2014 Morningstar Investment Conference

Franklin Templeton's Hasenstab: Predicting market opportunities

Jun 18, 2014 @ 12:00 am

Runtime: 3:27

With domestic markets in flux, fixed-income ace Michael Hasenstab of Franklin Templeton says that there are opportunities overseas, but advisers will need to know where to look. Can you separate the wheat from the chaff in emerging markets?

Video Transcript

We think there are some exciting investment opportunities both selectively in emerging markets. Given that the bank of Japan is likely to replace the Fed in terms providing global liquidity, which should help fuel growth in many emerging markets. secondly, we think there's a good investment opportunity to avoid interest rate risk as interest rates globally are likely to go higher. So, our portfolio is constructed to selectively take advantage of merging markets and hedge out interest rate risk. Emerging markets have a great degree of variance between countries with solid underlying fundamentals and countries that are quite vulnerable. So, selectively we think there are a handful of emerging markets with relatively strong growth, low levels of indebtedness, reasonably high interest rates for short duration assets in currencies that we think will appreciate against the U.S. dollar. These would include places like Mexico, Malaysia, Korea, Poland, Hungary. On the other side, there are countries that will be likely vulnerable to dislocations in capital markets. Places like Turkey, which run huge deficits. So we need to be very selective and differentiate the good from the bad. China is incredibly important globally. Although we don't have any direct investments in China, China's effect on the rest of the world is very significant. For example we have large investments in Malaysia that is a huge seller of palm oil into the Chinese market place or Korea, but sells cars or telephones into China. So getting comfortable that China can achieve a sustainable 7% growth rate, and not face the hard landing that many had feared, is incredibly important in our investment thesis. We spent a lot of time in China this year and have come away affirmed that China will be able to prevent a systemic banking crisis despite certain aspects of the banking system running into trouble. And secondly, given the shortages in labor because of a one child policy decades ago, we're seeing higher wages feed through into higher consumption. And consumption is gonna be increasingly the most important anchor in Chinese growth to achieve that 7% number. The number one objective of our strategy today in portfolio construction, is how to manage in a rising interest trade environment. How to generate positive returns when most bond markets will have negative returns. Number one, have very short duration, very limited interest rate exposure. The average duration of our strategies is incredibly short, so that when rates high, rise, we're not facing losses on capital. Number two is, selectively earn yields that can generate a positive return in countries that offer high interest rates at the short end of the yield curve, but have good underlying credit fundamentals in currencies that we think will appreciate. So for example, we can buy a two year government bond in Korea, earn 3% in a currency that we think makes money over time, in a country with almost no debt. And the third is selectively position in currencies, so we're long Dollar, short Yen, long Dollar, short Euro in an environment where US yields rise before they rise in Japan, or before they rise in Europe. The US Dollar should get a bit of strength and on the back of that, we wanna make money off of our rising Dollar. In today's environment, with the Fed being one of the largest buyers of US treasuries, yields inconsistently low with where growth and inflation is in the US. We think it is absolutely imperative to avoid exposure to the U.S. Treasury market. [MUSIC]


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