Executive Vice President, Portfolio Manager · severe economic slowdown amid a toxic policy mix...
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June 22, 2016 Being a contrarian- minded investor isn’t easy at times—it’s difficult to stay fixed to one’s long-term convictions when the markets may not be cooperating in the short term. Dr. Michael Hasenstab, CIO of Templeton Global Macro, certainly has strong convictions about many aspects of the global economy and markets—and is not afraid to act on them. Speaking at the Morningstar conference in June, Hasenstab outlined the Global Macro team’s strategy and potential opportunities they see within three tiers: developed-market currencies, US Treasuries and emerging markets. Executive Vice President, Portfolio Manager Chief Investment Officer Templeton Global Macro
Transcript of Executive Vice President, Portfolio Manager · severe economic slowdown amid a toxic policy mix...
June22,2016
Beinga
contrarian-
minded
investor
isn’teasyat
times—it’s
difficultto
stayfixed
toone’s
long-term
convictions
whenthemarketsmaynotbecooperatingintheshortterm.Dr.MichaelHasenstab,CIOof
TempletonGlobalMacro,certainlyhasstrongconvictionsaboutmanyaspectsoftheglobal
economyandmarkets—andisnotafraidtoactonthem.SpeakingattheMorningstar
conferenceinJune,HasenstaboutlinedtheGlobalMacroteam’sstrategyandpotential
opportunitiestheyseewithinthreetiers:developed-marketcurrencies,USTreasuriesand
emergingmarkets.
ExecutiveVicePresident,PortfolioManagerChiefInvestmentOfficerTempletonGlobalMacro
Wearecurrentlyfocusedondirectionalvaluationopportunitiesinthreeprimaryareasof
theglobalbondmarkets:developed-marketcurrencies,USTreasuriesandlocal-currency
exposuresinemergingmarkets.Theseareasoffersomeprofoundopportunities,inour
view—perhapsthebestindecadesinsomecases.
Ourviewonthemajorcurrencypairs(USdollar/euro,USdollar/yen,USdollar/Australian
dollar)boilsdowntodivergencesinglobalmonetarypolicies.TheUSFederalReserve(Fed)
hasalreadystoppeditspost-2008-2009financial-crisisquantitativeeasing(QE)program
andwasthefirstmajorcentralbanktotightenpolicy.Bycontrast,theBankofJapan(BOJ)
andtheEuropeanCentralBank(ECB)havebeendeployingadditionalQEandexpanding
theirbalancesheets.Inourview,thesecentralbanksarenowherenearapositiontodo
anythingotherthancontinuetoprintmoneyandprovideultra-accommodativepolicy.
Ultimately,thesedivergencesrepresentthecornerstoneofourthesis;theUSdollarshould
re-exertitselfagainstboththeeuroandyen.
Atthebeginningoftheyear,mostmarketobserversthoughttheFedwasgoingtoraise
interestrates100basispointsoverthecourseof2016;thenthatexpectationquickly
collapsedwhentheFedreduceditstargetedpaceofhikesfortheyearfromfourtotwo.In
response,themarketbeganpricinginoneratehikeorevennoratehikesfor2016.There
wereevenfearsthattheUnitedStateswouldbeexperiencingdeflationorrecession.We
donotseedeflationaryconditionsintheUnitedStates;infact,weseemorerisksof
inflationmovinghigherthanlower.
WhenweevaluatetheFed’sdualmandateofmaximizingemploymentandstabilizing
inflation,weseeaprettyhealthylabormarket,onethatisgettingbacktopre-2008-2009
crisislevels,orevengettingbacktolevelsnotseensincethe1970s.Evenwagegrowth
(whichoperateswithalag)isstartingtomovehigherwhileunderlyinginflationpressures
remainpersistent.Fromalabormarketperspective,wethinkitishardtojustify
maintaininginterestratesatzeroortopursueanegative-interestratepolicyintheUnited
States.WewouldarguetheFedshouldberaisingratessoonerratherthanlatertoavoid
losingcredibility.
Bycontrast,Europe’sfinancialcrisistrailedthefinancialcrisisintheUnitedStatesbya
coupleofyears,andEurope’sgrowthcycleandpolicyresponsehavelikewisebeen
lagging;itmakessensethatinflationinEuropehaslaggedtheUnitedStatesaswell.
ThesedifferencesininflationdynamicsshouldputtheFedinpositiontotightenbefore
eitherEuropeorJapan,butitappearsthemarketsdonotseemtoagreewithusanddo
notbelievetheFedwillraiseratesaswebelieveitshould.
Throughouthistory,centralbankershavetypicallystatedtheirrationaleforraisinginterest
rateswellbeforeinflationhasactuallyflaredup.ItseemsliketheFedisoperating
differentlytoday;itiswaitinguntilafteritseesinflation.Wecouldthenseethelongendof
theyieldcurvebecomesomewhatunhingeddespiteallthefinancialsuppressionfactors
thathavebeenholdingitdown.Thecentralscenarioisarate-normalization(upward
adjustment)willoccur,butthemoreextremescenarioisthatmaybethatnormalization
comesinthemoredistantfuture.Thus,ourstrategyhasbeenfocusedonashortTreasury
posturetohelpprotectagainstthatpotentialriskofhigherrates.
AdiscussionaboutemergingmarketsgenerallyrequiressomeviewonChina.Westill
believeChinaisexperiencingasoftlanding(notahardlanding);thereisastructural
adjustmenttakingplacethatiscausingadecelerationingrowthbutnotanimplosion.
Certainly,areasoftheoldindustrial-basedeconomyareinrecession,butcounterbalancing
supportiscomingfromdomesticconsumption.Thesechangesinthedomesticdynamics
arearesultofdemographicshiftsthatoccurredasthepopulationbegantoage.Whenthe
supplyoflaborstartedtodrop,wageswerepushedup,andthatinturnpushedup
consumption.Peoplearenotconsumingmorebecauseofapolicy-directedstimulussuch
astaxrebates,forexample;theyareconsumingmorebecausetheyhavemoretospend.
ThishascausedsomehugerelocationsintheChineseeconomy;itisnolongergoingtobe
ahugemanufacturingbase,buttherearepositivedynamicsfromtheshiftstotheservice
sectors.
SomeanalystsbelievethatChinaisalreadyexperiencingahardlandingandsaythat
officialeconomicnumbersshowingotherwiseareinaccurate.However,wageswouldnot
beincreasingifthecountrywereexperiencingawidespreadrecessionwithmajorjob
losses,yetwagescontinuetorise.Additionally,ifChina’seconomywereonlygrowingin
thelowsingle-digits(say3%),wewouldseegreatersocialunrest.Wearenotseeingthat;
rather,weseeathrivingservicesector,productivityinnovationsandagrowingmiddle
class.
Insum,despitetheovercapacityonthemanufacturingsideinChina,whichhasbeen
contracting,weseeasoftlandingfortheoveralleconomy.Chinamaynotbeexperiencing
off-to-theracesgrowth,butitcertainlyisnotexperiencingacollapse,asmanypeople
oftenconcludebyonlylookingatthemanufacturingsideoftheeconomy.
TheotherpocketofstrengthinChinahasbeenthehousingmarket.Thisresurgencehas
raisedsomequestionsaboutapotentialbubbleforming.Ifthegovernmentoverstimulates
thehousingmarketonanationallevel,wewouldbeonthelookoutforacorrection.
However,atthispointwethinkChina’shousingmarketisstillinanappropriate
acceleratoryphase—inthetier-twoortier-threecities—andconsumptionshouldbe
supportiveforatleastthenextyearortwo.
Emergingmarketshaveprobablybeenthemost-hatedassetclassforthelasttwoyears.
TheJ.P.MorganEmergingMarketCurrencyIndexplungednotonlythroughitslowsduring
theglobalfinancialcrisis,butalsothroughthelowsitreachedduringtheAsianfinancial
crisisinthe1990s. PartofthiswastiedtothemarketspricinginfutureFedratehikesand
partofitwastiedtospecificcrisesinsomecountries.Certainly,Brazilhasexperienceda
severeeconomicslowdownamidatoxicpolicymixthatcausedtheeconomytoimplode.
ThattypeofsituationcoupledwithconcernsaboutChinacausedpeopletopulltheir
moneyoutoftheemergingmarketassetclassasawhole,butinourview,themarkets
overshotonthedownside.
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Lastyearandearlythisyear,IspentalotoftimevisitingcountriesinAsiatoseeifmarket
valuationsaccuratelymatchedtheunderlyingfundamentals.Indonesiawasoneofthose
countries.ThemarketsseemedtobeconveyingthatIndonesia’seconomywasasbadas—
orworsethan—1988,whentheyhadriotsinthestreets,agovernmentcollapse,corporate
bankruptciesandamassiveeconomicrecession.Indonesiaexperiencedgrowthof4.8%
lastyear andappearstohaveastableregimewithaverygoodpresidentwhohasbeen
tacklingissuesthathavenotbeenaddressedindecades.Thecurrentaccountappearsto
berelativelyinbalance,andwedonotseemassivecorporatebankruptcies.Thoseand
otherindicatorswerenotscreamingcrisistous.Instead,webecameconvincedthatthe
marketswereoverreactingandthatIndonesiarepresentedanattractiveinvestment
opportunity.
Mexicoisanotherexcellentexample.Themarketshavebeenpricinginacrisis—perhaps
worsethanthe“TequilaCrisis”ofthemid-1990s.Butwedonotseeit.Growthhasbeen
solid,inflationappearsrelativelyundercontrol,andMexicocontinuestohavefairly
manageabledebt,almostallofwhichisdomesticdebt.Mexicoisacountrywefeelshould
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beabletoabsorbtheimpactofaFedratehike.Infact,whentheFedraisedratesin
December2015,theBankofMexicofollowedwithpolicytightening.Mexicoalsocontinued
tomakeresponsiblefiscaladjustmentsbycuttingitsbudgettocopewiththeimpactof
loweroilprices.ThesepolicymovesatthetimehelpedbolstertheMexicanpeso,andwe
seeindicationsthatMexicocanandwillcontinuewiththesetypesofpolicyresponses.
Ofcourse,therearealsoahandfulofcountriesthataremorevulnerabletoexternal
shockssuchasaFedratehike—theseincludecountrieslikeTurkey,Venezuela,South
AfricaandArgentina.Butonthewhole,webelievethemajorityofemergingmarket
countriesdonothavethemagnitudesofvulnerabilitiesthatmarketshavepricedin.It
seemsthatpeopleknowemergingmarketsarenotallthesamebutmarketbehavior
hasn’trecentlyreflectedthedifferences.Wheninvestorscrowdtogetheranddirectionally
overreact,thatoftenindicatesanopportunity—weseethatcurrentlyplayingoutin
emergingmarkets.Wethinkitisessentialtogoinandbeselectivewithinthecategory
andnottojustbuyintothebroadassetclassasawhole.Therearesomeovervalued
exchangerates,andatthesametimetherearesomeundervaluedexchangerates.Itis
importanttorecognizethosedifferencesinordertocapturethestrongestvaluation
opportunitieswhileavoidingtheareasthatarelegitimatelyvulnerable.
Therealchallengefromourperspectiveisfindingcountriesthatmaybeinacrisisbut
appeartoustohaveaworkablewayofexitingthatcrisis.Inthepast,wehaveoftentaken
contrarianviewsonspecificcountriesthatwereinsuchaposition.Recently,Brazil
appearedonourradarasacountryincrisisthatwebelievehastheabilitytorecoverand
finditswayout.Wedonotinvestincountriessimplybecausetheyareincrisis;rather,we
lookforopportunitieswherewebelievethemarketshaveoverpricedtherisksand
underappreciatethelonger-termfundamentalpotentialofthecountry.
RegardingBrazil,it’sourviewthatPresidentDilmaRousseffdroveBrazilintocrisiswitha
potentpolicymix.Butwiththeimpeachmentprocessunderway,weseethecountry
politicallyreversingcourseandheadingintherightdirection.Werecognizehowandwhy
thingswentwronginBrazilandweseehowthecountry’scurrentpoliticalregimeappears
toberectifyingthesituation.
TheDilmaadministrationforcedthecentralbanktocutinterestratestoanexceptionally
lowlevel,leadingtohighinflationandfinancialinstability.Thosepolicieshavenowbeen
reversed;significantlyhigherinterestrateshavebeenputinplacetoreinininflationand
restorefinancialintegrity.Additionally,Brazil’soutlookissupportedbythefactthatitdoes
nothavealotofexternaldebt,soitsfiscalissuesdonothavetobefixedrightaway.The
countrywillhavetodealwithsomestructuralissuesultimately,butitdoeshavethe
benefitoftimegiventherelativehealthofitsexternalconditions.Ifthenewadministration
followsthroughonitsplanstostoptheexcessesofthepast,webelieveBrazilhas
significantpotentialoverthelongerterm;thecountrywouldmeaningfullybenefitfroma
stableregimethatcancorrectthepolicymix.
Overall,wecontinuetobelievethatseveralareaswithinemergingmarketspresentonce-
in-a-decadeopportunities,thoughitisimportanttorecognizethattheassetclassisnot
uniformandthattherearespecificvulnerabilitiesthatshouldbeavoided.Weremainvery
optimisticaboutseveraloftheseopportunitiesinthelocal-currencymarkets,andbelieve
thatpatiencewillultimatelyberewarded.
Foramoredetailedanalysis,read“GlobalMacroShifts”aresearch-basedbriefingonglobaleconomiesfeaturingtheanalysisandviewsofDr.MichaelHasenstabandseniormembersofTempletonGlobalMacro.Dr.HasenstabandhisteammanageTempleton’sglobalbondstrategies,includingunconstrainedfixedincome,currencyandglobalmacro.Thiseconomicteam,trainedinsomeoftheleadinguniversitiesintheworld,integratesglobalmacroeconomicanalysiswithin-depthcountryresearchtohelpidentifylong-termimbalancesthattranslatetoinvestmentopportunities.
TogetinsightsfromFranklinTempletonInvestmentsdeliveredtoyourinbox,subscribeto
theBeyondBulls&Bearsblog.
Fortimelyinvestingtidbits,followusonTwitter@FTI_USandonLinkedIn.
Thecomments,opinionsandanalysesexpressedhereinareforinformationalpurposesonlyandshouldnotbeconsideredindividualinvestmentadviceorrecommendationstoinvestinanysecurityortoadoptanyinvestmentstrategy.Becausemarketandeconomicconditionsaresubjecttorapidchange,comments,opinionsandanalysesarerenderedasofthedateofthepostingandmaychangewithoutnotice.Thematerialisnotintendedasacompleteanalysisofeverymaterialfactregardinganycountry,region,market,industry,investmentorstrategy.
ThisinformationisintendedforUSresidentsonly.
Allinvestmentsinvolverisks,includingpossiblelossofprincipal.Bondpricesgenerally
moveintheoppositedirectionofinterestrates.Thus,asthepricesofbondsinan
investmentportfolioadjusttoariseininterestrates,thevalueoftheportfoliomay
decline.Foreignsecuritiesinvolvespecialrisks,includingcurrencyfluctuationsand
economicandpoliticaluncertainties.Investmentsinemergingmarketsinvolveheightened
risksrelatedtothesamefactors,inadditiontothoseassociatedwiththesemarkets’
smallersizeandlesserliquidity.
___________________________________________________________________________
1.Source:J.P.MorganCurrencyIndex,April30,2016.Indexesareunmanaged,andone
cannotinvestdirectlyinanindex.Theydonotreflectanyfees,expensesorsalescharges.
Pastperformanceisnotanindicatororaguaranteeoffutureperformance.See
www.franklintempletondatasources.comforadditionaldataproviderinformation.
2.Source:IMFWorldEconomicOutlookdatabase,April2016.
PostedinEmergingMarkets,FixedIncome,Perspectives TaggedBrazil,China,currencies,
emergingmarkets,FederalReserve,fixedincome,foreignexchange,globalbonds,interest
rates,Mexico,MichaelHasenstab,Monetarypolicy,TempletonGlobalMacro
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