Opportunities abound in Asia, with many of its diverse areas having peaked in terms of central bank policy, alongside inflation. Hence the region holds much stability and value.
Franklin Templeton Chief Investment Officer (Fixed Income Group) Sonal Desai believes there will not be a dramatic recession, but the volatility shall remain until the market actually believes the U.S Federal Reserve (Fed).
She added that the US economy is relatively strong and this is good news for the world. The extended period of dollar strength alongside the Fed raising rates, is likely to come to an end. Sonal said the Fed may not be at its final rate hike, but more likely than not, it has done it.
On Malaysia, the country is seen as an attractive investment destination despite growth having slowed due to the Covid-19 pandemic. Sonal believes a recession is unlikely to happen here, although inflation might be a bit higher than what Bank Negara would like.
Hence she does not foresee any rate cuts soon. But when the US Dollar is somewhat overvalued, together with the returns, Malaysian government bonds become more attractive. This reiterates the relative stability of the country and an economy that stands to benefit from China’s reopening.
Sonal goes on to highlight the status of Malaysia’s regional peers. Korea appears to have a robust economy while Singapore is showing strong recovery.
Diving into China, the nation is a positive factor for regional growth, although it is not necessarily like the previous growth cycles which were very capital-intensive.
Sonal, however, describes the high youth unemployment in China as unusual. But the bigger question here is the geopolitics surrounding China, with the escalating tensions.
She is of the view that China is cautious and rational in its choices, approaching the geopolitical situation in a more considerate way compared to Russia.
Unemployment in the US, however, is at a 60-year low now, indicating a strong real economy. It is slowing but it starts from such a strong point that there is room for weakness without a catastrophe.
“The US is not starting from a point of 5% unemployment going to 7%, we are looking at a country which is at 3.4% unemployment and could possibly go up to 4.5% to 5%, which is not catastrophic,” said Sonal.
If the pre-global financial crisis period was to be taken as a point of reference, 5% unemployment and 5% on Fed funds was the standard in the US. According to Sonal, people have become accustomed to very low rates, abundant liquidity and little worries about inflation.
Returning to the topic of the Covid-19 pandemic, Sonal disagrees with the term “new normal,” referring to the period between the global financial crisis and COVID as an aberration which was characterized by a combination of easy monetary policy and loose fiscal policy. This eventually leads to inflation. Reversing this and tightening the policy aids containing inflation.
She believes growth is going to be strong, inflation is a little sticky and that the Fed will need to keep rates positive in real terms for a while. Also, she thinks the market is underestimating the Fed’s seriousness. Sonal is of the opinion that the Fed is likely to win the fight against the market.
An avoidable catastrophe
The collapse of the Silicon Valley Bank (SVB) was another topic that Sonal acknowledged. She attributed the collapse of SVB to poor bank supervision and management.
The bank had liabilities which do not match in duration to their assets. No banks will match exactly, since deposits are daily and provide instantaneous liquidity while loans are rarely that.
But in a period of rising interest rates, which has been happening for the better part of two years, bank management should take the necessary steps to hedge against such exposure.
Sonal finds it vital to draw a distinction between what happened to SVB and what happened after the global financial crisis, where banks had assets which they could not value due to it being non-transparent.
“When a housing market collapses, the assets have no value. Contrasting this against SVB, the underlying assets were US treasuries. It is not a bad asset, the only thing which happened was the price of the asset went down when rates went up,” she said, adding that these were unfortunately long term US treasuries.
With regards to the recent bank collapses, Franklin Templeton was observing the situation and assessing the different regional banks to see if there were interesting opportunities which presented themselves, for example, people selling their bonds.
“Some regional banks are strong and some are less so. And so we are looking to find opportunities,” she said.
Where banks are being discussed, commercial real estate is also a vital factor to consider, being seen as a cause of the credit crunch. Sonal said unlike commercial real estate, residential real estate takes its cue from the unemployment rate.
“Unemployment doesn’t go up regionally. It goes up across the country,” she said.
Commercial real estate, on the other hand, has been in a problematic space for the past decade, being affected by the rise of e-commerce.
“Some parts of the US downtown are still empty. So in San Francisco, you have 30% occupancy, but there are other parts of the US, where downtowns are at 130% of traffic, foot traffic,” she said, adding that banks that finance these empty malls are very likely to be affected.
Sonal is of the opinion that commercial real estate by itself does not create the collapse, with the effects being very regional.
