Navigating Uncharted Territory

A conversation between Dr. Sonal Desai and Dr. Michael Hasenstab on macro views and navigating volatility in the shadow of Coronavirus and other shocks, along with a global investment outlook.

    Michael Hasenstab, Ph.D.

    Michael Hasenstab, Ph.D.Chief Investment Officer,Templeton Global Macro

    Dr. Sonal Desai

    Dr. Sonal DesaiChief Investment OfficerFranklin Templeton Fixed Income

    This week as Coronavirus and oil price shocks roiled global markets, we had the opportunity to capture this conversation between two of our CIOs. We have divided the conversation into four short videos below and provide you with the combined conversation in a podcast as well.

    There’s a couple of issues with global growth. The landscape has had so many vulnerabilities and then the shocks came in—the shutdown of demand. The clustering of shocks has been, eye opening.

    Take several steps back, it’s two very negative demand shocks and the politics are a wild card. The worry is this demand shock and the shutdown of the service sector, plus the industrial recession combined with weakness in consumer, you could have that toxic mix. Now, it’s possible that that doesn’t occur, and just have to watch it.

    This is a real live test. No one can predict the life of the virus, the severities, all the dislocations, but what we do know is we can prepare a portfolio for those uncertainties. If there’s a panic and it goes on for a protracted period of time and there’s big dislocations, there will be good assets that become valuable. We are nowhere near that point yet, but we need to be thinking about that. Looking for those opportunities when there is panic like this is very important.

    We as a world rely on central banks to solve everything. And it’s a lot to ask and they have done, I think as good as job as possible about trying to achieve so many objectives with very limited tools and at some point, are we asking too much of them?

    In the near term in fiscal policy, we may see something like we did post 9/11 or post 2008, where you look at a specific sector which is effectively bailed out. There is no other word for it, whether it’s the airline sector or elements of the energy sector. I don’t suggest for a moment it’s the right policy, but the fact is I think it will be used again and again over the medium term. It leads us as investors into truly uncharted territories.

    The currency space is useful because we still need to be able to generate a positive yield, while we wait and see how this plays out. From a broader fixed income sector perspective, it’s rare that an entire asset class only has bad apples in it.

    It may be quite a prolonged issue for energy, because clearly Russia and Saudi Arabia have viewed this as a good time to try and truly squeeze out US shale production, which has acted very much as a lid to global energy prices over the last decade now.

    Needless to say, sectors such as airlines, tourism, I mean it doesn’t even bear repeating because it’s so clear that these areas will be under stress.

    There will be other sectors, everything from home building onwards could show some signs of decent developments. If this were not too protracted, I repeat, and we don’t see this basically spiral into the depths of a protracted global slow down, this type of easy policy will end up having some beneficiaries, as well. We are observing this very carefully.

    This is not the time to be jumping in or jumping out. You know, it is a good time to take a deep breath and wait for some of this volatility to subside. It’s not normal to see 20 standard deviation moves. It’s completely abnormal.

    So, it is an important time to think about a world that’s entering a very different period, and how do we position for that.


    What Are the Risks?

    All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as the prices of bonds adjust to a rise in interest rates, the share price may decline. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets.

    Diversification does not guarantee profit or protect against risk of loss.