Is The Economic Cycle Shifting?

Our experts analyze recent global economic trends, and explain why a cautious approach to the aging credit cycle can still be profitable for long-term investing.

Many investors fear the economy may shift into recession, as all good things must come to an end. We don’t share their near-term pessimism. However, ten years into a US expansion, we do see rising market volatility on the global horizon. We think a cautious approach to inflation and the aging credit cycle can still be profitable for long-term investing. Stepping back to review the big picture in the third quarter, we see the following: 

Top Down Views

  • Positive US economic momentum should continue for another 18–24 months. We believe fears about inflation and trade tensions are overblown (for now), but require close monitoring.  
  • Global growth remains buoyed by consumer spending, though China and the eurozone have been decelerating slightly. We expect rising market volatility as more central banks end quantitative easing. 

Bottom Up Views

  • Some investment-grade bonds are riskier than their ratings imply, while high yield enjoys positive technical tailwinds. Bottom-up credit analysis is key to our investment process at this stage in the cycle.
  • A large number of bank loan agreements now favor borrowers over lenders. We explain the steps we’re taking to protect investors from potentially damaging changes to bank loan interest rates.

LEARN MORE IN OUR TOPIC PAPER

Franklin Templeton Thinks: Fixed Income Markets highlights the team’s ongoing analysis of global economic trends, market cycles and bottom up sector insights. Each quarterly issue spotlights the team’s thinking on different macro forces, and particular sector views that drive our investment process.

CONTRIBUTORS

The Franklin Templeton Fixed Income Group

Franklin Templeton has been among the first to actively invest in many sectors of the fixed income markets as they have evolved—covering corporate credit, mortgage-based securities, asset-backed securities and municipal bonds since the 1970s, international fixed income since the 1980s, and bank loans since the early 2000s. Over 170 investment professionals globally support the portfolio managers, who oversee more than $160 billion in assets under management. Being part of an established investment group at Franklin Templeton gives the portfolio managers access to experts across different areas of the fixed income market, helping them to diversify opportunities and risks across multiple sectors. Our global reach through Franklin Templeton Investments provides access to additional research, trading and risk management resources. Portfolio managers have opportunities to exchange insights with other investment groups, and collaborate with an independent risk team that regularly examines risk analytics to help identify and address areas of excessive risk exposure within our portfolios.

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