CONTRIBUTORS
Sonal Desai, Ph.D.
Chief Investment Officer, Franklin Templeton Fixed Income
Nikhil Mohan
Economist, Research Analyst
Franklin Templeton Fixed Income
Angelo Formiggini
Economist,
International Research Analyst
Patrick Klein, Ph.D.
Director of Multi-Sector Strategy,
Portfolio Manager
United States
John Beck
Director of Global Fixed Income,
Portfolio Manager
United Kingdom
David Zahn, CFA, FRM
Head of European Fixed Income,
Portfolio Manager
United Kingdom
Executive Summary
Since our last publication, we have upgraded our view on both the US and euro area (EA) economies, and we are no longer projecting a technical recession in the former. Where we break from market consensus is in our view on the US Federal Reserve’s (Fed’s) path to monetary policy normalization. The market appears to be confident in the Fed’s ability to orchestrate a “soft landing” that would allow the Fed to cut interest rates throughout next year. We feel the trajectory of disinflation in both the United States and EA will flatten—primarily due to wage pressures stemming from record low unemployment—and central banks are thus likely to keep rates higher for longer.
Spreads in fixed income sectors are pricing in a quite sanguine environment, with levels leaning toward long-term averages, much tighter than previous periods of stress. We retain the view that both active portfolio management and superior security selection will be the main drivers of returns for investors.
In this issue we cover:
Macroeconomic themes
- Economic conditions have remained resilient
- Wages remain a driving factor for inflation
- Upbeat employment expectations
Portfolio themes
- Interest-rate carry adds to performance
- Being mindful of yield curve positioning
- Market conditions have turned positive
US economic review
- More questions than answers
Euro area economy
- The labor market remains center stage
Special topic: Making a case for active corporate bond portfolio management
We believe skillful active management of corporate credit portfolios can potentially enhance performance and help offset the risk and return volatility associated with passive investment vehicles, including index exchange-traded funds (ETFs), over the long term.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Investments in technology-related industries carry much greater risks of adverse developments and price movements in such industries than investing in a wider variety of industries.
Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. High yields reflect the higher credit risks associated with certain lower-rated securities held in the portfolio. Floating-rate loans and high-yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal—a risk that may be heightened in a slowing economy.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton.
The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.