Forget taper talk, liquidity is still rising, says Templeton’s Hasenstab

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Global liquidity will continue grow despite the Fed’s moves to begin tapering, according to leading bond manager Michael Hasenstab.

The Franklin Templeton manager, who runs a host of fixed income funds on behalf of the US firm, said loose monetary policy will not end as tapering takes hold.

‘The total pool of global liquidity remains abundant and is likely to continue to expand,’ he said.

‘While the Fed will eventually discontinue new purchases, and eventually even gradually raise interest rates, we believe that would still equate to fairly loose monetary policy at the global level, given the size of the Fed’s outstanding balance sheet, as well as the actions of the BOJ and the ECB.’

Focusing on the Bank of Japan, Hasenstab said: ‘It appears likely to accelerate the pace of monetary easing with further measures to amplify accommodative monetary policy in the coming months.’

Emerging markets

In addition, he said the emerging markets would be able to weather capital outflows due to strong economic fundamentals and a lower reliance on foreign funding.

‘Many emerging markets have a surplus of savings and low indebtedness,’ said Hasenstab.

‘Many of these emerging market countries no longer rely on foreign capital inflows as they did in previous decades due to improved fiscal accounts and a large amount of foreign reserves, which can provide a cushion against capital outflows.’

Citing healthy growth prospects and low debt levels of emerging markets, he said continued capital inflows would benefit select economies.

‘Asia ex-Japan looks reasonably strong to us, as do select economies in Latin America and Europe. We believe credit conditions have remained favorable in these regions given their low levels of debt and relatively stronger growth rates.’

The Templeton Global Total Return Bond fund has returned 23.5% over the three years to the end of November 2013. Its Citywire benchmark, the Barclays Multiverse TR USD Unhedged, rose 10.26% in the same timeframe.