Hasenstab Sticks to His Guns
February 15, 2012
Some market-watchers believe that markets have been dominated by fear, inspiring investors to panic and liquidate investments that are otherwise fundamentally sound. They throw out the baby with the bathwater, so to speak. Dr. Michael Hasenstab, Portfolio Manager of the Templeton Global Bond Fund, doesn’t scare so easily, though. As he reiterated recently, he actually sees times of market panic as opportunities to make investments where he sees long-term value. The key thoughts he shared:
- The challenge during periods of volatility is that, although investors can take a short-term hit, this volatility can create opportunity.
- Fears Europe will sink Asia appear “overblown.” China not likely to see a “hard landing.”
- The Eurozone drama continues to unfold.
As the market continues to grapple with a number of uncertainties about the still-unresolved European debt crisis and investors worry the crisis will spread like a plague into the U.S. and Asia, how does Hasenstab maintain his steely resolve? In a nutshell, he always takes a long-term point of view:
“It’s not atypical in a long-term, contrarian strategy to run through periods where our long-term view is not consistent with the market’s short-term view. In the later part of 2011, our view was: the world is not ending. There were good opportunities in Asia and we don’t want to panic and just buy Treasuries. We didn’t think that was consistent with where we saw the long-term value was. So, we stuck to our guns. We kept doing the research and challenging our convictions, and ultimately came up with the view that Asia had long-term potential. We thought the U.S. was printing too much money and Treasuries were not a safe-haven asset. The challenge during periods of volatility is that investors can take a short-term hit. But volatility can also create opportunity.”
His key advice: don’t panic. When investors panic, they tend to sell everything, at any cost. Instead, Hasenstab picks through the rubble for value: “That’s really what we did in September; we got a lot of good deals at really good prices.”
China, a global engine for decades, is experiencing a GDP slowdown. Some pundits are throwing around the phrase “hard landing” to describe China’s possible fate. Hasenstab’s take? Don’t count China out just yet. China ended the year with 9.2% growth.1
“I would not define that as a hard landing. The fears that Europe is going to sink Asia are, I think, overblown. During the biggest shock of the past several decades, the global financial crisis, China, India and Indonesia never went through recessions. Things were not great, but they weren’t recessionary. I think we saw an empirical test in that these countries have moved beyond the boom-and-bust cycles of past decades. I think that is encouraging.”
Given the magnitude of China’s economy, Hasenstab suggests even if China’s growth slows to 7% or 8%, it would still look impressive.
“There are some negative shocks coming from Europe, but the reality is that Europe and the U.S. are printing so much money, and this money is going to flow abroad and boost investment in these countries. We don’t think there will be as bad a scenario in emerging markets as others may be predicting. “
Again, it’s a case of focusing on the long-term; taking a big-picture view.
“There was some short-term volatility as a result of the European debt crisis, but the capital is still flowing. There is robustness in these economies. Domestic demand is quite healthy. They have a lot of foreign exchange reserves. They are net creditors. All these fundamentals provide an important cushion.”
Turning his eye specifically to Ireland (you may have even read some of the recent media coverage about his activities there), Hasenstab wrote in October of last year that:
“Ireland was brought down by its wayward, over-leveraged banking system, which fueled a private-sector credit boom and a real-estate bubble. But this financial froth belied strong economic fundamentals and two key competitive advantages for the country: a skilled labor force and a business-friendly regulatory and tax environment. The financial crisis and ensuing global downturn dealt a heavy blow. But Irish citizens and politicians rolled up their sleeves and quickly worked to repair and rebuild. The early results are promising, with important strides in regaining competitiveness.” 2
On that positive note, in the well-known words of the late, great Sir John Templeton:
“To buy when others are despondently selling and sell when others are buying requires the greatest fortitude and pays the greatest ultimate rewards.”
Want more from Dr. Hasenstab? Read his 2012 Fixed Income Outlook.
Read Dr. Hasenstab’s editorial “Asia Resilient to Eurozone Woes.”
Learn more about the Templeton Global Bond Fund.
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Changes in interest rates will affect the value of the fund’s portfolio and its share price and yield. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in the fund adjust to a rise in interest rates, the fund’s share price may decline. Currency rates may fluctuate significantly over short periods of time, and can reduce returns. Derivatives, including currency management strategies, involve costs and can create economic leverage in the portfolio which may result in significant volatility and cause the fund to participate in losses (as well as capital gains) on an amount the exceeds the fund’s initial investment. The fund may not achieve the anticipated benefits, and may realize losses when a counterparty fails to perform as promised. Special risks are associated with foreign investing, which may be heightened in developing markets, including currency rate fluctuations, economic instability and political developments. The fund is also non-diversified, which involves the risk of greater price fluctuation than a more diversified portfolio. Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. The fund is actively managed but there is no guarantee that the manager’s investment decisions will produce desired results. These and other risk considerations are described in the fund’s prospectus.
1Source: National Bureau of Statistics of the People’s Republic of China. www.stats.gov.cn
2As of 12/30/11, Irish holdings represented 4.61% of the Templeton Global Bond Fund’s total net assets. Holdings are subject to change.
(c) Franklin Templeton