Day: 29 September 2021

The German election resulted in change in party leadership, but market impact should be limited, according to David Zahn, Franklin Templeton’s Head of European Fixed Income. He shares an overview of the election implications.

The German election results are in, and the Social Democratic Party (SPD) received the largest share of the vote for parliamentary seats—25.7%—beating the Christian Democratic Union (CDU) party of outgoing Chancellor Angela Merkel and its coalition partner the Christian Social Union (CSU), which received 24.1%. The Green Party received 14.8% of the vote, and the Liberal Free Democratic Party (FDP) received 11.5%. Germany’s government is typically comprised of a coalition, and a new one will take some time to form—in 2017, the process took more than five months. Merkel will remain in her current position until that happens.

Now, the real work begins in terms of what type of coalition there will be. The Green Party wants to be part of the coalition, and as the name implies, its aim is more greening of the economy—which requires more spending to finance. Meanwhile, the FDP tends to be a little bit more fiscally austere, which will probably be a countering force. That probably means we will see a modest fiscal expansion and probably more greening of the German economy and infrastructure, which is seen as positive. The far left won’t be part of the government, so there will be spending, but a big spending budget which would potentially upset the bond market won’t likely happen.

Having a three-way coalition is inherently less stable than just two parties as there may be competing priorities and opinions that make it more difficult to enact policy, particularly new initiatives. And, it could mean the new chancellor will not be as strong as previous ones. What’s interesting to note is that we have seen a return of a more centrist leaning in Germany—as the far left and far right didn’t do as well as in prior years. Whether that becomes a pattern elsewhere in the world remains to be seen.

As far as the Bund market and German interest rates, the market impact of the results looks limited, but if we do have a European crisis or geopolitical crisis in the future, vulnerability may surface given a lack of a strong leader to keep Europe together, leading to potential market volatility. We could see more power shift to Brussels and in that sense, the European Union should remain in a good position, but we could see more bickering than usual without that strong leadership force out of Germany.

For the near term, the European Central Bank’s actions are the greater focus for the bond market, so that’s what we are keeping an eye on for now.

---

Franklin Templeton Key risks & Disclaimers:

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.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

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. 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 professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton’s 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.

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. Past performance is not an indicator or a guarantee of future results. Actively managed strategies could experience losses if the investment manager’s judgment about markets, interest rates or the attractiveness, relative values, liquidity or potential appreciation of particular investments made for a portfolio, proves to be incorrect. There can be no guarantee that an investment manager’s investment techniques or decisions will produce the desired results. Diversification does not guarantee profit or protect against risk of loss.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Franklin Templeton Investment Management Limited (FTIML). No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

By David Roberts, Manager within the Liontrust Global Fixed Income Process

There were few market commentaries that accurately predicted how the US Federal Reserve and Bank of England would react to the current growth and inflation debacle. Hardly any that I read spotted the resultant hawkish tone, nor the bearish bond market reaction.

The question is why the change of tone now? We’ve had a QE (quantitative easing) decade and 18 months of pandemic misery during which we have been constantly dismayed by the underestimation of the disruptive impact of massive monetary and fiscal stimuli. Central banks failed to spot inflation – which has averaged 4% in the US since March while 4%+ is likely to be seen in the UK and Germany later this year.

Central banks failed to spot the economic imbalances that unfettered free money inevitably brings: Evergrande and the UK natural gas debacle are just the latest examples. They failed to understand the impact of price rises on rampant nominal growth. And let’s be honest, the “it’s all about jobs” argument just doesn’t wash with over 10 million vacancies in the US and a record 1.2 million in the UK, and yet unemployment remains around 5% in each country.

Comments from the Federal Open Market Committee (FOMC) and BoE’s Monetary Policy Committee (MPC) suggest a quicker reduction in free money than many had thought. The Fed was up first. An initial reading of its statement suggested to many a modestly more hawkish tone but one that could be ignored by investors. However, events later that week proved catalysts for bond market sell-offs and renewed talk of “reflation”.

Two members of the MPC wanted to end QE. The accompanying rhetoric talked of high inflation and a risk of it going higher still. Around the same time, the Norges Bank raised interest rates – yes, that can happen!

Taken together, these actions seemed to cause a reappraisal of the Fed’s position. Bond markets had one of their worst days for years. UK 10 year gilt yields threatened to move to 1% (still 3% below the MPC short-term inflation forecast). We haven’t seen this level for around two and a half years.

Arguably central banks should have been reducing stimulus for the past year ahead of the inflation spike. Perhaps the level of economic imbalance is now just too great to ignore? For example, the MPC noted the economic threat from higher UK gas prices. In the past, they would have ignored this and not responded to “idiosyncratic” events. The problem is that when adding all the idiosyncratic events together, it starts to look systemic.

Market rates have risen but in truth just a little and only to levels that should still favour borrowers. However, signs are that several other central banks will follow the Norwegians and raise rates in the coming months. Maybe it’s time to dust off those old investment textbooks and read how to invest when interest rates go up?

---

Liontrust Key risks and Disclaimers

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Investment in Funds managed by the Global Fixed Income team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The value of fixed income securities will fall if the issuer is unable to repay its debt or has its credit rating reduced. Generally, the higher the perceived credit risk of the issuer, the higher the rate of interest. Bond markets may be subject to reduced liquidity. The Funds may invest in emerging markets/soft currencies and in financial derivative instruments, both of which may have the effect of increasing volatility.

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Issued by Liontrust Fund Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518165) to undertake regulated investment business.

---

MeDirect Disclaimers

This information has been accurately reproduced, as received from Liontrust Fund Partners LLP. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.