Western Asset Core Plus Bond Fund Class R · NASDAQ:WAPRX
Western Asset Core Plus Bond Fund Class R — Western Asset Management Company — Investor Presentation (October 2020)
43 slides from Western Asset Core Plus Bond Fund Class R's investor presentation, Oct 6, 2020
Slide 1: 4Q20 Market and Strategy Update
4Q20 Market and Strategy Update October 6, 2020 Ken Leech Chief Investment Officer 1
Slide 2: Road Ahead Looks Like a Long Hard Slog
Road Ahead Looks Like a Long Hard Slog Optimism on virus/medical front Optimism on economic recovery Caution – Recovery is coming from such a challenged position Caution – Extraordinary amount of global economic slack will take years and continued policy support to absorb Re-ignition of inflation is
Slide 3: Renewed COVID Surge
Renewed COVID Surge Surge in cases implies more cautious consumer behavior Diminished death rate suggests renewed broad-based lockdowns are unlikely Vaccine hopefulness — no news is good news Treatments have improved dramatically Source: Western Asset. As of 05 Oct 20 3
Slide 4: Rolling Waves of COVID-19
Rolling Waves of COVID-19 Lockdowns in hard-hit European countries were initially effective, but have graduated into “second waves” US virus levels still elevated, but below summer highs and now concentrated in more rural, “first wave” states US vs. Europe Virus Trends 350 300 US 14-day cases per 10
Slide 5: US COVID-19 Trends
COVID-19 Recurrence Cases Increasing – Hospitalization and Mortality Rates Declining US COVID-19 Trends Mortality Rate vs. New Daily Cases 2,500 80,000 New Deaths (thousands) 70,000 New Cases (thousands) 2,000 New Cases (right) Deaths (left) 60,000 1,500 50,000 40,000 1,000 30,000 20,000 500 10,000
Slide 6: Vaccine Update
Vaccine Update We expect initial approval of one or more vaccine by 90 Estimated Clinical Trial Success Rates 2005-2015¹ YE20, with more broad distribution during 1H21 80 Percent of Success 70 60 Key factors Western Asset will be watching: 50 Timing of Phase 3 efficacy data release(s) 40 Indicat
Slide 7: Pieces of the Therapeutic Puzzle Are Falling Into Place
Pieces of the Therapeutic Puzzle Are Falling Into Place A vaccine leads to the production of antibodies and triggers an antiviral T cell response Monoclonal antibodies are functionally equivalent to vaccine-induced antibodies In clinical trials, Regeneron’s monoclonal antibodies reduce viral load an
Slide 8: The Global Road to Recovery Appears to Have Started
The Global Road to Recovery Appears to Have Started Global PMIs 70 US Euro China UK Japan 60 50 40 30 20 10 0 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Oct 18 Jan 19 Apr 19 Jul 19 Oct 19 Jan 20 Apr 20 Jul 20 Source: Bloomberg. As of 30 Sep 20 8
Slide 9: There Has Been a Tidal Wave of Monetary Easing
There Has Been a Tidal Wave of Monetary Easing Monetary Easing Since 31 Jan 20 100 20 20.0 15.1 50 10 10.7 11.3 4.1 9.0 2.7 1.4 1.0 2.5 6.0 0.9 0.4 0 0 -25 -50 -50 -50 -65 -10 -75 -75 -75 -75 Percent of GDP Basis Points -100 -100 -115-114 -20 -125-125 -140 -150-150-150-150-150-150 -150 -30 -175-175
Slide 10: Will the Enormity of Global Stimulus Prove Sufficient?
Will the Enormity of Global Stimulus Prove Sufficient? Change in Cyclically Adjusted Primary Fiscal Balance as % of Global GDP 6.0 Loosening ROW EM ex China and India Eurozone China 5.0 US World Pre-Covid World 4.0 3.0 Percent 2.0 1.0 0.0 -1.0 Tightening -2.0 2007 2008 2009 2010 2011 2012 2013 2014
Slide 11: Fed Will Be Very Slow to Raise Rates
Fed Will Be Very Slow to Raise Rates “So, again, we're — we're not thinking about raising rates. We're not even thinking about, thinking about raising rates. So, what we're thinking about is — is providing support for this economy.” - Chair Powell, June 10, 2020 FOMC Press Conference Core PCE Inflat
Slide 12: Government Support to Households Has Already Been Massive
Government Support to Households Has Already Been Massive Government direct support to households via the CARES Act and extended unemployment compensation to turn personal income growth positive Personal Income, With and Without Government Aid 22 21 The net income gain from CARES Act payments has 20
Slide 13: Household Balance Sheets: Leverage Remains Low, Savings Rate Elevated
Household Balance Sheets: Leverage Remains Low, Savings Rate Elevated Savings rate increased sharply as incomes rose and consumption fell. Going forward, fading government support to be offset by increased employment income. Personal Income and Savings Rate¹ Household Debt to GDP 80% 22 1.2 70% 20 1
Slide 14: Goods Sectors: While Demand Is Back, Output Is Following Only Gradually
Goods Sectors: While Demand Is Back, Output Is Following Only Gradually Factory Production Workers & Work Hours Industrial Production, High- & Low-Tech Manufacturing 8400 88 170 105 Production Hours (right) Jobs (thousands/month) 8200 84 160 100 Year 2012 = 100 Year 2012 = 100 Year 2002 = 100 8000 F
Slide 15: For Most Service Sectors, Recovery Is Only Nascent
For Most Service Sectors, Recovery Is Only Nascent Health Care Industry Activity During COVID Crisis Food Service Industry Activity During COVID Crisis 16.8 2.4 14 0.8 Real Consumer Spending (right) 2.2 Employment (left) 16.4 12 USD (Trillion $/yr.) USD (Trillion $/yr.) 2.0 Real Consumer Spending (r
Slide 16: Risks of Significant Scarring Remain
Risks of Significant Scarring Remain “Permanent” layoffs have steadily increased since March, even as “temporary” layoffs declined. Labor force participation is depressed; decline in the unemployment rate overstates strength in jobs. Reason for Unemployment Labor Force Participation Rate 25 66% Perm
Slide 17: The Road Ahead for Europe Also Appears Challenging
The Road Ahead for Europe Also Appears Challenging Low eurozone inflation makes the ECB’s life ever more European unemployment dynamics more similar to US complicated than what meets the eye Core inflation has been around 1 percent for a few years but has now A rather limited increase in the off
Slide 18: China's Recovery Is Gaining Traction
China’s Recovery Is Gaining Traction Chinese Factories Have Reopened Faster Than Their Global Competitors China's Consumption Has Lagged Other Major Economies China US EU Japan China US Japan EU 110 115 105 110 Index, Dec 2019=100 Index, Dec 2019=100 100 105 95 100 90 85 95 80 Industrial production
Slide 19: Our Current Thoughts on Japan's New PM Suga's Economic Policy
Our Current Thoughts on Japan’s New PM Suga’s Economic Policy (Suganomics) More than Abenomics, rather than more Abenomics Short-run Most likely market implication of Suga’s economic policy – In the short run, we expect little impact on the markets due to continuity of macroeconomic policy – In th
Slide 20: The World Economy Faces a Protracted Period of Output Slack
The World Economy Faces a Protracted Period of Output Slack Resumption of activity to pre-COVID levels could take as long as two years The fall-off in global aggregate demand is by far the steepest in recent history Global Output Gap 6 3 0 % of Potential GDP -3 -6 -9 -12 1Q70 1Q80 1Q90 1Q00 1Q10 1Q2
Slide 21: The Challenges of Widespread Global Slack & Debt Burdens Will Retard Future Growth
The Challenges of Widespread Global Slack & Debt Burdens Will Retard Future Growth World Economy, 1871-2020 Percent of Economies in Recession Government Debt as % of GDP 100 260 Without the top five recessions Japan Italy 240 US France the average is 47.6% 220 UK 80 200 180 60 160 Average during Per
Slide 22: When it Rains it Pours
When it Rains it Pours Last year’s global growth storm clouds return US-China trade and geopolitical tensions Brexit uncertainty Russian sanctions and geopolitical tensions Source: Western Asset. As of 08 Sep 20 22
Slide 23: Pace of Recovery to Consolidate Amid Persistent Uncertainties
Pace of Recovery to Consolidate Amid Persistent Uncertainties COVID-induced activity drag on developed markets continues to linger EM PMIs upturn is narrowly based, notably China and North Asia Differentiating Trends in Global PMIs 60 Developed Markets 55 Neutral = 50, 6-Month Moving Average 50 Emer
Slide 24: COVID-19 Continues to Be an Immense Emerging Market Challenge
COVID-19 Continues to Be an Immense Emerging Market Challenge EM COVID-19 Trends 7-Day Moving Average of New Cases 100,000 8,000 India (left) 90,000 7,000 80,000 6,000 70,000 Mexico (right) 5,000 60,000 50,000 4,000 40,000 3,000 30,000 Brazil (left) 2,000 20,000 1,000 10,000 0 0 Mar 20 Apr 20 May 20
Slide 25: Market Confidence in Renewed Inflation May Be Misplaced
Market Confidence in Renewed Inflation May Be Misplaced Breakeven Inflation Rates Near Beginning of the Year Levels Global Pricing Core Power Consumer Under Price Severe Inflation Downward in Various Pressure Regions 3.0 10-Year Breakeven Inflation (%) 2.5 China (Core CPI) 31 Dec 19 23 Mar 20 30 Sep
Slide 26: Market Election Expectations Are Shifting Toward a "Blue Sweep"
Market Election Expectations Are Shifting Toward a “Blue Sweep” Trump Odds of Victory and Approval Ratings 60 48 47 55 Trump Approval 46 Rating (right) 50 45 45 44 43 40 42 Market Odds of 35 Trump Victory (left) 41 30 40 Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 Aug 20 Sep 20 Oct 20 Source: P
Slide 27: Preliminary Election Thoughts on Possibility of a "Biden Sweep"
Preliminary Election Thoughts on Possibility of a “Biden Sweep” Expectation of much greater and sustained fiscal thrust Monetary policy should remain very accommodative Cyclically, good for near-term growth Potentially negative for Treasuries and the dollar Reasonable expectation of re-regulat
Slide 28: A Tale of Two Markets
A Tale of Two Markets Spread Sector Excess Returns – 1Q20 vs. 3Q20 1Q20 Excess Returns 0 -5 -0.8 -10 -7.0 -5.9 -9.0 -7.5 Percent -15 -12.6 -11.0 -13.9 -15.1 -20 -17.1 -20.3 -19.5 -25 -22.9 -30 EM EMD European US Euro US US IG Non- UK IG Euro Australia US US Local USD Banks High- High- Bank Credit Ag
Slide 29: In Every Post-War Recession — Investment-Grade Yields Have Declined
In Every Post-War Recession — Investment-Grade Yields Have Declined US Corporate Yields* 12 Change from Jan 90 – Dec 93 US Long Corporate: -3.27% US Corporate: -3.98% 10 Change from May 00 – Jun 03 US Long Corporate: -2.69% US Corporate: -4.14% 8 Percent 6 US Long Corporate 4 US Corporate 2 Change f
Slide 30: Investment-Grade as "Cornerstone Investment"
Investment-Grade as “Cornerstone Investment” “The pace of purchases is based upon an array of measures of corporate bond market functioning … If these measures indicate sustained improvement to levels at or near those prevailing prior to the COVID-19 dislocation, SMCCF purchases are expected to slow
Slide 31: Corporates Acting Conservatively: Tendering and Extending Debt
Corporates Acting Conservatively: Tendering and Extending Debt Notable Tenders Date Ticker Name Sector Rating Maturity Range MMs 13 Apr 20 GE GE Capital Intl Funding Finance Companies BBB *20s 5,500 13 Apr 20 GE General Electric Co Diversified Manufacturing BBB *20s-24s 4,200 04 May 20 KHC Kraft Hei
Slide 32: US Credit Markets Offer Both Attractive Yield and Size
US Credit Markets Offer Both Attractive Yield and Size Relative to other mature markets, US credit markets are attractive to a global investor. Credit Market Yields and Size Market Value (left) YTW (right) 12 5 10 4 8 3 USD (trillions) Percent 6 2 4 1 2 0 0 EUR IG JPY IG UK IG Asia IG US IG Source:
Slide 33: Today's High-Yield Valuations Better Reflect Market Expectations
Today’s High-Yield Valuations Better Reflect Market Expectations 1200 20 23 Mar 20 1-Year Implied Default Rate = 16.8% (right) 18 1000 16 Bloomberg Barclays US High-Yield 2% Index OAS (left) 14 800 12 Basis Points Percent 600 10 Bank of America Trailing 1- 8 Year Par Weighted High-Yield 400 Default
Slide 34: The High-Yield Asset Class is Now Higher-Quality and More Liquid
The High-Yield Asset Class is Now Higher-Quality and More Liquid Growth of BBs Measured by Par Value Growth of BBs 56 60 54 BB Share of Gross High-Yield New Issuance (%) BB % Share of Gross HY New 50 Issuance (right) 52 40 BB Par Amount (%) 50 BB Par Amount % (left) 30 48 20 46 10 44 42 0 Jan 20 Feb
Slide 35: Prepayment Risk Is Accelerating
Prepayment Risk Is Accelerating MBA Refinancing Index Mortgage Rate (right) Primary/Secondary Spread 7,000 3.0 2.0 6,000 1.8 MBA Refinancing Index 3.5 1.6 Mortgage Rate (%) 5,000 1.4 4.0 4,000 1.2 Percent 4.5 1.0 3,000 0.8 5.0 0.6 2,000 1,000 5.5 0.4 0.2 0 6.0 0.0 2011 2012 2013 2014 2015 2016 2017
Slide 36: Housing Market Recovery Path
Housing Market Recovery Path Housing has experienced a V-shaped recovery but credit spreads have lagged due to continued uncertainty and less direct Fed intervention. Housing Activity Spreads Year-to-Date Mortgage Purchase S&P CoreLogic Case-Schiller Non-Agency RMBS Legacy (left) Applications (left)
Slide 37: Local Currency Emerging Market Debt Prices Are Very Distressed
Local Currency Emerging Market Debt Prices Are Very Distressed Local Currency EM vs. Global Aggregate 200 135 J.P. Morgan GBI-EM Global Bloomberg Barclays Global- 180 Div Price Index (left) Aggregate Price Return 130 (right) 160 125 Index Level Index Level 140 120 120 115 100 110 80 105 2010 2011 20
Slide 38: China Local Onshore Bonds Offer Attractive Valuations
China Local Onshore Bonds Offer Attractive Valuations Relative to DM Peers 4 3.23 3.15 3.03 2.89 3 China 2.60 2 Percent 1 0.68 0.47 US 0.16 0.28 0.12 Japan 0 -0.13 0.02 -0.12 -0.11 -0.10 Germany -0.60 -0.54 -1 -0.76 -0.73 -0.67 -2 1 year 3 year 5 year 7 year 10 year Source: Bloomberg. As of 30 Sep 2
Slide 39: China Onshore Bond Market: Room For Foreign Ownership to Grow
China Onshore Bond Market: Room For Foreign Ownership to Grow Foreign Ownership in China Onshore Bonds But It Remains Low, Compared to Other Major Economies Reaches CNY 1.9 trillion (USD 280 billion) US Japan Germany UK China CGBs Policy Banky Financial Bonds NCDs Other Bonds 70% Foreign Holding of
Slide 40: 4th Quarter 2020 – 2021 Outlook
4th Quarter 2020 – 2021 Outlook The Road Ahead Will Be a Long Hard Slog Coronavirus-related growth setbacks have meaningfully reduced global and US growth Incipient global recovery appears to be gaining traction The medical battle will take time and prolonged efforts; recent developments are encoura
Slide 41: Questions & Answers
Questions & Answers M1 QA TN “WESTERN ASSET Je sie, PN
Slide 42: Thank you.
Thank you. rN ; “| WESTERN ASSET
Slide 43: Risk Disclosure
Risk Disclosure © Western Asset Management Company, LLC 2020. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidenti
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