Near-Term Economic Forecast Maintains Current Momentum

PASADENA, Calif., March 20, 2015 /PRNewswire/ -- Steady forward momentum and a lack of inflationary pressure are keeping a lid on volatility in US markets, according to noted financial experts at a recent advisor forum sponsored by Legg Mason. Discussing "The Seeds of Volatility: Recognizing Risk in the Global Economy Now," panelists from some of the nation's top asset management firms offered their analysis of why markets remain stable, and what to watch for in the future.

John Bellows, portfolio manager and research analyst at Western Asset (and former acting assistant secretary for economic policy at the U.S. Department of the Treasury), began the discussion by reminding the audience just how unusual current market conditions are. "Over the last year, we've seen many central banks take short rates negative, and we've seen long-term bond yields trade negative out to 10 years, so whatever your model was previously, you need to throw it away and do a new one," he said.

The unprecedented nature of the market makes the future hard to predict. "There's an interesting debate about whether Fed members will raise rates in June or September; we're in the latter camp, because monetary policy has been driving risk sentiment, and it seems likely they're going to be cautious going forward," Bellows said. The bottom line: "We believe the Fed's primary thrust will probably be accommodation, which we think is going to have the intended effect, with stocks up and bond yields under control," he said, thus limiting volatility.

Fellow panelist Rosemary Macedo, chief investment officer of QS Investors, cautioned that low volatility should not breed complacency. "The good news is that, as long as volatility is low, we can pay more attention to how investors are pricing risk," she said. "And low volatility on its own isn't a danger sign. But it should make us wary of investors becoming too comfortable and overpaying for growth."

Finding that sweet spot, Bellows affirmed, is a primary focus of the analysts at Western Asset. "Growth is the primary risk we're tracking," he said. "We want to be vigilant in the event that global growth takes a sharp downturn,"—an outcome he sees as unlikely. "We are using spread sectors (corporate bonds, emerging market bonds) in an effort to capture the global risk premium, but we're optimistic about the recovery," he said. Bellows and his team think there is potential for monetary policy to raise inflation (which is currently too low around the globe), as well as continued momentum in the economy to bring real GDP growth up. As a result, he said, "We are not taking a defensive stance right now." Among Western Asset's current positions: staying short on the euro and yen and long on a number of emerging market currencies.

In today's economic environment, Macedo said, QS Investors' emphasis vis-a-vis asset allocation is in line with the conventional wisdom: "We are looking for momentum, for earnings growth and estimate revisions," she said. "We are also paying attention to economic indicators, to the extent they hold up. And we are underweight commodities, overweight high-yield debt and overweight Asia and America versus Europe." In addition, Macedo noted she has been fielding questions about minimum or low volatility equities, or a combination of low volatility with high-dividend yield. "A number of people have been wondering, 'Are they too popular for their own good? Is it too crowded to trade? Are valuations too high for these strategies right now?' At QS, our answer is 'no.'"

Panel moderator Consuelo Mack, executive producer and managing editor of Consuelo Mack WealthTrack, asked Macedo to share insights into QS' shift from cap-weighted indexes to smart beta strategies like diversification-based investing. "It's a system of balancing out risks by tracking the extent to which different segments of the market are moving together—or away from each other," Macedo said. "The net result is that we have the potential to engineer the equity portion of our portfolios to have lower risk, lower beta and still give us some growth, which we think gives us more possibilities in our asset allocation."

About Western Asset
Western Asset Management is one of the world's leading fixed-income managers with $466 billion in assets under management as of December 31, 2014. The firm is a wholly owned, independently operated subsidiary of Legg Mason, Inc. (NYSE: LM)  From offices in Pasadena, Hong Kong, London, Melbourne, New York, Sao Paulo, Singapore, Tokyo and Dubai, the company provides investment services for a wide variety of global clients, across an equally wide variety of mandates.  To learn more about Western Asset, visit their web site at www.westernasset.com. 

About QS Investors
QS Investors creates innovative solutions within a quantitative framework. The firm takes a consultative approach to global asset management, and applies complementary behavioral and fundamental market insights to manage portfolios with a repeatable, risk-aware process.  QS Investors managed $13.6 billion in AUM as of December 31, 2014.  To learn more about QS Investors, visit their web site at www.qsinvestors.com.

About Legg Mason
Legg Mason is a global asset management firm with $711.0 billion in assets under management as of February 28, 2015. 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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