Franklin Templeton: Maximising total returns in a low but rising rate environment

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Global markets have been engulfed in a low yield environment since major central banks launched their quantitative easing (QE) programmes in the wake of the global financial crisis. Nearly a decade down the line, extracting yield is proving to be more challenging than ever, especially in the face of new policies aimed at normalising interest rates.

Yet, yield-hungry investors continue to seek income via an eclectic range of assets. Leading asset manager Franklin Templeton advises investors to turn to non-traditional fixed income strategies – such as unconstrained bond funds, which are not tied to any single fixed income sector or investment style – to generate alpha and shield their portfolios from risk.

Where do the best opportunities lie?

Despite the challenging landscape, some attractive opportunities remain – especially in emerging market (EM) bond markets. Franklin Templeton believes that EM bond markets offer appealing carry trade opportunities, even as and when central banks start reining in their loose monetary policies.

After underperforming for several years from 2011 due to declining commodity prices and decelerating economic growth, EM bonds have recovered significantly, with US$37.8 billion worth of net inflows in 2016.

Fundamentals within the asset class are robust: defaults are lower than consensus expectations and are in fact almost non-existent, while yields in certain markets are high.

However, given disparities within the EM bond market – across both yields and risks – Franklin Templeton says it is crucial to pick the right markets. The asset manager prefers EM countries that are less vulnerable to the external environment and are more domestically driven, and which have demonstrated that they are resilient to potential increases in trade costs.

In Asia, Franklin Templeton favours countries with strong domestic fundamentals and which are less reliant on China, such as India and Indonesia. In Latin America, it focuses on countries that have turned away from previous failed experiments with populism and are now moving towards more favourable policies, such as Brazil and Argentina.

In addition, the asset manager says that some local-currency bond markets are poised to outperform. Certain EM currencies, such as the BRL, COP, ARS, MXN, IDR and INR, are expected to fare better than some developed market currencies, including the EUR and JPY, when US interest rates start to normalise.

Yield differentials are favourable in some currencies which are fairly valued or undervalued, Franklin Templeton adds.

This is a sponsored advertorial from Franklin Templeton Investments.

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