Brandywine optimistic on inflation, but global growth remains uneven

Oksana Patron

11 August 2023

Despite a more optimistic view on inflation, the world remains out of sync on many issues and the global growth will be uneven, according to Brandywine Global, part of Franklin Templeton.

The firm’s Director of Global Macro Research, Francis Scotland, stressed not enough credence was given to the notion of policy lags and investors should remember that, for example, whatever the Fed is currently implementing will affect the broader economy months or years later.

“The retreat in inflation seen since June of last year has little to do with Fed policy, in our view. The reaction to what the Fed has done or is going to do is yet to come,” he said.

But what it really means is that the divergence between how the Fed wants things to slow while China’s government would rather see things pick up. On top of that, comes the European Central bank (ECB) which already has the economy in a technical recession and select emerging countries policy which is more stringent that in the US.

“This divergence explains why global growth is uneven and argues for much reduced inflation. China’s reopening has fizzled due to feeble domestic consumption. Nothing could be more crystal clear about the state of domestic demand in China than its inflation data,” Scotland noted.

Further to that, he pointed to the priorities of President Xi Jing as the biggest impediments of China’s reboot.

“Under his leadership, anti-corruption, national security, oversight of private companies, property speculation, and the stability of the Chinese Communist Party have taken priority over economic growth. President Xi did a U-turn on COVID containment late last year and elevated growth as a priority in the wake of public protests. But the follow-through has been tepid,” he said.

At the same time, Scotland said that, according to him, the Europe’s monetary profile was ‘horrible’ with banks not lending enough and stressed that bank lending was much more important in Europe than the U.S. and accounted for the majority of financial intermediation.

“The poor lending data rhymes with the June production manager surveys, showing a generalised contraction in European manufacturing. Meanwhile, the non-manufacturing survey is barely holding above 50. One reason for the stubborn nature of inflation is fiscal policy. Roughly 800 billion euros in fiscal support have been provided to EU business and households to help offset energy costs,” he said.

Under this scenario, the manager remained bullish on bonds across its portfolios through investments in Treasury bonds, mortgage-backed securities (MBS) bonds, and select emerging market bonds.

On the currency front, Scotland believes the U.S. dollar was overvalued based on most metrics but not in the extreme. In addition, tight monetary policy and expansionary fiscal policy is typically constructive for a currency.

He added that no other major economy had at the moment  the depth of capital markets, the institutional infrastructure, and the laws that could replace dollar hegemony.