Harnessing Growth in 2018
Harnessing Growth in 2018
Growth in 2018

 

Forecasts for growth in 2018 are positive, but many valuations in equities and bonds appear elevated. Still, Legg Mason’s managers see potential to uncover value by taking a selective approach to global markets.

 

For the first time since 2011, all major economies are expanding. However, the pace of that growth should remain moderate, constrained by high levels of debt. Western Asset notes debt has expanded dramatically since the financial crisis, fueled by low rates.

While major central banks are beginning to pull back from their ultra-accommodative stances, our managers believe that they are likely to continue with a cautious approach in 2018, recognizing that the pace of growth will be less-than-torrid — and therefore helping to moderate the impact of rate hikes on the markets.

The question, of course, is how much future growth is already priced into stock and bond prices.  The relatively muted sentiment our managers see relative to stocks now suggests that the markets could have additional room to run, assuming that earnings growth keeps pace.  But with that less than certain, the flexibility and selectivity of active strategies will allow investors to target sectors and securities whose prices may not reflect their true potential value. 

 


2018 Valuations

"Across asset classes…valuations have been grinding higher: nothing is cheap"

— EnTrustPermal          

 

  • U.S. large caps: As represented by the S&P 500, large cap stocks are trading at price-to-earnings ratios (P/Es) of nearly 22x trailing 12-month earnings[1] and over 19x estimated next years’ earnings. While this is not unprecedented, it is on the high side of normal, and dependent on continued earnings growth.  That calls for a selective approach to finding unrealized value. One way is to focus on sectors rich in targets for mergers and acquisitions activity, which historically picks up late in a market cycle, and is still supported by low borrowing costs. ClearBridge Investments notes: “Several sectors are well positioned to benefit from consolidation, including healthcare, where biotechnology stocks offer innovation and growth potential in their pipelines that is attractive to would-be acquirers in the large cap pharmaceutical space. Valuable assets exist in the energy and media sectors that could jump-start activity, while the potential cash windfall from repatriation could also drive deals in technology.  In energy, the firm sees opportunity in “U.S. exploration and production companies that have driven down the cost of extraction”, with the ability to weather current oversupply that it sees as moving to an undersupply by 2019 or 2020.
  • U.S. small caps: Royce sees value in cyclical industries, where valuations (P/E) are only 18.5x — vs 26.9x for defensive industries. Strong performance by small-cap Industrials and Materials in Q3 2017 could signal a more widespread shift in the market. More broadly, they state: Global economic expansion should mean good things for cyclicals with global exposure.” 
  • International stocks: U.S. equity prices are already elevated, after an average 13.5% annual gain for the S&P 500 since the end of 2009. In contrast, international stocks (MSCI EAFE) and emerging markets (MSCI EM) have returned 6.4% and 4.0% respectively over the same period (with P/Es of 19x and 16x respectively), making global markets outside of the U.S. look more attractive. According to Martin Currie:  “Europe, Japan and select emerging markets have more attractive valuations and are at an earlier point in their economic cycle….emerging markets in particular are benefiting from strong growth in infrastructure, ‘plain vanilla’ banking services, e-commerce, entertainment and convenience”.  ClearBridge also sees selected opportunities in developed-market stocks ex-US.

 


Growth in 2018


  Outlook 2018:
  New Year's reSolutions


    •  Harnessing Growth

    •  Generating Income

    •  Managing Risk


Equities outside the U.S. — room to run in 2018?

S&P500, MSCI EAFE, MSCI Emerging Market (January 2008–November 2017)
 

International Equities in 2018


Source: Bloomberg, December 1, 2017. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment

 

  • Bond credit sectors:  Western Asset’s current expectation is that spread sectors should outperform Treasuries and sovereign bonds. For investment-grade and high yield, its focus is careful name and industry selection, given that spreads are already compressed; in investment-grade, it prefers “rising stars” — lower-rated issuers that are working to reduce debt and improve cash flow, moving toward greater creditworthiness.  Agency mortgage securities also may offer a source of return with somewhat reduced volatility.
  • Emerging markets debt: Both Western Asset and Brandywine Global see this asset as a superior opportunity for return — in particular, debt denominated in local currencies in countries like Brazil and Russia that have high real interest rates, falling inflation and improving growth. According to Western: “Emerging market valuations also look attractive both on a historical basis and relative to developed markets, particularly given a better global recovery, lower risks in China and commodity stabilization.”

 

 

2018 Annual Outlook

After solid gains this year, investors are asking how long the momentum can continue -- and where to seek opportunity in 2018.
 

Read More  ➜

Generating income in 2018

Investors seeking to generate meaningful income next year should consider a  diverse set of strategies.
 

Read More  ➜

Managing Risk in 2018

As inflation continues to take root, can active strategies help investors protect their portfolios from downside risk?
 

Read More  ➜

Important Information:

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 in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland.

Issued and approved 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 Financial Conduct Authority. Client Services +44 (0)207 070 7444.

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.

© 2016 Legg Mason Investor Services, LLC, member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc.

 

All investments involve risk, including loss of principal. Past performance is no guarantee of future results. Please see each product’s webpage for specific details regarding investment objective, risks associated with hedge funds, alternative investments and other risks, performance and other important information. Review this information carefully before you make any investment decision.