Western Asset Managed Municipals Fund · NYSE:MMU
Western Asset Managed Municipals Fund — Western Asset Management Company — Investor Presentation (January 2019)
43 slides from Western Asset Managed Municipals Fund's investor presentation, Jan 10, 2019
Slide 1: Western Asset 1Q19 Market and Strategy Update webcast
Biographies Thank you for joining Western Asset’s 1Q19 Market and Strategy Update webcast featuring CIO Ken Leech. The presentation will begin shortly. Western Asset Tops CIO Magazine’s 2018 LDI Survey Follow us on social media! See full liability driven investing survey results at westernasset.com/
Slide 2: 1Q Market and Strategy Update
1Q Market and Strategy Update January 10, 2019 Ken Leech Chief Investment Officer 2
Slide 3: 2019 Outlook
2019 Outlook Global growth has downshifted but should remain sturdy US growth and inflation to moderate Central bank policy normalization will slow to a crawl Trade policy poses substantial risks Spread products should recover relative to Treasuries and sovereign bonds Emerging markets, though volat
Slide 4: US Inflation and Fed Policy
US Inflation and Fed Policy Fed Funds Target Rate vs. US Urban CPI 20 16 12 Fed Funds Percent 8 4 CPI 0 -4 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Source: U.S. Bureau of Labor Statistics, Federal Reserve, Bloomberg. As of 31 Oct 18 4
Slide 5: Inflation Refuses to Follow the Script
Inflation Refuses to Follow the Script Core PCE Inflation 2.5 2.0 Percent 1.5 1.0 2013 2014 2015 2016 2017 2018 2019 Source: Bureau of Economic Analysis. As of 30 Nov 18 “Ironically, the problem that we need to solve these days is the risk that inflation is too low rather than too high.” – John Will
Slide 6: Chronically Below-Target Core Inflation Is a Global Phenomenon
Chronically Below-Target Core Inflation Is a Global Phenomenon Core Inflation Rates: 12-Month Changes in Core Consumer Inflation 4.0 3.0 2.0 US Percent Per Year Euro 1.0 Japan 0.0 -1.0 -2.0 2013 2014 2015 2016 2017 2018 Source: Bureau of Economic Analysis, Bloomberg. As of 30 Nov 18 6
Slide 7: Central Bank Policy Experimentation
Central Bank Policy Experimentation Fed ECB BoJ BoE G4 Aggregate 250 Forecast 200 150 Asset Purchases (USD billion) 100 50 0 -50 -100 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: National Central Banks, Citi Research. As of 30 Nov 18 7
Slide 8: "Reflation Trade" vs. "Secular Stagnation"
“Reflation Trade” vs. “Secular Stagnation” Global growth has downshifted and inflation remains subdued. World Real GDP Growth Developed Markets Inflation 6 18 16 5 14 4 12 10 3 Percent Percent 8 2 6 1 4 2 0 0 -1 -2 2001 2004 2007 2010 2013 2016 2019 2022 1970 1975 1980 1985 1990 1995 2000 2005 2010
Slide 9: Global Headwinds: Debt and Demographics
Global Headwinds: Debt and Demographics Dependency Ratios Non-Financial Debt 2050 Forecast 2020 Forecast 2000 400 China US Japan Eurozone Japan 350 300 Percent of GDP European Union 250 United States 200 150 China 100 1995 2000 2005 2010 2015 0 20 40 60 80 100 120 Source: Bank for International Sett
Slide 10: Fed Speak
Fed Speak “But there's — there's really no reason to think that this cycle can't continue for quite some time, effectively indefinitely.” – Jerome Powell, October 3, 2018 On Neutral Rates On Neutral Rates “Guiding policy by the stars in practice, however, has been quite “We may go past neutral.
Slide 11: 2019 Jerome Powell
2019 Jerome Powell Third time is a charm or three strikes and you’re out? “Now when we get conflicting signals as is not frequently the case, policy is very much about risk management. And I’ll offer a couple thoughts on that to wrap up. First, as always, there is no preset path for policy. And part
Slide 12: Inflation – Wage Pressure Benign
Inflation – Wage Pressure Benign No wage pressure is evident yet in broad measures. Historically, there has been little correlation between wage growth and broad inflation (1990s). Nominal Percent Change (Year-over-Year) 8 6 Employment Cost Index 4 Percent 2 0 -2 Unit Labor Cost -4 -6 2002 2003 2004
Slide 13: Economic Outlook – US
Economic Outlook – US Normalization of interest rates and inflation is going to occur, but the process is very, very slow. There is still slack in the labor market, and still room for increases in capacity utilization. Employment and Participation Prime Age Workers (25-54 yrs old) 86 Labor Force Par
Slide 14: US Economy Faces Headwinds
US Economy Faces Headwinds Financial Conditions Index Home Sales 101 0.8 6.0 Million Units per Year Existing Single- Million Units per Year 5.5 Family (right) 100 0.6 Index Level 5.0 99 New Homes 4.5 (left) 0.4 98 4.0 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Source: Bloomberg. As of 31
Slide 15: Global Growth Started 2018 With a Bang!
Global Growth Started 2018 With a Bang! Emerging markets and developed markets growth synchronized? Composite Leading Indicators 103 102 101 OECD 100 Index 99 EM 98 97 96 95 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Organisation for Economic Co-operation and Development. As of 31 Dec
Slide 16: Global Growth – Synchronized to Desynchronized
Global Growth – Synchronized to Desynchronized J. P. Morgan Growth Forecast Revision Indices 102.5 102.0 US 101.5 1 year ago= 100 101.0 100.5 Euro Emerging 100.0 Markets 99.5 Jan 17 Mar 17 Apr 17 Jun 17 Aug 17 Sep 17 Nov 17 Jan 18 Feb 18 Apr 18 Jun 18 Jul 18 Sep 18 Nov 18 Dec 18 Source: J.P. Morgan.
Slide 17: Growth and Inflation Have Been Shifting Downward
Growth and Inflation Have Been Shifting Downward Global Economic Data Change US Global Emerging Mkts EU JPY 800 600 400 Index Level 200 0 -200 -400 -600 2014 2015 2016 2017 2018 2019 Source: Bloomberg. As of 08 Jan 19 Forecast Revision Index, Core Inflation: Percent Change in 4-Quarter Rolling Forec
Slide 18: Slowing Money Growth Suggests Low Global Inflation
Slowing Money Growth Suggests Low Global Inflation US M2 Year-Over-Year China M2 Year-Over-Year 8 17 7 15 13 Percent 6 Percent 5 11 4 9 3 7 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 Source: Bloomberg. As of 30 Nov 18 Source: Bloomberg. As of 30 Nov 18 Euro Area and Japan M2 Year-Ov
Slide 19: Divergence in Financial Market Returns
Divergence in Financial Market Returns 2018 Total Returns of Various Asset Classes in USD 4 1.86 2 0 -0.02 -2 -2.46 -2.14 -4 -2.85 Percent -6 -6.33 -8 -10 -12 -14 -13.79 -14.58 -16 MSCI MSCI MSCI US BAA EM Gold 10-Year USD EM EAFE US Corp Debt Debt US Treasury Cash Source: Bloomberg, Bloomberg Barcl
Slide 20: US Interest Rates Remain Attractive Relative to Most of the Developed World
US Interest Rates Remain Attractive Relative to Most of the Developed World Yield Curves 4 3 US Yield to Maturity (%) 2 UK 1 Germany 0 Japan -1 3m 1 2 3 4 5 7 10 Maturity (yrs) Source: Bloomberg. As of 31 Dec 18 20
Slide 21: Eurozone Growth & Inflation
Eurozone Growth & Inflation Euro area domestic demand has been slowly improving. Lending to Households and Non-Financial Corporations 12 Percentage Change in Lending 10 8 Year-on-Year 6 4 2 0 -2 -4 2004 2006 2008 2010 2012 2014 2016 2018 Source: Haver, Western Asset. As of 30 Nov 18 EA19: Domestic D
Slide 22: Eurozone Growth & Inflation
Eurozone Growth & Inflation Inflation to rise gradually as economic slack diminishes. German Bunds vs. Euro Inflation Swaps Eurozone: Core Inflation and Bund Yields 1.80 0.8 6 3.0 1.75 EUR Inflation 0.7 30-Year Bund (left) Swap Forward 5 2.5 1.70 5Y5Y (left) 0.6 4 2.0 1.65 Core CPI (%) 0.5 Yields (%
Slide 23: Japan
Japan The current fiscal and monetary policy mix supports moderate growth and higher inflation expectations. Japan Inflation 5 Japan Unemployment 4 3 2 Core CPI (YOY, excluding Percent fresh food and tax hike effects) 1 0 Core CPI (YOY, excluding -1 fresh foods, energy and effects of sales tax) -2 2
Slide 24: China Stimulus
China Stimulus Girding for potential trade war Measures include: Interest rate cuts Reserve requirement reductions Greater lending to private enterprises Targeted fiscal spending Individual tax cuts 24
Slide 25: China
China China Financial Condition Index Shanghai Interbank Offered Rate 2.0 5 1.0 4 Percent Percent 0.0 3 -1.0 -2.0 2 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 18 Source: Yicai Research Institute, Haver Analytics. As of 30 Nov 18 Source: Bloom
Slide 26: Where Next on Trade?
Where Next on Trade? Current and Potential Impact of Trade War 700 Currently Affected At Risk 600 500 USD (billions, 2017) 400 300 200 100 0 China Industrial Production Steel & Aluminum Autos & Auto Parts NAFTA Source: Nomura. As of 18 Sep 18 26
Slide 27: Spread Sectors
Spread Sectors Year to Date Ending December 31, 2018 2018 Excess Returns 4 1.9 2 0 -0.6 -0.4 -1.2 -2 -1.8 Percent -3.2 -3.1 -4 -3.6 -5.2 -5.1 -6 -8 -7.7 -10 EM EMD European US UK IG US IG US Australia US US Cash Local USD Banks High- Credit Credit Bank IG Credit MBS CMBS Currency (CoCo) Yield Loans¹
Slide 28: Investment-Grade Credit
Investment-Grade Credit Spreads 54 bps wider in 2018. A Better Entry Point vs. a Year Ago. Opportunities Appearing. Bloomberg Barclays U.S. Credit Index Option-Adjusted Spread 230 Top Sector YTD 2018 Overweights Excess Returns 210 Sub-banking: +208 bps -488 bps Metals: +207 bps -408 bps 190 Energy:
Slide 29: US Investment-Grade Credit
US Investment-Grade Credit Spreads and Default Rates Bloomberg Barclays U.S. Credit Index: Option-Adjusted Spread 600 Option-Adjusted Spread (bps) 500 400 300 200 +143 bps 100 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Bloomberg Barclays. As of 31 Dec 18 Def
Slide 30: Profit and Debt
Profit and Debt Although the amount of non-financial corporate debt …profitability of corporate America has also increased outstanding as a percentage of GDP looks worrisome… and profit as a percentage of GDP is higher. Outstanding Debt as a Percent of GDP (seasonally adjusted) Profits After Taxes 4
Slide 31: Financial Vulnerabilities?
Financial Vulnerabilities? US Debt 100 Households 90 80 Percent of GDP 70 Non-Financial 60 Corporates 50 40 1982 1987 1992 1997 2002 2007 2012 2017 Source: Bank of International Settlements. As of 31 Mar 18 31
Slide 32: Capital Securities of European Banks Currently Offer Attractive Values
Capital Securities of European Banks Currently Offer Attractive Values Fundamental credit story remains constructive Attractive Relative Value Within Credit Universe XCCY Adjusted USD Yield to Worst vs Rating European bank fundamentals are still improving 11.0 HY AT1 (EUR) European growth should
Slide 33: After the Energy-Fueled Spike the Default Rate Has Declined Sharply
After the Energy-Fueled Spike the Default Rate Has Declined Sharply High-Yield Default Rates vs. Spreads Bloomberg Barclays U.S. High-Yield Index Spread (left) Moody's Default Rate¹ (right) Forecast² (right) 2,000 20 1,800 18 1,600 16 1,400 14 1,200 12 OAS (bps) Percent 1,000 10 800 8 600 6 400 4 20
Slide 34: Mortgage Pass-Throughs Becoming Attractive
Mortgage Pass-Throughs Becoming Attractive MBS Option-adjusted spread is at multi-year high and wider than historical long-term average Treasury OAS History Treasury OAS No-Fed-Buying Ave LT Ave Post-2009 Ave 150 100 Basis Points 50 0 -50 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2
Slide 35: Emerging Market Challenges
Emerging Market Challenges Higher US rates Higher US dollar Downshifting European, Chinese and Japanese growth Higher oil prices Potential trade war As of 11 Jul 18 35
Slide 36: Emerging Markets
Emerging Markets Emerging markets valuations look attractive both on a historical basis and relative to developed markets. Spread Between Local Currency EM and DM Sovereign Yields 600 550 Basis Points 500 450 400 350 300 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: J.P. Morgan
Slide 37: Higher EM Yields Compiled With Weak Currency Presents Buying Opportunity
Higher EM Yields Compiled With Weak Currency Presents Buying Opportunity J.P. Morgan GBI-EM Global Div Price Index 180 170 160 150 Index Level 140 130 120 110 100 90 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bloomberg. As of 31 Dec 18 37
Slide 38: Emerging Markets Inflation Remains Subdued With Limited FX Pass-Through
Emerging Markets Inflation Remains Subdued With Limited FX Pass-Through Emerging Markets CPI (Percent Change Year to Year, Not Seasonally Adjusted, 2010=100) 9 8 7 Percent 6 5 4 3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Haver. As of 30 Nov 18 38
Slide 39: Real Yield Differential and Core Inflation Rates for Emerging and Developed Markets
Real Yield Differential and Core Inflation Rates for Emerging and Developed Markets Real Yield Differential (EM vs. DM) Emerging Market Inflation 400 8 300 7 6 EM Core 200 Inflation 5 Basis Points 100 Percent 4 0 3 -100 G10 GDP Weighted 2 Core Inflation -200 1 -300 0 2006 2008 2010 2012 2014 2016 20
Slide 40: 2019 Outlook
2019 Outlook Global growth has downshifted but should remain sturdy US growth and inflation to moderate Central bank policy normalization will slow to a crawl Trade policy poses substantial risks Spread products should recover relative to Treasuries and sovereign bonds Emerging markets, though volat
Slide 41: Questions & Answers
Questions & Answers QA “—_WESTERN ASSET Nu’ ca. 41
Slide 42: Thank you
Thank you “WesTERN ASSET DN _- «a \
Slide 43: Risk Disclosure
Risk Disclosure © Western Asset Management Company, LLC 2018. 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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