Western Asset Variable Global High Yield Bd Ptf I · NASDAQ:QLMYIX
Western Asset Variable Global High Yield Bd Ptf I — Western Asset — Corporate Update (April 2022)
37 slides from Western Asset Variable Global High Yield Bd Ptf I's corporate update, Apr 6, 2022
Slide 1: Thank you for joining Western Asset's 2Q22 Market & Strategy Update webcast
April 6, 2022 Thank you for joining Western Asset’s 2Q22 Market & Strategy Update webcast featuring CIO Ken Leech. The presentation will begin shortly. Delivering Timely Research and Analysis Every Week Follow us on social media! Our blog leverages the Firm’s award-winning investment capabilities an
Slide 2: 2Q22 Market and Strategy Update
2Q22 Market and Strategy Update April 6, 2022 Ken Leech Chief Investment Officer 2
Slide 3: 2022 Outlook
2022 Outlook Russia-Ukraine conflict poses massive geopolitical uncertainty ▪ Elevates both inflation and downside growth risks Inflation remains challenging but should ease substantially during 2022 Fixed-Income Outlook ▪ Covid continues to bedevil global populations ▪ US and global growth are dece
Slide 4: COVID-19 Outlook
COVID-19 Outlook Transitioning from pandemic to endemic New Cases Per Million (7-Day Rolling Average) North America Europe Asia South America 2500 2000 1500 1000 500 0 Jan 20 Apr 20 Jul 20 Oct 20 Jan 21 Apr 21 Jul 21 Oct 21 Jan 22 Source: Our World in Data. As of 04 Apr 22 COVID-19 Vaccines ▪ A once
Slide 5: Inflation Transition
Inflation Transition Tailwinds Ukraine – Russia conflict ▪ Fiscal thrust ▪ Higher commodity prices ▪ Monetary accommodation ▪ Additional supply side disruption ▪ Covid reopening demand Headwinds ▪ Debt ▪ Additional monetary tightening ▪ Demographics ▪ Increased pressure on real incomes and ▪ Technol
Slide 6: Declining Real Income a Headwind for Demand
Declining Real Income a Headwind for Demand Real incomes are declining to start 2022, due to fading fiscal stimulus and higher inflation Real Personal Income University of Michigan: Consumer Sentiment 22 18 120 3-Month % Change (right) 2012 Dollars (left) 15 110 21 12 100 20 9 90 USD (trillions) Per
Slide 7: Rebalancing Supply and Demand for Goods
Rebalancing Supply and Demand for Goods Real Consumer Spending by Type Book-Value Inventory Growth 20% 600 15% Real Goods, Growth Rate in Business Inventories, excluding vehicles and oil 10% Relative to Trend 400 USD (billions/yr) 5% 200 0% -5% 0 -10% Real Services, -200 3-M o. Rate -15% Relative to
Slide 8: Rebalancing Supply and Demand for Housing
Rebalancing Supply and Demand for Housing Housing Under Construction 1200 1000 Multi-Family 800 600 400 Change from Feb '20: 200 Single Family Multi-Family: +50% Single Family: +15% 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Source: Census Bureau. As of 31 Mar 22 Demand for B
Slide 9: Rebalancing Supply and Demand for Labor
Rebalancing Supply and Demand for Labor Labor supply improvement can continue in 2022. Job openings have peaked, albeit at high levels. Are hiring plans turning? Labor Force Participation Rate: 25-54 Years 84 14,000 35 83 12,000 30 10,000 25 82 8,000 20 Percent Percent Units 81 6,000 JOLTS: Job 15 O
Slide 10: Average Hourly Earnings Acceleration May Be Over
Average Hourly Earnings Acceleration May Be Over Average Hourly Earnings of All Employees: Total Private 8 7 6 5 Percent 4 3 2 1 0 2017 2018 2019 2020 2021 2022 Source: Bureau of Labor Statistics, Haver. As of 31 Mar 22 6-Month percent change annually, seasonally adjusted, USD per hour 10
Slide 11: The Fed's Hawkish Pivot Accelerated in March
The Fed’s Hawkish Pivot Accelerated in March Did the Fed overreact with changes to inflation outlook? FOMC Core PCE Inflation Forecast In March, the Fed significantly increased its forecast for 6 Core PCE inflation in 2022 FOMC Forecast: December ▪ January – increased by ‘a few tenths’ 5 FOMC Foreca
Slide 12: Fedspeak Following the FOMC Meeting Was Hawkish, on Net
Fedspeak Following the FOMC Meeting Was Hawkish, on Net Powell’s comments in particular led to a further repricing of 2022 hikes, now 50 bps above SEP¹ projections Chair Powell Interest Rates: FOMC Forecasts and Market Pricing ▪ “The labor market is very strong and extremely tight” 3.0 ▪ “The inflat
Slide 13: Yield Curve Inversion
Yield Curve Inversion “research by staff at the Fed says to look at the first 18 months of the yield curve … because if it's inverted that means the Fed's going to cut because the economy is weak." – Chair Powell, March 21, 2022 Yield Curve Inversions and Recessions 3.0 Monthly Average Data, except
Slide 14: Not So Fast, Global Economy!
Not So Fast, Global Economy! After a rapid bounce, growth is slowing due to lower real disposable income. Downside risks are higher in Europe. Global Growth (% Change in GDP year-on-year) IMF World Economic Outlook (Jan 2022 Update) Difference from Oct Western Asset IMF Long-Run Actual Projections 2
Slide 15: ECB: Faster Tapering, But Need for Rate Hikes Less Clear
ECB: Faster Tapering, But Need for Rate Hikes Less Clear (For Now) ▪ A stagflationary shock does not mean stagflation ▪ The ECB is more worried about the inflation profile drifting higher than the growth profile drifting lower … for now ▪ Survey-based inflation expectations have essentially converge
Slide 16: Japan Outlook
Japan Outlook Tankan Business Condition for Large Enterprises Japan Inflation 30 5 Non-Manufacturing 20 4 10 3 0 2 Year over year(%) Headline CPI -10 Manufacturing 1 -20 0 -30 Core CPI (excl -1 fresh foods) -40 -50 -2 -60 -3 2007 2009 2011 2013 2015 2017 2019 2021 2017 2018 2019 2020 2021 2022 Sourc
Slide 17: China – Growth/Regulatory/Russia Headwinds
China – Growth/Regulatory/Russia Headwinds Zero Covid policy Regulatory crackdown ▪ Mitigate systemic risks (property sector) ▪ Align private sector party goals US position ▪ Biden administration similar to Trump – Friction a permanent feature of relationship Russia connection ▪ Xi + Putin, abstaine
Slide 18: China Outlook: Policy Loosening Amidst Cyclical Soft Patch
China Outlook: Policy Loosening Amidst Cyclical Soft Patch Leading indicators have moderated from elevated levels, but policy stimulus are in place to mitigate the fallout from omicron variant and regulatory crackdowns. Underpinned by resilience in its external accounts, China maintains systemic con
Slide 19: A Slowing in Real Estate Activity Will Weigh on Chinese Growth
A Slowing in Real Estate Activity Will Weigh on Chinese Growth China Actual GDP Growth vs. Growth Target MSe Impact of GDP on Activities Related to Real Estate YoY%¹ YoY% YTD¹ 2Y CAGR 30% 8 25% 7 2014: ~7.5% China GDP (Percent) 2015: 2021: ~7% 20% >6% 2016: 2017: 2018: 6 6.5-7% ~6.5% ~6.5% 2019: 15%
Slide 20: European and Chinese Growth May Be Vulnerable to Downside Risks
European and Chinese Growth May Be Vulnerable to Downside Risks Euro Area GDP Hit Scenarios Relative To No Shock Baseline China 0.0 55 0 Average PMI¹ Upside 54 (left) -0.5 5 53 10 -1.0 52 Baseline 15 51 -1.5 Percent Index Index 50 20 -2.0 49 Goldman Sachs 25 Effective Lockdown 48 Index (right) -2.5
Slide 21: Challenges of Global Slack and Debt Burdens Will Retard Future Growth
The Challenges of Global Slack and Debt Burdens Will Retard Future Growth Dependency Ratios Government Debt as % of GDP 2050 Forecast 2021 Forecast 2000 280 Japan Italy 260 US France Japan 240 UK 220 200 European Union 180 160 Percent 140 United States 120 100 80 China 60 40 Mexico 20 0 1990 1995 20
Slide 22: Global Fiscal Stimulus Is Set to Turn to Global Fiscal Drag
Global Fiscal Stimulus Is Set to Turn to Global Fiscal Drag Change in Cyclically Adjusted Primary Fiscal Balance as % Global GDP 5.0 ROW EM ex China and India Loosening Eurozone China US World 4.0 Precovid world 3.0 2.0 Percent 1.0 0.0 -1.0 -2.0 Tightening Forecast -3.0 07 08 09 10 11 12 13 14 15 16
Slide 23: Spread Sector Excess Returns
Spread Sector Excess Returns Year-to-Date 2022 Excess Returns 2 1.2 1 0 -0.2 -0.6 Percent -1 -0.7 -0.9 -0.8 -1.4 -1.3 -1.3 -1.6 -1.5 -1.5 -2 -3 -3.6 -4 EMD Euro European UK IG Euro IG Australia US IG US EM US US US Non- USD High- Banks Credit Credit IG Credit Credit High- Local MBS CMBS Bank Agency
Slide 24: Valuations Improved - Significant Increase In Both Treasury Yields and Credit Spreads
Valuations Improved - Significant Increase In Both Treasury Yields and Credit Spreads Bloomberg U.S. 1-5 Year Credit Index YTW 3.0 2.85 2.5 Higher by Bloomberg U.S. 1-5 Year 48 bps Credit Index - OAS 2.0 Percent 1.5 1.34 0.90 Higher by 1.0 Interpolated Treasury Yield 146 bps 0.5 0.0 Sep 21 Oct 21 No
Slide 25: Cash Flow and Debt Metrics Support Investment-Grade Credit
Cash Flow and Debt Metrics Support Investment-Grade Credit Profit Margins Earnings growth >30% vs. Pre-Pandemic 34 50% YoY earnings growth, 2021 vs. 2019 32 30 30% Percent 28 10% 26 24 -10% 22 20 -30% 3Q21F 2Q16 1Q18 2Q15 3Q15 4Q15 1Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q1
Slide 26: Investment-Grade Energy – Strong Relative Performance So Far in 2022
Investment-Grade Energy – Strong Relative Performance So Far in 2022 IG Independent Energy OAS 1,200 Since 2016, IG managements have Dual Shock 20 Mar 20 1,000 +1003 bps ▪ Acted conservatively ▪ Lowered cost structures ▪ Improved cash flow 800 ▪ Delevered balance sheets ▪ Extended maturity runways ▪
Slide 27: US Credit Markets Are Attractive to Global Investors
US Credit Markets Are Attractive to Global Investors Good liquidity, higher yields and low hedging costs have increased global demand for US IG credit Credit Market Yields and Size Market Value (left) YTW (right) 12 5 10 4 USD (trillions) 8 3 Percent 6 2 4 2 1 0 0 JPY IG EUR IG UK IG Asia IG US IG S
Slide 28: US High-Yield Fallen Angels/Rising Stars and Credit Quality Improvement
US High-Yield Fallen Angels/Rising Stars and Credit Quality Improvement Fallen Angel (left) Rising Star (left) BB-BBB OAS (right) BB-BBB OAS Spread (bps) Amount Outstanding ($ bn) 350 350 300 277* 300 238 250 250 200 143 200 150 84 86 150 100 52 41 37 46 50 47 57 60 56 100 50 27 24 20 22 17 28 19 20
Slide 29: Fed Hiking Cycles Historically a Supportive Environment for Shorter Duration Credit
Fed Hiking Cycles Historically a Supportive Environment for Shorter Duration Credit Asset Classes Historical Impact of Rising 10yr Treasury Yields (100bps+) 10% 02 May 13 - 05 Sep 13 08 Jul 16 - 15 Dec 16 07 Sep 17 - 05 Oct 18 04 Aug 20 - 19 Mar 21 8% 6% 4% Total Retrun (%) 2% 0% -2% -4% Sectors tha
Slide 30: Floating Rate Corporate Loans Remain Attractive in Current Market Conditions
Floating Rate Corporate Loans Remain Attractive in Current Market Conditions Floating rate corporate loans will continue to see demand from retail investors looking for rising rate protection and a stable base of CLO investors CLO Creation Expected to Be Stable Remainder of Year Retail Loan Fund Inf
Slide 31: Agency Mortgage Spreads During QE/QT Cycles Since 2010
Agency Mortgage Spreads During QE/QT Cycles Since 2010 ▪ Mortgage spreads have widened significantly year to date as Fed support diminished ▪ Expect continued headwinds in the sector depending on the timing and pace of runoff (QT) as Fed shifts to Reinvesting and Runoff Mode FNMA 30-Yr Production Av
Slide 32: Mortgage Credit Offers Attractive Relative Value
Mortgage Credit Offers Attractive Relative Value ▪ In spite of expectations for real estate prices to cool from record increases in 2021, market spreads are elevated with increased risk premiums ▪ Reemerging from COVID, lending stayed conservative and real estate markets remain well supported by lon
Slide 33: Russia-Ukraine: Assessing Risk and Contagion
Russia-Ukraine Assessing Risk and Contagion IIF Vulnerability to Russia Conflict Score 3 Big picture views ▪ Structural break between Russia and West 2 ▪ West sanctions are further and faster than expected ▪ Slower global growth and higher inflation 1 Vulnerability Score Contagion channels ▪ Higher
Slide 34: 2022 Outlook
2022 Outlook Russia-Ukraine conflict poses massive geopolitical uncertainty ▪ Elevates both inflation and downside growth risks Inflation remains challenging but should ease substantially during 2022 Fixed-Income Outlook ▪ Covid continues to bedevil global populations ▪ US and global growth are dece
Slide 35: Questions & Answers
Questions & Answers 35 OA
Slide 36: Thank you.
Thank you. FTN ( WesternASsET
Slide 37: Risk Disclosure
Risk Disclosure © Western Asset Management Company, LLC 2022. 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