Western Asset Management, the leading global fixed income manager wholly owned by Legg Mason, Inc., said it is difficult to forecast when the current process of deleveraging will end or when liquidity will return to the marketplace, but policymakers in most countries seem determined to avoid erring on the side of doing too little.
“We are currently assigning a high probability to policymakers’ success, not in restoring growth, but simply in ending the vicious cycle and restoring some semblance of equilibrium. We believe the combination of monetary and fiscal stimulus that is just being enacted will be sufficient to end the state of disequilibrium that has persisted for a year and a half. Once liquidity returns to the marketplace, pricing of risky asset classes should stabilise,” said Mike Zelouf, product specialist at Western Asset.
However, the global fixed income manager does not expect underlying economic conditions to be rosy for quite some time.
“Policymakers may be empowered to end the vicious cycle but they cannot provide a sustainable engine of growth. It will be difficult for the U.S. to identify a growth engine that can propel the economy forward in the next few years. It will be equally difficult for the Germany and Japan economies, which have relied too heavily on export-led growth in the past, to shift away from external absorption towards domestic absorption,” Mr. Zelouf added.
In terms of opportunities in the fixed income space, Western Asset believes that both investment-grade and high-yield corporate bonds, as well as securitised debt, should perform particularly well, especially in the financial subsector in Europe that was less exposed to asset price bubbles. Mortgage-backed securities also continue to look attractive given their central role in the Fed’s reflationary strategy.
“Credit spreads are not likely to enjoy as sharp a reversal as they have when past financial crises came to an end. A tremendous amount of dynamic efficiency has been sacrificed and earnings growth may not recover for some time. Nevertheless, we believe there is a profitable opportunity for investors with time on their side. The market has priced in a debt-deflationary cycle for years to come, and anything less catastrophic would be positive for investors with a bias away from risk-free government debt,” Mr. Zelouf said in conclusion.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Investment Asia. The author was not remunerated for this article.
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