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Fixed-income markets attractive as economy recovers
By Christopher J. Molumphy |
December 24, 2012, Monday
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WE entered 2012 cautiously optimistic about US economic growth even though the US economy experienced stagnant wage levels and stubborn unemployment levels coupled with struggling residential housing and commercial real estate markets. Given the severe recession, combined with the financial crisis, from which the US has been recovering, expectations for growth both today and going forward continue to be appropriately muted.
As we enter 2013, however, we remain reasonably constructive on the US economy. Overall, the US consumer has made progress in reducing debt balances, the unemployment rate has continued to decline, corporations have remained healthy, and we think the housing sector has likely bottomed and should continue to improve gradually. However, headwinds do remain. When we look at the US debt situation, it very much concerns us that going into this fourth post-recession year, we simply do not see any credible plan to reduce this deficit on a go-forward basis.
While we don't necessarily see this as being an immediate issue, we are very much concerned that the lack of ability to manage a very serious debt problem will negatively impact the markets. Many have been closely monitoring the fiscal cliff negotiations for some sign of progress in this area.
While we believe that a temporary patch providing time for further negotiation may be possible, a more definitive resolution could still be some time away. In the meantime, much remains unknown about the impact of future fiscal and tax policies on investor sentiment.
Europe's economy, on the other hand, is anemic at best, and we don't see much growth potential there over the next couple of years as it struggles through a deleveraging cycle.
China, in contrast, has been a tremendous success story, in our view, and has grown by double-digit rates for many years to the point where it is now one of the largest economies in the world. Given how large the economy has gotten, expecting it to continue to grow at double-digit rates is probably a bit unrealistic. Quite frankly, we think growth rates in the mid-to-high single digits on a percentage basis, particularly in this anemic global growth environment, would be extremely healthy.
In this environment of sluggish growth, we think a number of fixed income sectors still hold some potential for investors. For example, global fixed income sectors continue to look attractive to us. Outside the US, many regions and countries with better fiscal conditions have continued to issue debt with higher yields than the debt of their peers. We believe the corporate fixed income sector, including high-yield debt, bank loans and investment-grade debt, continue to hold reasonable valuations.
US municipal bonds have also held up well, as many municipalities have made progress in reducing costs and managing their debt. In an environment in which tax rates look likely to rise in the near future, we think the current tax-exempt status of municipal securities is likely to hold even greater appeal than in the past.
Christopher J. Molumphy is Chief Investment Officer of the fixed income group of Franklin Templeton. The opinions are his own.
As we enter 2013, however, we remain reasonably constructive on the US economy. Overall, the US consumer has made progress in reducing debt balances, the unemployment rate has continued to decline, corporations have remained healthy, and we think the housing sector has likely bottomed and should continue to improve gradually. However, headwinds do remain. When we look at the US debt situation, it very much concerns us that going into this fourth post-recession year, we simply do not see any credible plan to reduce this deficit on a go-forward basis.
While we don't necessarily see this as being an immediate issue, we are very much concerned that the lack of ability to manage a very serious debt problem will negatively impact the markets. Many have been closely monitoring the fiscal cliff negotiations for some sign of progress in this area.
While we believe that a temporary patch providing time for further negotiation may be possible, a more definitive resolution could still be some time away. In the meantime, much remains unknown about the impact of future fiscal and tax policies on investor sentiment.
Europe's economy, on the other hand, is anemic at best, and we don't see much growth potential there over the next couple of years as it struggles through a deleveraging cycle.
China, in contrast, has been a tremendous success story, in our view, and has grown by double-digit rates for many years to the point where it is now one of the largest economies in the world. Given how large the economy has gotten, expecting it to continue to grow at double-digit rates is probably a bit unrealistic. Quite frankly, we think growth rates in the mid-to-high single digits on a percentage basis, particularly in this anemic global growth environment, would be extremely healthy.
In this environment of sluggish growth, we think a number of fixed income sectors still hold some potential for investors. For example, global fixed income sectors continue to look attractive to us. Outside the US, many regions and countries with better fiscal conditions have continued to issue debt with higher yields than the debt of their peers. We believe the corporate fixed income sector, including high-yield debt, bank loans and investment-grade debt, continue to hold reasonable valuations.
US municipal bonds have also held up well, as many municipalities have made progress in reducing costs and managing their debt. In an environment in which tax rates look likely to rise in the near future, we think the current tax-exempt status of municipal securities is likely to hold even greater appeal than in the past.
Christopher J. Molumphy is Chief Investment Officer of the fixed income group of Franklin Templeton. The opinions are his own.
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