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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 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 realized. 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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