A Global Macro Perspective: Populism, Trade and Emerging-Market Volatility

Host/Richard Banks: Hello and welcome to Talking Markets with Franklin Templeton Investments: exclusive and unique insights from Franklin Templeton. I’m your host, Richard Banks. Ahead on this episode: long-term concerns in the eurozone as a result of populism, politics and sentiment. Templeton Global Macro Chief Investment Officer Dr. Michael Hasenstab on why believes the EU could face significant challenges for years to come. Plus, taking advantage of the recent volatility in emerging markets. Dr. Calvin Ho, Templeton Global Macro vice president and deputy director of research, also issues a potential warning about the trade disputes for the medium and long term.

Host/Richard Banks: Speaking with Dr. Ho and Dr. Hasenstab is Franklin Templeton’s Katie Klingensmith. Katie, take it away.

Katie Klingensmith: Thank you, Richard…Michael, let’s start with you and how you view the global landscape right now, and I’m guessing it all starts with the continued economic growth in the US?

Michael Hasenstab: We have an acknowledgement that the US economy is actually pretty strong, whether you look at the ISM [Institute for Supply Management] numbers, the labor data, even the Fed’s [US Federal Reserve] conversation tone is changing to acknowledge that we are at full employment, the economy is growing quite strong. You look at GDP numbers, you name it, things are strong and as a result, Treasuries have now started to gap higher and we have had a pretty big move, and we think there’s far more to go. We have also seen the yen re-couple with the interest-rate differential and with [Japanese] Prime Minister [Shinzō] Abe’s re-election, that keeps Abenomics in play which keeps loose policy, while the Fed tightens policy and that interest-rate differential is pushing the yen weaker.

Generally, we have now seen also some euro weakness on the back of populism concerns and budgetary issues. And on emerging markets, this reasonably good growth backdrop, plus the fact that Turkey is isolated and it isn’t being contagious to the rest of the emerging markets, I think has caused some stability.

Katie Klingensmith: You mentioned the euro weakness, and I know it’s an area you and your team are closely monitoring. Calvin, turning to you, what’s your perspective with what’s happening in the eurozone?

Calvin Ho: Well, I think the first thing to remember is 2017 was a very good year for the euro area. Growth was 2.4%, you look at when it was 2.4% the last time or higher than 2.4%, the last time was 2007. So we basically have the best year in euro last year. And what we look for is the growth start to moderate. Again, the market consensus is about 2%, next year is marginally lower than 2%, but we actually see downside risk. One reason, taking our estimate for potential growth for Euro area is about 1.5%. So it won’t be a surprise to us that the growth is below the market consensus of 1.8% next year.