Hasenstab: Emerging Out of the Consensus Trade
Franklin Templeton Investments
By Michael Hasenstab
July 12, 2013
Just when is a potential long-term reward worth the short-term risk? Investors are often most focused on the short-term pain of a particular event (hard to blame them), losing sight of possible outcomes farther out into the future. That could partially explain whatâ€™s going on in the emerging markets right now, at least according to Michael Hasenstab, co-director of the International Bond Department, Franklin Templeton Fixed Income GroupÂ®.
In recent weeks, fear and confusion over â€śtaperingâ€ť (the US Federal Reserve withdrawing its â€śQEâ€ť asset purchasing program) and unrest in several emerging markets have caused some to conclude that the short-term risk of investing in all emerging markets isnâ€™t worth the potential long-term rewards, and many have fled.
Hasenstab, who managesÂ Templeton Global Bond Fund,Â Â Templeton Emerging Markets Bond FundÂ and co-managesÂ Templeton Emerging Markets Balanced Fund, cautions that itâ€™s important to keep in mind that not all emerging markets are on equal footing. And, in some cases, short-term market volatility can be viewed as an opportunity for investors, not necessarily a complete peril. Assuming the classic contrarian stance, when others are panicking is often when Hasenstab seems the most comfortable.Â
â€śWe believe the fear of liquidity being pulled out of emerging markets due to the Fed eventually ending its bond-purchasing program is overstated, as we do not believe there would be a massive contraction of liquidity out of emerging markets. Instead, the situation will more likely be about less new money pouring into these markets. Emerging markets no longer rely on capital inflows like they did in previous decades. In past periods, many emerging markets were dependent upon external financing.Â
â€śHowever, today itâ€™s quite the reverse. Emerging markets are generally running balanced fiscal and current accounts, have a surplus of savings and low debt.Â Theyâ€™re no longer dependent on capital inflows, and therefore arenâ€™t as reliant upon US monetary policy as they were historically. There are ample foreign reserves in many of these countries to cushion capital outflows; however, I donâ€™t expect these outflows will be substantial.â€ť
The Economic Impact of Political Turmoil
So thatâ€™s the Fed part of the recent panic. What about the turmoil in places like Brazil, Turkey and Egypt? How should investors be thinking about the risks that political and social unrest pose in emerging markets versus the economic risks? Hasenstab says you canâ€™t separate the two, but that doesnâ€™t mean investors should shun all emerging markets.
â€śIf there is political unrest, such as weâ€™ve seen in parts of the Middle East, there are likely to be economic problems. Our individual country selection is critical to our investment process in determining which countries have the most attractive fundamentals.Â We donâ€™t believe in buying all emerging markets as they are not all equal, in our view. We continue to favor those countries that run a good policy mix and have stayed ahead of the curve regarding fiscal, monetary and financial policy. In my opinion, country selection will be critical for investors over the next five years.â€ť
From a fixed-income viewpoint, places with more political stability, including Mexico and South Korea, are areas Hasenstab favors right now.
â€śItâ€™s not the case that all emerging markets are experiencing social chaos or political turmoil. There are many countries that are fundamentally sound and we seek to take advantage of those opportunities. Mexico, for example, recently had an election and we believe the reform agenda will likely be an improvement.â€ť
â€śThe consensus trade has moved from being bullish in emerging markets to overly bearish within a month, which for us is a great opportunity. The teamâ€™s investment philosophy often leads to a contrarian view during periods of market wide, panic-driven selling. I feel more comfortable today than three months ago when our views came into consensus. Weâ€™ve used this period to add to our favorite positions while others were selling, which can set the stage for potential subsequent gains once volatility subsides and valuations begin to better reflect fundamentals. Outside China, the rest of Asia ex-Japan looks reasonably strong to us, as do select economies in Latin America and peripheral Europe.â€ť
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