EnglishTranscript
Hello, I’m David Zahn and this is your European fixed income update. Boris Johnson has resigned as prime minister of the UK, which probably comes as not a huge surprise to most people, given he’s been under pressure for quite some time. The way the UK elects a new prime minister has a very set process, but it does take time.
And it really is that we need to have a new leader of the Tory party (Conservatives). So far, 10 candidates have thrown their hat in the ring saying, “I would like to be prime minister” with various different slates of what does that mean—tax cuts, Brexit, etc. It is quite varied, and so I don’t really think the markets will take a lot from it until we have a better clue as to which one or two people will be prime minister. As once they’re elected as the new leader of the Conservative Party, they become de facto prime minister, and then I’m sure Labor will be saying, “now we need to have a new election” because we need to basically ratify that this leader is the one that people want. Unlikely, the Tories want to do that because they would lose an election. So, I think that we have a period of time now where you have a caretaker government in charge. So no new policies will put through, which is difficult given we have a lot of uncertainty in the world at the moment.
But as far as financial markets, I don’t really think that bonds, currencies will really be that focused on it because until we know what the policies and new government are, we will just continue with the current policies. The fiscal room will be quite limited to allow tax cuts. So even though many may talk about cutting taxes, I think the chances are low.
But really what they want to do is they want to make a clean break from what Boris was doing and be a more conservative-run government. I would expect that, which means smaller spending lower taxes in general. But as I said, there won’t be a lot of fiscal room for that. And then we’ll have to see, will they try to mend the relationship with Europe, because that’s one of the biggest issues after Brexit.
It’s not been a very friendly relationship. That doesn’t mean Brexit is going to reverse itself, of course not, Brexit has happened. But it does mean that the relationship between Europe and the UK could become a little bit more friendly, which I think would probably be positive. Financial markets would take that as something that’s positive.
Overall though, the UK markets will be driven by growth. We’re probably heading into recession later this year. Inflation, which still remains stubbornly high, and the Bank of England is going to continue to hike rates to deal with that. And so, I think that’s what the currency and bond markets will look for. Bonds will probably continue to be under pressure and have higher yields until we can have some clearer focus of where the government is going to go with its new policies.
WHAT ARE THE RISKS?
This material is intended to be of 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. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.
The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance.
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. 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 lower-rated bonds include higher risk of default and loss of principal. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. 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.
Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT 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 outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.
Issued in the U.S. by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com – Franklin Distributors, LLC, member FINRA/SIPC, is the principal distributor of Franklin Templeton U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.
