We have found that there's degree of misunderstanding of the virus: Franklin Templeton CIO

Sonal Desai, Franklin Templeton Fixed Income Group Chief Investment Officer joins the On the Move panel to discuss the impact of COVID-19 on the economy and what needs to change in order for the country to start to recover from the virus.

Video Transcript

- Let's also talk about what effect they're having-- we talked a few moments ago about what stocks are doing. Let's talk about what bonds are doing and fixed income is doing, as well. Right now, we're seeing the 10-year bond, the yield rising, at 0.56%. Sonal Desai is joining us now. She is Franklin Templeton Fixed Income Group Chief Investment officer. She's joining us from San Francisco.

Sonal, it's always good to talk to you about these issues because, as usual, it seems as though stocks and bonds are perhaps getting a different message. In other words, whereas equity investors seem to be paying more attention to China headlines today, it looks like perhaps what's going on in the bond market is they're paying more attention to the economic data. Is that the right way to think about it?

SONAL DESAI: I think maybe. But having said that, at this stage, if I look at bond prices, they are so massively distorted by all the different policy action that's being taken that I would be hesitant to ascribe major-- you know, it would be one thing if we had had a blowout number so the market started thinking that blowout, in today's version of blowout, which would imply, you know, another $4, $5 million jobs figure, and if you'd seen a selloff, I'd say yes, they're looking at the data.

Instead, what we're really looking at is 1.7, 1.8, you know, that we've lost so many, as Constance said, that it's a slow grind back. And there's a slight grind upwards on the bond market. And it might have to do a little bit perhaps with uncertainty regarding the next fiscal package, but I would just leave it at that. I wouldn't read too much into it today.

- Would you add anything into the fact that-- we're talking about the headlines with China with TikTok, but there's also the threat of delisting Chinese companies in the US. Is that anything that we-- whether it's fixed income or equities, that we should be paying attention to as investors?

SONAL DESAI: Oh, absolutely. I mean, that is a little bit-- it's-- you know, so you have delisting, you have the next stage, which would be just not allowing American asset managers to own Chinese equities. These are pretty-- if we started moving in that direction, I think you'd see a major impact, major impact on the equity market, and to equity funds generally, because China, of course, now is a very important part of all of these indices.

I think that right now, though, something we need to recognize is this is not a one-off issue. This is quite different from the previous trade war. And a part of the reason is there is such universal get tough on China rhetoric coming out of DC. So it really isn't impacted that much by the elections. It feels very much like we're in a new stage of the world now. So.

JARED BLIKRE: Jared Blikre. I wanted to get your take on the bond market, specifically longer-term yields, but then decomposing the 10-year, for instance, into the real-- into real yields reflected in the TIPS rate, which is negative 1 point-- or it hit negative--

SONAL DESAI: Yeah.

JARED BLIKRE: --1.1--

SONAL DESAI: Yeah.

JARED BLIKRE: --a record low, just before the job report, but now jumping a little bit. At the same time, we have the US dollar index very, very oversold, by some measures the most in 40 years, but it's jumping a little bit. What if we see these trends reverse, with the dollar higher and yields going higher, as well?

SONAL DESAI: I think that's what you're going to see if you do get more of a recovery, right? If you do get a-- one thing I would say, if you look at the nominals right now, nominal yields instead of the real yields, you are seeing that they're highly, highly suppressed, largely based on different kinds of policy action. Is this realistic in terms of even three-year inflation, five-year inflation, 10-year inflation? I'd say absolutely not.

Now, the near-term impact of everything that we're seeing in the economy, yes, it's not massively inflationary, but if you look further out, there's no reason to believe that the US is going to fall into deflation, because the only country where this happened really was Japan. This is not the US. It really isn't. And actually, Franklin, together with Gallup, we did a recent survey, because we're trying to understand are there inflationary forces-- for one of the things we're trying to understand, are there inflationary forces which we're not capturing.

Looking over the medium term, I think we might be surprised because people are scared enough of COVID that they're actually willing-- right now, they're not willing to travel, more than half of them aren't willing to travel, but at least half of the people who do fly are actually willing to pay as much as 20% extra to have a-- to guarantee an empty seat next to them. Almost a third are willing to pay 100%-- not 100%, sorry, 30% extra to guarantee an empty seat. These different elements, I don't think we can see-- we cannot discount that, looking forward three months, six months, we might be looking at a very different inflation picture than we are right now.

- At the same time, Sonal, your survey also found, as-- to your point, people are concerned enough about coronavirus that they're perhaps right now not going out and doing that spending in the same way. So what does that tell us about the economic recovery over the coming month, and what kind of speed we can expect?

SONAL DESAI: So you know, the fact that they're not spending shows up in the fact that we currently are looking at a 25% savings rate. I think the more fascinating thing is actually the degree to which there is misunderstanding. And six months into the crisis, actual levels of lack of understanding of this disease-- the one thing which we-- the few things we know about it, which I admit, you know, it's few, the few things we know about it is the age dispersion in the fatality rate.

Now, you know, it goes without saying that every death from any cause is one which would ideally be prevented. But having said that, we have found a degree of misunderstanding which is remarkable. And the issue is that a little over half of Americans believe that essentially, on average, that people-- Americans aged 55 and over are just a little more than half as likely to die as those who are significantly older. If you look instead, the actual figure of people who die above the age of 55 in the US, it's over 92% of all deaths.

Remarkably, Americans believe that those who are aged younger than 44, almost a third of the deaths, fatalities associated with COVID-19, happen to Americans aged less than 44. Now, these are prime working-aged people, and they believe that they have a 30% chance of actually dying of the disease. Actual number is less than 3%. There is a degree of lack of understanding. Simultaneously, Americans are underestimating the risks to older people. So it's risk coming from two sides.

Further, we found that those who underestimated-- under-- those who overestimated their ability-- their potential for dying were most likely to then be worried about school reopening, going back to work. It's pretty logical. But this has policy implications. We need better information out there--

- Yeah.

SONAL DESAI: --to get people back.

- We definitely do. Although I would be curious, once we start to get more information about the long-term effects of COVID, as well, on that younger cohort, because we're starting to get some anecdotal information about that, once we get more hard data, I'm really curious to see how that shifts perceptions, as well. Sonal, we will continue this conversation another time. There's always plenty to cover. Sonal Desai is Franklin Templeton Fixed Income Group Chief Investment Officer. Thank you, again, so much.

SONAL DESAI: Thank you very much.