Michael Hasenstab, who manages the venerable Templeton Global Bond fund is a star manager with an exemplary track record having returned over 12% a year over the last decade (and 3.3% YTD). What distinguishes Hasenstab from other bond managers is his global focus and his use of currency overlays which have added significant alpha to his returns. In a previous newsletter,
I had discussed the views of Ray Dalio of Bridgewater Associates (the world's largest one of the most successful hedge funds) with regards to the impending revaluation of some emerging market currencies versus the developed world as being the seismic event over the next 18 months – I now bring to you the views of Hasenstab (via Wealth Track) on the same theme.
He is staying away from bond markets which are overvalued and have a degree of fiscal and monetary risk (i.e. the US, Europe and Japan) and focussing on markets (i.e. EM, Scandinavia, Australia) where they can earn yield without taking too much interest rate and credit risk by buying short dated bonds.
He views the US to be on a reasonable 2.5-3.5% growth trajectory and is therefore not an environment to own long dated bonds. In addition, he is concerned about the lack of political ability in the US to address the budget deficit
While the US tackled the crisis very aggressively (and appropriately) by printing money, fiscal spending and dealing with bank recapitalization thereby avoiding a Japanese style lost decade, they continue to employ aggressive measures in a much improved environment and are therefore creating market distortions.
With the three largest economies in the world having the loosest monetary policies on record, the excess liquidity is creating distortions in global asset prices - like commodities prices which are driven up by growth in EM countries as well as the flow of liquidity.
He likes currencies of countries which do not have excess leverage, have prudent fiscal management, and are ahead of the curve in terms of monetary policy – which include some developed countries like Australia, Sweden, Norway and EM countries like China and Malaysia.
Japan is likely to continue its very easy monetary policies, and have lower growth and interest rates than the US, resulting in a weakening in the Yen. In addition, G7 policymakers have drawn a line in the sand at 80 Yen which would prove to be a strong resistance for Yen appreciation.
He is negative on the Euro, particularly against some Scandinavian and Central European countries. Poland is a favourite as it has conservative accounting standards, one of the lowest debt to GDP ratios and a relatively fast growing economy –it was the only European country which did not have a recession during the crisis.
The big risk facing the world is that countries get behind the curve in terms of monetary policy – with the US exporting its loose monetary policy to the world it is critical that countries negate this with raising their interest rates and currencies - and the Asia-Pacific region is doing a tremendous job in this regard.
The Chinese Yuan is likely to become one of the three major global currencies , in addition to the dollar and the euro. This process would require opening up of their capital accounts resulting in an appreciation of the Yuan, which will bring up the value of many Asian currencies as well.
They get exposure to the Chinese Yuan via linked economies and currencies which benefit from Chinese growth – i.e. most Asian countries as well as countries like Australia and Chile.
He does not see a dollar crisis, but more of a gradual realignment where the dollar will actually do well against the Euro and Yen but very poorly against a lot of the EM currencies.
The key theme for them is to purchase short term bonds in countries where they expect rising interest rates and currencies.
A great interview as it presents Hasenstab's views in a clear, simple and precise manner. The key theme espoused by him - to focus on buying short-dated high quality bonds in countries which are pursuing conservative fiscal and monetary policies with rising interest rates makes eminent sense and is likely to provide a 10% plus return over the next few years. In addition to the countries he has mentioned like Australia, Sweden, Norway, Poland, China, Malaysia, Indonesia, Chile – I would add (by perusing the last page of the Economist which lists a table with the budget deficits, current account balances and interest rates for all countries) – South Korea, Mexico, Brazil, Hungary, Russia (India does not quite make the cut due to its high budget deficit despite having a conservative monetary policy and other countries like Singapore have sound fiscal and monetary policies but very low interest rates making them relatively less attractive as a yield investment- but an attractive cash holding).
In terms of the all-important portfolio allocation – an appropriate allocation target could be: a 30% allocation to a bond & currency portfolio as above, 10% to US credit and private mortgage funds (US treasuries are now a range trading play, and with the recent sharp rally, are for now more of a sell than a buy!), a 30-35% allocation to equity funds/ETFs comprising primarily Greater China(8-10%) , India(7-9%), US & global natural resource (7%), US high quality (5%) and balance exposure to Russia, Brazil, South Korea, Singapore and Canada, 20% cash (diversified) , 5% in gold and 5% in real estate (investment – not including abode). Some may find the exposure to real estate exceptionally low, and to counter that view I present below a graph which clearly illustrates the bubble like price movements in Asian home prices – and this is not a "paradigm shift" resulting from increasing demand for finite natural resources as argued by Grantham last week (and supported by the likes of Paul Krugman-I would vote with the two of them than a multitude of others!).
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He is staying away from bond markets which are overvalued and have a degree of fiscal and monetary risk (i.e. the US, Europe and Japan) and focussing on markets (i.e. EM, Scandinavia, Australia) where they can earn yield without taking too much interest rate and credit risk by buying short dated bonds.
He views the US to be on a reasonable 2.5-3.5% growth trajectory and is therefore not an environment to own long dated bonds. In addition, he is concerned about the lack of political ability in the US to address the budget deficit
While the US tackled the crisis very aggressively (and appropriately) by printing money, fiscal spending and dealing with bank recapitalization thereby avoiding a Japanese style lost decade, they continue to employ aggressive measures in a much improved environment and are therefore creating market distortions.
With the three largest economies in the world having the loosest monetary policies on record, the excess liquidity is creating distortions in global asset prices - like commodities prices which are driven up by growth in EM countries as well as the flow of liquidity.
He likes currencies of countries which do not have excess leverage, have prudent fiscal management, and are ahead of the curve in terms of monetary policy – which include some developed countries like Australia, Sweden, Norway and EM countries like China and Malaysia.
Japan is likely to continue its very easy monetary policies, and have lower growth and interest rates than the US, resulting in a weakening in the Yen. In addition, G7 policymakers have drawn a line in the sand at 80 Yen which would prove to be a strong resistance for Yen appreciation.
He is negative on the Euro, particularly against some Scandinavian and Central European countries. Poland is a favourite as it has conservative accounting standards, one of the lowest debt to GDP ratios and a relatively fast growing economy –it was the only European country which did not have a recession during the crisis.
The big risk facing the world is that countries get behind the curve in terms of monetary policy – with the US exporting its loose monetary policy to the world it is critical that countries negate this with raising their interest rates and currencies - and the Asia-Pacific region is doing a tremendous job in this regard.
The Chinese Yuan is likely to become one of the three major global currencies , in addition to the dollar and the euro. This process would require opening up of their capital accounts resulting in an appreciation of the Yuan, which will bring up the value of many Asian currencies as well.
They get exposure to the Chinese Yuan via linked economies and currencies which benefit from Chinese growth – i.e. most Asian countries as well as countries like Australia and Chile.
He does not see a dollar crisis, but more of a gradual realignment where the dollar will actually do well against the Euro and Yen but very poorly against a lot of the EM currencies.
The key theme for them is to purchase short term bonds in countries where they expect rising interest rates and currencies.
A great interview as it presents Hasenstab's views in a clear, simple and precise manner. The key theme espoused by him - to focus on buying short-dated high quality bonds in countries which are pursuing conservative fiscal and monetary policies with rising interest rates makes eminent sense and is likely to provide a 10% plus return over the next few years. In addition to the countries he has mentioned like Australia, Sweden, Norway, Poland, China, Malaysia, Indonesia, Chile – I would add (by perusing the last page of the Economist which lists a table with the budget deficits, current account balances and interest rates for all countries) – South Korea, Mexico, Brazil, Hungary, Russia (India does not quite make the cut due to its high budget deficit despite having a conservative monetary policy and other countries like Singapore have sound fiscal and monetary policies but very low interest rates making them relatively less attractive as a yield investment- but an attractive cash holding).
In terms of the all-important portfolio allocation – an appropriate allocation target could be: a 30% allocation to a bond & currency portfolio as above, 10% to US credit and private mortgage funds (US treasuries are now a range trading play, and with the recent sharp rally, are for now more of a sell than a buy!), a 30-35% allocation to equity funds/ETFs comprising primarily Greater China(8-10%) , India(7-9%), US & global natural resource (7%), US high quality (5%) and balance exposure to Russia, Brazil, South Korea, Singapore and Canada, 20% cash (diversified) , 5% in gold and 5% in real estate (investment – not including abode). Some may find the exposure to real estate exceptionally low, and to counter that view I present below a graph which clearly illustrates the bubble like price movements in Asian home prices – and this is not a "paradigm shift" resulting from increasing demand for finite natural resources as argued by Grantham last week (and supported by the likes of Paul Krugman-I would vote with the two of them than a multitude of others!).
1 of 1 File(s)
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