US Core 2021 Outlook

Western Asset US Core Plus Strategy Outlook for 2021.

    Heading into 2021, Western Asset’s base case outlook is for an elongated, U-shaped global economic recovery. In the near-term, we expect that the escalating COVID-19 case count will continue to present challenges, particularly if there are additional regional restrictions imposed in the US and/or if European countries maintain their broad-based lockdowns. However, we believe that last month’s breakthrough news regarding the successful development of COVID-19 vaccines was indeed a gamechanger, as it heralded a clear end in sight for the global pandemic.

    The rally in risk markets since the bottom of the crisis in March 2020 has been remarkable. Forceful policy action to date has buoyed global economic activity and restored market functioning. Additionally, even prior to the successful development of a vaccine, market sentiment and expectations had shifted to the belief that the war against COVID-19 would eventually be won. Going forward, we expect central banks to remain extraordinarily accommodative to support the recovery, especially in light of both the high levels of economic slack and subdued global inflation pressures. Though the news of a COVID-19 resurgence in recent months has ushered in more cautious economic behavior on the part of many, which in turn has further tested investors’ resolve, we believe that markets are gradually adjusting to a brighter future.

    As we navigate the next few months as investors, our challenge will be in weighing opportunities tied to the reopening trade with the reality of the current economic landscape, which is still heavily impacted by COVID-19.

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    Link: Solution to consider: Western Asset Core Plus Bond Fund

    We are optimistic on investment-grade and high-yield corporate credit, as we believed that the unprecedented amount of US Federal Reserve (Fed) stimulus would provide a significant tailwind for these asset classes and would continue to do so for the foreseeable future. Additionally, the high-yield asset class overall has benefited further from lowered default rate assumptions and an improving global growth outlook. Looking ahead, while there will certainly be challenges on this long road to recovery, we feel there will be improvement in both market optimism and the reality on the ground. Lastly, we are also optimistic on emerging market debt, which we believe is an undervalued space. While Emerging Market (EM) countries will no doubt continue to face substantial medical- and fiscal-related challenges, we believe they will be the eventual beneficiaries of a broader global recovery.

    We cannot understate how important we find the positive vaccine news to be, but realize that logistical distribution and acceptance challenges lie ahead. We also remain mindful of non-COVID-19-related downside risks that may present in the form of partisanship in US fiscal policymaking, post-Brexit trade negotiations, US-China trade discussions and geopolitical tensions. All of these have the potential to disrupt economic and financial market activity.

    Ultimately, our inclination is that markets are very forward looking and that fixed-income spread products should be among the eventual beneficiaries of the next phase of the recovery. Given our belief that markets are truly forward-looking, and in light of the unique road to recovery ahead, we favor remaining flexible enough to capture value opportunities as they appear.


    Definitions:

    A U-shaped recovery represents the shape of the chart of certain economic measures, such as employment, GDP, and industrial output. This shape occurs when the economy experiences a sharp decline in these metrics without a clearly defined trough but instead a period of stagnation followed by a relatively healthy rise back to its previous peak.

    WHAT ARE THE RISKS?

    Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

    Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

    U.S. Treasuries are direct debt obligations issued and backed by the “full faith and credit” of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasuries, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.