10 July 2024 – Inflation may be sailing toward trend, but uncertainties remain on the horizon. Experts from Brandywine Global, a specialist investment manager of Franklin Templeton, provide their insights into the factors that may impact the economy and financial markets in the second half of 2024.
Commenting on developed markets fixed income outlook, Jack McIntyre, Portfolio Manager, Brandywine Global, said: “In the U.S., we expect election-induced market volatility to start earlier this year than typical. Our base case is that we get a divided government no matter who wins the White House. That would be the best-case scenario for markets. A divided government curtails new major spending programs and tax cuts. There is not a clear-cut hedge against election volatility other than taking smaller positions than normal to better withstand the price moves. There are several other developments to monitor in the developed markets bond space in the second half of 2024, and one theme that will persist is that data will continue to be more important than central bank rhetoric. We still believe the rest of 2024 will continue to be the year of the coupon. Developed market bonds have value because the coupon is now meaningful. One caveat, investors should expect to endure an uptick in volatility in the second half, as markets focus more on the political landscape than on the economic one.”
Commenting on emerging markets fixed income outlook, Carol Lye, Portfolio Manager, Brandywine Global, said: “U.S. inflation persistence early in the year resulted in higher U.S. rates, a stronger dollar, and volatility in Federal Reserve (Fed) pricing, which has weighed on local emerging market (EM) rates and currencies so far this year. Asian bond yields offer low carry and are less attractive compared to Latin America and Central and Eastern European countries (CEE). While Chinese policymakers have been supporting the beleaguered property market, and the latest policy rescue package involving the purchase of unsold inventories has been encouraging, consumer confidence remains relatively weak. We believe China will do more to bring confidence back to the property market.
We are seeing some deterioration in U.S. labor market data that will support further declines in wage pressure but could weigh on the growth outlook should unemployment accelerate higher. A recession in the U.S. would likely be a bad outcome for emerging markets. We have already seen a number of surprising election outcomes so far this year, with the U.S. election still ahead in the coming months. Polls currently show a tie between the two candidates; however, polls have not been a good barometer for actual election outcomes. We also will be monitoring developments in China, given the significant impact on the commodities complex and growth in other EM.”
Commenting on emerging market currencies outlook, Anujeet Sareen, Portfolio Manager, Brandywine Global, said: “Emerging market currencies generally performed well in 2023 and the first quarter of 2024, as their higher policy rates and stronger economic fundamentals attracted capital into their markets. However, in the second quarter, a number of these currencies experienced corrections, partly because valuations changed, interest rate spreads narrowed, and/or political risks rose. We reduced exposure to emerging market currencies in the first half of 2024. Going forward, we expect further upside in emerging market currency performance is likely limited to more select opportunities.”
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About Brandywine Global
Since 1986, Brandywine Global has provided a range of differentiated fixed income, equity, and alternative solutions to clients worldwide. Brandywine Global, a specialist investment manager of Franklin Resources, Inc., manages US$60 billion in assets under management as of 31 March 2024, with headquarters in Philadelphia and offices in Singapore and London. Brandywine Global is a specialist investment manager and part of the Franklin Templeton group.
About Franklin Templeton
Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management and technology solutions. Through its specialist investment managers, the company offers specialization on a global scale, bringing extensive capabilities in fixed income, equity, alternatives and multi-asset solutions. With more than 1,500 investment professionals, and offices in major financial markets around the world, the California-based company has over 75 years of investment experience and over AU$2.4 trillion in assets under management as of 30 June 2024. For more information, please visit www.franklinresources.com and follow us on LinkedIn, Twitter and Facebook.
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