Quick Thoughts: Debating the Next Moves for Inflation, Growth, and Rates

by Stephen H. Dover, CFA, Franklin Templeton Investments

Rising inflation globally raises the question of whether inflation is persistent versus transitory, driving debate among our investment managers. Our Stephen Dover, Head of the Franklin Templeton Investment Institute, recently discussed economic growth, interest rates, and inflation during a roundtable, “What Our Managers Think: Debating the Next Moves for Inflation, Growth, and Rates,” with Sonal Desai, Ph.D., Chief Investment Officer, Franklin Templeton Fixed Income; John Bellows, Ph.D., Portfolio Manager, Western Asset; and Gene Podkaminer, CFA, Head of Research, Franklin Templeton Investment Solutions. Below are some takeaway points.

Globally, the rise in inflation is surprising many in its magnitude and duration. Shipping constraints, production slowdowns, stronger demand than expected, and continued fiscal stimulus are all contributing to this environment. I recently discussed the question of persistent versus transitory inflation with three of our investment managers: Sonal Desai, Ph.D., Chief Investment Officer, Franklin Templeton Fixed Income; John Bellows, Ph.D., Portfolio Manager, Western Asset; and Gene Podkaminer, CFA, Head of Research, Franklin Templeton Investment Solutions.

  • Our managers agree that the US Federal Reserve Board (Fed) and many countries’ central banks will likely raise interest rates in late 2022 or 2023 but disagree on the size of the increases.
  • Our managers disagree on the state of supply constraints. Are these temporary or will demand grow, exceeding pre-pandemic levels? The US economy still has savings rates close to 10%, which could support continued spending that shifts the rise in inflation from transitory to long-term status. The eurozone seems well positioned over the next year for an acceleration of its economies, while the United States, Canada, United Kingdom, Australia, Japan, and many emerging markets will likely see more modest growth.
  • With China’s new regulatory cycle and weakness in China’s property markets impacting its own and other countries’ economies, investors need to watch for downside risks.
  • Fiscal policies will likely shift from crisis mode towards supporting sustained growth once the reopening spending surge slows. Long-term disinflationary forces, including globalisation, digitalisation, and increasing investments in technology and innovation, have the potential to boost productivity and mitigate pricing increases.
  • Emerging markets debt, investment grade credit, and US Treasury investments can generate portfolio income without taking on excessive risk. Fixed income investments may seem costly compared to equities, but equities face risk from slowing global growth. The safe-haven status of the fixed income asset class supports continuous allocation globally.

Skillful and nimble portfolio construction and management includes selecting individual securities that can help withstand macroeconomic factors, volatility, and downside risks.

 

 

 

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. Past performance is not an indicator or a guarantee of future results. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity

 

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. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realised. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. 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.  Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. 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.

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This post was first published at the official blog of Franklin Templeton Investments.

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