ClearBridge Investments Co-CIO Sees Opportunity In Recent Market Volatility

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Oct 22, 2014, 10:00 ET

NEW YORK, Oct. 22, 2014 /PRNewswire/ -- A U.S. equity market that had proven resilient to headline risk for most of the year has become much more sensitive to negative news over the last month. Volatility has returned to stocks since large cap indices touched all-time highs in September. Scott Glasser, Co-CIO of ClearBridge Investments, believes this creates opportunity for fundamental investors.

Mr. Glasser said, "Stocks are currently suffering through a perfect storm of uncertainty wrought by global economic growth concerns, plummeting oil prices that are fanning deflation fears, the Ebola virus outbreak, as well as ongoing geopolitical risks presented by ISIS and the Russia-Ukraine standoff. In our opinion, the S&P 500 is now in an oversold position with put/call volumes spiking and investor sentiment turning extremely negative. However, to gain confidence that a bottom has been reached we need to see both selling subside and then a reversal that includes strong and broad-based buying interest."

He continued, "We do not foresee the current sell-off creating the conditions that could lead to a recession. Instead, we are in an ongoing correction that we believe is constructive for the markets longer term. We are resetting expectations globally for continued low growth and low inflation. The current sell-off has raised the equity-risk premium to its highest point in three years but well off levels reached at the height of the financial crisis."

He noted that a higher risk premium is another signal that fear has quickly replaced complacency. At ClearBridge Investments, the investment team is confident that U.S. company fundamentals are strong enough to withstand ongoing volatility and that any further downside in stock prices will be temporary.

In Mr. Glasser's view, the most recent selloff restored a measure of value to equities, which should have a positive impact on stock repurchase programs. Companies should take advantage of elevated risk premiums and more attractive prices to step up stock repurchases, providing a stabilizing bid to the market. He noted that during the current market cycle, companies have bought back $1.4 trillion in stock consistently. After the earnings season, the team at ClearBridge expects that companies will go back to buying 2% to 3% of outstanding equity.

Quality Well-Positioned to Outperform

"We believe the latest market action will also accelerate a shift in investor preference toward better quality companies with low debt levels and high returns on capital, particularly as the Federal Reserve winds down its bond buying program. Quality stocks have lagged over the last several years as abundant liquidity favored smaller and lower quality companies, but as monetary policy reverses we expect quality to regain market leadership," continued Mr. Glasser.

He noted that the current S&P 500 dividend yield of 2.1% is now in line with the 10-year Treasury yield with half of the stocks in the index yielding more. Combined with an S&P 500 payout ratio that is still historically depressed at about 35%, his view is that the environment has become supportive of double-digit dividend growth among quality companies.

ClearBridge Investments' teams believe that there are attractive opportunities in many parts of the market. Current weakness in equities provides a good opportunity to upgrade holdings across their products, especially among stocks hit disproportionally more than the market. In addition to high-quality dividend names, the investment teams are also seeing value in industrials and oil stocks, which have suffered from sharp drops in the price of crude, assuming that current oil prices, which are near marginal cost, find stability at close to current levels."

Finally, Mr. Glasser noted that "Five years of nearly uninterrupted gains, supported by an accommodative Federal Reserve, may have lulled investors into believing that stocks can overcome any form of bad news. We hope this latest sell-off will reacquaint investors with the idea that volatility is the natural course for capital markets. We expected low single-digit equity returns at the beginning of 2014 and still expect the same."

About ClearBridge Investments

ClearBridge Investments is a well-established global investment manager with a legacy dating back more than 50 years and approximately $106.2 billion in assets under management, as of June 30, 2014. We are committed to long-term results through active management.

Led by the insight of proprietary, fundamental research and a team of Portfolio Managers with an average of 24 years of investment industry experience, our investment process provides clients with equity-focused strategies in a number of investment vehicles and personalized, value-added client service. Our strategies are oriented around three primary investment objectives: Low Volatility, High Active Share and Income Solutions.

About Legg Mason

Legg Mason is a global asset management firm with $708 billion in assets under management 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, Maryland, and its common stock is listed on the New York Stock Exchange (NYSE: LM).

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SOURCE ClearBridge Investments