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Thursday, June 19, 2014

Hasenstab Shares His Contrarian Tips at M*

Reported by Anastasia Donde

Criticize him all you want, but Michael Hasenstab, Franklin Templeton’s CIO for global bonds and portfolio manager of the $72 billion Franklin Templeton Global Bond Fund, doesn’t mind being contrarian. Even though he’s gotten a lot of flack from the press lately about his position in Ukraine (one he intends to maintain, thankyouverymuch), he’s still optimistic about it and other investments in the emerging markets, but noted that you can’t expect the area to be homogenous and need to look at specific countries to ferret out lucrative investment deals.

Hasenstab, who kicked off the 2014 Morningstar Investment Conference at the McCormick Place Convention Center in Chicago yesterday, shared his views on the emerging markets at 3 p.m. and told attendees that the future of Japan and China will play a large part in how some of these countries will perform.

Many of the emerging market countries have been negatively impacted by the Fed’s tapering and this has led to fears of liquidity drying up in the system, but Hasenstab noted that the Bank of Japan announced its own QE program and a 2 percent inflation target earlier this year, which could stand to pump a lot of liquidity back into the system.

The investment community’s views on China have been fairly negative, including expectations that China’s growth will slow, that it’s headed for a hard landing, and could even stand to experience a Lehman-type crisis. But Hasenstab thinks many of these fears are overblown. Up until recently, a lot of China’s growth has been fueled by investment, but Hasenstab thinks it’ll be fueled by consumption going forward and that President Xi Jinping has put policies in place to see to that. He also reminded the audience that shadow banking is a relatively small part of China’s GDP. According to his slides, it’s 5 percent of GDP in China, while it represents 156.3 percent in the U.S. and 168.9 percent in Europe.

He said he doesn’t doubt that China will eventually go through a recession, but expects the country will still be able to achieve around 7 percent growth in the next few years, and this, as well as Japan’s policies should have positive effects on emerging market countries.

Though he was careful to note that it depends which ones. “It’s not a uniform asset class. Views on the emerging markets swing from extreme pessimism to extreme optimism, but both are very dangerous. You really need to look at what’s driving those views,” Hasenstab said.

For an American fund manager, Hasenstab spends a lot of time overseas and said he and other portfolio mangers at Franklin Templeton like to get to know these countries and their circumstances and cultures well before investing in them.

“We’ve spent the last six months entrenched in the emerging markets and figuring out what are the big picture themes and country-specific issues are,” he said.

Emerging market countries perform very differently depending on their specific socio-political situations, and relationships with the developed markets, as well as China and Japan, so it makes no sense to go whole hog into all the emerging markets or avoid them all together. In one of his slides, he presented a range of how emerging market countries performed last year, which was, for the most part, a bad year for EM, and noted that several countries actually did well. Hungary was the winner at the positive end of the spectrum, while Indonesia had the worst returns at 30 percent.

Hasenstab’s presentation was the first of many investment and business focused panels that will take place at the Morningstar event, which boasts some 2000 attendees, or eventually will, as many people’s flights have been delayed due to heavy storms and torrential downpours in the windy city. But once you’re here, you may never need to leave the premisses. The conference venue, which is attached to the Hyatt Regency hotel at McCormick Place has several restaurants and bars, a Starbucks, a fitness center and pool, the conference exhibit hall and other amenities, making going out into the rain largely unnecessary.

Today’s panels will feature breakout sessions on more emerging markets, global investing, unconstrained bond funds, ETF strategies and much more. PIMCO’s Bill Gross will also be delivering the lunch keynote address. Stay tuned for more coverage. 

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