Listen to their podcast.
Here are some of their key points:
- Sonal remains convinced the Federal Reserve (Fed) is behind the curve in raising interest rates. She warned about three months ago the Fed’s move toward hawkishness is a direct result of the persistence of inflation. Looking at the trends over the past three, six and 12 months, she thinks inflation could end the year between 5% and 7%.
- John remains convinced the outlook for a moderation of price increases is compelling. John acknowledged inflation has not abated in 2022 as he expected. Based on his interpretation of recent data, the pandemic-related factors that caused rising wages, increased housing prices and supply chain bottlenecks are starting to subside.
- Sonal believes the fiscal and monetary stimulus provided in 2020 sowed the seeds for rising inflation, and supply shocks ignited the upward trend. While rate rises may help in addressing the supply chain issues, the low starting point will force more aggressive hikes than the market expects, and that will have negative implications for growth.
- John’s outlook is that economic growth will slow on its own in 2022.The inversion of the US Treasury yield curve is signaling that the Fed’s actions are creating the conditions for lower future growth, and this will, in turn, lower inflation.
- Sonal’s opinion is that the inversion of the yield curve doesn’t necessarily mean lower growth. It has been distorted at the long end of the curve by the Fed’s asset purchase program. However, one shift in her thinking is that the higher levels of inflation could accelerate the spending of pent-up savings, creating risks to future growth.
- John points out the opportunities in fixed income markets have increased. The reason? Many potential buyers have been scared off by the extreme volatility. During times of uncertainty, investors tend to prefer safer assets, so he believes there is value in diversifying toward neglected areas.
- Sonal remains committed to the short end of duration. Credit segments that will likely benefit from rising rates include bank loans and commodity-focused emerging markets. As Europe is currently seeing a higher risk of recession, there is potential for finding value in longer-duration assets.
To read more views on inflation from our Fixed Income teams, read “On My Mind: The Fed Takes the Red Pill” and “Six Common Misconceptions About Inflation.”
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Investments in lower-rated bonds include higher risk of default and loss of principal. Floating-rate loans and debt securities tend to be rated below investment grade. Investing in higher-yielding, lower-rated, floating-rate loans and debt securities involves greater risk of default, which could result in loss of principal—a risk that may be heightened in a slowing economy. Interest earned on floating-rate loans varies with changes in prevailing interest rates. Therefore, while floating-rate loans offer higher interest income when interest rates rise, they will also generate less income when interest rates decline. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Past performance is not an indicator or a guarantee of future results. Diversification does not guarantee profit nor protect against risk of loss.
Important Legal Information
This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.
Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.
