BALTIMORE, Dec. 18, 2017 /PRNewswire/ -- Volatility in
equity markets has dwindled to historic lows as U.S. equity market
indexes soar past record highs. Even professional market watchers
are hard-pressed to definitively explain the calm.
Legg Mason brought together
senior investment professionals from its affiliates to identify
global market opportunities. They suggested market volatility will
remain mysteriously low, continuing without the signs of irrational
exuberance typically seen during an aging bull market.
"We are in a sort of fear/greed bounce right now," declared
Mark S. Lindbloom, a fixed income
portfolio manager with Western Asset Management, of Pasadena, CA. "We have a lot of greedy
chickens in the market; people don't want to give up the upside. We
are in the ninth inning of a baseball game. That ninth inning can
last a long time, but everybody is very concerned. They are afraid
things are too good, volatility is too low. That's why they are
moving more into high-sustainable-dividend stocks, or lower
volatility stocks, as a hedge, to stay in the equity markets."
"I think absolutely it's time to rotate into things that are a
little more defensive. But investors are afraid to not be in the
market because they are afraid they will miss another 20 percent
up."
If volatility does take a turn, Jeff
Schulze, an investment strategist with ClearBridge
Investments, suggested it could bring turbulence in 2018 but not
necessarily lead markets to hard landings.
"Volatility should pick up here from here," Mr. Schulze
predicted. "We are at generational lows as far as market volatility
is concerned, so the path from here is probably up. Volatility has
been low because of the backdrop we have. Volatility usually
heightens around recessions, yet in our opinion, recessionary risk
is very low. ClearBridge put together a recession dashboard of 11
indicators that typically foreshadow an upcoming downturn. Only one
of those indicators is flashing a warning sign, so we think the
odds of a recession right now are extremely low."
To James Norman, President of QS
Investors, diversification outside the U.S. is critical:
"The safest thing is to diversify across asset classes into
different types of risk assets. Maybe hedge some of downside risks
with more defensive types of assets, such as defensive
equities."
"It is hard to predict whether emerging markets, or
international markets outside of the U.S. on the developed side, or
stocks in the U.S., are going to outperform," he said. "Investors
should diversify. The growth potential outside the U.S. is probably
higher. EMs and international developed markets are probably about
five years behind the U.S., which is reflected in valuations and
the growth cycle. Those markets could be very attractive over the
next one to three years."
"There is nothing obviously cheap," Mr. Norman emphasized.
"Central banks encouraged investment in risk assets by keeping
interest rates so low, and that's why valuations have risen. It is
hard to predict when a market drop will occur. It is important to
keep invested in risk assets, whether it's credit spreads, equities
in the U.S., international developed, or emerging markets. There
are just so many opportunities. This might go on for a while, and
it might not."
Mr. Lindbloom also said Western Asset is recommending selected
emerging markets to clients.
"In the cycle we are in, with the underperformance in previous
years, very select emerging market bonds – in U.S. dollars as well
as local debt and currencies – are quite attractive."
Mr. Schulze keyed on earnings growth, which "has beat to the
upside for the last three quarters."
"That's going to continue into 2018," he forecast. "Global
central banks are tightening, but not enough to choke off the
economy. That all coalesces into a backdrop of low volatility.
Share buybacks are at the high end; that's also a volatility
dampener, forward guidance. All these things are just pricing in
volatility lower, because there should not be a lot of fear in the
markets."
About other opportunities for global bond investors, Mr.
Lindbloom was cautiously optimistic.
"We are certainly seeing a continued inflow," he said. "A lot of
cash is still finding its way into the U.S., particularly from
Asia, Europe and other parts of the world. When that
stops will be an important factor in how we position. It's easier
these days in the fixed income world to identify those sectors we
don't like: for example, $8-10
trillion of sovereign debt trades at negative interest rates. High
yield in Europe trades at 2
percent, a bit higher adjusted for currency."
"There are pockets we like. We have been much more selective
late this year, into 2018, on investment-grade cooperates, sticking
with sectors that are deleveraging and not piling on debt, like
banks, energy, minerals and mining. We avoid those that continue to
leverage up in high yield. We have been moving up in terms of
quality because we are concerned about leverage."
Having traveled around the country, Mr. Schulze said he has met
with investors from many regions, often with very different levels
of sophistication, to broadly gauge market sentiment.
"There is a lot of skepticism out there," he reported.
"Investors are really scared that we're close to the abyss, and
there is a big drop ahead of us. That's not behavior you see at the
end of a bull market. It's head-scratching that, in the ninth year
of this expansion, you still have so much fear."
"I think there is still room to go on the upside, just from a
sentiment perspective."
About Legg Mason
Legg Mason is a global asset
management firm with $755 billion in
assets under management as of October 31,
2017. 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).
Important Information
This information and data in this material has been prepared
from sources believed reliable but is not guaranteed in any way by
Legg Mason Investments (Europe)
Limited nor any Legg Mason, Inc.
company or affiliate (together "Legg
Mason"). No representation is made that the information is
correct as of any time subsequent to its date.
Opinions expressed are subject to change without notice and do
not take into account the particular investment objectives,
financial situations or needs of investors.
This material is not intended for any person or use that would
be contrary to local law or regulation. Legg Mason is not responsible and takes no
liability for the onward transmission of this material.
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201
Bishopsgate, London, EC2M 3AB.
Registered in England and
Wales, Company No. 1732037.
Authorised and regulated by the UK Financial Conduct Authority.
This information is only for use by professional clients, eligible
counterparties or qualified investors. It is not aimed at, or for
use by, retail clients.
All investments involve risk, including possible loss of
principal.
© 2017 Legg Mason Investor Services, LLC. Member FINRA, SIPC.
Legg Mason Investor Services, LLC and all entities mentioned above
are subsidiaries of Legg Mason,
Inc.
View original content with
multimedia:http://www.prnewswire.com/news-releases/where-did-volatility-go--and-where-will-it-take-markets-next-300572578.html
SOURCE Legg Mason, Inc.