When contemplating the investment story in developed economies versus emerging markets, the political tables have turned, said Michael Hasenstab, CIO at Templeton Global Macro. What we are left with is an interesting juxtaposition; a politically polarised United States and Europe, and many emerging countries with a politically mainstream bent, he said.
“In developed markets, we have seen a rise in populism because some voters see themselves as disenfranchised, and there has been a lack of real wage growth, causing real political upheavals,” noted Hasenstab. “In emerging markets, countries such as Brazil and Argentina that went off track in terms of unorthodox policies have returned to sort of state-planning systems; those political regimes have ended, and the countries have come back to more mainstream orthodox policies.”
“Areas that once were thought of as highly risky and vulnerable, like Mexico, Indonesia and India, have proved to be following what we view as a very consistent path that, I think, has benefited investors,” he continued. “Meanwhile, Europe has seen a rise in nationalism and populism that we think could draw into question the whole eurozone project.”
For this reason, the emerging markets theme has become a key driver for Hasenstab’s fixed income focused global fund, although he stressed that the fundamentals in individual countries do matter. Turkey and Venezuela are obvious outliers that do not fit within the overarching theme of stability and resilience against slow global growth, he said.
“Overall, we are being very selective in emerging markets,” Hasenstab explained. “I think what will be key as we look ahead is examining each individual country’s policy decisions and the political landscape–the variances will likely be massive. We think differentiation will be critical as the year progresses and into next year. You cannot treat emerging markets as uniform, that’s our main message.”
“In US and Europe, contrastingly, the political situation remains undeniably more fragmented,” added Rick Frisbie, head of Franklin Templeton Solutions. As such, Frisbie said he is “definitely positioning to become a little more defensive.”
“We have a saying that when the CBOE Volatility Index (VIX) is low, it’s time to go. The VIX is often referred to as the fear index or fear gauge, and when it’s at low levels, we think it could be a prudent time to move a little more out of risk assets. Currently, the VIX is trading at about 13, but the 20-year average is just above 20 or 21, so sitting at lower-than-average levels, it means many investors have become less concerned about risk and maybe a bit too complacent,” he explained.
And during a time when populist and nationalist parties are contributing to the fragmentation of governments of developed markets and people are beginning to lose faith in central banks, complacency could be dangerous, Frisbie stated.
