Franklin Templeton’s Michael Hasenstab says long-term focus key in global bond strategy
Generally speaking, the current events in Europe do not change our medium-term investment thesis.
Greek voters narrowly endorsed pro-bailout forces in a momentous election, easing fears of an imminent rupture with the eurozone. However, we think more work needs to be done and we expect volatile periods should markets panic in the short term while the scenario in Greece continues to play out.
We are likely to view short-term volatility as an opportunity. In our opinion, the combination of a large war chest to stem pressures in the short term and fiscal and reform commitments over the long term should ring-fence the eurozone from financial fallout from Greece.
We believe current proposals for labour reform and deregulation in Spain and Italy should help support long-term growth, and while implementation and results are likely to take time, important first steps have been taken.
Additionally, recently adopted, prudent fiscal packages in Spain and Italy can help stabilise their respective long-term debt dynamics, in our opinion.
We do not believe France’s newly elected president, Francois Hollande, should differ as significantly in terms of policy goals as he portrayed before the elections.
While there was a lot of political rhetoric during the campaign, in terms of actual fiscal policy, Hollande has only proposed shifting forward the plan to bring the country’s deficit into balance by one year.
The debate has been framed thus far as austerity versus growth, which is incorrect, in our view. We believe it needs to be austerity and growth. There is no getting around controlling finances, which means some form of austerity. Over the medium term, it is unavoidable that government indebtedness needs to be capped and brought under control. For growth, structural reform is the essential component, in our opinion.
We believe it is important that Germany and France continue to take the lead in setting up a fiscal union. It is also likely to require some political compromise. Germany is probably not going to get all the austerity it wants, while the countries receiving fiscal transfers are probably going to give up more national sovereignty than they would like.
Ultimately, however, we think an agreement to hard rules about long-term financing needs to be put in place for the euro to survive, and we find it encouraging that the current discussion has acknowledged this reality.
We are doing what we have always done and we have no plans to change course.
Our investment discipline employs a fundamental, research-driven process that focuses on the long term. Probably today more than ever, we think it is the only way to get through periods of volatility. Additionally, we are fortunate to have a huge global footprint of resources, which includes a solid and diverse research team, and so we have a hands-on approach to understanding the fundamentals in each individual country