Quick Thoughts: Inflation, Debt, and Changing Economic Sweet Spots

Investors need a more flexible, opportunistic approach to investing, given the current low interest rate environment with the likelihood of interest rates rising over the next few years, according to Stephen Dover, Head of Franklin Templeton Investment Institute. He opines on inflation, debt, and changing economic sweet spots.

Over the past 40 years, global interest rate declines created a unique environment that favored capital gains over income. As we examine inflation, interest rates, and the path forward from this low-rate starting point, there is an increasing need to look beyond fixed income at other sources of income.

  • A strong cyclical rebound in global growth, fueled by fiscal expansion and led by the United States and many developed countries, continues as countries manage the COVID-19 pandemic and its virus mutations.
  • Central bank policies remain dovish as countries transition from the aggressive accommodative policy during the pandemic crisis toward supporting a sustained economic recovery.
  • Global supply bottlenecks are the main contributor to current inflation increases and are unlikely to persist. Going forward, globalization, changing demographics, labor dynamics, and technology decrease the likelihood of long-term inflation in the years ahead.
  • Emerging markets are well-positioned to benefit from demographic changes, and global investors seeking increased returns and diversification for their portfolios should consider investing outside of their home countries.
  • We see significant investment growth in alternative assets, including hedge funds and commercial real estate assets, that may provide diversification away from equity and fixed income. Additionally, investing with environmental, social and governance (ESG) awareness will likely continue to lead as one of the fastest-growing investment trends.
  • Rising interest rates do not support fixed income as an appreciating asset class. However, government bonds have historically provided a ballast for portfolios during volatile periods.

Our belief is that investors need a more flexible, opportunistic approach to investing for income, given the current low interest-rate environment and the likelihood of interest rates rising over the next few years. For a more detailed discussion on inflation and interest rates, including insights on when a country reaches its sweet spot of economic development, please watch “Quick Talks: Inflation, Debt, and Changing Economic Sweet Spots.”