fluctuations,
economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in
addition to those associated with their smaller size and lesser liquidity. The use of derivatives and other foreign currency techniques involve
special risks as such techniques may not achieve the anticipated benefits and/or may result in losses. Bond prices generally move in the
opposite direction of interest rates. Thus, as the prices of bonds in investment portfolios adjust to a rise in interest rates, the value of a
portfolio may decline. Currency rates may fluctuate significantly over short periods of time and reduce returns.
This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or an
invitation to apply for shares of any Franklin Templeton Investment fund. Nothing in this document should be construed as investment
advice. Opinions expressed within the promotion are subject to change without prior notice. Data from third party sources may have been
used in its preparation and Franklin Templeton has not independently verified, validated or audited such data. The value of shares in the
Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Franklin Templeton
Investment shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or
omissions in its contents, regardless of the cause of such inaccuracy, error or omission.
For more information, UK investors should contact: Franklin Templeton Investments, Telephone: 0800 305 306, Email:
[email protected] or write to us at the address below. In Denmark, Finland, Norway or Sweden, please contact: Franklin
Templeton Investment Management Limited, Birger Jarlsgatan 4, SE-11434, Stockholm, Sweden. Telephone: +46 (0)8 545 012 30, Email:
[email protected]
Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: The Adelphi, 1-11 John Adam Street, London
WC2N 6HT. FTIML is authorised and regulated by the Financial Services Authority and is authorised to conduct investment business in
Denmark by the Finanstilsynet, in Sweden by the Finansinspektionen, in Norway with Kredittilsynet, and in Finland with
Rahoitustarkastuksen.
FURTHER INFORMATION:
UK Investors
Tel: 0800 305 306
Email: [email protected]
www.franklintempleton.co.uk
Franklin Templeton Investments
Nordic Investors
Tel:+ 46 (0) 8 545 012 30
Email: [email protected]
www.franklintempletonnordic.com
For Professional
Investor Use Only. Not For Distribution to Retail Investors