Legg Mason Affiliates Offer Prescriptions For Sparking Global Economic Growth

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Feb 23, 2015, 09:00 ET

BALTIMORE, Feb. 23, 2015 /PRNewswire/ -- With the global economy sluggish and the inflation outlook subdued, many are wondering, "What will it take to jump-start global growth?"

Legg Mason posed this simple yet complicated question to chief investment managers and portfolio managers at its seven affiliates, hoping to provide insights for institutional and retail investors. Their answers covered a wide variety of markets and products, and made clear that there is no "magic bullet."

"Our investment affiliates are guided by independent investment philosophies and decision-making which means our clients have access to a wide range of market views and insights across asset classes and geographies," said Joe Sullivan, Chairman and CEO of Legg Mason.

"It is the breadth, depth and diversity of our investment expertise which, when combined with a common-sense application, brings out the best, most actionable investment ideas for our many clients."

Some of those insights include:

Brandywine Global

The single most bullish development for global growth is the collapse in energy costs, which is equivalent to a huge coordinated tax cut. It takes inflation worries off the table for central banks in countries like India, South Africa and Indonesia, allowing them to halt rate hikes or make growth-stimulative rate cuts. From reduced inflation worries and easier monetary policy, to the direct impact of putting more money in consumers' pockets, cheaper oil will have positive effects on growth.
Developed countries should restructure their public debt to take advantage of excess savings and low interest rates. Turning everything held by central banks into perpetual zero-coupon bonds would permit governments to leverage up all over again. As Larry Summers points out (repeatedly), imagine what the U.S. would look like if, every year for the next 10, $500 billion were allocated to infrastructure and modernization programs.

Clearbridge Investments

While fiscal policies could be helpful, serious structural reform of individual economies is necessary to promote sustainable growth. These include labor, workplace and regulatory reforms that can put capital to more productive uses. Spain, and to a lesser extent Japan, have seen initial momentum from aggressive structural reform agendas.
Commodity price declines have hurt producer nations, yet lower costs for oil, steel, copper, concrete and other inputs should be stimulative for consumer nations. This is especially true for developing and emerging economies, like India, that are major importers of raw materials for infrastructure and industrial development.

Martin Currie

Monetary policy continues to distort normal functioning of markets. Several investment categories benefit from being considered "bond proxies," while others pray for rising rates to help their fundamentals. Policy in this area is intrinsically political, and thus not necessarily logical. We do not buy companies that live or die by policy rate decisions.
Chinese growth appears to be slowing substantially, removing a rising tide that has lifted many boats. However, a slowing pace of infrastructure-related spending may leave room for growth in spending among "normal" consumers. While debt levels have grown substantially at the national level, large swathes of the population remain staunch savers.

Permal

There is not one global "problem," but many, exacerbated by increasing economic divergence and the China slowdown. Europe needs more than just quantitative easing, but large-scale fiscal and structural reforms in the large recalcitrant countries, namely France and Italy. While Spain shows progress, populism grows – a worrying development.
Some emerging market countries are well placed, such as Indonesia, India and the Philippines. Others, like Brazil, must aggressively fight inflation to resume healthy growth. Japan has gone all in, both monetarily and fiscally, but it is not enough – to succeed Japan requires structural reforms.
The U.S. economy has the right growth foundations in place, but requires fine tuning. Greater attention should be paid to household formation in the 22-to-35 age brackets and more pro-growth tax reform.

Royce

The U.S. economy shows ongoing strength, which is good for bottom-up, domestically-oriented investors. Strong GDP growth, improving employment numbers and higher levels of labor force participation are encouraging. U.S. capital markets are normalizing via the end of QE, rising rates for corporate debt and all-but-inevitable rate hikes by the U.S. Federal Reserve later this year.
While no "silver bullet" is likely to ignite global growth, developed nations embarking on similar fiscal policies are likely to follow the U.S.'s lead – and recover.

QS Investors

The U.S. shows a revival in corporate spending and robust job growth, primarily because the financial sector was recapitalized and household debt fell to its lowest point relative to incomes in over a decade, due to rock bottom interest rates. The actions taken by the U.S. should serve as a rough blueprint for the rest of the world.
Europe and Japan have adopted this approach in varying degrees – and had varying success. China has taken a slightly different route, using infrastructure investments to jump start their economy, and may need to rethink their approach. Each country should work harder to spur consumer demand. Japan and Europe are weakening their currencies to "borrow" U.S. demand, but eventually they will have to restart their engines of domestic demand.
Governments will have to resist the urge to tighten fiscal policy too soon. Worrying about deleveraging government balance sheets is a red herring. Given enough growth, debt burdens should mitigate gradually. Most developed economies have taken on significant debt, to ensure that their private sectors and consumers can deleverage.

Western Asset

Business expansion in the U.S. is unlikely to improve until regulatory burdens are restrained. U.S. corporations are liquid and generally in very good financial shape, yet reluctant to meaningfully expand capital spending. Restrained output is a factor, but many companies are holding back due to concerns about increased health care costs in the face of national health care insurance, increased liabilities to consumer protection enforcement and increases in other regulatory burdens. More regulation and intensified enforcement of capital requirements have turned most banks from risk-taking lenders to hidebound "financial utilities."
Formal international agreements to liberalize trade and standardize property rights to physical and intellectual assets are crucial. Foreign trade is especially important to expediting growth, for any country, yet natural inclinations toward protectionism are as prevalent as ever. Multilateral agreements on merchandise trade are proceeding reasonably, but increasingly service-oriented economies – like the U.S. – need greater standardization and recognition of IP rights globally to enjoy their full growth potential.

About Legg Mason
Legg Mason is a global asset management firm with $706 billion in assets under management as of January 31, 2014. The Company provides active asset management in many major investment centers throughout the world. Legg Mason is headquartered in Baltimore, Maryland, and its common stock is listed on the New York Stock Exchange (symbol: LM).

All investments involve risk, including loss of principal. Past performance is no guarantee of future results.

The views expressed are those of Legg Mason's affiliates and are subject to change based on market and other conditions. These views are not intended to be forecasts of future events, a guarantee of future results, or investment advice.

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SOURCE Legg Mason, Inc.