Our thought now is that the optimism for US growth is a bit overdone and pessimism around lethargic global growth rates has swung too far to the downside. Summary of a Webcast, October 25, 2018.
Our thought now is that the optimism for US growth is a bit overdone and pessimism around lethargic global growth rates has swung too far to the downside. As such, we expect a slight pullback in US growth and an uptick for the global economic expansion.
We view central bank policy as a linchpin keeping the recovery on track and we expect central bankers to continue to move cautiously and adjust policy as needed, based on market realities and not on static models. Our hope is for clear communication and minimal uncertainty as unexpected monetary policy moves will undoubtedly lead to even greater volatility.
The biggest threat to the ongoing recovery is the persistent air of protectionism as illustrated by the tough trade talk and escalating tariffs; they have the potential to create a further drag to growth. Given these challenges, we continue to have an optimistic view of emerging markets (EM)—while mindful of continued high volatility.
- US interest rates remained attractive by all historical standards and relative to all other developed markets.
- The US spread sectors have generally held up over the first half of 2018 while the rest of the world has been more challenged.
- Weakness outside of the US led to widespread negative returns, with EM underperforming significantly.
- Trade policy has been the most substantial threat to the global recovery, as we have not had an era of protectionism in the last 30 years.
US Economic Outlook
- We expect US growth to slow slightly next year with inflation remaining moderate.
- While we think wage pressure will continue to be benign, the housing market may be reaching a peak.
Global Economic Outlook
- Slowing money growth suggests low global inflation; we expect that global growth and inflation will moderate.
- Global monetary policy will continue to play a major role in the recovery, and must be carried out carefully. We expect more volatility like we saw this year should central banks misjudge the market or mishandle communica- tion regarding policy moves.
- Europe: European growth, despite massive pessimism about the challenges of Brexit and Italy, has actually been sturdy and we expect that to continue. Going forward, we expect a European growth rate between 1.5% and 2.0%.
- Japan: Japan’s current fiscal and monetary policy mix supports moderate growth.
- We think the “divergence trade,” whereby the US is moving in an opposite direction from non-US issues, will abate.
- High-yield: The high-yield default rate is declining sharply. Our focus is on BB bonds with “rising star” status that have the potential to be upgraded to investment-grade. within a short period of time; we are paying close attention to issue selection.
- Investment-grade: The growth of BBB bonds has been incredible with BBBs now comprising 45% of the credit index ($2.7 trillion). We are optimistic about metals and mining, sub-banking, energy and US credit issues.
- EM: EM inflation remains remarkably subdued; EM valuations look attractive both on a historical basis and relative to developed markets.
- The new US-Mexico-Canada Agreement (USMCA) deal is a big positive for Mexico, and while we've become marginally less optimistic because of the improvement in prices, we remain optimistic about the total return potential in Mexico.
- Our view is that in a very low inflation environment where inflation is contained and moving up very slowly if at all, higher short-term rates are actually going to lead to flatter yield curves.
- Our baseline scenario is for a soft Brexit deal but we think there are a lot of related risks, and that the market’s pessimism is misplaced regarding Italy falling off a cliff or Brexit causing some meaningful implosion in Europe.
- Global debt is very detrimental to the long-term growth outlook and eventually the fiscal easing we’ve seen lately may be replaced by some type of fiscal tightening that would bring the growth rate down.
Accommodative No Longer?
EM Valuations and Fundamentals
Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.
All investments involve risk, including possible loss of principal.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.
Equity securities are subject to price fluctuation and possible loss of principal. 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.
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.
Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.
Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.
The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).
This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.
This material is only for distribution in those countries and to those recipients listed.
All investors and eligible counterparties in EU and EEA countries:
In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office Floor 6, Building Three, Number One, Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4. D04 EP27, Ireland. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.
In the UK, this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the UK Financial Conduct Authority.
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.
Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.
All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.
This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.
All Investors in the People’s Republic of China (“PRC”):
This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.
This material has not been reviewed by any regulatory authority in the PRC.
Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.
This material has not been reviewed by any regulatory authority in Korea or Taiwan.
All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.
All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.