Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

Franklin Templeton Thoughts: European Fixed Income

As European economies slowly start to come out of coronavirus lockdowns, it could be some time before growth returns to pre-crisis levels, according to David Zahn, Franklin Templeton’s Head of European Fixed Income. He says the crisis has been another test for the European Union as the coronavirus has affected some countries more so than others. But he sees this as perhaps the best time in years to invest in European fixed income.

There’s no doubt COVID-19 has been devastating to the European economy, with gross domestic product (GDP) in the euro area contracting 3.8% in the first quarter in Europe. Given the period only included a couple weeks of shutdowns, we saw quite a big impact in a short period of time. We would anticipate GDP is likely to shrink further in the second quarter, but then hopefully we will see growth rebound a bit in the third and fourth quarters. For the year as a whole, we could see European GDP down 10% or more.

Disparate Impacts, Disparate Needs

COVID-19 has impacted countries in Europe differently. As such, individual needs have differed, as have local government responses to the crisis. In our view, the European Union’s (EU’s) response so far has been weak; policymakers are still debating how much stimulus is needed and in what form, while individual countries have already taken actions. We are seeing almost a “Balkanisation” of Europe, in that some countries have dealt with the virus more effectively, have suffered less impact from it, and thus have been able to reopen their economies earlier than others. Italy and Spain are not allowing movement in and out of the country, for example, but Lithuania, Estonia and Latvia are allowing movement amongst them as a block. So, we will see certain country groupings where slow movement of trade and people is allowed.

Tourism is vital for many European economies, so a lack of travel during the summer season ahead is likely to have longer-term impacts on certain countries more than others. For example, travel and tourism represent roughly 15% of Spain’s GDP, so a prolonged drop off in travel is likely to negatively impact Spain more than some other countries.

There has been some fiscal stimulus to tide people over while they are at home, but in our view, additional stimulus will be needed as countries come out of lockdowns to get economies moving. We are seeing early signs of progress, but there’s also human psychology to deal with—what will make people feel safe to come back out of their homes, travel and spend?

It could take several years for the European economy to get back to the growth level prior to the pandemic, and there will be hiccups. Economies have never been stopped and then restarted on this type of scale.

Looking at the United Kingdom, policymakers on the fiscal and monetary side have come out with a strong support package—in that sense, we think they’ve taken the right actions to support the economy. On May 12, the UK government announced its furlough programme will be extended into October, so people out of work will have income coming in for a few more months.

In our view, the Bank of England (BoE) will probably announce more quantitative easing at its next meeting in June. The economic fallout in the United Kingdom has been similar to broader Europe, with GDP this year likely down about 10%, so we think the central bank will need to be ultra-accommodative and continue to buy bonds into the summer and beyond. As such, we think gilts will continue to perform well.

German Court Adds Wrinkle

The European Central Bank (ECB) has been ultra-accommodative—and with inflation not near its target, it can be. At the most recent policy meeting, the ECB announced new targeted longer-term refinancing operations (TLTRO III) at -1% and pandemic emergency longer-term refinancing operations (PELTROs) at -0.75 basis points, so bank funding is very inexpensive right now. The ECB also announced its €750 billion pandemic emergency quantitative easing programme of bond buying may need to be increased.

Meanwhile, we are seeing friction between one country—Germany—and pan-European institutions. The German constitutional court ruled on 5 May that the ECB’s 2015-2018 bond-buying programme didn’t respect “the principal of proportionality” and may have financed government deficits. While the ruling didn’t target the current program tied to the coronavirus, some observers say there could be implications down the road—it too could later be deemed illegal. It’s an interesting wrinkle that represents a test to the strength of the EU, pitting north against south.

Spain and Italy to the south were hit hardest by the coronavirus and have said they need more help. They support the issuance of “coronabonds,” a new debt instrument that would be backed by all countries in the eurozone to fund the crisis fallout. Meanwhile, Germany and the Netherlands are against the bonds.

There has been debate about a joint pandemic response plan as well. The northern countries generally favour loans that must be paid back, while the southern countries want grants. This type of disagreement harkens back to the 2011 sovereign crisis in Europe, which similarly pitted Italy and Spain against Germany and the Netherlands. The two sides of the eurozone are arguing again in terms of who should pay for the current crisis—and how.

What’s different today is that COVID-19 represents an external shock from a humanitarian event that is nobody’s fault. It seems like it should be fairly easy for the two sides to come together. If we don’t see EU countries come together with a solid, unified pandemic response, we are sowing the seeds for more distrust. There could be renewed noise about the future of Europe.

Given the poor outlook for economic growth and employment in the near term, in our view something will be needed to get the European economy restarted. There will be a European-wide assistance program coming, but slower than other individual countries. This easy money policy will be with us for several more years.

Brexit Issues Will Bubble Up Again

While Brexit headlines have taken a bit of a backseat to the coronavirus, there are still issues to be worked out—namely a trade deal. The United Kingdom has a deadline of 1 July to ask for an extension, but the UK government hasn’t asked for one. There is a template, but the EU countries want access to UK fishing waters, or they won’t do a deal. Both sides are digging in their heels, but neither side can afford a no-deal Brexit because neither the EU or UK economy is doing very well right now. We may see some brinkmanship but with trade currently reduced, maybe it doesn’t matter as much if there isn’t a trade deal.

Another interesting point is that the EU prohibits bilateral agreements between individual countries. However, with the coronavirus situation, we are seeing individual countries forming small travel and trade blocks, as noted previously.

If the United Kingdom does ask for an extension, that raises an interesting question: Would the United Kingdom be expected to contribute to a pandemic fund?


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. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries 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. Such investments could experience significant price volatility in any given year.

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 and may be deducted from the invested amount therefore lowering the size of your 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.

Join MeDirect today to access the tools you need to put your money to work on your own terms.

Latest news articles

Staying dynamic in our strategic views
All News

BlackRock Commentary: Staying dynamic in our strategic views

BlackRock anticipates that the new macroeconomic environment, characterized by increased volatility, will lead to more frequent valuation changes across asset classes. While short-term outcomes may not always be influenced by valuations, they remain significant in the long run.

Experience better Banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. 

Sign up and open your account for free, within minutes.



We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.