Michael Hasenstab is more than a little cautious about Western economies. In recent years, the controller of $120 billion (€111.2 billion) in funds at the U.S. investment manager Franklin Templeton has targeted his investments at developing regions.
He was impressed by the way South America pulled itself out of the latest economic crisis when the situation turned unbearable, for example. And while he hopes Europe and his home country can implement reforms without sliding into a decade of crisis, he intends to keep investing his billions elsewhere. At least for now.
The 43-year-old, who lives near Franklin Templeton's California headquarters, sees the policies of U.S. President Donald Trump affecting mostly threshold countries and their currencies. The Mexican peso, for example, lost more than a fifth of its value between Mr. Trump’s election victory in November and his inauguration in January. But Mr. Hasenstab, whose employer ranks as one of the world’s 30 largest fund traders with $733 billion under management, thinks the panic will subside.
A trend to higher interest rates will remain, underpinned by the election outcome, Franklin Templeton’s chief bond strategist said. And Mr. Trump’s policies are likely to heat up inflation. “Protectionism drives up prices, so does increasing government spending, as well as generating more releases of state bonds,” Mr. Hasenstab added.
In 2015 we invested heavily in Mexico and Colombia, when everyone hated it. Michael Hasenstab, Fund manager
Mr. Hasenstab thinks Mr. Trump has a tendency to talk up his plans, and that investors should wait to see what actually happens. For example, the new president first announced federal spending of more than a trillion dollars on roads and other infrastructure, then reduced it to $500 billion.
The fund manager also thinks Mr. Trump will pressure the Federal Reserve by changing the composition of the monetary policy committee. He would likely place hawks, i.e. practitioners of restrictive monetary policy, on the committee. There is also the possibility of the Fed raising prime rates to avoid jeopardizing its independence, he said.
For a long time markets seemed to be uncoupled from economic development, Mr. Hasenstab observes. “Investors now recognize the risks to bonds. Inflation is rising, growth hasn’t collapsed, there’s been a marked rise in interest rates.”
On currencies, Mr. Hasenstab sees the euro as fundamentally more vulnerable than it was six years ago because of Britain’s plan to quit the European Union and because of Mr. Trump’s election. “The nationalist parties will gain so much influence that the political cohesion of the euro zone may be called into question,” he said.
Investors should also ask themselves whether they should still buy European bonds, as the euro might lose value against the dollar this year. “But I’m not betting that the euro zone will break apart in the next few years,” Mr. Hasenstab said.
Still, seeing only poor profitability ahead in Europe, Franklin Templeton has sold its holdings in Hungary, Ireland and Poland and invested the money in South America instead. And it’s been years since the firm held euro-zone state bonds, U.S. Treasuries or Japanese government bonds. “When interest rates are very low you get only loss risks,” said Mr. Hasenstab.
In Mexico, Franklin Templeton holds more than a sixth of its Fund Assets in their flagship fund "Global Bond" with assets of $60.5 Billion. Mr. Hasenstab notes that investors savaged Mexico after Mr. Trump won the election and spoke negatively of the Mexican economy.
“We did the opposite. We bought more in South America after Trump won. The response in threshold countries is exaggerated,” he added.
There’s still a lot of nervousness, with markets reacting whenever the new U.S. president says something. “But we’ve seen the most extreme. Reality is usually less extreme,” Mr. Hasenstab said.
Despite Mr. Trump’s threatening tone about Mexico, Mr. Hasenstab predicts that the U.S. will not stop trading with it. On the campaign trail Mr. Trump railed that he’d rip up the North American Free Trade Agreement (NAFTA), but now he wants to renegotiate it, he says. Whichever way he looks at it, there is a tight economic weave between the two countries. Very many American jobs depend on it. Mexico imports massive quantities of maize from the U.S., for example, and farmers would suffer enormous problems if that trade were cut.
In addition, U.S. car makers depend on Mexican parts suppliers. A lot of jobs would go if trade collapsed, Mr. Hasenstab says, adding that Mexico could weather an increase in the cost of trade.
Franklin Templeton also continues to invest large chunks of its assets in Asia.
The reasons for investors to venture even further south are clear to Mr. Hasenstab: “[In South America] there was a decade of populist experiments with government interventions, fiscal deficits, inflation, economic collapse and social unrest – especially in Brazil and Argentina.”
“The new governments are more orthodox: they keep out of private business, take on fiscal responsibility. Plus the central banks are independent and the manipulation of energy prices and exchange rates was stopped. That’s released potential.”
Franklin Templeton has invested some 5 percent of its fund capital in Argentina. The company still see risks in the country but good returns are the reward – 4 to 5 percent in the short term. Things have also gone well in Brazil, where Franklin Templeton achieved double-digit returns last year.
Franklin Templeton also continues to invest large chunks of its assets in Asia. Countries such as Indonesia appear vulnerable when U.S. interest rates rise, Mr. Hasenstab explains.
But punts in South America remain Mr. Hasenstab's most courageous investment. “In 2015 we invested heavily in Mexico and Colombia, when everyone hated it. Our fundamental analysis convinced us," he said.
“We stuck to our bet on the interest turnaround. Many gave up when interest kept dropping in 2016. They closed their selling positions and bought bonds. We didn’t, despite poorer performance. It’s encouraging that in the last quarter we were 9 percentage points ahead of the market and the competition again.”
Anke Rezmer covers the investment fund industry for Handelsblatt out of Franfurt, Germany's finance capital. To contact the author: [email protected]