Franklin Templeton: Malaysia may be among those not at risk when Fed rate hike comes

LONDON: An expected rise in U.S. interest rates will magnify differences between emerging economies in 2016, with South Korea, Mexico and Malaysia likely to prove resilient, said Franklin Templeton's star bond investor Michael Hasenstab.

Hasenstab, CIO, Templeton Global Macro, said countries such as Mexico were in a better position to raise interest rates alongside or shortly after the U.S. Federal Reserve, thanks to their relatively strong economic fundamentals.

"In our view, apprehensions about risks in places like Mexico, South Korea and Malaysia are likely to abate as these countries prove their resilience to Fed rate hikes," Hasenstab said in an emailed statement.

"However, countries with relatively weaker fundamentals, such as Turkey and South Africa, are likely to be negatively impacted by U.S. interest-rate hikes."

Concerns over a "systemic crisis" across emerging markets have been exaggerated, said Hasenstab, adding he did not expect solvency issues in many emerging markets.

Looking at China specifically, Hasenstab predicted the world's second-largest economy would continue its rebalancing process and that growth would remain within range of its current expansion.

Concerns over the health of China's economy sparked a global market rout in the summer, triggering massive volatility and a flight from riskier assets like emerging markets.

"We think that was an overreaction and continue to believe that China's economy is not headed for a hard landing."

The Institute of International Finance, the world's most closely watched monitor of capital flows, predicted in October that emerging markets would see the first net capital outflow this year since 1988.

Hasenstab, who does not expect a global recession or global deflation in 2016, said his funds were positioned for rising U.S. Treasury yields as well as currency appreciation in select emerging markets. Franklin Templeton also expects a continued depreciation of the euro and the yen.

"Underlying inflation in the United States has not been adequately priced into bond yields in recent months, in our assessment, and we are wary of the lack of inflation being priced into bond yields across the globe," he said.- Reuters