Thoughts on recent global market volatility and potential central bank actions from our EMEA Investment Strategist, Kim Catechis, Franklin Templeton Fixed Income’s David Zahn, and Martin Currie’s Zehrid Osmani.
To gain insights on how to think about recent market volatility, our EMEA Investment Strategist, Kim Catechis, sat down with David Zahn, Head of Franklin Templeton Fixed Income Europe and Zehrid Osmani, Head of Martin Currie’s Global Long-Term Unconstrained strategy. These were the areas they all agreed on.
- They expect yields to rise, as the big central banks (the Bank of Japan, the US Federal Reserve, the European Central Bank [ECB], and the Bank of England) pivot from buying around US$3.5 trillion of bonds per year, to around half a trillion dollars this year. That reduction of over US$2 trillion seemingly will result in higher yields. The key question is, how much will they rise? The answer will vary, depending on the market you’re in and what the impact is on other market sectors.
- They remain constructive on equity markets in general. That positive stance is based on real rates that remain negative and the longer economic cycle. However, we also expect lower returns compared to 2021, which was an exceptional year for equity markets across the globe.
- Short term, the market is most concerned about inflation and wage growth. But it’s not unusual at this stage of the cycle to have a pickup in wage inflation. They expect inflation to prove frictional, rather than structural, because of disruptions in production lines and bottlenecks in supply chains. The evidence will not be clear until the second half of this year. In any case, if inflation expectations don’t become unhinged and the central banks keep their credibility, this period could be beneficial for economic growth. In Europe for example, having a bit of inflation is a good thing—it’s something the ECB has been wanting to get into the system for a while, so it will not want to put inflation down via higher rates too sharply. And for the many highly indebted countries out there, a bit of inflation is helpful.
- They do expect increased and persistent volatility. Volatility can be equated to a need for the market to shift expectations. We are moving from economic recovery into expansion. And as the global economy transitions, monetary policies adjust from being accommodative, to “more normal”. Investors are now adjusting expectations of monetary policies. Once they adjust for the shift in monetary policy regime, we could see a reduction in volatility; possibly once interest rate hikes start to come through. It just takes time.
We all believe that this is the beginning of the transition to a “less exceptional”/“more normal” market regime and investors need to digest a wide number of variables as they navigate the bumps in the road. The transition itself is not a surprise, but the way it unfolds is unpredictable. It pays to be a selective, patient, and knowledgeable investor at these moments.
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. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. 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. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies.
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.
