Brandywine Global See Value in Emerging Market Opportunities Stemming from Potential Fed Rate Hikes

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Oct 14, 2014, 02:30 ET

PHILADELPHIA, Oct. 14, 2014 /PRNewswire/ -- While some fixed income investors are leery given the prospects for rising interest rates as a result of expected U.S. Federal Reserve Bank tightening, Brandywine Global portfolio manager Steve Smith and his global fixed income team believe opportunities in emerging markets bonds are becoming increasingly attractive.

"The stark contrast between ultra-low G3 yields and increasing emerging markets yields illustrates why global flexibility in fixed income investing today is crucial for success," advised Mr. Smith.

"We believe select emerging markets countries offer the most appealing combinations of attractive fundamentals and high real yields available in today's global bond markets," Mr. Smith said. "It's critical to have global flexibility in any fixed income portfolio during the current climate of ultra-low G3 interest rates. Global flexibility allows investors to earn better yields and potentially avoid principal loss when G3 rates eventually rise."

The challenge is in identifying which of these markets are poised to deliver above-average results.

The Brandywine Global team identifies several areas where savvy investors can benefit. "Many of the largest pricing anomalies in the global bond and currency universe are attached to poor sentiment on Chinese growth," said Mr. Smith. "We have a more optimistic view than most market participants in that we believe China can continue to produce 7 percent or greater growth for another decade."

That strength leads them to recommend several related bond and currency investments including the Malaysian ringgit, Indonesian bonds and the rupiah, as well as the Brazilian real and bonds, the Chilean peso and Australian dollar.

Some of the best emerging markets opportunities have arisen from the selloff in many countries' bonds and currencies in late September. As Mr. Smith explained, "The 2013 'taper tantrum,' the market's reaction to the first step in the process of U.S. Federal Reserve policy normalization, sent emerging market yields higher and currencies lower. During most of 2014, though, these bonds and currencies rallied back. We expect a similar showing after initial volatility associated with the market's recent pulling forward of U.S. interest rate hike expectations. That's been a normal and expected reaction during periods of Fed tightening."

Fed rate-hike cycles have historically led to greater volatility and challenges for emerging markets investors. The Brandywine Global team, however, believes the current Fed normalization cycle will be different for emerging markets given better fundamentals, as well as indications that the ultimate trajectory and pace of Fed rate hikes will be low and slow.

According to Brandywine Global senior portfolio manager Jack McIntyre, "The Fed has been pretty clear in signaling that U.S. policy rates will rise slowly and will not reach the same heights as in past cycles. G3 bonds and currencies compete for global investment with emerging markets, so lower G3 interest rates over the long term should set a constructive backdrop for emerging market bonds over the next few years."

"Many emerging markets are far better positioned going forward than they were for past crisis periods catalyzed by Fed normalization," Mr. McIntyre said. "Flexible currency regimes and issuing debt primarily in local currencies allow emerging economies to better absorb changing global sentiment. Better macroeconomic policies and an emphasis on inflation control, learned in past crises, make emerging markets assets more robust in the face of increased volatility. The best of these markets have larger foreign-exchange reserves, more sticky institutional money in their bond markets, and better liquidity, which ultimately will support valuations and guard against tail risks. "

Mr. Smith agrees and sees opportunities arising worldwide.

"Once the ECB and Bank of Japan inject fresh quantitative easing, emerging markets should benefit from more abundant global liquidity," Mr. Smith said. "That means bonds, stocks and currencies should receive support. We continue to like those countries implementing structural reform, like Mexico. We also like some that are less attractive from a reform standpoint, but still inexpensive due to Fed concerns and manageable domestic issues, such as Brazil, Indonesia, and South Africa. Many of these markets are getting to cheap levels not available since late 2013."

About Jack P. McIntyre, CFA

As senior portfolio manager for global fixed income and related strategies, Mr. McIntyre provides valuable analytical and strategic insight at Brandywine Global. He joined the firm in 1998. Previously, he was a market strategist with McCarthy, Crisanti & Maffei, Inc. (1995-1998); senior fixed income analyst with Technical Data, a division of Thomson Financial Services (1992-1995); quantitative associate with Brown Brothers Harriman & Co. (1990), and investment analyst with the Public Employee Retirement Administration of Massachusetts (1987-1989). Mr. McIntyre is a CFA® charterholder. He earned an M.B.A. in Finance from the Leonard N. Stern Graduate School of Business at New York University and a B.B.A. in Finance from the University of Massachusetts, Amherst.

About Steve Smith

Mr. Smith is co-lead portfolio manager for global fixed income and related strategies, and a member of the Executive Board at Brandywine Global. He joined the firm in 1991 to diversify investment strategies and start the global fixed income product. Previously Mr. Smith was with Mitchell Hutchins Asset Management, Inc. as managing director of taxable fixed income (1988-1991); Provident Capital Management, Inc. as senior vice president overseeing taxable fixed income (1984-1988); Munsch & Smith Management as a founding partner (1980-1984), and First Pennsylvania Bank as vice president and portfolio manager in the fixed income division (1976-1980). He earned a B.S. in Economics and Business Administration from Xavier University, where he is currently chair of the university's foundation and is a member of the board of trustees. Mr. Smith is also a member of the Board of Trustees at St. Mary's Villa for Children and Families, a provider of services for abused and neglected children, and the Winterthur Museum & Country Estate, a nonprofit educational institution.

About Brandywine Global

Founded in 1986, Brandywine Global Investment Management offers a broad array of fixed income, equity, balanced, and alternatives strategies that invest across global markets. Brandywine Global manages $58 billion in assets as of June 30, 2014. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM), and is headquartered in Philadelphia with office locations in San Francisco, Montreal, Toronto, Singapore, and London.

Brandywine Global's mission is to deliver superior investment solutions and performance for our clients. To attain this mission, we listen to our clients; aim to hire, support, and retain the industry's best people; encourage independent thinking by sponsoring an open marketplace for ideas; promote a culture of integrity and partnership; and find value throughout the world that others have not yet recognized.

For more information on investments sub-advised by Brandywine Global, call your financial adviser or visit www.leggmason.com/fixedincome.

About Legg Mason

Legg Mason, Inc. is a global asset management firm with assets under management of $708 billion as of September 30, 2014. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, MD and its common stock is listed on the New York Stock Exchange (symbol: LM).

Investments in fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. An increase in interest rates will reduce the value of fixed income securities. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Brandywine Global Investment Management (Canada), ULC; Brandywine Global Investment Management (Asia) Pte. Ltd.; Brandywine Global Investment Management (Europe) Limited is authorized and regulated by the Financial Conduct Authority (the "FCA"). (FRN 472774). Registered in England and Wales, No. 06324517

SOURCE Legg Mason, Inc.