Templetonís Hasenstab: How to get ready for rising rates

Jun 30, 2014 @ 12:00 am

Runtime: 7:36

Michael Hasenstab, portfolio manager at the Templeton Global Bond Fund, discusses how his portfolio is positioned for a positive return as rates rise and why fears of U.S. deflation are overstated.

Video Transcript

[MUSIC] This week on Wealthtrack, a world traveling great investor, who tracks to unusual, out of favor places, to find value in shunned bonds and currencies. Why has Templeton Global Bond Funds' Michael Hasenstab visited China, South Korea, and even Ukraine recently? His contrary views are next on Consuelo Mack Wealthtrack. [MUSIC] Let's talk about how you are diversifying your bond portfolio and, and I'm also interested in the fact that you've kept your durations or maturities and your interest rate risk which there's more interest rate risk in a, in a bond or fixed income security that the farther out you go in maturity. So you've kept your maturities quite low in your portfolio. Why? Generally we think we're at the turning point in interest rates. As I mentioned, for 30 years, rates have been coming down Right. We think that is over. And so we wanna position for an environment where rates go higher. And to preserve capital in a higher interest rate environment, you need to have very short duration assets so that you're not subject to the price effects when rates go higher, the negative price effects. So, yeah, our portfolio, by and large, has very, very short duration. Negative correlation to rates and that's our way of positioning for what we think will be a very different interest rate environment going forward. Have you been surprised at how relatively benign at least in the developed world that interest rates have been? Yes. We thought it would probably go higher earlier. Right. But at the end of the day would rather be early than wrong. And so we positioned very defensively on interest rates for a number of years and, and that didn't work for some time and then when it worked it it was very dramatic. We think about last year when rates moved over 100 basis points in a very short period of time. And, and you're talking about U.S. Treasuries. Right. U.S. Treasuries, and So, we were glad that we were defensively positioned, prior to that event. So that when rates went higher, and most bond funds. U.S. Treasury Market lost about five percent value. We were still able to generate a positive return in that environment. So, for us, it's all about how do we get a positive return in an environment where most bond funds. Generate negative returns when rates go higher. So, yes, we were early. But as I said, I'd rather be early than wrong. And what about your inflation outlook? And again, if you look at the way a number of other global bond managers are. Are talking. They're and, and central bankers for instance are talking. They're worried about deflation or at least disinflation and yet you're still focused on inflation. Why? We've printed so much money globally. It's not just the fed. But it's the ECB. It's the Swiss national bank. And it's now the bank of Japan. Have flooded the world with liquidity and it's only a matter of time before that feeds into inflationary pressure. So we don't know the exact timing, but we do know, at some point, we will have an inflationary environment that's very different than what we have today. The other factor about this debate between inflation and deflation, think about it here in the US. We had a period with double digit unemployment, with a recession, with huge deleveraging and financial collapse, and we never really had deflation. So, now we have an environment where the banking system is a lot better. It's functioning not completely, but it's better. We have positive growth. We have unemployment that is, you know, half of what it was before. So it would be very unlikely to have deflation in that environment if we never had it when things were much worse. I think the fear of deflation certainly in the US is overstated. Europe, you could make a bit more argument. But then if you go beyond some of the G3 countries. And look at emerging markets you're already seeing actually inflationary pressures build, places like Brazil, places like India, inflation is actually a real threat in some other parts of the world, so inflation will be different in different countries, emerging markets are likely to face inflationary pressures well before the developed world, and then we have to look at inflation of not just goods but asset prices, clearly this fed. QE program has created asset price inflation right so we've already seen inflation it's just been in different areas. You just mentioned that fact that Japan is pumping, you know, very vigorously and, they're expanding their monetary base and so tell my why you're keeping. Your eye in Japan and and what the implications are for for the global bond markets. Japan I think has huge implications globally. We're all focused on fed tapering that they're gonna be printing less money. But at the same time Japan is ramping up their [UNKNOWN] program and is likely to continue this beyond the end of this year. And the reason that we expect them to continue is twofold. One, the only part of abenomics that is really functioning at this point is the first arrow, which is the printing of money. And so because the second and third arrow, which are fiscal consolidation and structural reform to get growth have yet to really kick in. He has to rely upon that one lever that is working. And so place an even larger emphasis on the [UNKNOWN] program. Just as President Abe. President Abe. Correct. The other reason we expect printing of money to continue in Japan is that it's. A big part of really monetization of their large debt. they have over 200% debt to GDP. They're running fiscal deficits on a magnitude of 8 to 9%. They have a shrinking current account surplus so they used to have this huge pool of domestic savings that they could recirculate to fund their government debt market. Right. The reality is the changing demographics and the trade surplus that's gone from surplus to deficit. They no longer have that pool of savings. So the only entity large enough to fund their, their government debt, is the government itself. And because we don't see this debt dynamics changing, we think the need to do money printing to finance the deficit will go on for years to come. So, Japan is, we think just, embarking on a, a massive [INAUDIBLE] program. This is important. Particularly for global equitity environment because if this continues it will more than offset what the fed is pulling back. And so if you're a small southeast asian country the flows from Japan are gonna be quite significant. So we don't think there's gonna be a short of global equitity provided that [UNKNOWN] continues in Japan. In fact. The challenge for many countries is going to be too much money coming into these markets from Japan. Talk to us about, the, the roll of the dollar. And I'm thinking if, if Japan is kind of becoming the central bank to the world. That the, in replacing as the U.S. Fed withdraws, what are the, you know, currency repercussions of that vis a vis the U.S. dollar? Certainly, I think the Fed will be exiting a QE program at the same time Japan is, wrapping it up at the same time, the ECP is probably needing to ramp up some kind of easing. You would likely see a much stronger dollar against the yen, a much stronger dollar against the euro over the next one to two years. So how are you taking advantage of that? Quite simply, long dollar, short yen. Long dollar, short euro. So on the one hand we have a long dollar bias. Right. From a currency point of view? From a currency standpoint. Right. But there are also some currencies that we actually think will weaken against the dollar in places like Mexico, places like Korea. That a stronger US economy is actually very good for those countries, because they're highly exposed to the export markets. So, as the US economy improves, Mexico sells more cars, Korea sells more TVs. And so a stronger US economy will actually benefit a handful of emerging markets that are cyclically tied to the US. [MUSIC]


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