Beyond Bulls & Bears http://global.beyondbullsandbears.com Perspective From Franklin Templeton Investments Tue, 31 Mar 2015 21:02:42 +0000 en-US hourly 1 http://wordpress.org/?v=3.8.5 In the Know: Europe’s Capital Markets Union http://global.beyondbullsandbears.com/2015/03/31/know-europes-capital-markets-union/ http://global.beyondbullsandbears.com/2015/03/31/know-europes-capital-markets-union/#comments Tue, 31 Mar 2015 21:02:42 +0000 http://global.beyondbullsandbears.com/?p=7776 In_The_Know_FeatureIn the Know: Professionals from Franklin Templeton Investments offer a quick but insightful update on a pressing investment topic. Today, Templeton Global Equity Group’s Norm Boersma discusses the European Commission’s newly unveiled proposals for Capital Markets Union. Norman J. Boersma, CFA, is chief investment officer,Templeton Global Equity Group™ What is Capital Markets Union? The core idea of a capital markets union in Europe is to strengthen the financial system across the European Union (EU) by integrating regional capital markets to create robust and diverse financing options that more efficiently match supply of and demand for credit. Proponents hope to achieve this by removing barriers to cross-border investment to create a single market for capital for all 28 EU member states. They believe this should lower costs of funding within the EU. Why is it in the headlines now? A consultation process is underway, which is based on proposals unveiled in February by the European Commissioner for Financial Services Jonathan Hill. Lord Hill’s policy is designed to complement Europe’s banking union and enhance the strength and flexibility of the broader regional financial system. The consultation period closes on May 13, 2015, and an Action Plan reflecting the feedback is due to be published in the third quarter of 2015. It is important to note that these types of structural reforms take time. While it warrants discussion now, at the moment of its formal introduction to policymakers, this is not something that will be carried out overnight. We expect to see some initial progress in key areas in the short term, though we are cognizant that it will likely be years before a capital markets union could be fully implemented in the EU. What is the European Commission trying to achieve? European policymakers realize that reforms are needed to improve access to credit in the eurozone, particularly for small- and medium-sized enterprises. Smaller businesses are overly reliant on banks for access to capital, which impedes credit growth and economic activity when banking systems retrench or deleverage, as they have in Europe over the last several years. Europe has also taken note of the US financial system’s relatively swift recovery from the brink of disaster and concluded that deeper, more liquid and diverse capital markets can act as a source of stability and support. What implications does it have for investors? We believe the initiative should help improve liquidity and expand investment options. In Europe, banks provide about 70% of external financing for corporations, with the remainder coming from securities markets. In the United States, it’s the other way around: the bulk of corporate financing is market-based. As a result, financial markets are far more dynamic in the United States, providing companies access to more efficiently priced credit and savers with more ways of investing their capital. How are your strategies geared up to respond if it becomes reality? As investors in European banks, we do like the captured pool of credit that they control. However, thinking more holistically, we realize that Europe’s overreliance on banks is inhibitive to the growth and development of the corporate sector in the region. We are generally supportive of any “pro-European” measures that help improve systemic integration across the monetary union. We believe investors should ultimately benefit from the enhanced liquidity and stability that a capital markets union in Europe is likely to provide. The US financial system has been very good at segmenting the market so that the appropriate type of investor is matched with the needs of the borrower. Venture capital and private equity are both robust industries in the United States that offer competitive financing in parts of the market that are not as efficiently serviced by banks. Asset-backed securities can also help improve the provision of credit by taking loans off of banks’ balance sheets, freeing them up to lend more. There are risks to all this, of course, as the global financial crisis made clear; but when done judiciously, in a well-regulated financial system, we believe such market-based credit solutions can help encourage growth and stability. We expect that Europe, which remains a major focus in our equity portfolios, is likely to ultimately benefit from these initiatives. The comments, opinions and analyses are the personal views expressed by the investment manager and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region, market or investment. Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction. Get more perspectives from Franklin Templeton Investments delivered to your inbox. Subscribe to the Beyond Bulls & Bears blog. For timely investing tidbits, follow us on Twitter @FTI_Global and on LinkedIn. What Are the Risks? All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Hyperlink Disclaimer Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use and other policies...]]> In_The_Know_Feature

In the Know: Professionals from Franklin Templeton Investments offer a quick but insightful update on a pressing investment topic.

Today, Templeton Global Equity Group’s Norm Boersma discusses the European Commission’s newly unveiled proposals for Capital Markets Union.

Norm Boersma

Norm Boersma

Norman J. Boersma, CFA, is chief investment officer,Templeton Global Equity Group

What is Capital Markets Union?

The core idea of a capital markets union in Europe is to strengthen the financial system across the European Union (EU) by integrating regional capital markets to create robust and diverse financing options that more efficiently match supply of and demand for credit. Proponents hope to achieve this by removing barriers to cross-border investment to create a single market for capital for all 28 EU member states. They believe this should lower costs of funding within the EU.

Why is it in the headlines now?

A consultation process is underway, which is based on proposals unveiled in February by the European Commissioner for Financial Services Jonathan Hill. Lord Hill’s policy is designed to complement Europe’s banking union and enhance the strength and flexibility of the broader regional financial system. The consultation period closes on May 13, 2015, and an Action Plan reflecting the feedback is due to be published in the third quarter of 2015. It is important to note that these types of structural reforms take time. While it warrants discussion now, at the moment of its formal introduction to policymakers, this is not something that will be carried out overnight. We expect to see some initial progress in key areas in the short term, though we are cognizant that it will likely be years before a capital markets union could be fully implemented in the EU.

What is the European Commission trying to achieve?

European policymakers realize that reforms are needed to improve access to credit in the eurozone, particularly for small- and medium-sized enterprises. Smaller businesses are overly reliant on banks for access to capital, which impedes credit growth and economic activity when banking systems retrench or deleverage, as they have in Europe over the last several years. Europe has also taken note of the US financial system’s relatively swift recovery from the brink of disaster and concluded that deeper, more liquid and diverse capital markets can act as a source of stability and support.

What implications does it have for investors?

We believe the initiative should help improve liquidity and expand investment options. In Europe, banks provide about 70% of external financing for corporations, with the remainder coming from securities markets. In the United States, it’s the other way around: the bulk of corporate financing is market-based. As a result, financial markets are far more dynamic in the United States, providing companies access to more efficiently priced credit and savers with more ways of investing their capital.

How are your strategies geared up to respond if it becomes reality?

As investors in European banks, we do like the captured pool of credit that they control. However, thinking more holistically, we realize that Europe’s overreliance on banks is inhibitive to the growth and development of the corporate sector in the region. We are generally supportive of any “pro-European” measures that help improve systemic integration across the monetary union.

We believe investors should ultimately benefit from the enhanced liquidity and stability that a capital markets union in Europe is likely to provide. The US financial system has been very good at segmenting the market so that the appropriate type of investor is matched with the needs of the borrower. Venture capital and private equity are both robust industries in the United States that offer competitive financing in parts of the market that are not as efficiently serviced by banks.

Asset-backed securities can also help improve the provision of credit by taking loans off of banks’ balance sheets, freeing them up to lend more. There are risks to all this, of course, as the global financial crisis made clear; but when done judiciously, in a well-regulated financial system, we believe such market-based credit solutions can help encourage growth and stability. We expect that Europe, which remains a major focus in our equity portfolios, is likely to ultimately benefit from these initiatives.

The comments, opinions and analyses are the personal views expressed by the investment manager and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The information provided in this material is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding any country, region, market or investment.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

Get more perspectives from Franklin Templeton Investments delivered to your inbox. Subscribe to the Beyond Bulls & Bears blog.

For timely investing tidbits, follow us on Twitter @FTI_Global and on LinkedIn.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments.

Hyperlink Disclaimer

Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use and other policies of each site you visit, as we have no control over and assume no responsibility or liability for them.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

]]>
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Notes From the Trading Desk – Europe http://global.beyondbullsandbears.com/2015/03/30/notes-trading-desk-europe-6/ http://global.beyondbullsandbears.com/2015/03/30/notes-trading-desk-europe-6/#comments Mon, 30 Mar 2015 16:52:34 +0000 http://global.beyondbullsandbears.com/?p=7940 Notes_from_the_Trading_Desk_FeatureFranklin Templeton’s Notes From The Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice. Monday, March 30, 2015 Last week saw a positive five days for global equities, although there were some stand-out performers. US equities performed well after a slower start to the year, thanks to a dovish tone from the Federal Open Market Committee (FOMC) meeting, however, the star performers were Chinese equities, helped by the proposition of further stimulus. European equities lagged after experiencing a strong start to the year but still saw positive performance. Crude Oil Strength and Yemen Crude oil prices were volatile last week on increasing tensions in the Middle East, following Saudi Arabia’s military action in Yemen. Given some are going as far as to say that this is in essence a proxy war between Saudi Arabia and Iran, it’s worth considering how the ongoing nuclear negotiations between Iran and the West will now proceed, while the effect on crude oil has also been a focus. On one hand,we have the potential negative impact of Iran production coming back online but on the other, the possibility of increased tensions in the region pushing the price higher. Yemen is a relatively small-scale oil producer in global terms, but there is indeed concern that this fresh military activity might indeed lead to an escalation in regional tensions. Most observers feel the market remains materially over-supplied, so we are not surprised that current consensus opinion is that any rally in crude pricing is likely to be short-lived. However, we also think that in the short-term geopolitical tensions and the possibilities of any escalation are likely to keep oil prices well supported alongside some early signs that demand trends are improving. Volatility in crude and in the energy sector appears likely to us in the short-term. Greece Saga Continues Greece’s fiscal woes remain in focus as the government works on another set of reforms to present to its creditors in order to secure further funding. The week started with high profile talks between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tspiras in Berlin where they tried to demonstrate a more constructive tone to the talks after weeks of squabbling between the Greek and German finance ministers. Aside from making the right noises about working together, we felt there was little of substance to come from the talks. Greece is due to submit a list of reforms to its creditors today in order for them to unlock further loans. The country’s left wing government outlined some reforms on Friday, but the full list will be handed over today and the measures have to be approved by the eurozone ministers before more financial aid is released to Greece. So in our opinion, this will be a focus for investors early this week. It does feel like time, or rather funding, is running out for the Greek government; at the moment the situation seems to be lurching from week to week and we don’t think we’re seeing signs of a long-term solution to the problems. As talk of a Greek exit from the eurozone – or ‘Grexit’ – increases so too, we believe, will the pressure on all parties involved to find a solution. With the European Central Bank’s (ECB) Quantitative Easing (QE) programme seemingly shielding other eurozone countries from contagion so far, talk of Grexit will likely increase if progress on resolving Greece’s fiscal problems stalls. Fund Flows and Positioning European equities continued to see inflows last week, bringing the number of consecutive weeks where funds flowed into the region to 11, and raising the question as to when these inflows will peak. With many European markets now trading at multi-year highs and with strong performances year to date – particularly among the perceived beneficiaries of the ECB’s QE – some are suggesting markets might expect to see some profit taking by investors. Given the scale of these inflows, European equities seem to be becoming something of a ‘crowded trade’, and we think any pull back could be exacerbated by some of that money being taken out of European equities. As we go into quarter-end, we think it will be an important and interesting gauge of market sentiment to see if equities do experience some profit taking.     Europe In Europe on the macro front, we saw contrasting performances from France and Germany – the German economy continues to power on while France declined (though at a slower pace). The services data from both countries showed expansion and was at a better level than expected. At the beginning of last week, the ECB gave its weekly update on QE purchases and said it settled €26.3 billion in public-sector bond buying as of March 20; that was compared with €9.8 billion the previous week which means that the ECB purchased approx. €16.5 billion in its second week of buying. In a speech last Monday, ECB governing council member and Governor of Banque de France, Christian Noyer, said that the asset-purchase programme has been “an important and clear signal of the expansionary monetary policy stance over an extended horizon”. He also said that there was little appetite to move deeper into negative rates. In the United Kingdom, there was a plethora of commentary from the Bank of England last week as policymakers played down deflation risk after February inflation hit zero, which was the softest reading since the 1960s. The weak outturn was driven by weakness in energy and food prices, and reinforced expectations that rates will remain on hold for at least a year. Americas From a macro perspective, US consumer pricing index (CPI) data returned to growth in February, delivering the first positive headline CPI reading since October...]]> Notes_from_the_Trading_Desk_Feature

Franklin Templeton’s Notes From The Trading Desk offers a weekly overview of what our professional traders and analysts are watching in the markets. The European desk is manned by eight professionals based in Edinburgh, Scotland with an average of 15 years of experience whose job it is to monitor the markets around the world. Their views are theirs alone and are not intended to be construed as investment advice.

Monday, March 30, 2015

Last week saw a positive five days for global equities, although there were some stand-out performers. US equities performed well after a slower start to the year, thanks to a dovish tone from the Federal Open Market Committee (FOMC) meeting, however, the star performers were Chinese equities, helped by the proposition of further stimulus. European equities lagged after experiencing a strong start to the year but still saw positive performance.

The Digest

Crude Oil Strength and Yemen

Oil_Barrels_Leading

Crude oil prices were volatile last week on increasing tensions in the Middle East, following Saudi Arabia’s military action in Yemen. Given some are going as far as to say that this is in essence a proxy war between Saudi Arabia and Iran, it’s worth considering how the ongoing nuclear negotiations between Iran and the West will now proceed, while the effect on crude oil has also been a focus. On one hand,we have the potential negative impact of Iran production coming back online but on the other, the possibility of increased tensions in the region pushing the price higher.

Yemen is a relatively small-scale oil producer in global terms, but there is indeed concern that this fresh military activity might indeed lead to an escalation in regional tensions. Most observers feel the market remains materially over-supplied, so we are not surprised that current consensus opinion is that any rally in crude pricing is likely to be short-lived. However, we also think that in the short-term geopolitical tensions and the possibilities of any escalation are likely to keep oil prices well supported alongside some early signs that demand trends are improving.

Volatility in crude and in the energy sector appears likely to us in the short-term.

Greece Saga Continues

Greece_Flag_Leading

Greece’s fiscal woes remain in focus as the government works on another set of reforms to present to its creditors in order to secure further funding.

The week started with high profile talks between German Chancellor Angela Merkel and Greek Prime Minister Alexis Tspiras in Berlin where they tried to demonstrate a more constructive tone to the talks after weeks of squabbling between the Greek and German finance ministers. Aside from making the right noises about working together, we felt there was little of substance to come from the talks.

Greece is due to submit a list of reforms to its creditors today in order for them to unlock further loans. The country’s left wing government outlined some reforms on Friday, but the full list will be handed over today and the measures have to be approved by the eurozone ministers before more financial aid is released to Greece.

So in our opinion, this will be a focus for investors early this week. It does feel like time, or rather funding, is running out for the Greek government; at the moment the situation seems to be lurching from week to week and we don’t think we’re seeing signs of a long-term solution to the problems. As talk of a Greek exit from the eurozone – or ‘Grexit’ – increases so too, we believe, will the pressure on all parties involved to find a solution. With the European Central Bank’s (ECB) Quantitative Easing (QE) programme seemingly shielding other eurozone countries from contagion so far, talk of Grexit will likely increase if progress on resolving Greece’s fiscal problems stalls.

Fund Flows and Positioning

magnifying glass and globe

European equities continued to see inflows last week, bringing the number of consecutive weeks where funds flowed into the region to 11, and raising the question as to when these inflows will peak. With many European markets now trading at multi-year highs and with strong performances year to date – particularly among the perceived beneficiaries of the ECB’s QE – some are suggesting markets might expect to see some profit taking by investors. Given the scale of these inflows, European equities seem to be becoming something of a ‘crowded trade’, and we think any pull back could be exacerbated by some of that money being taken out of European equities. As we go into quarter-end, we think it will be an important and interesting gauge of market sentiment to see if equities do experience some profit taking.

 

Around The World

Around_the_World

 

Last Week

Europe

In Europe on the macro front, we saw contrasting performances from France and Germany – the German economy continues to power on while France declined (though at a slower pace). The services data from both countries showed expansion and was at a better level than expected.

At the beginning of last week, the ECB gave its weekly update on QE purchases and said it settled €26.3 billion in public-sector bond buying as of March 20; that was compared with €9.8 billion the previous week which means that the ECB purchased approx. €16.5 billion in its second week of buying.

In a speech last Monday, ECB governing council member and Governor of Banque de France, Christian Noyer, said that the asset-purchase programme has been “an important and clear signal of the expansionary monetary policy stance over an extended horizon”. He also said that there was little appetite to move deeper into negative rates.

In the United Kingdom, there was a plethora of commentary from the Bank of England last week as policymakers played down deflation risk after February inflation hit zero, which was the softest reading since the 1960s. The weak outturn was driven by weakness in energy and food prices, and reinforced expectations that rates will remain on hold for at least a year.

Americas

From a macro perspective, US consumer pricing index (CPI) data returned to growth in February, delivering the first positive headline CPI reading since October and the first rise in energy prices since June. The third iteration of fourth quarter 2014 GDP came in light of expectations at 2.2% which matched the previous estimate while the sizable unexpected decline in the February durable goods orders underlined the somewhat mixed data seen from the United States so far this year.

As the market continues to focus on monetary policy divergence, there was a significant focus on the deluge of US Federal Reserve (Fed) speakers last week following the disappointing durable goods order data. Fed Chair Janet Yellen said on Friday that a rate hike may well be warranted later this year. However, she reiterated that the pace of policy normalization will likely be gradual. She again mentioned that the dollar strength may impact US exports, but said the currency market had to be put in context, and that other factors like robust consumer spending and foreign central bank stimulus should help the US economy. We also heard chatter from FOMC members: John Williams, who remained upbeat on the economic recovery and reiterated that the Fed should consider raising rates around the middle of the year, Dennis Lockhart, who remains confident that the Fed will tighten by September and Stanley Fischer, who said that lift-off will likely be warranted by the end of the year.

Asia

Mainland Chinese markets were again the best performing indexes on the week, on hopes of further stimulus measures. Market sentiment was also helped by local government measures to support the housing sector.

Japanese nationwide core CPI fell to an 11-month low. The latest addition to the Bank of Japan board, Harada Yutaka, known as an advocate of aggressive easing, offered a more practical assessment that while remaining committed to the 2% target is important, achieving that goal within the confines of a rigid two-year timeframe is challenging.

Week Ahead

Economics: Although this week is shortened for Easter Holidays – European and US markets will be closed on Good Friday – US labor data for March will be released on that day anyway and will be the week’s most important data, in our view. The consensus forecast is for total jobs adds of +250K and an unemployment rate of 5.5% (unchanged since Feb).

Monetary Policy: We get a number of Fed speakers across the dove-hawk spectrum over the coming days, including Stanley Fischer, Jeffrey Lacker, Dennis Lockhart, Loretta Mester, Esther George, John Williams and Narayana Kocherlakota.

Politics: In the United Kingdom ahead of the General Election in May, we have the one and only Party Leaders election debate featuring both Prime Minister David Cameron and opposition leader Ed Miliband on Thursday.

Yemen & Iran: Oil traders will be closely following events in Yemen, while in Iran, the soft deadline to have a “political framework” in place for the Iran nuclear talks is Tuesday. The deadline for an actual signed nuclear deal isn’t until June, however.

There will be no edition of Notes From the Trading Desk next Monday owing to the Easter Holiday.

Views You Can Use

Insight From Our Investment Professionals

 

REITs in a Rising US Interest-Rate Environment

Magee_Wilson-150x150It’s a challenging time for investors who want to maintain a diversified, income-oriented portfolio.

Higher US interest rates appear to loom on the horizon, although bond yields in most of the developed world are low and some central banks continue to pursue easing measures. Potential inflation is a concern in the United States, given the Federal Reserve’s six-year history of manufacturing money through quantitative easing (QE) (which lasted from 2008 through 2014).

Wilson Magee, director of global real estate and infrastructure securities, Franklin Real Asset Advisors®, believes this environment is causing many investors to search for alternative investments that can add an income-oriented asset to their portfolio as well as gain exposure to global economic growth potential. He outlines why he thinks it’s an opportune time for many investors to consider diversifying into global real estate through an actively managed investment vehicle. Read More

 

In the Know: March FOMC Meeting and Interest Rate Moves

Christopher Molumphy

Christopher Molumphy

Franklin Templeton Fixed Income Group’s Christopher Molumphy offers his analysis of the March 17-18 Federal Open Market Committee (FOMC) Meeting, where he sees US interest rates headed next, and why he thinks the 10-year Treasury yield could remain lower for longer than perhaps it should. Read More.

 

 

 

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For timely investing tidbits, follow us on Twitter @FTI_Global and on LinkedIn.

Important Legal Information

This article reflects the analysis and opinions of Franklin Templeton’s European Trading Desk as of March 30, 2015, and may vary from the analysis and opinions of other investment teams, platforms, portfolio managers or strategies at Franklin Templeton Investments. Because market and economic conditions are often subject to rapid change, the analysis and opinions provided may change without notice. An assessment of a particular country, market, region, security, investment or strategy is not intended as an investment recommendation, nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. This article does not provide a complete analysis of every material fact regarding any country, region, market, industry or security.

Nothing in this document may be relied upon as investment advice or an investment recommendation.

Data from third-party sources may have been used in the preparation of this material and Franklin Templeton Investments (“FTI”) has not independently verified, validated or audited such data. FTI accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user. Products, services and information may not be available in all jurisdictions and are offered by FTI affiliates and/or their distributors as local laws and regulations permit. Please consult your own professional adviser for further information on availability of products and services in your jurisdiction.

What Are the Risks?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.  Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

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Franklin Templeton Investments is not responsible for the content of external websites.

The inclusion of a link to an external website should not be understood to be an endorsement of that website or the site’s owners (or their products/services).

Links can take you to third party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use, and other policies of each site you visit as we have no control over, and assume no responsibility or liability for them.

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Links can take you to third-party sites/media with information and services not reviewed or endorsed by us. We urge you to review the privacy, security, terms of use and other policies of each site you visit, as we have no control over and assume no responsibility or liability for them.

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REITs in a Rising US Interest-Rate Environment http://global.beyondbullsandbears.com/2015/03/26/reits-rising-us-interest-rate-environment/ http://global.beyondbullsandbears.com/2015/03/26/reits-rising-us-interest-rate-environment/#comments Thu, 26 Mar 2015 23:56:31 +0000 http://global.beyondbullsandbears.com/?p=7893 Real_Estate_Sign_LeadingIt’s a challenging time for investors who want to maintain a diversified, income-oriented portfolio. Higher US interest rates appear to loom on the horizon, although bond yields in most of the developed world are low and some central banks continue to pursue easing measures. Potential inflation is a concern in the United States, given the Federal Reserve’s six-year history of manufacturing money through quantitative easing (QE) (which lasted from 2008 through 2014). Wilson Magee, director of global real estate and infrastructure securities, Franklin Real Asset Advisors®, believes this environment is causing many investors to search for alternative investments that can add an income-oriented asset to their portfolio as well as gain exposure to global economic growth potential. He outlines why he thinks it’s an opportune time for many investors to consider diversifying into global real estate through an actively managed investment vehicle. Wilson Magee Director of Global Real Estate and Infrastructure Securities Franklin Real Asset Advisors® Portfolio Manager Diversifying into REITs in a Rising US Interest-Rate Environment Given expectations for a rising interest-rate environment in the United States in 2015, and what is likely to be another volatile year for global equities, we think many investors should consider holding a broad and diversified portfolio. While it’s true that rising US Treasury rates can make yield-sensitive investments like real estate investment trusts (REITs) appear to be less appealing on the surface, we counter with evidence that adding REIT exposure has its merits—even in a rising-rate environment. What Are REITs? A REIT is a type of publicly traded company that invests directly in real estate and related assets. Many REITs specialize in a specific type of property, such as shopping centers, warehouses, apartments, hotels, office buildings or self-storage units. Many also concentrate in a specific geographic zone, such as the United States, Japan, the United Kingdom or other nations. In most countries that have REITs, companies that qualify generally are exempt from normal corporate taxes. In markets where REITs or REIT-like structures do not exist, other publicly traded real estate companies are often available for investment. REITs primarily offer several potential benefits: diversification from traditional stocks and bonds, income opportunity, and exposure to the real estate sector. Diversification: REITs have historically had reduced correlations with traditional asset classes such as stocks and bonds.1 While past performance is no guarantee of future results, if historical correlations2 to bond returns continue, we think REITs can provide an important element of diversification. (Diversification does not guarantee profit or protect against risk of loss) Income Opportunity: To preserve their special tax status, generally REITs must distribute income back to shareholders in the form of dividends. US REITs, for example, are required to distribute 90% of taxable income to shareholders. We think these dividend distribution requirements make REITs an opportunity to consider for investors in search of potential income. Sector Exposure: Publicly traded REITs offer investors a more liquid way to invest in the real estate sector, compared to purchasing real property directly. Direct real estate investing is generally more illiquid, carries higher transaction costs, necessitates a more active role on the part of the individual investor, and often requires a higher minimum investment. Global REITs outside of the United States can offer additional diversification potential by allowing investors to gain exposure to worldwide real estate markets. Direct investment in overseas real estate, by contrast, generally carries much higher barriers to entry. Investing directly in property internationally can involve additional legal and tax complications as well. Many real estate operating companies are also listed and traded on exchanges, just like REITs. However, they typically are subject to local corporate taxation and aren’t required to distribute cash flow back to investors. US Interest Rates Likely to Rise US interest rates remain near historic lows but are likely to rise as the economy begins to feel the impact of the conclusion of the Federal Reserve’s six-year quantitative easing program. Federal Reserve (Fed) Chair Janet Yellen has remarked that the Fed will eventually tighten the monetary supply by raising short-term interest rates rather than selling off bonds. This is a strong indication to most market watchers that higher US interest rates loom in the near future—although the exact timing and pace of Fed tightening are still subject to speculation. US REITs (as represented by the FTSE NAREIT Equity REITs TR Index) have historically performed well in periods of rising interest rates.3 Between 1994 and 2013, the United States experienced nine distinct time periods when interest rates rose (as measured by the 10-year US Treasury note yield) by greater than 100 basis points (1%). During six of these nine time periods, REITs provided positive returns, while in three, REITs provided negative returns, as illustrated in the chart below. In our view, rising interest rates that reflect a healthy, growing economy (as opposed to sudden or extreme interest-rate hikes) could be positive for both US stocks and REITs. Both could also benefit as employment, consumer spending, and real estate demand rise. Real estate, in fact, can be—and has been—viewed by many investors as a good barometer of overall economic health. Exposure to REITs, we believe, can help investors potentially capitalize on an improving economy while still maintaining diversification from traditional assets such as stocks and particularly, bonds as a broad asset class. Global Exposure In our view, investing in US REITs has merit in a rising-rate environment, but we also believe in the merits of maintaining a diversified portfolio in general, which we view as requiring exposure to the global economy, including worldwide real estate. We believe global markets are poised for long-term growth, despite some near-term challenges in select markets. Gross domestic product growth in a number of emerging markets has been robust, particularly in parts of Asia, but global stocks were volatile in 2014, due in part to worries about the health of the European economy as well as geopolitical tensions in the Middle East and Ukraine/Russia. In fact, global REITs have outperformed global stocks (as represented by the MSCI World GR USD Index) in the...]]> Real_Estate_Sign_Leading

It’s a challenging time for investors who want to maintain a diversified, income-oriented portfolio.

Higher US interest rates appear to loom on the horizon, although bond yields in most of the developed world are low and some central banks continue to pursue easing measures. Potential inflation is a concern in the United States, given the Federal Reserve’s six-year history of manufacturing money through quantitative easing (QE) (which lasted from 2008 through 2014).

Wilson Magee, director of global real estate and infrastructure securities, Franklin Real Asset Advisors®, believes this environment is causing many investors to search for alternative investments that can add an income-oriented asset to their portfolio as well as gain exposure to global economic growth potential. He outlines why he thinks it’s an opportune time for many investors to consider diversifying into global real estate through an actively managed investment vehicle.

Magee_Wilson-150x150

Wilson Magee

Wilson Magee
Director of Global Real Estate and Infrastructure Securities

Franklin Real Asset Advisors®
Portfolio Manager

Diversifying into REITs in a Rising US Interest-Rate Environment

Given expectations for a rising interest-rate environment in the United States in 2015, and what is likely to be another volatile year for global equities, we think many investors should consider holding a broad and diversified portfolio. While it’s true that rising US Treasury rates can make yield-sensitive investments like real estate investment trusts (REITs) appear to be less appealing on the surface, we counter with evidence that adding REIT exposure has its merits—even in a rising-rate environment.

What Are REITs?

A REIT is a type of publicly traded company that invests directly in real estate and related assets. Many REITs specialize in a specific type of property, such as shopping centers, warehouses, apartments, hotels, office buildings or self-storage units. Many also concentrate in a specific geographic zone, such as the United States, Japan, the United Kingdom or other nations. In most countries that have REITs, companies that qualify generally are exempt from normal corporate taxes. In markets where REITs or REIT-like structures do not exist, other publicly traded real estate companies are often available for investment.

REITs primarily offer several potential benefits: diversification from traditional stocks and bonds, income opportunity, and exposure to the real estate sector.

Diversification: REITs have historically had reduced correlations with traditional asset classes such as stocks and bonds.1 While past performance is no guarantee of future results, if historical correlations2 to bond returns continue, we think REITs can provide an important element of diversification. (Diversification does not guarantee profit or protect against risk of loss)

Income Opportunity: To preserve their special tax status, generally REITs must distribute income back to shareholders in the form of dividends. US REITs, for example, are required to distribute 90% of taxable income to shareholders. We think these dividend distribution requirements make REITs an opportunity to consider for investors in search of potential income.

Sector Exposure: Publicly traded REITs offer investors a more liquid way to invest in the real estate sector, compared to purchasing real property directly. Direct real estate investing is generally more illiquid, carries higher transaction costs, necessitates a more active role on the part of the individual investor, and often requires a higher minimum investment. Global REITs outside of the United States can offer additional diversification potential by allowing investors to gain exposure to worldwide real estate markets. Direct investment in overseas real estate, by contrast, generally carries much higher barriers to entry. Investing directly in property internationally can involve additional legal and tax complications as well.

Many real estate operating companies are also listed and traded on exchanges, just like REITs. However, they typically are subject to local corporate taxation and aren’t required to distribute cash flow back to investors.

US Interest Rates Likely to Rise

US interest rates remain near historic lows but are likely to rise as the economy begins to feel the impact of the conclusion of the Federal Reserve’s six-year quantitative easing program.

Federal Reserve (Fed) Chair Janet Yellen has remarked that the Fed will eventually tighten the monetary supply by raising short-term interest rates rather than selling off bonds. This is a strong indication to most market watchers that higher US interest rates loom in the near future—although the exact timing and pace of Fed tightening are still subject to speculation.

US REITs (as represented by the FTSE NAREIT Equity REITs TR Index) have historically performed well in periods of rising interest rates.3 Between 1994 and 2013, the United States experienced nine distinct time periods when interest rates rose (as measured by the 10-year US Treasury note yield) by greater than 100 basis points (1%). During six of these nine time periods, REITs provided positive returns, while in three, REITs provided negative returns, as illustrated in the chart below.

US REITs and stocks snip2

In our view, rising interest rates that reflect a healthy, growing economy (as opposed to sudden or extreme interest-rate hikes) could be positive for both US stocks and REITs. Both could also benefit as employment, consumer spending, and real estate demand rise. Real estate, in fact, can be—and has been—viewed by many investors as a good barometer of overall economic health.

Exposure to REITs, we believe, can help investors potentially capitalize on an improving economy while still maintaining diversification from traditional assets such as stocks and particularly, bonds as a broad asset class.

Global Exposure

In our view, investing in US REITs has merit in a rising-rate environment, but we also believe in the merits of maintaining a diversified portfolio in general, which we view as requiring exposure to the global economy, including worldwide real estate.

We believe global markets are poised for long-term growth, despite some near-term challenges in select markets. Gross domestic product growth in a number of emerging markets has been robust, particularly in parts of Asia, but global stocks were volatile in 2014, due in part to worries about the health of the European economy as well as geopolitical tensions in the Middle East and Ukraine/Russia.

In fact, global REITs have outperformed global stocks (as represented by the MSCI World GR USD Index) in the previous 5-year and 10-year periods.4

Allocation case

Fortunately, as REITs have exploded in popularity since the 1990s, many other nations have enacted legislation to establish REIT structures. The United Kingdom, Singapore, Australia, Canada, France, Finland, Hong Kong, Japan, the Netherlands, New Zealand and South Africa, among others, allow investors from around the world to gain exposure to their growing property markets through REITs.

Potential Alternative Income Opportunity

Many investors look to their bond allocation to provide their portfolios with a strong potential income component, as well as diversification from stocks. But bond yields remained low in the past year in the developed world, and many people expect them to stay that way for some time. Even if the Fed starts raising interest rates this year, we believe it will most likely do so gradually.

REITs can provide income opportunities as well as the potential for long-term capital appreciation. REITs are generally considered yield-oriented investments, and a component of their returns comes from dividends rather than price gains.

Like all yield-oriented investments, REITs will likely exhibit some sensitivity to interest-rate changes, and are not without risks. But unlike bonds, REITs can earn potential profits by making positive investment spreads both acquiring and developing additional properties. REITs also can increase cash flow when property revenues grow faster than expenses, and this cash flow growth often leads to dividend growth.

According to data from NAREIT, US REIT dividend growth averaged over 7% per year from 1994–2012.5 This potential for dividend growth also means that REITs are fundamentally different from fixed income investments. In general, fixed income investments have fixed coupons with regular payments; the purchaser of a bond receives regular monthly, quarterly or annual coupon payments which do not change. REITs have been able to grow their dividend over time.

So, it is important for investors to keep in mind that changes in interest rates can impact real estate investments in a wide variety of ways, some negative and some positive. Changes in interest rates are only one piece of this puzzle. However, in general, we have found that higher interest rates can be a net positive for the REIT sector.6 We believe investors who are seeking exposure to a growing global economy, and diversification from traditional asset classes like stocks and bonds, in their portfolio may want to consider REITs.

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What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Investing in real estate securities involves special risks such as declines in the value of real estate and increased susceptibility to adverse economic or regulatory developments affecting the sector. REITs involve additional risks; since REITs typically are invested in a limited number of projects or in a particular market segment, they are more susceptible to adverse developments affecting a single project or market segment than more broadly diversified investments. Foreign investing, especially in emerging markets, involves additional risks such as currency and market volatility, as well as political and social instability.

 


1. Source: FactSet, based on data from 2005–2014. Global REITs are represented by the S&P Global REIT Index; US REITs are represented by the FTSE NAREIT Equity REITs TR Index; Global Stocks are represented by the MSCI World GR Index; US Stocks are represented by the S&P 500 TR Index; Non-US Stocks are represented by the MSCI EAFE GR Index; Global Bonds are represented by the Barclays Global Aggregate Bond Index; US Bonds are represented by the Barclays US Aggregate Index; Cash is represented by Barclays US Treasury Bills.

2. Correlation is a statistical measure of how two securities move in relation to each other. Negative correlation indicates a relationship in which one increases as the other decreases.

3. Sources: Citi Research, Franklin Templeton Investments. Indexes are unmanaged, and one cannot directly invest in an index. Past performance does not guarantee future results.

4. Source: FactSet, as of  31 December 2014. Annualized basis. See www.franklintempletondatasources.com for additional data provider information. Indexes are unmanaged, and one cannot directly invest in an index. Past performance does not guarantee future results.

5. Source: The National Association of Real Estate Investment Trusts®.

6. Past performance is no guarantee of future results.

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