The Big Picture: Matching willpower with firepower
A current look-in at the amount designated, allowed, and spent by the key US authorities combating the economic and financial fallout of COVID-19, paints interesting observations.
Of the total USD 11.6 Trillion set aside, about 43% has been committed or disbursed. That leaves under 57% of intended support left untouched, a seemingly healthy buffer.
Chart 1: An updated view of pledged and utilized government support (USD Trillion)
Chart 1 source: Committee for a Responsible Federal Budget. Data as of 21 September 2020.
A deeper dive, however, reveals that the Fed’s initial direct asset support that played a key role in stabilizing asset prices since market lows in late-March 2020, is close to being exhausted. That said, the Fed still has over USD 737 billion in dry powder in its Corporate Credit Facilities magazine.
Chart 2: Original bonds support has dried up, but a large cushion remains (USD Billion)
Chart 2 source: Committee for a Responsible Federal Budget. Data as of 21 September 2020.
Chart 3: The liquidity war chest is barely touched (USD Trillion)
Chart 3 source: Committee for a Responsible Federal Budget. Data as of 21 September 2020.
The vast amount of resources is enabling the Fed to keep stimulating the economy in hopes to produce inflation past 2% and that implies lower rates for a longer period. There is no doubt that the Fed has brought back some confidence that was badly drained towards the end of Q1 2020.
Zeroing in: Re-examining US Investment Grade
Within US bonds, there is perhaps no other area where market confidence is clear. US Investment Grade bonds were designated as early recipients of Government support and the asset class found its feet quickly rising 6.7% year to date as of the end of August 2020*. What was supposed to be a dismal year for corporates got a shot in the arm. Most were winners except sectors hit hard by COVID-19, Leisure and Airlines.
Chart 4: Gains were (mostly) across the board (%)
Chart 4 source: Bloomberg, *Bloomberg Barclays US Credit Total Return Value Unhedged. Returns in USD. Data as of 31 August 2020.
Against the background of such sizable gains, investors have begun to ask if the US investment Grade asset class is overbought. Valuations are less attractive than in the recent past as spreads have meaningfully recovered from crisis levels. In addition, the weight of a spreading virus, a weak global economy, and an upcoming US general election could produce volatility ahead.
However, the technical backdrop remains positive with the pace of new-issue supply in the second half of the year expected to decelerate as most firms have already liquefied their balance sheets. That said, the low-yield environment is incentivizing borrowers to conduct liability management exercises whereby they issuer longer-dated debt to tender for high-coupon shorter maturity issues. Against that, demand is expected to remain robust.
The bottom line
Credit fundamentals will undoubtedly be challenged as we head into the fourth quarter of this year. However, the US Investment Grade asset class has historically provided investors with stable income amid lower default risks and is thus an important component of a well-diversified portfolio.
To gain exposure in these uncertain times, instead of buying an index fund where poorly performing sectors can negate outperforming sectors, Specialised Investment Managers with market access, sector know-how and a dedicated team could possibly enhance the risk-return profile of this important area of your portfolio.
Source: Franklin Templeton, Western Asset. Data as of 31 August 2020 unless otherwise stated.
Legg Mason Asset Management Hong Kong Limited and Legg Mason Asset Management Singapore Pte. Limited are indirect wholly owned subsidiaries of Franklin Resources, Inc.
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 Franklin Resources, Inc, its affiliates (collectively “Franklin Templeton”) 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, or a 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 and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Franklin Resources, Inc, its affiliates (collectively “Franklin Templeton”) 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 Franklin Resources, Inc, its affiliates (collectively “Franklin Templeton”) or any of their officer or employee of Franklin Templeton 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 Franklin Templeton. 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 Franklin Templeton. Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.
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 the Securities and Futures Commission in Hong Kong. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
Intended recipients in the People’s Republic of China ("PRC"):This material is provided by Legg Mason Asset Management Hong Kong Limited (Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for 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. Legg Mason Asset Management Hong Kong is not authorised 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:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea.
This material has not been reviewed by any regulatory authority in Korea.
Distributors in Macau:
If this document is distributed in Macau, this may not be used other than by the Distributors.
This document has not been reviewed by the Monetary Authority of Macao in Macau.
Issuer: Legg Mason Asset Management Hong Kong Limited.