Western Asset CIO Optimistic About Global Growth Prospects
U.S. Continues To Lead, Europe Creeping Up, China In Soft Landing
PASADENA, Calif., March 31, 2015 /PRNewswire/ -- In his quarterly market outlook webcast, Western Asset Management Chief Investment Officer Ken Leech observed that global economic growth is improving. In his view the U.S. will likely continue to grow at a 2 to 2.5 percent pace, Europe will likely turn upwards thanks to massive liquidity infused by the European Central Bank (ECB), China will likely experience a soft landing and emerging markets will likely provide opportunities for careful investors.
"I would characterize us as optimistic," Mr. Leech headlined in his remarks. "The global recovery – despite all the challenges it's faced – continues to move forward. We believe global growth is going to improve from last year. 2014 wasn't a great year, but every year you go forward and have a little bit of improvement. We get further away from the financial crisis, with asset prices obviously returning to more normal valuations levels. That continues to be the major theme for us."
"It's been an unbelievable period of time that we've all been living through, with a lot of policy experimentation not only in the U.S., but around the globe."
The full Western Asset webcast can be found on the Western Asset website.
While the overall outlook is positive, there will be significant differentiation across regions.
"On the U.S., we thought maybe at most we might get 2.5% growth this year," Mr. Leech said. "The Fed has actually moved its forecast down in line with that number."
"Our feeling is this 2% to 2.5% range may be moving towards the higher end. We haven't been able to get quite as optimistic as the Fed. From time to time it has moved to three percent projections and have been falling short of its target – for the last four years."
"When you look at the U.S. GDP trend, both nominal and real GDP, it's not a flamboyantly positive picture, but it's not negative either. We think consumption is solid. The improvement in the housing market is slow, but steady. We would like to see a little bit better thrust from capital spending or manufacturing, but fundamentals in the U.S. are solid, if not spectacular."
Europe continues to face challenges, but the Western Asset team sees prospects improving.
"When we look at Europe, probably the first time in four years, we've actually started to become more optimistic," Mr. Leech said. "We raised our forecasts at the beginning of the year. Ironically, just like the U.S., the ECB has moved its forecast up. Now we're closer to consensus there as well."
"[ECB Chair Mario] Draghi has vowed to get the balance sheet back up to the previous high. That's an enormous expansion, which will take them to a level of total expansion that's greater than that of the Fed. The enormity of the buying we're going to see in the next 15 months has caused the price action in the European bond market to be really outstanding."
Mr. Leech also believes the Japanese recovery "is positive, although it's downshifting."
"When you look at what Japan's trying to accomplish, it makes both the ECB and the Fed pale by comparison. We're talking about an unbelievable amount of liquidity provision in an attempt to get inflation expectations higher and get their economy on a stronger footing. The enormity of that, the combination of the ECB and the Bank of Japan, along with the Fed's desire not to do anything to short circuit the U.S. recovery – we believe it's going to be very positive for global growth."
China will help, in Western Asset's view, or at least not spoil the party.
"We've been believers in the soft landing," Mr. Leech said. "The progress that China is making towards having more internal consumption and being less dependent on investment and export growth is on course. It's going to be an uneven path and there are going to be challenges, but we think something like a 7% growth rate is in store for China this year."
One area that has been more turbulent in these times is emerging markets.
"Emerging markets have been very challenged," Mr. Leech said. He noted that Western Asset has been willing to have overweights in the emerging market space in a lot of our programs, which has been a headwind. Mr. Leech said he underestimated the severity of the decline in oil.
"One of the positives is simply the yield, the attractiveness from a valuation perspective of emerging market yields relative to developed market yields. They are very near the crisis high in a world that's very challenged for a yield. You have to be very, very thoughtful, you have to do your homework, but these opportunities continue to be available. From a strategic point of view, we think emerging markets in Asia will have better growth dynamics than in Europe or Latin America."
Among the bond market's big themes is inflation, which has remained subdued.
"One of the real surprises over the last five years of recovery has just been how soft inflation has been," Mr. Leech said. "The path to normalizing rates is really the path to normalizing inflation and that just hasn't happened as of yet. That process is going to take time even though we've been serious believers that inflation was going to remain reasonably dormant."
"We were still surprised by the downshift in global inflation late last year. One of the positives is that central bank policy can be very, very accommodative. There's no immediate inflation risk that would prevent central banks from being aggressive. In fact, that's exactly what we'll be seeing all over the world – whether it's the ECB, BoJ, or interest rate cuts from China and across the emerging market space. The Fed provided guidance that it might be even slower to raise rates than previously thought."
Of the Fed, "It centered on a September hike as the most probable course. It also showed a course of interest rate increases that was much less than had been previously thought."
Mr. Leech discussed how all these factors impact global bond market performance.
"Last year was a story of declining yields and a dramatically flatter curve," he explained. "This year yields have declined, modestly, but the yield curve change has been more muted. There's been a little bit of flattening in the sense that the intermediate and longer maturities have done a little bit better than the very short maturities, which haven't changed much, obviously, with the Fed itself not changing. The performance across the curve has been more even."
"When you look at Treasury notes from a fundamental perspective they don't have a lot of value by any historical standards. But then when you look around the globe at a German investor who can sell a German bund at 30 bps and buy U.S. Treasury 10-year notes at close to 2%, that's an enormous pickup in yield. Plus you have a currency that's been going up instead of one that's been going down; the relative attraction of the U.S. to other rates is very positive."
"As fundamental investors, we don't want to be long the Treasury market outright. We really don't want to use our risk budget in an attempt to be short Treasuries. We would rather use it in other sectors, where the opportunity to provide return for our clients is better. So while we don't have any real excitement or positive news to talk about in the Treasury market, we don't have any positions of any note."
When it comes to specific sectors, the Western Asset team sees targeted opportunities.
"We continue to have overweights in the non-agency mortgage market," Mr. Leech reported. "Housing fundamentals have continued to turn for the better. The decline in housing prices is behind us. We're finally starting to see a pickup in some housing-related activities."
"We continue to think housing prices are on the upward trend. We're not dramatically bullish, but something like a 3% to 5% - home price appreciation over time is in the cards. That's more than sufficient to underpin the improving fundamentals in the space."
Another area Western Asset likes is investment-grade credit, in which U.S. spreads have been widening relative to European spreads, which have been declining.
"That gap has really opened up," Mr. Leech said. "You'll be seeing us moving assets into portfolios which have global flexibility from Europe to the U.S."
"You have to look through your credits very carefully. We've been very aggressive, starting with the energy opportunity. Some of these companies are well positioned to withstand quite a long period of energy prices in the $40 to $50 area, although our belief is that prices are starting to stabilize. If we're right on global growth trends over time, we should see energy prices improve."
In the high-yield space, Mr. Leech believes the buzz is all about energy.
"Energy had a difficult time last year," he said, "a story we all know well because of the declining price of oil. When you look at this year, it's been a sawtooth kind of a year so far. The first quarter was obviously very difficult. The second quarter, we had a balance and credit has generally been obsolete, energy specifically, only to have a renewed challenge in March."
"For the year-to-date, the good news is that energy's off to a positive start, but has not performed as well as other sectors of the high-yield market. We continue to think that the energy story is going to be one of the brighter performers over the course of the year."
About Kenneth Leech
Ken Leech is Chief Investment Officer of Western Asset Management Company. He joined the Firm in 1990. From 1991–2014, assets under management grew from just over $5 billion to $466 billion. Ken leads the Global Portfolio, US Broad Portfolio, and Macro Opportunity teams. From 2002–2004, Ken served as a member of the Treasury Borrowing Advisory Committee. In 2014, Ken and the Western Asset team were named Morningstar's US Fixed-Income Fund Manager of the Year for the Western Asset Core and Western Asset Core Plus Funds. Ken was inducted into the Fixed-Income Analyst Society Hall of Fame in 2007.
Ken is a graduate of the University of Pennsylvania's Wharton School, where in four years, he received three degrees, graduating summa cum laude.
About Western Asset
Western Asset Management is one of the world's leading fixed-income managers with $466 billion in assets under management as of December 31, 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, Sao Paulo, Singapore, Tokyo and Dubai, the company provides investment services for a wide variety of global clients, across an equally wide variety of mandates. To learn more about Western Asset Management, please visit www.westernasset.com.
About Legg Mason
Legg Mason is a global asset management firm with $711 billion in assets under management as of February 28, 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).
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. Asset-backed, mortgage- backed or mortgage-related securities are subject to prepayment and extension risks. Risks of high-yield securities include greater price volatility, illiquidity and possibility of default. Diversification does not assure a profit or protect against market loss.
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Morningstar Award: Awarded to Ken Leech, Carl Eichstaedt, and Mark Lindbloom for Western Asset Core Bond Fund (WACSX) and Western Asset Core Plus Bond Fund (WAPSX) named Morningstar 2014 U.S. Fixed Income Manager of the Year, United States of America. Morningstar Awards 2015 © Morningstar, Inc.
Morningstar Fund Manager of the Year award recognizes portfolio managers who demonstrate excellent investment skill and the courage to differ from the consensus to benefit investors. To qualify for the award, managers' funds must have not only posted impressive returns for the year, but the managers also must have a record of delivering outstanding long-term performance and of aligning their interests with shareholders'. The Fund Manager of the Year award winners are chosen based on Morningstar's proprietary research and in-depth evaluation by its fund analysts.
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Yield Curve
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Gross Domestic Product (GDP)
Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.
Federal Reserve Board
The Federal Reserve Board ("Fed") is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
© 2015 Legg Mason Investor Services, LLC, member FINRA, SIPC. Western Asset Management, and Legg Mason Investor Services, LLC, are subsidiaries of Legg Mason, Inc.
Views expressed are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Predictions are inherently limited and should not be relied upon as an indication of actual or future performance. As a result, Legg Mason cannot guarantee the accuracy or completeness of any statements set forth in this article. All information was current at the time of this publication and is subject to change without notice. This article should not be deemed as an offer to sell or a solicitation to buy the securities mentioned in this article.
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