LONDON, July 7, 2015 /PRNewswire/ -- At a recent
Legg Mason conference in
London to discuss prospects for
the often unpredictable global financial markets, portfolio
managers from its affiliates were asked, "What risks do you think
are not fully appreciated by investors now?"
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Their answers covered several broad areas, but for Brandywine
Global, the focus settled squarely on China.
"A principal risk that is not being considered by most investors
is the structural decline in growth rates in China," said Gary
Herbert, Global Credit portfolio manager with Brandywine
Global. "When we look at retail sales, rail car shipments, vehicle
sales, retail sales – they are at effectively Depressionary levels.
When we look at producer price indices, those numbers have been
negative for roughly 36 months."
"If structural consumption and economic growth does not occur in
China, this could have a very
negative knock-on effect in many emerging markets."
His views were echoed by co-lead portfolio manager of Global
Fixed Income with Brandywine Global, Steve
Smith: "To me this big bust in commodity prices that we've
seen in the world, the big slowdown in global growth, is a
combination of not just the Europeans but also the Chinese, which
are the second and third-largest economies in the world."
In 2014, most market watchers were focused on monetary policy in
Europe. That culminated on
March 9, when ECB President
Mario Draghi announced the central
bank would pursue quantitative easing.
"What they really missed is what was going on in China," Mr. Smith said. "PPIs have been
negative for 37 consecutive months and the country's headline
consumer inflation rate is lower than the U.S.'s in 2012, yet real
short-term interest rates are at 10 percent. Not only that, but
China loosely pegs its currency to
the U.S. dollar. The dollar, Swiss franc and of course the Chinese
renminbi are the three strongest currencies in the world. Can you
imagine 10 percent real rates for an economy with such a strong
currency?"
"The reason China's economy has
been struggling is that monetary policy is just way too
tight. China, I think, has
been way too late in easing policy, overly cautious not to
encourage a further build-up of speculative borrowing. But I think
China is now pressing the panic
button. The country's policymakers finally have figured it out. If
they don't continue to lower interest rates and get funding costs
down for the private sector, I think that would be the real risk in
the market."
Mr. Herbert agreed with Mr. Smith's analysis, adding another
perspective.
"Currency yields in emerging markets, as well as bond yields,
have been elevated over the last, roughly, year or two," Mr.
Herbert observed. "It's an asset class that's underperformed
relative to corporate high yield, as well as more safe-haven
assets. Our concern is that if growth does not return to
China, if monetary policy does not
become more stimulative, many of these emerging markets could see
their currencies continue to weaken against pound sterling, the
dollar, and even potentially the euro."
"Effectively that could reprice risk premia in many of those
emerging markets."
Mr. Herbert believes that the ECB is pursuing a much more
stimulative and aggressive monetary policy, and its balance sheet
is anticipated to grow from about 2 trillion
to 3 trillion euros by the third quarter of 2016.
"We are still, however, waiting for the Chinese authorities to
introduce a much more stimulative policy," Mr. Herbert warned.
"They have had a significant period of mal-investments, whether
it's been property investment or investment in some of the core
commodity markets. Some of those sectors as well as state-owned
enterprises need to adjust their capital structure."
He concluded, "We view that as a predominant risk in the broader
economy at this time."
Notwithstanding these trepidations, Mr. Smith sounded hopeful
notes.
"We are relatively optimistic that China has figured it out and are going to
continue to move forward in bringing short-term interest rates
down. Because they need to… because the currency has been so
strong. If they do it, I think it is really going to be a help for
global growth."
About Gary Herbert
Gerhardt (Gary) P. Herbert, CFA
is a portfolio manager for Brandywine Global's fixed income group,
with a concentration in high yield securities. Mr. Herbert joined
Brandywine Global in March 2010 and
has more than 25 years of high yield experience. Previously he was
a managing director, portfolio manager with Guggenheim Partners,
LLC (2009-2010); a managing director, portfolio manager with Dreman
Value Management, LLC (2007-2009); and an executive director,
portfolio manager (1999-2007) and associate (1994-1998) with Morgan
Stanley Investment Management. Mr. Herbert earned a M.B.A. with
honors from Columbia University, and a
Bachelor's degree from Villanova
University. He holds a Chartered Financial Analyst
certification and is a member of the Philadelphia Scholars Program
Investment Committee.
About Stephen S. Smith
Managing Director and Executive Vice President Steve Smith is co-lead portfolio manager for
Brandywine Global's global fixed income and related strategies, and
a member of the firm's executive board. He joined Brandywine Global
in 1991 to diversify investment strategies and start the global
fixed income product. Previously Mr. Smith was with Mitchell
Hutchins Asset Management, Inc. as managing director of taxable
fixed income (1988-1991); Provident Capital Management, Inc. as
senior vice president overseeing taxable fixed income (1984-1988);
Munsch & Smith Management as a founding partner (1980-1984);
and First Pennsylvania Bank as vice president and portfolio manager
in the fixed income division (1976-1980). He earned a B.S. in
economics and business administration from Xavier University, where he chairs the university's
foundation and is a member of the board of trustees. Mr. Smith also
serves on the board of trustees at St. Mary's Villa for Children
and Families, a provider of services for abused and neglected
children, and Winterthur Museum & Country Estate, a nonprofit
educational institution.
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 March
31, 2015, Brandywine Global manages $66.5 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.
1. Brandywine Global Investment Management (Asia) Pte. Ltd.;
2. Brandywine Global Investment Management (Europe) Limited is authorized and regulated by
the Financial Conduct Authority (the "FCA"). (FRN 472774).
Registered in England and
Wales, No. 06324517
About Legg Mason
Legg Mason is a global asset
management firm with $707 billion in
assets under management as of May 31,
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).
All investments involve risk, including loss of principal.
Past performance is no guarantee of future results.
Fixed income securities are subject to interest rate and credit
risk, which is a possibility that the issuer of a security will be
unable to make interest payments and repay the principal on its
debt. As interest rates rise, the price of fixed income securities
falls. International investments are subject to special risks
including currency fluctuations and social, economic and political
uncertainties, which could increase volatility. These risks are
magnified in emerging markets. Asset-backed, mortgage- backed or
mortgage-related securities are subject to prepayment and extension
risks. Risks of high-yield securities include greater price
volatility, illiquidity and possibility of default.
Commodities and currencies contain heightened risk that include
market, political, regulatory, and natural conditions and may not
be suitable for all investors.
The views expressed are those of the portfolio manager as of
June 3, 2015 and are subject to
change based on market and other conditions. These views may differ
from other portfolio managers or the firm as a whole, and are not
intended to be a forecast of future events, a guarantee of future
results or investment advice.
INVESTMENT PRODUCTS: NOT FDIC INSURED | NO BANK GUARANTEE |
MAY LOSE VALUE
©2015 Legg Mason Investor Services, LLC, member FINRA, SIPC.
Brandywine Global Investment Management, LLC and Legg Mason
Investor Services, LLC, are subsidiaries of Legg Mason, Inc.
FN1512659
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