8th July 2013
The sell-off in bond and currency markets has created investment opportunities for the rest of 2013, argues Brandywine Global.
Brian Hess, a manager on the $2bn Legg Mason Brandywine Global Fixed Income and $250m Legg Mason Brandywine Global Opportunistic Fixed Income funds, says the extreme volatility seen last month, while painful in the short term, has produced more attractive valuation levels for many assets.
“Any currency with either a commodity link or a high interest rate/carry component, with the latter a beneficiary of excess liquidity produced by the Fed, got annihilated over May,” he says. “We are looking to take advantage of markets where there has been a major weakening in either sovereigns or currency.”
Indonesia and Thailand, where Hess says Brandywine has not had exposure since 2011 and 2005, respectively, are two of these markets. He says the Philippine peso, Colombian peso and Peruvian sol are also on the radar.
“These are five ideas where there may be opportunities in the second half of the year at more favourable pricing after recent volatility.”
Coming into 2013, Brandywine’s thesis was that it would be a year of transition for markets, with the Fed taking a less aggressive stance towards monetary easing and global growth improving via re-acceleration in the US, stability in China, and less bad news out of Europe.
“By and large, that has played out well,” says Hess. “The two things we have been doing as a result of this outlook are shortening duration, trimming back our exposure to treasuries or gilts, and moving more defensive by exiting developed markets where the chance for rates to rise was most severe. We have also been building dollars into the portfolio as part of the idea the Fed would be getting less aggressive in terms of monetary easing.
“With US growth outperforming much of the developed world, we thought that would provide a tailwind to US dollar performance, particularly against the Japanese yen where domestic policy considerations are aimed at currency weakening.”
Hess says this strategy has largely worked and that the macro picture remains intact, with stable US growth, China adroitly managing its slowdown, and commodity prices constrained.
“With respect to the Eurozone, the effects of the fiscal drag will diminish as we move through the next 12 months. By this time next year, the rate of change from austerity should be much less of a headwind for peripheral economies. Overall, the environment is improving but in a way that is not bringing huge inflation pressures. This means that while the Fed wants to start tapering asset purchases, it does not have to tighten policy in any hurry. Perhaps what we saw in May was a knee-jerk overreaction to concerns about a big reversal of liquidity.”