Fixed-income expert says we may be at an inflexion point and questions when asset inflation will translate to goods
Inflation promises to the be the story of 2021 as fixed-income investors adjust to long-time low rates and an equally long economic recovery.
That’s the view of Tom O’Gorman, SVP, Director of Local Asset Management, Americas, Fixed Income, Franklin Templeton Fixed income, who said that while fund returns have consistently been good despite low yields, it feels like we at an inflexion point.
Central banks are in no hurry to raise rates and, while able to control the overnight rate, could still influence the long end of the curve through QE.
O’Gorman said: “To me, the big story for next year is the one around inflation. Will we get it with what the pandemic’s done in terms of productivity and how businesses have to run, and in terms of pent-up demand when there is a vaccine and people start moving and shopping?
“If you look at U.S. and Canadian inflation for the past 10 years, today is no different than where it was 10 years ago, when they were doing QE … and now they're doing QE again.”
He added: “That’s the one thing we're looking at, with the front end [of the curve] being anchored and but probably some movement out the curve. The question is, therefore, how does the economy react to that? How do central banks react to that as we go forward?”
How to deal with that as an investor will often come down to whether you opt for a passive or active-management approach. As an active proponent, O’Gorman unsurprisingly believes the latter is the best approach. He explained there is certainly a role for passive investing but that, by doing so, you take on the most indebted names in the index, which you may not want.
He said: “Do you want in your global fund, negative Japanese yields to be your largest weight? Or do you want the most indebted high yield company in your high yield portfolio to be in there? You’re not getting any security selection, you're accepting the risks.
“If you’re better than everybody else and can market time around sector rotation and different things like that, when to go long or short duration, and you can shift your passive strategies, that's great. It doesn’t work for us. We want to make those decisions in our fund.”
