Revisiting Corporate Credit amid Market Volatility

In 2018, rising inflation, higher US interest rates and escalating trade tensions have led to concerns about global economic growth and bouts of equity-market volatility. However, Ed Perks, CIO of Franklin Templeton Multi-Asset Solutions, says corporate credit has been a bright spot for fixed income investors. He gives his outlook for the global economy and explains why he still sees value in select high-yield bonds.

As we head into the latter half of 2018, rising inflation and higher US interest rates―against a backdrop of intensifying global trade tensions and widening tariffs―have begun to pose challenges for many developed and emerging-market economies. As a result, many investors could be wondering about our outlook for global growth and its influence on our investment decisions.

Despite these issues, and weakness in a number of confidence indicators, we think the balance of economic news and data remains supportive. We continue to expect positive global economic growth led by a US economy that appears to be in relatively good health.

Midsummer Outlook for Inflation and US Interest Rates

We do not see inflation as a meaningful factor just yet in the United States. What we see with inflation today is a return to normalization after the global financial crisis.

Our view is that inflation will continue to tick up, but the increase is apt to be very gradual. The primary forces that have kept inflation muted—globalization and technological innovation—are still in place and should continue to have a restraining influence, in our view.

In the United States, labor-market strength has continued while generating what we believe are manageable increases in labor costs as job openings have exceeded the number of unemployed. We think increasing costs, particularly wages, are apt to be only a modest drag on profit margins.

What’s more, we think US corporate profits―supported by business spending and expanding manufacturing activity―are likely to be strong and hold the potential to be conducive to further interest-rate hikes.