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Hasenstab: don't fear the Fed's taper tantrum

Hasenstab: don't fear the Fed's taper tantrum

Michael Hasenstab, has warned that investors are missing out on the long term opportunities in fixed income because they are panicking over near term issues such as QE's end and a potential credit crunch in China.

Hasenstab, who runs nine funds at the firm including the Templeton Global Bond and Templeton Emerging Markets Bond  fund, said volatility should not come as a surprise given the so-called US Federal Reserve 'taper tantrum', the fear of a credit crunch in China and hot spots of global unrest.

But he insists that 'those who can't stand the heat may miss out'.

Taper tantrum

The renowned bond manager said investors needed to separate short term market panics from long-term trend shifts to find the best opportunities and claimed that many were missing the point that permanently higher interest rates were a likelihood going forward.

He said: 'It’s critical to understand or disentangle the recent volatility in fixed income markets. There were two major factors. One was the rise in interest rates, which, in our view (and what we’ve been positioning for), could likely be a permanent move higher.'

'I consider this rise in rates from exceptionally and distortedly low levels in many countries as moving toward more normal levels. I don’t think we’re fully there yet in terms of an equilibrium level, but we’ve at least begun to adjust.'

Hasenstab said that the other factor had been a more general bout of panic and risk aversion.

He accepted that talk of the Federal Reserve starting to taper off its liquidity injections was always going to spark some market dislocations but stressed that there should still be sufficient liquidity in the global system even with some tightening.

'It’s important to remember tapering does not necessarily mean tight policy. It means the end of an excessively loose policy.'

Hasenstab also believes that if the Fed is tightening against a perceived backdrop of an improving global economy, it would be beneficial for the rest of the world and emerging markets in particular.

'I think this fear of liquidity being pulled out of emerging markets due to the Fed ending its bond purchasing program is overstated as we do not believe there would be a massive contraction of liquidity out of emerging markets. Our view is that this is likely to be more of an entry point for investors as opposed to an exit.'

He pointed out that Japan was also likely to continue to print money for some time.

'Thus as the US begins to taper, Japan is beginning to ramp up. In our view, it doesn’t really matter whether the Fed prints or Japan prints or Europe prints. If it’s printed, it’s going to flow out.'

He also said fears over a potential Chinese credit crunch and overheating real estate sector were probably overdone.

'I think it’s important to understand what’s happening in China in the context of broader reform and the short-term need to rein in the shadow banking system. When a sector gets too hot, it is necessary to pull it back.'

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