Western Asset Core Plus Bond Fund Class R · NASDAQ:WAPRX
Western Asset Core Plus Bond Fund Class R — Western Asset Management Company — Earnings Presentation (January 2021)
36 slides from Western Asset Core Plus Bond Fund Class R's earnings presentation, Jan 14, 2021
Slide 1: 1Q21 Market and Strategy Update
1Q21 Market and Strategy Update January 14, 2021 Ken Leech Chief Investment Officer 1
Slide 2: I'd like to cancel my subscription to 2021
I’d like to cancel my subscription to 2021. I’ve experienced the free 7-day trial and I’m not interested. 2
Slide 3: Darkness: The Winter COVID-19 Wave Has Been Severe and Is Not Over
Darkness: The Winter COVID-19 Wave Has Been Severe and Is Not Over A Massive Third Wave of COVID in the US Japan and South Korea Have Also Struggled With Outbreaks COVID-19 Reported Hospitalizations and Daily Deaths COVID-19 Cases and Net New Hospitalizations (daily) 7-Day Moving Average (thousands)
Slide 4: COVID-19: Humanity will win this war
COVID-19 Humanity will win this war, although it is losing the current battle Cases surging everywhere US, UK and South Africa amongst places of greatest concern Virus is evolving and has spawned new, more infectious variants first detected in the UK and South Africa Existing vaccines are effect
Slide 5: The Global Economy Is Gaining Traction But Faces Output Slack
The Global Economy Is Gaining Traction But 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 1Q7
Slide 6: Global Governments Have Provided Enormous Amounts of Stimulus
Global Governments Have Provided Enormous Amounts of Stimulus While the stimulus to date has been substantial, the question remains if current stimulus will be sufficient in mitigating permanent damage to global economies or if more will be required. Change in Cyclically Adjusted Primary Fiscal Bala
Slide 7: 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 22 Personal Income, With and Without Government Aid 21 The net income gain from CARES Act payments has 20
Slide 8: Consumer Fundamentals Have Improved Post-COVID-19
Consumer Fundamentals Have Improved Post-COVID-19 Increased savings rate has gone to reduce debt Lower interest rates have decreased debt burden levels to the lowest in 20 years 14 20 18 13 16 12 14 Savings Rate (right) 12 Percent Percent Debt Burden Percent Disposable Income (left) 11 10 8 10 6
Slide 9: Labor Markets Have Been Severely Wounded
Labor Markets Have Been Severely Wounded US Employment Permanent Job Losses Unemployment Rate for Minorities 8000 20 U-3 Hispanic African American 7000 18 16 6000 14 5000 12 4000 10 3000 8 6 2000 4 1000 2 0 0 2001 2002 2004 2006 2008 2010 2012 2013 2015 2017 2019 2000 2001 2003 2005 2007 2009 2011 2
Slide 10: The Road Ahead for Europe Also Appears Challenging
The Road Ahead for Europe Also Appears Challenging Low eurozone inflation makes the ECB’s job 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 offi
Slide 11: 2021 European Outlook
2021 European Outlook We expect Europe to recover to pre-crisis activity levels, but not before the end of 2022 Inflation in the eurozone is likely to remain muted for an extended period, abstracting from significant base effects in 2021 due to tax changes This will allow the ECB to focus its interv
Slide 12: China Outlook: Nascent Signs of Economic Normalization
China Outlook: Nascent Signs of Economic Normalization Despite abating coronavirus outbreak, China maintains systematic control Leading indicators are encouraging Financial market conditions continue to be growth-supportive Fiscal policy is also becoming supportive Chinese Exports Gather Mom
Slide 13: 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 The package of current monetary and fiscal policies (first and second arrows in Abenomics) will be maintained in principle. – Abe had never seriously implemented the third a
Slide 14: The Challenges of Global Slack & Debt Burdens Will Retard Future Growth
The Challenges of Global Slack & Debt Burdens Will Retard Future Growth Dependency Ratios Government Debt as % of GDP 2050 Forecast 2020 Forecast 2000 260 Japan Italy 240 US France UK Japan 220 200 180 160 European Union Percent 140 120 100 United States 80 60 40 China 20 0 1990 1995 2000 2005 2010
Slide 15: The Prevalence of Negative Yielding Debt Globally Continues to be Remarkable
The Prevalence of Negative Yielding Debt Globally Continues to be Remarkable Bloomberg Barclays Global Aggregate Negative Yielding Debt 20 35 18 30 16 14 25 Market Value (USD mn) 12 % Negative Yielding (right) 20 Percent 10 15 8 6 10 Negative Yielding Debt Market Value (left) 4 5 2 0 0 Jan 17 May 17
Slide 16: Democrats Control Government; Continued Spending Likely
Democrats Control Government; Continued Spending Likely Budget Reconciliation: Pass legislation with 50 votes in the Senate; there will be three chances in 2021-2022 Razor Thin Margins: 50-50 in Senate, 6 vote margin in the House; legislation must be acceptable to all factions of Democratic party Ex
Slide 17: Fed Expects Only a Gradual Rise in Inflation
Fed Expects Only a Gradual Rise in Inflation “Looking at everything we know about inflation dynamics in the United States and around the world over recent decades, we expect it will take some time…There will be slack in the economy… The economy will be below maximum employment, below full demand. An
Slide 18: Recent Fed Quotes
Recent Fed Quotes Vice Chair Clarida, Jan 8, 2021 Governor Brainard, Jan 13, 2021 Discussion about base effects: “Overall, payroll employment is still nearly 10 million jobs below its February level. If we adjust the 6.7 percent “I do believe that because of some year-over-year base headline unemplo
Slide 19: 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 PowerPrice Consumer Under Severe Inflation in Downward Pressure Various Regions 2.4 10-Year Breakeven Inflation (%) China (Core CPI) 2.0 USA 31 Dec 19 23 Mar 20 11
Slide 20: Inflation — Keeping an Open Mind
Inflation — Keeping an Open Mind 200 Short-Term Growth in M2 Money Stock Percent Change in Employment 10% COVID Shutdown 13-week average of weekly changes in M2 money stock 0% Billion USD Per Week 150 -10% High Wage (>$60k/y) 100 -20% Low Wage -30% (<$27k/y) 50 -40% 0 -50% 2019 2019 2019 2019 2020 2
Slide 21: Market and Fed Expectations for Rising Inflation Have Been Seen Before
Market and Fed Expectations for Rising Inflation Have Been Seen Before Core PCE Deflator Inflation vs. Successive Fed Forecasts Core PCE Deflator Inflation vs. Break-Even Inflation Rates 2.5 2.5 Sep 2018 Break-Even Inflation Rate Sep 2019 2.0 Sep 2014 2.0 on 10-Yr TIPS Percent Per Year Percent Per Y
Slide 22: US Rates Are Relatively Attractive Relative to Other Developed Countries
US Rates Are Relatively Attractive on Both Hedged and Unhedged Relative to Other Developed Countries 10-Year Yields Government Bond Yields, JPY-hedged 1.4% Hedged-Yield Local JPY-Hedged Yield 1.2% Advantage Over 10- Yield (%) (%) Year JGBs 1.0% 10-Year Japan 0.04 0.04 0.8% 10-Year US 1.16 0.76 0.72
Slide 23: A Tale of Two Markets
A Tale of Two Markets Spread Sector Excess Returns — 1Q20 vs. April 1 to December 31, 2020 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 Hi
Slide 24: US Investment-Grade Credit
US Investment-Grade Credit Spreads and Default Rates Bloomberg Barclays U.S. Credit Index: Option-Adjusted Spread 600 500 Basis Points 400 300 200 100 92 bps 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: Bloomberg Barclays. As of 31 Dec 20 Default Rates, I
Slide 25: Record Debt Issuance Over the Last Year Is Less Concerning
Record Debt Issuance Over the Last Year Is Less Concerning Because Corporates Used Almost All the Funds Raised to Bolster Cash Positions Non-Financial Companies 50 40 45 35 40 30 Percent Debt Less Cash as a Share Percent 35 of Assets (right) 25 30 Debt as a Share of 25 Assets (left) 20 20 15 1975 19
Slide 26: 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 27: High-Yield Strategy – Term Loans Offer Better Relative Value
High-Yield Strategy –Term Loans Offer Better Relative Value Post HY Outperformance HY unsecured bond vs. secured term loan yields have compressed from +200 bps in March 2020 to roughly flat High-Yield vs. Loan Yields 12 10 Yield-to-Maturity (%) 8 Bloomberg Barclays US High- Yield Ba/B Index 6 4 Non-
Slide 28: Loan Fundamentals Remain Intact and Improving While Yields Remain Attractive
Loan Fundamentals Remain Intact and Improving While Yields Remain Attractive Loan asset class distress ratio below pre-Covid levels with improving fundamental profiles and positive outlook Distressed Ratio Positive Ratings Migration – Loan 2020 S&P Weekly Volume 90% 10% 20 60 80% Loan Distress Ratio
Slide 29: Housing Market Recovery Path
Housing Market Recovery Path Housing has experienced a V-shaped recovery but 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) 20-Cit
Slide 30: Mortgage Credit Offers Attractive Relative Value
Mortgage Credit Offers Attractive Relative Value Mortgage credit (both residential and commercial) has lagged in the post-Covid recovery as there has not been explicit stimulus from the US Federal Reserve (Fed) Sectors Without FED Support Sectors With FED Support J.P. Morgan J.P. Morgan Bloomberg Ba
Slide 31: 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 32: China Local Onshore Bonds Offer Attractive Valuations
China Local Onshore Bonds Offer Attractive Valuations Relative to DM Peers 4 3.18 3.18 2.99 2.87 3 China 2.47 2 Percent 1 0.68 0.47 US 0.16 0.28 0.12 Japan 0 -0.11 0.02 -0.11 -0.11 -0.09 Germany -0.67 -0.60 -1 -0.77 -0.76 -0.71 -2 1 year 3 year 5 year 7 year 10 year Source: Bloomberg. As of 31 Dec 2
Slide 33: 2021 Outlook
2021 Outlook Economic Global economy is recovering Fiscal and monetary policy should stay supportive Second half should see meaningful pick-up in growth—as economy “Reopens” Global economic slack, debt burdens, labor market scarring, and SME destruction will take years to absorb Central ba
Slide 34: Questions & Answers
Questions & Answers QA TN “WESTERN ASSET Je sie, PN 34
Slide 35: Thank you.
Thank you. rN ; “| WESTERN ASSET
Slide 36: Risk Disclosure
Risk Disclosure © Western Asset Management Company, LLC 2021. 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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