“Going forward, we expect significant convergence in relative growth rates after a long period of US exceptionalism. Global investors are structurally overweight US dollar (USD)-denominated assets, and we believe there are both economic and geopolitical reasons for reducing these exposures over time. However, a further selloff in the USD may require definitive evidence of a deterioration in US economic growth.

“Meanwhile, there are multiple crosscurrents affecting the US bond market, which are currently balancing each other out. On one hand, the US economy is gradually slowing down. On the other hand, additional US fiscal easing at a time when the government debt level is already high is pushing bond yields upward.

“Despite a reprieve in tariffs, the trade war is far from over. We expect tariff rates to eventually settle at meaningfully higher levels than before the Trump administration took office. Tariffs lead to higher inflation and slower economic growth. Faced with stagflationary risks, the Federal Reserve (Fed) is likely to be cautious in reducing policy rates.

“Even though short-term recession risks have diminished, we expect US growth to slow significantly in the second half of the year. This deceleration is due to the tax-like impact of tariffs along with trade policy uncertainty also depressing investment and hiring. Federal workforce layoffs, lower immigration, and a decline in international tourism may contribute additional drags on economic activity. What is unclear is whether the weakness in growth will be significant enough to trigger a more aggressive Fed policy easing cycle amid elevated short-term inflation risks. At the same time, the eurozone economy will be supported by the significant monetary easing delivered over the past 12 months and the massive multi-year German fiscal stimulus package.”

On the outlook for global equities, Sorin Roibu, Portfolio Manager and Research Analyst said, “The global equity landscape is experiencing a fundamental shift as the era of US market dominance faces mounting challenges. With first quarter gross domestic product (GDP) turning negative and trade policy uncertainty weighing on growth prospects, the US economy appears increasingly vulnerable to stagflationary pressures from tariff-driven inflation and constrained Federal Reserve policy. This environment is driving what we call the “Great Expectations Reversal,” a strategic pivot away from overvalued US markets toward undervalued international opportunities.

“The US faces multiple headwinds: shaky consumer confidence, heightened trade uncertainty, and a challenging handoff from government to private sector leadership. While labor markets remain resilient, downside risks are increasing. Equity markets continue to shrug off these growing warning signs, with US market valuation levels back to historic highs.

“Europe is emerging as the standout destination, bolstered by German fiscal stimulus, attractive valuations, and resilient labor markets. European banks have already delivered exceptional returns, with some gaining 35% to 45% year to date.

“Within emerging markets, Brazil presents compelling opportunities with strong fundamentals and solid economic performance. Meanwhile, China offers selective prospects, particularly in companies benefiting from AI.

“With US market capitalisation-to-GDP ratios reaching levels last seen in 1929 and 1936, the risk-reward dynamic increasingly favours international diversification. We believe investors should consider reducing US exposure while capitalising on the fundamental strength emerging across global markets.”

Emerging Markets expert, Carol Lye, Portfolio Manager, Senior Research Analyst added, “Despite elevated uncertainty, emerging markets (EM) have performed well this year. Local currency markets are up over roughly 10%, and hard currency sovereigns and corporates have returned just over 4% and 3%, respectively, for the year to date. In local markets, currencies have contributed a little over 50% of the return, and we believe there is still room for further appreciation. The US dollar remains elevated from a valuation perspective, and the world is overweight dollar-denominated assets following years of outperformance. Some rebalancing out of the dollar and into undervalued or overlooked markets could benefit EM.

“From a regional standpoint, Latin America offers elevated nominal and real yields. We will be following the heavy election calendar for signs of shift to more centrist candidates, which could reinforce investor confidence and act as a catalyst for the region. Central European markets are well positioned to benefit from a departure from Europe’s recent economic stagnation, especially if fiscal stimulus and targeted industrial policy gain traction.

“A more aggressive trade rebalancing coupled with the cyclical and structural dynamics that are underway may expand opportunities in other EM. Some of these markets may be well positioned to benefit from a secular shift in global production and capital flows. US policy aimed at curbing state-subsidised overcapacity may accelerate the relocation of supply chains toward other markets, including EM economies. This trend could invigorate investment opportunities in infrastructure, local manufacturing, and upstream commodities across Asia, Latin America, and Africa.”

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Chris Siniakov

The latest Franklin Templeton fixed income webinar saw investment experts share their perspectives on managing fixed income portfolios in an era characterised by both heightened volatility and changing inflation dynamics.

The speakers shared their insights on timely topics for fixed income allocators to cover:

• diversifying duration
• credit risk allocations
• elections and geopolitical impacts.

Excerpts from discussion by Chris Siniakov, Managing Director and Portfolio Manager, Franklin Templeton Fixed Income and Carol Lye, Portfolio Manager and Senior Research Analyst Brandywine Global Investment Management, are below:

Chris Siniakov, Managing Director and Portfolio Manager, Franklin Templeton Fixed Income, said: “Although the U.S. presidential election is still in its early stages, we believe that the key issue for the U.S. and the globe is the increasing focus on fiscal considerations in global financial markets. The U.S. is running a budget deficit, and this difficult and challenging environment may require continued government support. Fortunately, being a reserve currency allows the U.S. to offset higher funding costs. Nevertheless, we see opportunities for investors in shorter dated bonds vs longer-dated bonds.

“In Australia, we are experiencing a different interest rate cycle where the Reserve Bank of Australia (RBA) has not responded to the policy tightening as expected. As a result, interest rates will likely decrease abruptly by around 100 basis points. The pacing of rate adjustments is influenced by unique economic conditions in each state. While global inflation pressures play a role, the domestic housing market’s supply-demand imbalance is a significant issue that will lead to a more cautious and gradual pace of interest rate reductions.

“Active management is crucial in today’s complex and volatile fixed income environment. Duration can provide a hedge against market volatility, and short-dated bonds have experienced lower volatility in recent quarters. Overall, it is important for investors to navigate these dynamics in fixed income investments.”

Carol Lye, Portfolio Manager & Senior Research Analyst Brandywine Global Investment Management, said: “U.S. exceptionalism has been a major theme driving markets, but I think we are at a juncture where growth expectations in the U.S. are starting to come down, there is less fiscal spending, the labor market could be slowly softening and volatility could start increasing again.

“Although volatility in the fixed income markets will not be as high as what we experienced late last year, we think it makes a lot of sense to be more in the belly of the curve and we prefer more to be in the five-year part of the curve, which would benefit from the Fed cutting rates one or two times.

“From a credit perspective, we are constructive on high yield, especially when it comes to generating income. Yields in the U.S. high yield market are around 9%, which is very compelling, and this is supported by strong fundamentals as defaults are still relatively low, and recovery rates in different scenarios are still looking good.

“Additionally, we are also seeing opportunities in emerging market debt, particularly in some Latin America and central European markets.”

The post From volatility to victory: Franklin Templeton experts on building resilient Fixed Income portfolios appeared first on AdviserVoice.