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Bond veteran Beck: BOJ liquidity will compensate for Fed tapering

Bond veteran Beck: BOJ liquidity will compensate for Fed tapering

High levels of global liquidity are continuing to drive selective opportunities in the emerging markets, Franklin Templeton’s John Beck has said.

Beck, who is co-director of international bonds for the US group, said he has bolstered developed world currency bets in his global bond funds despite widespread uncertainty.

He told Citywire Global the potential risk from the Fed’s decision to cut back on bond purchases is not equally weighted between emerging market assets

This, therefore, has led Beck to invest in the Mexican peso, Korean won and Malaysian ringgit in his portfolios. He has held some of these positions for over two years.

‘The problem is with people lumping different economies together – like the fragile five or BRICS – and not all of them will be affected by macro concerns like tapering in the same way. These kinds of generalisations are what we are trying to avoid.’

Beck is currently overweight the won and the ringgit, which he says stand to benefit from growth in the Chinese economy, while both currencies have strengthened against the dollar in the past six months.

‘We thought the third Plenum was a positive outcome for Chinese reform and we are probably more optimistic on China than consensus,’ he said.

Continued liquidity

Beck said his investment decisions come at a time when the Federal Reserve beginning to taper its bond buy programme at the start of the year, while the Bank of Japan retains an ultra-loose monetary policy path.

‘Around 60-70% of our investment decisions are due to the countries’ structural changes whilst the rest is based on global liquidity,’ Beck said in relation to overweight positions in the ringgit and won.

‘We think that there is still ample liquidity provided by the central banks. Even if the Fed starts pulling the plug, the Japanese central bank will more than compensate by pumping more liquidity into the system.’

Citing improving growth, Beck said that he could expect the US and UK’s central banks to start raising rates as soon as next year. The ECB he said could remain some way behind.

‘The ECB is going to be at least a year behind (the US and UK central banks) and then together with the weak growth, we think that it may raise rates in 2017,’ he said.

In this low rate environment in the region, Beck says that there are still some opportunities in peripheral debt.

‘It’s never going to be a buy and hold strategy due to associated contingent liabilities but we still see some opportunities in peripheral economies as growth in the region remains weak,’ he said.

The portfolios Beck helps manage currently don’t hold any UK gilts, Austrian or Finnish government bonds. UK gilts haven’t been bought for the funds since 2009.

‘We do not see these assets as risk-free but rather as low yielding,’ added Beck, who helps manage a range of fixed income funds alongside David ZahnMichael Hasenstab and Sonal Desai.

The Templeton Gl Aggregate Inv Grade Bond fund, co-managed by Beck and Zahn, has lost 2.82% (in EUR terms) over three years to the end of January. Its benchmark the Barclays Global Aggregate Index lost 8.44% in the same period.

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