Brandywine Global Considers Energy Cost Declines A Broad Blessing For Worldwide Economies

PHILADELPHIA, Feb. 12, 2015 /PRNewswire/ -- The global collapse of energy prices has analysts everywhere grasping for answers. No one is certain why prices fell so quickly – despite the myriad theories postulated – so it can be difficult to authoritatively predict future movements.

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The Global Fixed Income team at Brandywine Global, an affiliate of Legg Mason, believes there are real benefits to the current situation – which well-positioned investors can exploit.

"The collapse in energy costs is equivalent to a huge, globally coordinated tax cut," said Francis A. Scotland, Co-Director of Global Macro Research. "The size of that tax cut for the upcoming year is difficult to estimate because it depends on the outlook for energy prices, but $400 billion to $500 billion would be a reasonable estimate, with roughly $125 billion accruing to U.S. consumers. That's a lot of stimulus to add, suddenly and unexpectedly."

Many of the benefits will fall on emerging market (EM) countries, in Brandywine Global's view.

"The decrease in energy costs 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," Mr. Scotland explained. "For instance, the Indian rupee and Indian equities rallied alongside the January 2015 Reserve Bank of India rate cut, which demonstrates that the markets think the RBI should be cutting and that inflation isn't an issue."

"That many EMs will start or accelerate rate cut cycles in 2015 is a main pillar of the call many market analysts – including ours – have issued for better global growth. During the 2013 'Taper Tantrum,' when the U.S. economy started to show cyclical rebounding and longer-term rates increased from very low levels, many EM countries were forced to protect their currencies by raising rates. These rate increases, however, pushed many EMs into recession. With EMs cutting in 2015, the stimulative effects of easier monetary policy and the attendant consumer sentiment change may be enough to tip the global economy toward a sustainable lift-off speed."

"Cheaper oil also gives political cover for large energy subsidizers — again, India or Indonesia are good examples — to trim or cut those subsidies, which both countries are doing. Cutting subsidies promotes future macro stability through efficient energy usage, budget stability and better resource allocation more broadly."

The Brandywine Global team also considers it instructive to take a China-centric view.

"China is one of the most important vectors of potential systemic risk in the global economy today," Mr. Scotland said. "Many investors fear that a mix of high debt and supply overcapacity may drag China into a hard-landing, which would create a deflationary bust felt worldwide. Obviously a major decline in the cost of energy is an extremely constructive and timely development for sustaining non-inflationary growth and bolstering domestic demand."

From reduced inflation worries and easier monetary policy, to the direct impact of putting money in consumers' pockets, Brandywine Global believes cheaper oil will have positive effects on growth.

"One criticism of the global rebound from 2008 has been that economic growth is lopsided and, hence, less robust and sustainable," Mr. Scotland said. "By nature of the fantastic recent capital gains earned by owners of financial assets and high-end property, the economic rebound has primarily benefited higher income and wealth brackets. A decrease in the price of energy bolsters real incomes at the lower end of the income curve."

About Francis A. Scotland

Since joining Brandywine Global in 2006, as Co-Director of Global Macro Research, Francis Scotland has developed a proprietary global macroeconomic research structure to support the fixed-income group's investment process. In addition to his extensive contribution to the global macro strategy, he provides investment ideas and strategic asset allocation recommendations for the firm's global fixed income and hedge fund products. Prior to joining Brandywine Global, from 1984 until 2005 Mr. Scotland was a principal of the BCA Research Group and head of global investment strategy. He also spent several years in the policy departments of the Bank of Canada in the early 1980s, working in monetary, economic and financial analysis. Mr. Scotland has a Master's degree in Economics from the University of Western Ontario in London, Canada, and an Honors B.A. in Economics from Queen's University in Kingston, Canada.

About Brandywine Global

Founded in 1986, Brandywine Global Investment Management offers a broad array of fixed income, equity, and balanced strategies that invest across global markets. As of 12/31/2014, Brandywine Global manages $63 billion in assets. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM), and is headquartered in Philadelphia with an office in San Francisco. Brandywine Global also operates two affiliated companies with offices in Singapore¹ and London².

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).

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