David Zahn, CFA, FRM, head of European Fixed Income, Senior Vice President, Portfolio Manager at Franklin Templeton Fixed Income Group
We at the Franklin Templeton Fixed Income Group believe Europe in general will be in a slow-growth, low-inflationary environment for a considerable time. With that backdrop, we think a long-term, accommodative approach is needed to help spur the economy.
While the European Central Bank (ECB) has a role to play in the eurozone’s economic recovery, we think the core economies should do a bit more to achieve necessary reform. We don’t think the authorities are doing nearly enough in France, for example. Their deficit is quite high, and, in the latest draft budget, the French government has effectively said it can’t meet the deficit target and will try to meet it at a later date. The country needs economic reform, in our view, and it doesn’t appear to be working hard enough on it.
Germany, we believe, is meeting its fiscal requirements very well. Still, when most other countries in Europe are in fiscal austerity, maybe Germany can afford not to be so austere.
I think some of the eurozone’s core countries could take a lesson from the so-called periphery economies. In many of the periphery countries, the authorities have enacted necessary reforms. They have put plans into place that successfully reduced their budget deficits. I’m not saying some of the periphery countries shouldn’t do more, but many reforms have been passed, and we’re starting to see them implemented.
Still in Europe, but outside the eurozone, the UK economy is moving in a positive direction, in my opinion. Growth is good, inflation appears to be under control, and the country’s central bank is in a very different place than the eurozone’s. The central bank—the Bank of England—is considering raising interest rates, and we believe it’s not a matter of if, but when it will raise rates.
I think that’s a good sign for the UK economy and, as a result, we don’t believe UK Gilts offer a lot of value. For UK investors, there may be a case for looking at opportunities elsewhere in Europe because the economies appear to be moving in different directions.