Higher for longer, or higher for forever?

PartnerVest

This is a summary of ‘Allocation Views’ published on 12 October 2023 by Franklin Templeton Investment Solutions.

The month of September saw a notable decline in global equities, perhaps driven by surprisingly sharp rises in longer-dated government bond yields across developed markets. All of this occurred against a backdrop of relatively benign inflation and growth data. Perhaps policy changes were the culprit?

What is interesting is that rate hikes were not the key. Rather, in delivering well-anticipated decisions, central banks injected some uncertainty over how long they would sustain elevated rates. The US Federal Reserve (Fed) held rates unchanged but hinted at one last hike still to come this year. Perhaps more tellingly, the Fed “dot plot” led financial markets to accept that rates would stay “higher for longer” or perhaps even “higher forever.”

This led to an ongoing rise in the so-called “term premium,” or the return over anticipated short-term rates required to compensate for the uncertainty of holding longer-dated bonds (see Exhibit 1).

Uncertainty Rises to Multi-Year High

Exhibit 1: US 10-year Treasury Term Premium
As of September 30, 2023

It has become increasingly difficult for the Fed and the European Central Bank (ECB) to manage policy expectations. During September, in raising rates once more, the ECB strenuously reiterated its desire to see inflation return to target, but, in reality, it offered little or no firm guidance on the path of rates that might achieve this goal. With inflation continuing to moderate as hoped, a slowing in the pace of rate hikes had already occurred, and debate about where the peak in rates would stand had morphed into acceptance that it was quite close to hand. If central banks were to simply say “that’s us done with raising rates,” investors would have been in danger of getting ahead of themselves and assuming a rapid pivot to lower rates in the quarters ahead.

Even as inflation is likely to ease through the end of this year, it seems less certain that the Fed will rush to cut rates before the impact of slower growth is felt, as it will be these forces that cement the return to target levels of inflation. Only in select emerging economies are we now starting to see moderation in monetary policy, which may help to support these markets.

Overall, this sees our policy theme remain quite a negative driver for financial markets, even as it has evolved to downplay the likelihood of any further rate hikes, while emphasizing “Policy to Remain Restrictive” even as we move into 2024.

Partnervest – supporting unions by supporting their members investments

Partnervest is a specialist provider of investment solutions for Unions, Entitlement Funds, Charities and through your financial advisor at Industry Super Funds.

In particular we offer 5 multi asset funds:

• Franklin Multi-Asset Defensive Fund
• Franklin Multi-Asset Conservative Fund
• Franklin Multi-Asset Balanced Fund
• Franklin Multi-Asset Growth Fund
• Franklin Multi-Asset High Growth Fund

These funds are adjusted to consider the relative attractiveness of each asset class given the prevailing economic conditions, whilst maintaining risk and return parameters.

To learn more about how Partnervest can help you build your financial future, contact Serg Premier 1300 734 496 or email [email protected].

IMPORTANT INFORMATION
All investments carry risk. Before deciding to invest, you should consider the following key risks:
• The value of investments will vary. You can lose money as well as make money.
• The level of returns will vary, and future returns will differ from past returns
• Returns are not guaranteed and investors may lose some or all of their money, and
• Laws change.

Past performance is not an indicator of future returns. Issued by Partnervest, a division of Franklin Templeton Australia Limited (ABN 76 004 835 849, AFSL 240827).

Before making an investment decision you should read the relevant Product Disclosure Statement (PDS) carefully and you need to consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS is available and can be obtained by contacting Partnervest on 1800 679 541 or at www.partnervest.com.au. In accordance with the Design and Distribution Obligations and Product Interventions Powers requirements, we maintain Target Market Determinations (TMD) for each of our Funds. All documents can be found via www.franklintempleton.com.au or by calling 1800 673 776. 

The information in this presentation is of a general nature only and is not intended to be, and is not, a complete or definitive statement of the matters described in it. The information does not constitute specific investment advice and does not include recommendations on any particular securities. Franklin Templeton Australia Limited nor any of its related parties, guarantee the repayment of capital or performance of any of the Franklin Templeton trusts referred to in this document. Although statements of fact in this presentation have been obtained from and are based upon sources Franklin Templeton Australia Limited believe to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this communication constitute our judgement as of the date of this communication and are subject to change without notice.