Keeping in mind the enormous amount of policy uncertainty there is around the world and particularly in the US, upside growth prospects are coming amidst challenging secular headwinds and a constrained global growth background, says Ken Leech, chief investment officer, Western Asset Management, a Legg Mason affiliate and one world’s leading fixed-income managers.
He notes “Our base case is for steady but unspectacular global growth, and US growth and inflation may rise with fiscal stimulus.
“It is encouraging to see that global inflation has stopped declining. However, central banks, which have been a big source of accommodation for the global recovery, are becoming a little less accommodative. Nonetheless, government bonds should remain underpinned by low policy rates and we believe spread sectors should outperform over the longer term.”
Leech highlights that there are few material issues that investors need to consider such as demographics, productivity and debt burdens.
“With Brexit and the election of Donald Trump, one could argue that we are seeing a deceleration of globalisation and the political ascendency of nationalism. These trends we should continue to watch very carefully, and we remain thoughtful about how positions may need to change.”
“There is no doubt that these trends will impact investment portfolios in 2017.
“Last year was a terrific year for spread sectors, particularly high-yield and emerging markets (EMs). Within investment-grade, an asset class that returned 440 basis points (bps) for the year, the biggest returns were within energy and metals and mining, where there has been significant deleveraging.
“Positioning within sectors is becoming more and more important, since the returns can vary greatly depending on where a sector is in the credit cycle.
“2016 was also a championship year for long credit and the asset class ended up with 904 bps of excess return in 2016. We believe investment-grade credit should offer attractive income in 2017, but we have trimmed the overweights across all spread products because the valuations are not as attractive as they were last year.
“US credit spreads appear attractive at long-term averages given our economic outlook.
“In high-yield, valuations are on the tighter side and we intend to have smaller overweights while remaining very thoughtful about positioning and quality ratings. There is a strong case to be made for high-yield, and we expect better earnings in 2017, particularly for energy companies. In addition, the prospects for corporate tax reform are straightforwardly positive.
“We believe the mortgage-backed bond sector continues to look attractive on a risk-adjusted basis. Consumer and housing fundamentals remain constructive, house prices are projected to grow at 2%–3% over the next 12 months and the pent-up demand for housing should be a positive.
“In EMs, valuations look attractive on a historical basis and relative to developed markets. While the possibility of protectionism and border taxes can be very difficult, the spread between EMs and developed market continues to be very near the wides that we saw in the financial crisis.
“Our EM balance sheet strength continues to be a pillar of support. We intend to remain very thoughtful about opportunities in the EM sector. We continue to like Russia, India, Brazil and Mexico,” he says.
In recent months, Legg Mason has expanded their local fund range to provide access to the global fixed income expertise of Western Asset through the launch of both the Legg Mason Western Asset Global Bond Fund and also the hugely successful Macro Opportunities strategy.
About Western Asset
Western Asset, with more than A$600 Billion in assets under management as at 30 September 2016 is one of the world’s leading fixed-income managers. 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. Western Asset’s long performance track record and global presence have positioned the company to continue its commitment to excellence in fixed-income investment management and client service.
About Legg Mason
Legg Mason is one of the world’s largest funds management groups, with a history that dates back to 1899. The firm is listed on the New York Stock Exchange and employs approximately 3,100 employees in 31 offices worldwide. One of Legg Mason’s most distinguishing characteristics is its global multi-affiliate model. Legg Mason provides a global platform and centralised business and distribution support for its nine affiliated fund managers that include: Brandywine, Clarion Partners, ClearBridge, EntrustPermal, Martin Currie, RARE (in addition to its own domestic distribution), Royce & Associates, QS Investors and Western Asset. Each affiliate operates independently under its own brand and investment process, and is considered an industry expert in its asset class. Legg Mason offers a diverse set of investment solutions across institutional, wealth management and direct investor channels, covering a range of asset classes including Australian equities, global equities, fixed income, real assets, income, alternatives, emerging markets, direct lending and multi-asset products.
Legg Mason Asset Management Australia Limited (ABN 76 004 835 849 AFSL 240827) (Legg Mason) is part of the global Legg Mason, Inc. group. Legg Mason is the issuer of the trusts named in this document (the “Trusts”). Product Disclosure Statements are available for the Trusts and can be obtained by contacting Legg Mason on 1800 679 541. The information in this article is of a general nature only and is not intended to be, and is not, a complete or definitive statement of the matters described in it. The information does not constitute specific investment advice and does not include recommendations on any particular securities. Investors should obtain professional advice and read the relevant trust’s Product Disclosure Statement before making any investment decision. Legg Mason Australia nor any of its related parties, guarantee the repayment of capital or performance of any of the Legg Mason trusts referred to in this article. Past performance is no indication of future performance.
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