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CONTRIBUTORS

Sonal Desai, Ph.D.

Chief Investment Officer,
Portfolio Manager

Nikhil Mohan

Economist, Research Analyst
Franklin Templeton Fixed Income

Angelo Formiggini

Economist,
International Research Analyst

Patrick Klein, Ph.D.

Director of Multi-Sector Strategy,
Portfolio Manager
United States

John Beck

Director of Global Fixed Income,
Portfolio Manager
United Kingdom

David Zahn, CFA, FRM

Head of European Fixed Income,
Portfolio Manager
United Kingdom

Executive summary

Our growth projections for the United States continue to improve as a “soft landing” becomes the most likely outcome, while other economies may face harsher conditions. US and European central banks appear to have reached the peaks of their hiking cycles, but we believe it is still too soon to declare victory against inflation. A core tenet of our macro view is central banks will need to maintain rates at higher levels than the market anticipates, which will keep pressure on yields across the curves.

We are still cautious about taking broad-based risks as spreads are currently not pricing in any potential downside; however, all-in yields remain at historically high levels, making them appear attractive to us. We are finding pockets of value across several sectors and are focusing on security selection.

In this issue we cover:

Macroeconomic themes

  • Fed narrative changes, but inflation battle not won
  • Still healthy private sector surplus
  • Uncertainty around the US economy continues

Portfolio themes

  • Yield investors provide a technical tailwind to credit
  • Market discounting downside risk
  • Follow the Fed speak

US economic review

  • Underlying macro fundamentals still point to structurally higher US Treasury Yields

Euro area economy

  • Navigating the pause

Special topic: Commercial real estate realities—Pandemic reckoning and WeWork’s uncharted journey

There has been a lot of attention given to the ever-worsening office sector of commercial real estate (CRE) with headlines capturing defaults. WeWork, who was supposed to challenge the dynamic of shared office use, filed for bankruptcy on November 7. With co-working being one of the largest categories of office space, the decline of WeWork mirrors what is happening in office CRE and the challenges the Commercial mortgage-backed securities (CMBS) sector faces.

Read the full paper to learn more.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Investments in technology-related industries carry much greater risks of adverse developments and price movements in such industries than investing in a wider variety of industries.

Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Floating-rate loans and debt securities are typically rated below investment grade and are subject to greater risk of default, which could result in loss of principal. Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton.

The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Important Legal Information

This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any research and analysis contained in this document 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. 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. Any views expressed are the views of the fund manager as of the date of this document and do not constitute investment advice. 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. 

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 realized. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein.

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.

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