Last updated: 03:27 / Thursday, 28 January 2016
According to Legg Mason

The Current Market Presents Unique Opportunities for Active Managers

The Current Market Presents Unique Opportunities for Active Managers
  • Technology, financials and health care look attractive to Francis Scotland
  • James Norman emphasizes on the importance of a diversified portfolio
  • Scott Glasser is excited about the pending volatility
  • All markets will see a high correlation but a very different magnitude of return, says Norman

Reacting to the recent downturn in global equity markets, Francis Scotland of Brandywine Global, a Legg Mason affiliate, observed that there’s been a loss of confidence in the last month, which he attributed to a tightening global liquidity position; and capital coming out of financial assets worldwide. “We are in a correction that’s ongoing. I don’t expect it to be an extreme correction,” Mr. Scotland declared. “As a manager I like to use volatility to my advantage. I’m seeing compelling values come to the surface in U.S. stocks. The values tend to be in technology, financials, health care. A number of dividend growth stocks appear attractive. Quality-oriented stocks are doing better. That’s where the opportunities are.”

James Norman of QS Investors added that “people are re-evaluating where opportunities are. It’s hard to predict because a lot of it will be based on what investors believe. There’s going to be a lot of behavior involved in this. If people are nervous, markets will become more volatile. I think investors are nervous. We’ll have a lot of uneven economic data: some will surprise on the upside, some will surprise on the downside. It’s going to be very mixed. Going forward you need a diversified portfolio. Make sure you’re not exposed to too much of any individual economic risk or macro risk, whether oil prices, or China, or any of the things that China affects, and so on. That really is the best course of action. But it can go either way. If you look further out – three to five years – we think equities will be a very attractive place to be. However, it’s going to be a very bumpy ride over the next three to five years.”

Scott Glasser of ClearBridge Investments thinks the markets have retained many positives. “For stocks that are growing their earnings and giving capital back it is a fine environment,” he said. “We’re coming out of a period where we’ve had extremely low volatility, a function of a QE regime that had been in place for five plus years. Easy money and ultra low or zero interest rates promote a low volatility environment. We’re going back to normal and volatility will go back to at least normal. My expectation is to see higher volatility over the course of the next year… I don’t mind volatility,” he said. “From a client perspective it’s not fun to go through, but I think from a portfolio manager’s standpoint it actually gives us better ability to add value.”

In the fixed income arena, Michael Buchanan of Western Asset Management said, “We should continue to expect elevated fixed income volatility… One answer to what’s driving this increase in volatility is regulatory. Post-crisis, many firms – especially dealers and market makers – have been operating with a higher level of regulation, whether Volker Rule, Basel III, you name it. They’re operating defensively, with less inventory…the key point is that, especially given where valuations are now, you can take advantage of this opportunity. As much as it hurt in 2015, it’s likely to contribute to performance in 2016.”

“Global equity markets have really had quite a strong six years plus,” he said. “The things that had been very cheap six years ago have now gotten not cheap, and arguably maybe a little bit towards the upper end of normal. That’s sort of like a rubber band. When that rubber band is pulled tight, it’s much more sensitive to somebody pulling at it and vibrates a lot more... Three things we’re focusing on, that are going to drive a lot of the volatility but also a lot of opportunities because there’s a lot of dispersion, are: we are at fair valuations; investors are worried about growth going forward, but it’s going to be slow growth; and macro risks, since people are more sensitive to them when valuations are towards the higher end. Whether it’s China, oil, the U.S. Federal Reserve raising rates, people just become very concerned.”

“Because of that we’re seeing a lot of dispersion in individual country returns,” Norman said. “We’re also seeing a lot of dispersion in sector returns, so there are very large differences... All markets will see a high correlation but a very different magnitude of return,” he said.

In regards to China, Scotland mentioned “Philosophically, this is an economy where success has been measured by their ability to control the outcome. Moving forward, they really should be measured in terms of letting go.” Norman said. “China will be sort of a lumbering awkward teenager trying to figure it out. But at the end of the day, they will figure it out, because they have to. They’re also really a state-controlled economy and they will make it work – whatever it takes.”

When asked about oil, Buchanan said, “It’s tough to say near-term where oil is going… We strongly believe – and we think it’s a 2016 event – we’re going to print the bottom on oil, and that you will see a migration higher in terms of pricing… It’s just a matter of time before you start to see production come down in a meaningful way. At the same time, we do see demand continuing to grow. That supply-demand dynamic should go a ways towards addressing the imbalance.”