By Edward Perks (Executive Vice President, Chief Investment Officer, Franklin Templeton Multi-Asset Solutions).
In 2018, rising inflation, higher US interest rates and escalating trade tensions have led to concerns about global economic growth and bouts of equity-market volatility. However, Ed Perks, CIO of Franklin Templeton Multi-Asset Solutions, says corporate credit has been a bright spot for fixed income investors. He gives his outlook for the global economy and explains why he still sees value in select high-yield bonds. As we head into the latter half of 2018, rising inflation and higher US interest rates―against a backdrop of intensifying global trade tensions and widening tariffs―have begun to pose challenges for many developed and emerging-market economies. As a result, many investors could be wondering about our outlook for global growth and its influence on our investment decisions. Despite these issues, and weakness in a number of confidence indicators, we think the balance of economic news and data remains supportive. We continue to expect positive global economic growth led by a US economy that appears to be in relatively good health. Midsummer Outlook for Inflation and US Interest Rates We do not see inflation as a meaningful factor just yet in the United States. What we see with inflation today is a return to normalisation after the global financial crisis. Our view is that inflation will continue to tick up, but the increase is apt to be very gradual. The primary forces that have kept inflation muted—globalisation and technological innovation—are still in place and should continue to have a restraining influence, in our view. In the United States, labour-market strength has continued while generating what we believe are manageable increases in labour costs as job openings have exceeded the number of unemployed. We think increasing costs, particularly wages, are likely to be only a modest drag on profit margins. What’s more, we think US corporate profits―supported by business spending and expanding manufacturing activity―are likely to be strong and hold the potential to be conducive to further interest-rate hikes. Will Trade Disputes Affect Global Growth? We think it is important to acknowledge that fears of protectionism are not new and have been with us in many parts of the world during the current economic expansion. At this stage, the likelihood of a full-scale retaliatory trade war appears at least partially contained as world leaders continue to seek productive solutions, but the escalating conflicts that we saw in the spring and early summer remain a risk. On the whole, we do not see international trade coming to a standstill or the global economy toppling into recession in the near term. We hold this view even as the US yield curve, which is a graphical representation of the difference between interest rates on short-term and long-term US government bonds, has been flattening as shorter-term rates have been rising more quickly than longer-term rates. Although we think it is perfectly normal for yields to rise along with stocks, this metric is closely watched due to its apparent predictive value—every recession in the past 60 years has been preceded by the yield curve inverting, or falling below zero. As the chart below shows, the gap between two-year and 10-year Treasury notes narrowed to roughly 30 basis points in June, and the yield curve compressed to a level not seen since 2007.
Industry Viewpoints are a place for thought-provoking views and debate. These views are not necessarily shared by The DESK or its publisher.
For more comment from Franklin Templeton CLICK HERE. TOP OF PAGE