Templeton Emerging Markets Income Fund : Product Commentary - Templeton Emerging Markets Income Fund

United States - Retail

Fund Commentary

Performance Review

• As optimism over the potential timing of interest-rate cuts from the US Federal Reserve (Fed) ebbed and flowed during 2024's first quarter, yields on most developed and emerging market sovereign bonds rose, and the US dollar (USD) gained somewhat. The yield on the 10-year US Treasury note increased 32 basis points to end March at 4.20%. A number of central banks in Latin America and eastern Europe continued reducing rates during the quarter, while the Fed and the European Central Bank kept rates unchanged.

QUARTERLY KEY PERFORMANCE DRIVERS

• Emerging market debt indexes were mixed for the quarter. Select exposures to subinvestment-grade sovereign credits in Latin America and Africa contributed to absolute fund return.
• Most emerging market sovereign bond yields rose during the period. Duration exposures in Ghana and Egypt contributed to absolute fund performance. We have extended duration in select countries where we see opportunity from lower inflation and interest-rate outlooks, or where we see improving fundamentals in a range of factors from fiscal progress to reshoring.
• Most currencies weakened against the USD during the quarter. Positions in the Thai baht, Malaysian ringgit and Hungarian forint detracted from absolute fund results. We continue to focus on currencies in countries with strong trade dynamics, current account surpluses, better fiscal management and stronger growth potential, notably in Asia. Appropriate monetary policy reaction functions and better fiscal performance also support certain currencies in the Americas.
• We see value in sovereign bond yields in several emerging markets. In currencies, we focus on value opportunities in countries with strong trade dynamics and healthy financial profiles, notably in Asia. Taking all these factors into account, our top local-currency exposures include India, Colombia, Brazil and Egypt. In credit markets, we see value in select sovereign credit exposures that have undervalued growth drivers and attractive risk-adjusted spreads. At this stage of the US rate cycle, we are exploring opportunities to expand our holdings in USD sovereign credit. However, at present we continue to avoid corporate credit, given lingering corporate headwinds associated with the rate cycle and pedestrian levels of growth in the US and Europe.

Outlook & Strategy

• We broadly expect inflation to continue declining this year, though the pace of deceleration should slow from last year, and inflation may remain above targets for a while yet in a number of countries. The timing of developed market central banks initiating rate cut cycles, in this context, is likely to be particularly dependent on inflation dynamics (especially core), as well as the growth outlook.
• Global trends aside, certain countries remain more vulnerable to inflation dynamics and weaker fundamentals that may limit their ability to participate in the global easing cycle; such heterogeneity in fundamentals and policy responses should create relative valuation opportunities among countries. We therefore continue to closely monitor individual inflation drivers and outcomes, as well as policy responses, in different regions and countries. Risks remain to the lower global inflation outlook, including upward risks to oil prices from the continued conflicts in Russia/Ukraine and Israel/Gaza.
• We maintain the view that the USD is at stretched valuations. We anticipate that both cyclical factors and structural factors will lead to USD weakness, although the path has been and is likely to remain uneven. We expect select emerging markets to benefit from this. Thus, given our views of both USD weakness and positive fundamentals in specific countries, we believe the greatest areas of value in the sovereign bond markets are to be found in these non-USD assets.

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• On a regional basis, areas of both emerging and developed Asia stand out. We have a positive structural view on Japan. Although the recovery in China has been weaker than expected, the government has pledged fiscal policy and other support measures, targeting various sectors to help accelerate the recovery. Improved economic activity in China is expected to have positive spillover effects for regional neighbors too. Improving growth differentials versus the US should, in our view, support select Asian currencies against the USD. Moreover, the more muted prior upcycle in Asian rates compared to the US implies a narrowing rate differential looking forward into the downcycle, which should also support these currencies against the USD. Structurally, several countries in Asia have solid fundamentals in the form of current account surpluses, small fiscal deficits and low levels of debt. Some of these countries are also set to benefit from global reshoring trends. Looking ahead, we expect Asia to remain an important driver of global growth.
• In Latin America, those countries whose central banks had responded early and/or aggressively to higher inflation expectations are benefiting now as they reduce rates following a sharp slowdown in inflation. Moreover, several Latin American countries have exhibited significant fiscal improvement since the pandemic. This too provides comfort in holding select Latin American assets.
• Geopolitics will continue to have varying effects. The post-COVID new normal for the world has been characterized by the constant shadow of various geopolitical factors. US-China relations were already quite strained during the pandemic, with distrust around the pandemic itself and renewed tensions in the South China Sea exacerbating the situation, though more recently there have been some efforts at alleviating tensions. The rest of Asia would likely be affected by any escalation of US-China tension and potential conflict in the region, and we continue to closely monitor the situation, including the possibility that tensions may intensify again late this year depending on the outcome of the US presidential election.

Performance Data1

Performance shown represents past performance and is no guarantee of future results. Current performance may be higher or lower than the performance shown. Investment return and principal value will fluctuate so shares, when sold, may be worth more or less than the original cost. Returns based on Market Price or NAV, and assume the reinvestment of all distributions at the Dividend Reinvestment Plan Price or NAV, respectively. All returns include the deduction of management fees, operating expenses and all other fund expenses, and do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares. When applicable, performance would have been lower if fees had not been waived in various periods. The index is unmanaged and includes reinvestment of any income or distributions. It does not reflect any fees, expenses or sales charges. One cannot invest directly in an index, and an index is not representative of the fund's portfolio. Index data is provided for comparison purposes only. The fund is not managed against an index. Returns for periods of less than one year are not annualized. Please visit franklintempleton.com for the most recent month-endperformance.

An investor cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.

The JP Morgan EMBI Index tracks total returns for U.S. dollar-denominated debt instruments issued by emerging market sovereign and quasi- sovereign entities: Brady bonds, loans, Eurobonds and local market instruments. Source: JP Morgan Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change. Important data provider notices and terms available at www.franklintempletondatasources.com.

Portfolio Diversification

Top Holdings

% of Total

Investment Team

1. Net Returns (NR) include income net of tax withholding when dividends are paid.
2. Periods shorter than one year are shown as cumulative total returns.

What Are The Risks?

All investments involve risks, including possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Liquidity risk exists when securities or other investments become more difficult to sell, or are unable to be sold, at the price at which they have been valued. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance. The manager may consider environmental, social and governance (ESG) criteria in the research or investment process; however, ESG considerations may not be a determinative factor in security selection. In addition, the manager may not assess every investment for ESG criteria, and not every ESG factor may be identified or evaluated.

Important Information

The information provided is not a complete analysis of every material fact regarding any country, market, industry, security or fund. Because market and economic conditions are subject to change, comments, opinions and analyses are rendered as of the date of this material and may change without notice. A portfolio manager's assessment of a particular security, investment or strategy is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy; it is intended only to provide insight into the fund's portfolio selection process. Holdings are subject to change.

Distributions are not guaranteed and are subject to change. The Closed-End Funds are not sold or distributed by Franklin Distributors, LLC, or any affiliate of Franklin Resources, Inc. Unlike open-endfunds, shares are not continually offered. Like other public companies, closed-endfunds have a one-timeinitial public offering, and once their shares are first issued, are generally bought and sold through non-affiliatedbroker/dealers and trade on nationally recognized stock exchanges. Share prices will fluctuate with market conditions and, at the time of sale, may be worth more or less than your original investment. Shares of exchange-traded closed-endfunds may trade at a discount or premium to their original offering price, and often trade at a discount to their net asset value. Investment return, market price and net asset value will fluctuate with changes in market conditions. The Funds are subject to investment risks, including the possible loss of principal invested.

Gross expenses are the fund's total annual operating expenses as of the fund's annual report available at the time of publication. Actual expenses may be higher and may impact portfolio returns. Net expenses reflect voluntary fee waivers, expense caps and/or reimbursements. Voluntary waivers may be modified or discontinued at any time without notice. NAV is total assets less total liabilities divided by the number of shares outstanding. Market Price, determined by supply and demand, is the price an investor purchases or sells the fund. The Market Price may differ from a fund's NAV. Premium / Discount reflects the difference between the NAV and the Market Price of the fund, and represents the amount that the fund is trading above or below its NAV, expressed as a percentage of the NAV.

Before investing, carefully consider a fund's investment objectives, risks, charges and expenses. You can find this and other information in each prospectus, or summary prospectus, if available, at www.franklintempleton.com.Please read it carefully.

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Source: FactSet. Important data provider notices and terms available at www.franklintempletondatasources.com.

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