Stand: 30.06.2023
Performance Review The third quarter saw European bond markets posting positive returns. The outlook for the eurozone was bolstered considerably in July when European Union leaders finally reached an agreement on the ?750 billion COVID-19 rescue plan initially proposed in May. However, in August,the eurozone entered a period of deflation for the first time in four years. Against this backdrop, benchmark yields on German Bunds ended thequarter marginally down and remained well within negative territory. For the quarter, the fund s A (Mdis) EUR shares returned 2,41%, and its benchmark, the Bloomberg Barclays Euro Aggregate Index, returned 1,50%. QUARTERLY KEY PERFORMANCE DRIVERS The fund s sector allocation and security selection bolstered relative results, particularly selection in Italian, French and Austrian sovereign debt. Underweight exposure to German Bunds also added relative value. Positioning in eurozone corporate financial bonds (investment-grade andhigh-yield) further bolstered relative performance. The fund s duration and yield-curve positioning also contributed to relative returns, due mostly to an overweight duration stance on eurozone bonds, where rates fell. In contrast, the fund s currency positioning weighed on relative performance, notably overweight positions in the Polish zloty, Czech koruna and Norwegian krone, all of which weakened against the euro. ONE-MONTH KEY PERFORMANCE DRIVERS The fund s currency positioning weighed on relative performance, notably overweight positions in the Norwegian krone, Polish zloty and Czech koruna, all of which weakened against the euro. The fund s sector allocation also detracted from relative results, although this was offset to some degree by the positive impact of stock selection. Positioning in eurozone corporate investment-grade financial and high-yield industrial issues hindered relative returns, but selection in Italiansovereign debt added relative value. In contrast, the fund s duration and yield-curve positioning contributed to relative returns, notably due to an overweight duration stance on eurozone bonds, where rates fell. Outlook & Strategy Europe faces challenges in the months ahead. First, there is the strained relationship with the United States, although this could improve with a victory for Biden in the forthcoming US presidential elections. Franklin European Total Return FundSecond, issues remain in the Brexit saga. We believe a no-deal Brexit will likely lead to further disruptions in supply chains, trade frictions and more tariffs. However, regardless of the outcome of the US presidential election or the Brexit negotiations, we do not foresee any fundamental changes in the dynamics for European fixed income markets.