We are optimistic that we could finally see better U.S. economic growth in 2014. Since 2009, when the U.S. emerged from the Great Recession, we have seen a fairly consistent pattern of subpar growth. During 2013, however, the U.S. economy faced significant headwinds from a variety of sources, such as higher taxes and diminished government spending levels. The diminished impact from fiscal drag leads us to a modestly more constructive outlook for the U.S. economy than last year.
Internationally, we think prospects for developed markets relative to their emerging-market counterparts are looking better for the first time in a long time. In particular, we think several countries in the core eurozone have the potential for modestly improved growth. In addition, we are reasonably constructive on the Japanese economy based on the supportive aggregate impact of the country’s monetary and fiscal policy regimes.
In contrast, while we believe there are still a number of emerging economies with decent opportunities, we think it will be critical to discriminate from country to country. While certain nations, such as South Korea, Poland and Malaysia, have maintained fiscal discipline, face positive growth prospects and appear poised to potentially do well in 2014, in our view, others are facing weaker growth amid limited policy options.
In this environment, we think a number of fixed-income sectors hold appeal. For example, the corporate credit sector may continue to benefit from solid underlying fundamentals, such as healthy balance sheets, ample liquidity and reasonable earnings prospects. Consequently, we are constructive on market sectors such as investment-grade securities, high-yield bonds and floating-rate bank loans.
The global fixed-income market also holds opportunities for investors, although we do not think it will be as easy as investing in the broad emerging-market category. However, we think it could prove beneficial to have selective exposure to countries where, despite better fundamental fiscal conditions and growth prospects, yields are higher than in the United States. As a result of the supportive fiscal situations in those countries, investors may also be exposed to the potential for currency appreciation.
Overall, we think the U.S. municipal bond sector has sold off indiscriminately in recent months, driven by a few high-profile situations, notably those in Puerto Rico and Detroit. In contrast, we believe that many state and local governments have made solid progress in achieving fiscal sustainability and that the situation overall has continued to improve. As a result, we believe there are attractive opportunities in that sector.
Fundamentally, we are constructive on the broad fixed-income asset class. Given year-end market valuations following some of the negative media coverage and the subsequent indiscriminate selloffs in the asset class, we think the fixed-income sector may represent some value potential in 2014.
Christopher J. Molumphy is executive vice president and chief investment officer of Franklin Templeton Fixed Income Group, a global fixed-income platform that includes all major sectors of the fixed-income market, including investment-grade and high-yield corporate bonds, mortgage- and asset-backed securities, global sovereign and emerging market debt and currencies, municipal securities and bank loans. He is portfolio manager of Franklin High Income Fund and Franklin Strategic Income Fund.