Dr. Michael Hasenstab Market Outlook
Jeannette Simmons: Welcome to Franklin Templeton’s Global Investment Perspectives. Today is June 9th. I’m Jeannette Simmons and speaking with me is Dr. Michael Hasenstab, Senior Vice President and Co-Director of the International Bond Group. Michael, it’s nice to see you today.
Michael Hasenstab: Good to be back.
Jeannette Simmons: What are the major themes you and your team are currently focused on, and where are you finding opportunities in the sovereign credit, currency, and duration markets?
Michael Hasenstab: Certainly, there’s a lot of volatility out there, but we are finding a number of opportunities where we can invest in very shortdated bonds in countries with good credit conditions. So we’re able to earn a decent yield. These are countries that have been raising interest rates because of stronger growth without taking a lot of interest rate risk and without taking a lot of credit risk. The objective right now across most of our global strategies is to generate a good yield without taking a lot of interest rate risk or a lot of credit risk, but taking advantage of currency opportunities which we believe will benefit over the longer term.
Jeannette Simmons: What are the biggest challenges to global fixed income markets in the next six months?
Michael Hasenstab: I think the biggest challenges are an expectation of rising interest rates, so that’s why our strategy is so focused on minimizing interest-rate exposure and taking advantage of some of the distortions that are being created by excessively loose monetary policy in Japan, the U.S. and Europe [and] excessive fiscal policy in the U.S. and Japan, and looking for the other countries which will benefit from tighter policy, stronger growth, higher interest rates.
Jeannette Simmons: Can you provide your outlook on potential solutions to the current U.S. debt situation, the seeming government gridlock and the potential impact to the U.S. dollar and U.S. bond markets?
Michael Hasenstab: The solution would be politicians stop being politicians and actually focus on the real issues. Unfortunately we’re entering the 2012 election cycle and the chances of a serious fiscal reform diminish by the day. Not only do the Democrats and Republicans disagree, there’s disagreement within each party as to what the plan should be, so we see very low likelihood that a meaningful fiscal reform of the entitlements is met. It’s likely there is a temporary or small solution that’s arrived at around the time of the debt ceiling, but it’s unlikely that it is the big fiscal reform that is needed to get rid of this $1.5 trillion annual deficit.
Jeannette Simmons: Many people are concerned about the increased levels of inflation particularly in fast growing emerging markets like China, what is your outlook on the emerging markets and how are you positioning the portfolio to take advantage of these dynamics?
Michael Hasenstab: That is an important issue and so far the good news is they [emerging market policymakers] have stayed ahead of that curve and we haven’t seen runaway inflation in any significant way in any of the major economies. There have been a few exceptions but in the major countries like China, Brazil, Indonesia, or Malaysia, they have stayed ahead of that curve and it is going to be crucial in our analysis going forward that we keep monitoring where these policymakers are, do they tighten interest rates enough, do they cut back fiscal spending, do they allow exchange rates to appreciate? Those, so far, have been policies they have followed and the good news is that makes this growth more sustainable and the risks of an asset price bubble or runaway inflation at this point remain very minimal in many of those economies.
Jeannette Simmons: There are continued concerns of the debt situation for Greece and some of the GIIPS [Greece, Ireland, Italy, Portugal, and Spain]. What is the likelihood of European default occurring in light of the pending known leadership at the IMF [International Monetary Fund] and what would the potential impacts be?
Michael Hasenstab: Ultimately, we think Greek debt needs to be restructured. It’s just a matter of when and where the burden sharing comes out and that is really a political debate and discussion that’s going to take place probably over the next couple of years. But that doesn’t have in our mind a systemic risk to the entire Eurozone. It needs to be dealt with, but the conditions in Greece and Portugal are very different than the conditions in Ireland or Spain, which are in far better shape. Both Ireland and Spain have met their fiscal targets whereas Greece has missed them and we don’t see a very optimistic scenario in Portugal. So, I think within the GIIPS, there are two camps: there are Greece and Portugal, which face very difficult and likely insurmountable problems with regards to their indebtedness, and there are Ireland and Spain, which are on track. There’s a very difficult situation but it is manageable. And as a result, I think there are going to be a lot of political challenges that come up over the next year with how to share the burden of a Greek restructuring, but ultimately we do not believe it would lead to a systemic collapse of the banking or financial system.
Jeannette Simmons: Great perspectives Michael. Thank you so much for joining us today.
Michael Hasenstab: My pleasure.
Jeannette Simmons: And thank you for watching Franklin Templeton’s Global Investment Perspectives.
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