Download Winners and losers from the oil price decline

January 11, 2013
Portfolio Update
27 January 2015
Winners and Losers from Oil Price Decline
PERSPECTIVE FROM THE FRANKLIN TEMPLETON GLOBAL BOND GROUP
Michael Hasenstab, Ph.D.
Executive Vice President, Portfolio
Manager, Chief Investment
Officer, Global Bonds
Franklin Templeton Fixed Income
Group®
Sonal Desai, Ph.D.
Senior Vice President, Portfolio
Manager, Director of Research,
Global Bonds
Franklin Templeton Fixed Income
Group®
Global oil prices sharply declined by 50 percentage points over
Chart 1: Brent Crude Price per Barrel (US$)
the course of 2014. The fall from a 2014-peak of over
3 January 2014–31 December 2014
US$110/barrel in June to around US$56/barrel by end-
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December has triggered a broad-based selloff of emergingmarket assets, including currencies. A variety of different
reasons appear to have contributed to the downward pressure
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on oil prices on both the supply and demand side. On the supply
side, technological innovations in drilling techniques have led to
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an increase in output from non-OPEC nations and added
inventory. At the same time, OPEC has not yet taken steps to
reduce member country production. On the demand side,
concerns regarding a slowdown in global growth may have
negatively influenced demand for crude. If we look at the
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reduction in prices, we have seen both clear winners and losers
emerge. Commodity producers in which oil is the main revenue
source could face greater vulnerabilities and budgetary stress.
However, as most major economies are oil importers, this price
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decline, in our view, is likely to add rather than subtract from
global growth; the effect of the decline in oil prices is
Source: Bloomberg
comparable to a tax cut for these economies. Nonetheless, the
sharp decline has led to volatility in asset prices and triggered
broad-based fear across nearly all emerging markets.
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Bifurcated Impact – Winners/Losers
We believe select countries that lack reserve funds and that rely
heavily on oil to support state budgets and current account
balances will likely suffer from lost revenue and lower growth.
Oil related revenues for the major oil-producing countries of
Russia and Venezuela represent a significant portion of their
respective total fiscal revenue. These countries have already
been facing deep economic problems and are likely to
experience more strains should depressed oil prices persist,
with meaningful cuts to GDP (gross domestic product) possible.
On the other hand, we believe the decline in oil prices is
potentially favorable for a host of net-energy importers ranging
from developed nations such as Japan and certain European
Union members to emerging markets such as India and South
Korea. The drop in prices also has the potential to bolster
economic reform in certain economies. Recently, many
emerging-market countries, such as Malaysia and Indonesia,
have moved toward cutting fuel subsidies while others, such as
India and Egypt, have made similar policy commitments to
improve their public finances.
Commodity and Currency Volatility
In times of uncertainty and volatility, short-term panic and
contagion have the potential to trigger broad-based selloffs
across emerging markets and risky assets, including currencies.
The decline in oil price has placed downward pressure on
foreign exchange markets, particularly those of countries
dependent on oil sales such as Russia (see chart below). We
expect that currencies with strong ties to commodity prices will
likely remain under pressure if softer oil prices persist. However,
we believe currencies of countries that have a diverse export
base and a fiscal budget supported by multiple revenue sources
are likely to be more resilient and could potentially outperform
those of countries highly reliant on a single sector when volatility
subsides and fundamental factors drive valuations.
Portfolio Update
In the short term, the broad strengthening of the US dollar along
with depreciating emerging-market currency movements from
lower energy prices and renewed concerns over global growth
have weighed on the Templeton Global Bond Plus strategy’s
performance. However, the fundamental outlook underpinning
our currency positions has not changed; we expect the
currencies of economies with relatively strong growth and with
more prudent policies to likely appreciate against the currencies
of the G3 (i.e., the United States, the eurozone and Japan) over
the longer term. As part of the fundamental research process,
our investment team assesses a country’s oil price exposure
and whether a country has multiple levers to deal with an oil
price shock. We seek to avoid countries that we believe do not
have the ability to deal with declining oil prices, such as
Venezuela, and have generally favored countries with strong
fundamentals and a broad mix of industries like Malaysia and
Mexico. Moreover, a handful of Asian countries, from South
Korea to India, are large oil importers: A decline in oil prices
would likely be favorable to their economies and current
account dynamics.
Chart 2: Russian Ruble Performance Indexed
As at 31 December 2014
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60
50
40
3/1/14
3/3/14
1/5/14
29/6/14
27/8/14
25/10/14
23/12/14
31/12/14
(Index) RUB/USD – Price
Source: FactSet. See www.franklintempletondatasources.com for additional data provider information.
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Winners and Losers from Oil Price Decline
2
Strong Long-Term Performance
Despite the recent negative performance, as at 31 December
Amid the headline news and market noise, we encourage
investors to be patient and maintain a longer-term focus. We
believe the ability to weather short-term volatility enables
investors to achieve strong risk-adjusted performance that is
based on underlying fundamentals.
2014, the Templeton Global Bond Plus Composite outperformed
its benchmark over the one-, three-, five- and 10-year periods.
Table 1: Composite Performance Data
Total Returns (USD %)
As at 31 December 2014
Inception Date
3 Mo
1 Yr
3 Yr*
5 Yr*
10 Yr*
Templeton Global Bond Plus – Gross of Fees
31/12/1993
-1.55
2.50
7.32
6.72
8.51
Templeton Global Bond Plus – Net of Fees
31/12/1993
-1.66
2.04
6.84
5.98
7.53
JP Morgan Global Government Bond Index (JPM GGBI)
-0.91
0.67
-0.88
2.13
3.36
Excess return (gross of fees) vs. JPM GGBI
-0.64
1.83
8.20
4.59
5.15
Excess return (net of fees) vs. JPM GGBI
-0.75
1.37
7.72
3.85
4.17
*Periods greater than one year are shown as average annual total returns.
Performance data represents past performance, which does not guarantee future results. Current performance may differ
from figures shown. Total returns are presented in USD both gross and net of investment advisory fees, are inclusive of commission
and transaction costs, and assume reinvestment of any dividends, interest income, capital gains or other earnings. An index is
unmanaged and one cannot invest directly in an index. The benchmark is used for comparative purposes only and is provided to
represent the investment environment existing during the time periods shown. The Templeton Global Bond Plus strategy is
managed independent of any benchmark. The differences between the strategy and its benchmark may include but are not limited
to such differences as level of risk, holdings, duration, average credit quality and geographic allocation.
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Winners and Losers from Oil Price Decline
3
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Currency rates may fluctuate significantly over short periods of
time, and can reduce returns. Derivatives, including currency
management strategies, involve costs and can create economic
leverage in the portfolio which may result in significant volatility
and cause the portfolio to participate in losses (as well as
enable gains) on an amount that exceeds its initial investment.
The portfolio may not achieve the anticipated benefits, and may
realize losses when a counterparty fails to perform as promised.
Foreign securities involve special risks, including currency
fluctuations and economic and political uncertainties.
Investments in emerging markets involve heightened risks
related to the same factors, in addition to those associated with
these markets’ smaller size and lesser liquidity. Investments in
lower-rated bonds include higher risk of default and loss of
principal. Changes in interest rates will affect the value of the
portfolio. Bond prices generally move in the opposite direction of
interest rates. As the prices of bonds in the portfolios adjust to a
rise in interest rates, the value of the portfolio may decline.
Changes in the financial strength of a bond issuer or in a bond’s
credit rating may affect its value.
COMPLIANCE STATEMENT AND OTHER INFORMATION
Franklin claims compliance with the Global Investment
Performance Standards (GIPS®).
Franklin (the “firm”) encompasses the equity, fixed income and
balanced accounts managed by Franklin Advisers, Inc., and
related Franklin affiliates, including, effective 1 January 2007,
the equity accounts managed by the institutional investment
teams of Franklin Templeton Institutional, LLC under the former
firm name of Fiduciary Global Advisors. The combined equity
assets of Franklin and Fiduciary Global Advisors form the
Franklin Equity Group (formerly Franklin Global Advisers prior to
30 June 2010) unit of Franklin. Effective 1 January 2006, the
fixed income assets managed from that date forward by
Franklin Templeton Institutional, LLC (“FTI”) or its related
affiliates (managed previously by Fiduciary Trust Company
International - Institutional Division or “FTCI’s Institutional
Division”) that went through the institutional portfolio review
process were combined with the fixed income assets of Franklin
to form the Franklin Templeton Fixed Income unit of Franklin.
Total returns are presented in U.S. dollars both gross and net of
investment advisory fees, are inclusive of commissions and
transaction costs, and assume reinvestment of any dividends,
interest income, capital gains, or other earnings. For pooled
investment vehicles, gross of fee returns are based on the
primary share class (typically Class A) and are calculated by
adding 1⁄12 of the funds’ annual expense ratio, which includes
management fees and all other fund expenses, to the 12
monthly returns for each fiscal year. Net of fee returns for
separate accounts are net of actual management fees. For
pooled investment vehicles or non-fee paying accounts, net of
fee returns are calculated by applying the highest breakpoint
from the standard institutional fee schedule to the gross
performance. Returns for periods of less than one year are not
annualized. Performance data is shown rounded to the nearest
hundredth. The performance presented for Franklin is in
compliance with GIPS® from 1 January 2000 to the present.
Past performance does not guarantee future results and
results may differ over future time periods.
To receive a complete list and description of Franklin
composites (including any single account mutual fund
composite) and/or a presentation that adheres to the GIPS®
standards for any composite, contact your Franklin Templeton
representative at the following address:
Franklin Templeton Investments
One Franklin Parkway
Attention: Performance Analysis and Investment Risk SM-910-1
San Mateo, CA 94403 USA
Templeton Global Bond Plus Composite:
Templeton Global Bond Plus Composite consists of all portfolios
managed on a fully discretionary basis with an investment
objective that seeks to achieve above average total return by
investing principally in a portfolio of fixed or floating rate debt
securities and debt obligations issued by government or
government-related entities worldwide. The strategy may also
purchase debt obligations issued by supranational entities
organised or supported by several national governments, such
as the International Bank for Reconstruction and Development
or the European Investment Bank. The portfolio may invest a
portion in below investment grade bonds (rated below BBB-).
The strategy may also utilise financial derivative instruments
dealt in either regulated or over-the-counter markets for
investment purposes. These financial derivative instruments
which are used on a less frequent basis may include, inter alia,
swaps (such as credit default swaps or total return swaps),
forwards and cross forwards, futures contracts (including those
on government securities), as well as options. The strategy
regularly takes tactical exposure to various foreign currencies,
including through the frequent use of foreign currency forward
contracts and cross forwards, and, to a lesser degree, futures
contracts and currency options. Effective 31 March 2014,
Franklin Templeton Global Bond Plus Composite was renamed
as Templeton Global Bond Plus Composite.
The JP Morgan Global Government Bond Index is used as a
benchmark. The benchmark is used for comparative purposes
only and is provided to represent the investment environment
existing during the time periods shown. The JP Morgan Global
Government Bond Index is a market value weighted fixed
income index comprised of government bonds in developed
countries.
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Winners and Losers from Oil Price Decline
4
IMPORTANT LEGAL INFORMATION
This document is intended for the use of qualified and
institutional/professional investors only. It is a confidential
communication to, and solely for the use of, such persons and
is not intended for general public distribution. It is intended to
provide general information only, and does not constitute legal
or tax advice nor is it an offer of any investment fund or service.
Nothing in this document should be construed as investment
advice or a recommendation, and it was prepared without
regard to the specific objectives, financial situation or needs of
any particular person who may receive it. The descriptions in
this document are intended to provide a general overview of our
investment philosophy, strategies, services and other related
matters. Any research and analysis contained in this
presentation has been procured by Franklin Templeton
Investments for its own purposes and may be acted upon in that
connection and, as such, is provided to you incidentally.
Franklin Templeton Investments shall not be held liable for any
inaccuracy of information contained in this document or for any
errors or omissions in its contents, regardless of the cause of
such inaccuracy, error or omission. Any views expressed are
the views of the fund manager and do not constitute investment
advice. The underlying assumptions and these views are
subject to change. Franklin Templeton Investments accepts no
liability whatsoever for any direct or indirect consequential loss
arising from the use of this commentary or any information,
opinion or estimate herein. Any performance quoted is
historical. Past performance is not an indicator nor a
guarantee of future performance. Investments entail risks.
The value of investments and the income from them can go
down as well as up and you may not get back the full amount
that you invested. Any prediction, projection or forecast on the
economy, stock market, bond market or the economic trends of
the markets is not necessarily indicative of the future or likely
performance.
Franklin Templeton Investments has exercised professional
care and diligence in the collection of information in this
document. However, data from third party sources may have
been used in its preparation and Franklin Templeton
Investments has not independently verified, validated or audited
such data. Opinions expressed are the authors’ at publication
date and they are subject to change without prior notice. Given
the rapidly changing market environment, we disclaim
responsibility for updating this document.
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