Western Asset CIO Forecasts Modest Global Growth, Led by U.S.

PASADENA, Calif., Oct. 1, 2014 /PRNewswire/ -- Ken Leech, Chief Investment Officer of Western Asset Management, said in a webcast today that his team expects global growth to remain "modest," led by the slow but steady continuing recovery in the U.S. economy.

"Global growth is slow but it is improving incrementally," was Mr. Leech's main message.  Progress is advancing at a historically slow pace, akin to "two steps forward, one step back."  The global growth picture, he said, "while recovering and warranting optimism, is still fragile."

"The United States is the positive story," Mr. Leech said, attributing the success of his fixed income funds over the past year to accurately forecasting U.S. growth in the 2.5 percent range, while others were more bullish.  "We continue to suspect that the U.S. economy stays in a sweet spot of modest growth."

While "inflation has remained stuck in the mud," he expects the U.S. Federal Reserve to remain true to its previously announced plans to end market easing.

"In the United States the emergency is past," he said, and as a consequence "the Fed wants to get away from the zero percent funds rate."  These will not be rapid changes, since "we expect the Fed to remain accommodative for a very long time."  Mr. Leech believes "the Fed will take a very, very slow approach towards moving rates off zero," predicting action in mid-2015.

Because "the bond market story is not a U.S. story," Mr. Leech focused on four other geographic areas: Europe, emerging markets, China and Japan.

Europe represents Mr. Leech's primary concern, since it "still faces significant challenges."

"Europe creates anxiety," he said.  European growth is slowing, highlighted by persistent challenges in France and Germany.  He further noted that "bank lending in Europe has been faltering for the last couple of years."

"Our overall view is that this moderate growth picture in the globe continues," Mr. Leech said.  "That should be a very conducive backdrop to many spread products, both in the U.S. and globally.  We do not want to be Pollyannaish … We continue to believe that policy will be forthcoming but we want to be very, very attentive to make sure that is the case."

With regard to emerging markets, "our growth expectation is a bit downcast." While the valuation gap still remains wide between emerging market and developed economy bond yields, and "the yield advantage is not available anywhere else," Mr. Leech advised that "you have to be selective."  For savvy investors, he sees this opportunity set lasting through 2014 and into 2015.

China's soft landing is coming into evidence, Mr. Leech said, as indicated by the downshift in its real Gross Domestic Product (GDP) growth.  The Japanese economy is also downshifting even as the Bank of Japan continues to expand its balance sheet.  "They want to be more proactive," Mr. Leech noted, although "the yen continues to be under downward pressure."

Mr. Leech also addressed several issues related to the markets, including housing.

"The sector of structured mortgage finance is area that we have been very positive on, very constructive on," Mr. Leech said.  "We continue to think that's an area of opportunity.  When we look at the housing market we certainly think the bottom is in on housing prices and that we're starting to see a slow but persistent increase. Something like a 3 ½ percent trend might be our expectation over time.  While that's a pretty modest increase I think it's important because it does underpin the fact that the credit stress in the sector continues to diminish."

"Slowly but surely the housing market is healing. We don't look for a strong liftoff because we all know credit is still constrained with respect to home buyers."

When asked to name a specific emerging market he favored, Mr. Leech did not hesitate.

"The country we like the most is Mexico," he said.  "We feel very strongly that the structural reforms in Mexico are going to really change the dynamic of that country over time.  While in the short run you have to take some bounciness with respect to any emerging market position … from our perspective this would be our foremost pick."

He also discussed the liquidity situation in the global markets.

"There's no question that liquidity changes in the market sharply from time to time," Mr. Leech said.  "Liquidity is kind of a two-edged sword.  On one hand it is difficult to navigate when liquidity ebbs and flows but in other cases the lack of liquidity provides an opportunity.  Where you've done your credit work, where you have the opportunity to select issues that you think are attractive and you're able to commit your capital, that's a real positive.  It can also be a positive in terms of new issues.  The new issue calendar remains robust as a source of financing for the corporate sector, and during times of illiquidity, price concessions have to be much more meaningful.  I think that gives a firm like ours an advantage."

About Ken Leech, Chief Investment Officer

Mr. Leech oversees the interest rate strategy and leads the long duration effort.  He joined Western Asset in 1990.  In 1998, he was named CIO and spearheaded the performance and product development efforts that helped underpin Western Asset's global growth and success. After taking medical leave for much of 2008, Mr. Leech resumed investment duties in early 2009 and was named Chairman of the Global Strategy Committee. In this position, he directed the global portfolio management and the macro-strategy alternative efforts.  In 2013 he became Co-CIO as part of the transition process, before fully resuming the CIO role in April 2014.

From 2002 to 2004, Mr. Leech served as a member of the U.S. Department of Treasury's Borrowing Committee.  Prior to joining Western Asset, he spent much of his career focusing on proprietary trading, most recently with Greenwich Capital (1988–1990) and the First Boston Corporation (1980–1988). In his four years at the University of Pennsylvania's Wharton School, Mr. Leech obtained three degrees while graduating summa cum laude.

Mr. Leech and Western Asset were named US Fixed-Income Core and Core Plus Managers of the Year by Institutional Investor in 2013 and Morningstar's Fixed-Income Manager of the Year in 2004. Together Mr. Leech and the firm were also among four finalists for Morningstar's award in 2003 and 2006.  In 2007, Mr. Leech was named to the Fixed-Income Analysts Society's (FIASI) Hall of Fame.

About Western Asset

Western Asset is one of the world's leading fixed-income managers with $455 billion in assets under management as of June 30, 2014.  The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM)  From offices in Pasadena, Hong Kong, London, Melbourne, New York, São Paulo, Singapore, Tokyo and Dubai, the company provides investment services for a wide variety of global clients, across an equally wide variety of mandates.

About Legg Mason

Legg Mason is a global asset management firm with $711 billion in assets under management as of August 31, 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 (symbol: LM).

© 2014 Legg Mason Investor Services, LLC, member FINRA, SIPC. Western Asset Management, LLC and Legg Mason Investor Services, LLC, are subsidiaries of Legg Mason, Inc.

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. High yield bonds possess greater price volatility, illiquidity, and possibility of default. 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.

SOURCE Legg Mason

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