There will be richer opportunity in the credit space going forward.
That’s the view of Ken Leech, CIO of Western Asset Management.
Western Asset Management already has an overweight in US commercial mortgage-backed securities, which may illustrate its investment stance.
‘That has been a good sector to be in, certainly it has held up better than some of the others in previous years.
‘That is the reason why, while we are optimistic about that sector, we feel the opportunities are a little more compelling in other sectors, particularly in the credit sectors.
‘We are overweight in investment grade and high yields. Those sectors are still attractive.’
Concerns for bear markets
However, the Western Asset team is also concerned that a bear market may be approaching.
‘We are starting to modestly reduce positions,’ Leech said. ‘Given the high price, we still think you have seen a growth backdrop that’s favourable and a policy backdrop that’s favourable.
‘Valuations are fine, given that they had two previous years of such challenge. Where we have selected opportunities and we get full restoration or value, we want to start trimming positions.'
One of the things, Leech said, is that he has always believed strongly in building portfolios that protect downside risks.
‘We try and have macro strategies to help cushion for the drawdown. And the biggest one we have had is the sense that we need to have a little bit of extra duration.
‘We needed to have that duration really concentrated on one end of the yield curve. We are reducing the size of our curve-flattening position, reducing a little bit of our duration overweight.'
Furthermore, weakness in US manufacturing is also a drag on the economy, according to Leech.
‘The reason we think US growth rate is unlikely to meaningfully move to the upside comes down to our premise that manufacturing is unbelievably in the doldrums,’ he said.
‘It is really challenged in the global environment that we are in.’