U.S. Economic Growth Moderate Yet Steady As Global Growth And Inflation Downshift

PASADENA, Calif., Nov. 20, 2014 /PRNewswire/ -- In a Market Commentary issued by Western Asset Management, a Legg Mason Affiliate, Chief Investment Officer Ken Leech expects continued U.S. economic growth that will be solid if unspectacular; struggles and deflationary pressures for Europe and Asia; and emerging markets challenged by falling commodity prices, particularly oil.

That global economic outlook – along with a strengthening dollar, continued prospects for accommodative U.S. Federal Reserve policies and the S&P 500 having reached all-time highs – have combined to create a favorable environment for investors in fixed-income spread products.

"We believe combining spread products with the opportunistic use of duration remains compelling," Mr. Leech advises.

The market commentary can be found in Western Asset's research center at http://www.westernasset.com/us/en/research/whitepapers.cfm.  

Mr. Leech and the Western Asset team have been steadfast in their contention that the path of the U.S. and global recovery would be a long one.  Thus the firm's diversified investment strategies have performed well in 2014.  Mr. Leech believes they are likely to continue to be appropriate in 2015, as the U.S. recovery retains its moderate pace of roughly 2-2.5 percent growth.

"A constructive investment environment needs elements of attractive valuations, economic growth and supportive liquidity conditions," Mr. Leech writes.  "Our view is that the U.S. now enjoys all three elements."

"Valuations are attractive as spreads remain somewhat elevated.  The U.S. 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 U.S. Treasuries."

As for the international outlook, Mr. Leech writes, "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.  Monetary policy continues to be very accommodative ... Some estimates suggest an improvement of as much as 0.5 percent."

Other key points made in the Market Commentary include: 

• U.S. spread products have not kept pace with equities.  Yield spreads have widened moderately since late June, and are now roughly back to where they started the year.

• Western Asset continues to lean on the benefits of opportunistically using additional U.S. duration in conjunction with spread assets to provide crucial portfolio ballast.

• Global crosscurrents have cut into spread products even as the economic storylines remain favorable.

• Global inflation is shifting downward and the U.S. dollar is gaining, which is producing a favorable backdrop for U.S. Treasuries.

• For the developed world, the decline in energy prices should provide a boost to growth.

• The low interest rate backdrop is favorable: rates have declined meaningfully worldwide.  These factors could form the base for a more positive growth backdrop next year.

• Mr. Leech believes the risk to the Western Asset 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.

About Kenneth Leech

As Chief Investment Officer, Ken Leech oversees the firm's interest rate strategy and leads the long duration effort.  He joined Western Asset Management in 1990.  In 1998, he was named CIO and spearheaded the performance and product development efforts that helped underpin Western Asset's global growth and success. After taking medical leave for much of 2008, Mr. Leech resumed investment duties in early 2009 and was named chairman of the global strategy committee. In this position, he directed global portfolio management and the macro-strategy alternative efforts.  In 2013 he became Co-CIO as part of the transition process, before fully resuming the CIO role in April 2014.

From 2002 to 2004, Mr. Leech served as a member of the U.S. Department of Treasury's Borrowing Committee.  Prior to joining Western Asset, he spent much of his career focusing on proprietary trading, including with Greenwich Capital (1988–1990) and the First Boston Corporation (1980–1988).  In his four years at the University of Pennsylvania's Wharton School, Mr. Leech obtained three degrees while graduating summa cum laude.

Mr. Leech and Western Asset were named US Fixed-Income Core and Core Plus Managers of the Year by Institutional Investor in 2013 and Morningstar's Fixed-Income Manager of the Year in 2004. Together Mr. Leech and the firm were among four finalists for Morningstar's award in 2003 and 2006.  In 2007, Mr. Leech was named to the Fixed-Income Analysts Society's (FIASI) Hall of Fame.

About Western Asset Management

Western Asset Management is one of the world's leading fixed-income managers with $472 billion in assets under management as of September 30, 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.

About Legg Mason

Legg Mason is a global asset management firm, with $720 billion in AUM as of October 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.

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed-income securities falls. U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity.

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