David Zahn, head of European fixed income at Franklin Templeton, believes that sustainable investing will be a dominant investment trend, with structural tailwinds that could help improve financial returns.

David Zahn (pictured) at Franklin Templeton sees opportunity in locking-in currently attractive yields with longer-duration assets, such as green and social bonds.

Zahn believes that the European Central Bank (ECB) is likely to cut rates ahead of the US Federal Reserve, as it is forced to respond to lacklustre growth. He is pencilling in a first rate cut for the third quarter of 2024.

The ECB’s move to make 10 consecutive policy rate hikes has led to slowing economic growth in the eurozone. In Zahn's view, the ECB has probably overtightened. He believes that economic growth in the eurozone will stagnate over the coming quarters, before picking up towards the end of 2024.

Zahn is therefore seeing investors starting to lock in the currently attractive yields that hover near multi-year highs: “A re-allocation towards longer-duration assets can also help to reduce the reinvestment risk present with the recently popular money market funds, especially in a falling rate environment.”

Weakening growth and a sustainable downward trend in inflation suggest that policy rates in the eurozone have most likely peaked, he added, believing that it is an opportune time for investors to start extending the duration of their fixed income holdings. Zahn thinks that green and social bonds, which are typically issued to fund longer-term projects, are a good source of longer-duration investments. He told WealthBriefing recently that they did well last year too.

Zahn also believes that an expanding and increasingly diverse sustainable finance market means that attractive returns can go hand in hand with a positive impact on the environment and our communities. He expects demand for green and social use-of-proceeds instruments to remain strong going forward, with both markets set for dynamic growth. Sustainable investing will be a dominant trend in the coming years, in his view, with structural tailwinds that could help improve financial returns.

Franklin Sustainable Euro Green Bond UCITS ETF
Zahn manages the Franklin Sustainable Euro Green Bond UCITS ETF which aims to provide exposure to the European green bond market whilst maximising total returns. It is classified as Article 9 under the EU Sustainable Finance Disclosure Regulation (SFDR), and invests mainly in bonds that are labelled green and denominated in European currencies. The fund, which is heavily weighted towards Germany, followed by France, the Netherlands, Spain, Belgium and Austria, has outperformed the index over a three to five-year period. Zahn said he invests mainly in the energy transition, namely in renewables.

Franklin European Total Return Fund A (acc) EUR  
Zahn also manages the fund which is classified as Article 8 under the EU SFDR. The fund aims to maximise total investment return by achieving an increase in the value of its investments, earning income and realising currency gains over the medium to long term. It invests mainly in higher-quality debt securities issued by governments, government-related entities and corporations located in Europe and/or in euro-denominated securities of non-European issuers. Heavily weighted towards Germany, followed by Spain, Denmark, the US, Austria and France, it has outperformed the index over a three to five-year period.

Other wealth managers also favour bonds in 2024. UK wealth manager Brown Shipley, Paris-based asset manager Carmignac, HSBC Global Private Banking, UBS Global Wealth Management see value in quality bonds in 2024. See more here and here.