CONTRIBUTORS
Michael Hasenstab, Ph.D.
Portfolio Manager, Chief Investment Officer, Templeton Global Macro
Calvin Ho, Ph.D.
Portfolio Manager, Director of Research, Templeton Global Macro
Key Takeaways
- September overview: Most of the market movement during the month was tied to two main factors: a continued stalemate in the Middle East—which caused oil prices to surge and inflation fears to reignite—and the US Federal Reserve’s (Fed’s) September interest-rate hike. The US dollar (USD) strengthened against most currencies in September. Sovereign bond yields rose in the vast majority of countries, with 10-year US Treasury bond yields reaching a nearly two-decade high, and Japanese government bonds hitting a three-decade high. Hard-currency emerging market (EM) bond indexes fell in aggregate. Inflation remains at relatively high levels across a number of countries. While recent inflation outcomes have been mixed, some countries are seeing the effects of higher energy prices, and the latest move in oil (Brent crude is now over US$100/barrel) suggests more pressure to come. Central banks mostly continued to tilt hawkish, and policy rates were raised in a number of developed markets, including the United States, the euro area (EA) and Japan, as well as in some EMs. Global growth data remains relatively resilient despite the geopolitical backdrop.
- Outlook: The outlook remains highly uncertain given the current global backdrop, but we expect some countries to perform significantly better than others. Certain countries (such as energy importers and vulnerable economies) are at greater risk from the global geopolitical situation and higher oil prices, while others are benefiting from integration into the global technology value chain as the artificial intelligence (AI) demand cycle remains robust. We highlight that the latter group includes a number of EMs, particularly in Asia. These factors underscore the importance of analyzing countries based on their idiosyncratic fundamentals. For example, among EMs, while resilience remains a notable broad factor, differing sensitivities and policy require careful country-by-country analysis. The monetary policy outlook is somewhat clouded by the growth and inflation risks stemming from the conflict in the Middle East, though it appears that most countries are now in or heading toward a hiking cycle. The El Niño weather pattern is expected to further complicate the growth and inflation outlook in coming months. Despite the current geopolitical backdrop, our thesis of “global rewiring” remains intact, and we expect global relations to continue shifting and realigning for some time yet.
This month’s Global Macro Insights offers a comprehensive update on regional developments, along with analysis of the key opportunities and challenges shaping the current macroeconomic landscape.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. There is no assurance that any estimate, forecast, or projection will be realized.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
Currency management strategies could result in losses if currencies do not perform as expected.
Active management does not ensure gains or protect against market declines.
Diversification does not guarantee a profit or protect against a loss.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.