“Large stimulus measures may be unavoidable in the near term, but responsible fiscal governance will be essential to debt sustainability going forward,” he said. “Unorthodox policies such as modern monetary theory and debt monetization are likely to see greater political interest in upcoming years, increasing the risks for structural damage by imprudent governments. This makes it ever-more crucial to monitor policy across developed and emerging markets alike, to identify which sovereigns have their fiscal houses in order or the ability to bring them to order, versus those that do not.”
The debt levels in the United States, Hasenstab said, will have long-term ramifications. It is projected to exceed 100% of gross domestic product (GDP) over the next decade with a fiscal deficit heading toward more than 5% of GDP by 2030. Short-term US Treasury yields are likely to remain anchored by monetary accommodation in the near term, but surging fiscal deficits, massive debt levels and inflation pressures will “eventually drive term premiums higher”.
So, what’s the strategy? How should global investors approach the current environment. Franklin Templeton Global Macro views the crisis in two phases, with the markets currently in the first phase, which is characterized by a prolonged period of elevated risk and uncertainty. It expects the second phase to feature a more sustainable recovery, shortly preceded by periods of distorted asset prices and compelling investment opportunities. This is where the opportunities are as investors look ahead.
He said: “In phase one, we are maintaining a largely defensive stance that focuses on higher allocations to safe-haven assets, lower duration exposures in select emerging markets, broad risk reductions and optimized liquidity. In phase two, we anticipate pursuing undervalued risk assets, with a particular focus on distressed valuations in higher duration local-currency sovereign bonds, emerging market currencies, and various credit sectors.
“We remain confident that these types of phase-two investment opportunities will ultimately arise, but we also recognize that the pandemic may persist for multiple quarters, potentially pushing out the timeline for when certain investment opportunities may become suitable. Until that point, we continue to glean new information and new insights amid the evolving crisis, as we monitor the global economy on a country-by-country basis to uncover current and future investment opportunities.”
