Market Commentary - ホーム • ウエスタン・アセット

KEN LEECH
Market Commentary
NOVEMBER 2014
Little by little does the trick. ~Aesop
Our diversified strategies have performed well in 2014 and we believe they are likely to be appropriate in
2015. Global crosscurrents have cut into spread products even as the economic storylines remain favorable.
Global inflation is shifting downward and the US dollar is gaining, which is producing a favorable backdrop
for US Treasuries (USTs). So, as the US economy continues to improve, even as the Federal Reserve (Fed)
inches off its zero-rate policy, we believe combining spread products with the opportunistic use of duration
remains compelling.
The US economy continues to grow solidly if unspectacularly, while global growth and inflation have downshifted. In the US, the debate centers on the timing and pace for rate increases by the Fed, while in Europe
and Japan, monetary policy is slated to become much more expansionary. The sharp decline in commodity
prices, particularly oil, presents meaningful challenges for many emerging markets. But for the developed
world, the decline in energy prices should provide a boost to growth.
The global crosscurrents complicate what appears to be a pretty sunny US environment. Indeed, the S&P 500
has hit all-time highs. For fixed-income investors, US spread products have not followed suit. Yield spreads
have widened moderately since late June, and are now roughly back to where they started the year.
Exhibit 1
Sector Spreads: Normalized
130
Non-Agency MBS*
120
MBS
110
100
90
HY Credit
IG Credit
80
70
60
Dec 13
Jan 14
Feb 14
Mar 14 Apr 14 May 14 Jun 14
Beginning of the Year Levels
Non-Agency MBS*
MBS
IG Credit
HY Credit
Jul 14
Aug 14 Sep 14
Oct 14
Nov 14
104.0
55.4
112.3
428.4
Source: Barclays, Bank of America Merrill Lynch. As of 13 Nov 14
*NAMBS uses the (BAML R0FH Index) YTW over government yield at a point on the fair value curve equal to the workout date. For the other indicies we use the Zero
Volatility Spread on the Barclay's MBS, IG Credit, and HY Credit 2% Issuer Capped indicies.
© Western Asset Management Company 2014. This publication is the property of Western Asset Management Company and is intended for the sole use of its clients, consultants, and other intended
recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or
medium without express written permission.
Market Commentary
For investors in spread products, the benefits for higher yields must be weighed against the challenges of
adverse economic events. A constructive investment environment needs elements of attractive valuations,
economic growth and supportive liquidity conditions. Liquidity conditions rely on supportive Fed policy,
which in turn, relies on benign inflation trends. Our view is that the US now enjoys all three elements. Valuations are attractive as spreads remain somewhat elevated. The US economy should continue to grow at a
moderate pace. The Fed, while moving away from the emergency policy engendered by the crisis, intends
only to inch the funds rate slowly above zero, a process not expected to begin until the middle of next year.
The combination of all these factors strongly suggests spread sectors should outperform USTs.
The risk to this outlook can come from one of two directions, and one important reason for today’s elevated
spreads is that both are at play. Stronger economic growth, which is traditionally beneficial for spreads sectors, may accelerate the path of Fed interest rate increases. Weaker economic growth, perhaps caused by
a more pronounced global downturn, might undermine the recovery picture and cause spread sectors to
widen sharply.
The risk from stronger growth was seen in the summer of 2013 as investors learned how challenging a market
of both higher interest rates and wider spreads can be. If the pace of the US economy were to accelerate
alongside a labor market that shows definitive signs of healing (as it has already), the Fed might move to
normalize rates more quickly. This has been the risk investors have focused on for most of this year, keeping
durations short to avoid such adverse consequences. Our view is that this is a risk worth running for two
reasons. The first and most important is that better growth, while it might bring a Fed-induced widening in
the short run, is ultimately not bad for the fundamentals of spread products. Better growth brings declining
default rates and higher real asset prices, particularly in housing. A short-term mark-to-market risk should give
way to improving fundamentals. Indeed we saw this in the late summer of 2013—after the initial widening
of spreads, the market stabilized and subsequently improved.
The second reason is tied to our expectation that the economy and inflation are unlikely to accelerate meaningfully. We have been steadfast in our contention that the path of the US and global recovery would be a long
one. We continue to expect the US economy to maintain a roughly 2%–2.5% growth pace. More important,
in our view, is the substantial change in the projected path of inflation. Considering how subdued inflation
has already been during the post-crisis recovery, the downshift in global growth and the sharp decline in
commodity prices suggest an even weaker global inflation picture. (Exhibit 2)
Annual Percent Changes
World Inflation: Average Consumer Prices*
45
40
35
30
25
20
15
10
5
0
1980 1985 1990 1995 2000 2005 2010 2015
Year-Over-Year % Change
Exhibit 2
China CPI
Percent
Percent
China Inflation
2012
2013
2014
Source: Bloomberg. As of 31 Oct 14
Western Asset
US Inflation
CPI
2012
2013
2014
Source: Bloomberg. As of 30 Sep 14
Source: IMF. As of 31 Oct 14 *Forecast
7
6
5
4
3
2
1
0
2011
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2011
European Inflation
3.5
3.0
2.5
2.0
EU Headline Inflation
1.5
1.0
0.5
0.0
2011
2012
2013
2014
Source: Eurostat and Bloomberg. As of 31 Oct 14
2
November 2014
Market Commentary
Exhibit 2 shows the trend in global inflation, as well as a breakout of trends in the US, Europe and China. The
recent declines in energy and other commodity prices should feed through with a lag, further accentuating
the declining trends. In Europe, the European Central Bank (ECB) is wrestling with inflation dropping toward
zero. Chinese inflation declined from over 6.5% to under 2%. The US is not immune. A stronger dollar also
acts as a strong disinflationary force. Early estimates for 2015 CPI are in the 1% zone.
Over long periods of time, the story of interest rates is simply the story of inflation. We have felt inflation
would be slow to return to normal levels in this subpar recovery. Recent developments suggest this timeframe
may be even longer, keeping global sovereign bond rates, including USTs, near recent lows. In the absence
of inflationary pressure, our view is that a dovish Fed will be very restrained. We still expect them to move
the fed funds rate above zero, ending this “emergency” policy rate. But we think it is unlikely they will move
faster than the path embedded in the forward UST yield curve.
The bigger risk, in terms of its consequences, would be a downturn in growth. The global recovery continues
to be fragile. In early October, investors got a whiff of how quickly the risk-off scenario can return. Fears of
slowing growth in both Europe and China led to a rout in risk assets. For spread sector investors, this is the
risk that must be examined most acutely. Presently, the greatest source of concern emanates from Europe
where much weaker growth has been combined with a swift deterioration in the Russia/Ukraine conflict.
Additionally, the softness in commodity prices suggests the meaningful prospect that global demand may
be weakening. The previously noted downward inflation trends are a serious concern. As Alan Greenspan
once famously said, ”the US cannot continue to be an island of prosperity.” If the global growth backdrop
becomes sufficiently challenging, US risk assets will suffer.
We think investors must be exceptionally attentive to monitoring global risks. But we also think there are
meaningful reasons for optimism, and that the tail risks embodied in a global downturn are unlikely to be
realized. The global economy has moved a long way since the crisis. While the recovery has only been one
of moderate growth, it is still nearly six years old, and the systemic risks have been severely reduced. In addition, monetary policy continues to be very accommodative. The Fed, while moving away from emergency
stimulus and eventually raising rates above zero, will still retain an accommodative posture. The ECB, the Bank
of Japan, and to a lesser extent, the People’s Bank of China will be moving toward greater monetary accommodation. Lower oil prices also act to stimulate global growth. Some estimates suggest an improvement of
as much as 0.5%. The low interest rate backdrop is also favorable. Interest rates have declined meaningfully
around the globe. These factors could form the base for a more positive growth backdrop next year. But
at a minimum, they should support the modest pace of global growth we have seen over the last several
years. If this view proves correct, the fears of tail risk scenarios brought about by a steeper decline in global
growth should go unrealized.
Our base case is that the US recovery will retain its moderate pace though 2015. We believe the Fed will
inch the policy rate above zero but remain in a very accommodative mode. With the extensive monetary
accommodation and low international interest rate backdrop, US yields are unlikely to rise substantially.
More importantly, the risk case of a shortfall in global growth in such a low inflation context could lead
to further rallies in the sovereign bond markets of the US and other developed countries. We continue to
lean on the benefits of opportunistically using additional US duration in conjunction with spread assets to
provide crucial portfolio ballast.
Diversified strategies are important because forecast errors abound, particularly given the global crosscurrents we currently face. When the base case falls short, strategies that can provide returns and bolster the
downside risk are crucial. This year was another constructive example as spread sectors, against a backdrop
of favorable valuation, growth, inflation and monetary policy, still widened. The heavy lifting for portfolio
Western Asset
3
November 2014
Market Commentary
returns had to come from the macro contributions of duration and yield-curve management, in conjunction
with the bottom-up contributions of security selection and subsector positioning.
We expect the same approach to be beneficial in 2015. Spread sector valuations are attractive, US growth is
solid, inflation is subdued and monetary policy is accommodative. Although the global backdrop will need
to be constantly monitored for further weakness, the seeds for better growth—given a favorable policy
backdrop and lower energy prices—are being sown. Importantly, low if not falling inflation provides for the
continuation of broad-based global accommodative monetary policy.
Past results are not indicative of future investment results. Investments are not guaranteed and you may lose money. This publication is for informational purposes only and reflects the current
opinions of Western Asset Management. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with
respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western
Asset Management may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on
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regulations of your country of residence. Potential investors in emerging markets should be aware that investment in these markets can involve a higher degree of risk. Any forecast, projection or
target is there to provide you with an indication only and is not guaranteed in any way.
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Western Asset
4
November 2014
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