The apparent anomaly of rising US interest rates and a falling dollar should not come as a surprise, Brandywine Global managing partner, Adam Spector, told NZ investors last week.
Spector, on tour last week in NZ with Brandywine Global head of business development Tad Fetter, said while investors traditionally associate interest rate hikes with higher currency levels, historical data shows otherwise – at least in the case of the US Federal Reserve.
He cited Brandywine research showing the US dollar generally trended down in five of the last six Fed hiking cycles dating back to August 1977. In fact, the US dollar was only above where it started two years post the first Fed interest rate rise in the up-cycle kicked off in June 1999.
According to Spector, the current relatively weak greenback should be seen in the context of good, but not spectacular, US growth and “synchronised expansion” in the rest of the world.
At the same time, the global fixed income manager says in its December quarter report that the much-touted Trump tax cuts, while perhaps adding fuel to US growth, have not pushed the dollar higher.
“This seems in line with our view that the direct effects [of the tax cuts] are not that significant, and also recognition that the U.S. is not the only country in the world cutting taxes,” the report says. “Under these circumstances, we continue to believe that a significant rally in the U.S. dollar would not be in the interests of the global economy and would be equivalent to a premature tightening in global monetary policy.”
Given its global mandate, Spector said Brandywine Global was well-positioned to take advantage of the US dollar weakness.
He said the Brandywine Global Opportunistic Fixed Income Fund – launched in portfolio investment entity (PIE) format last week in NZ under the banner of distribution partner Legg Mason – was also able to reposition quickly at the margins as opportunities arose out of the recent market volatility.
Overall, Spector said the group was upbeat about the prospects for the global economy this year despite concerns that higher interest rates, rising inflation, and the unprocessed back-log of central bank crisis-era monetary fuel could destabilise markets.
For instance, he said about US$8 trillion of the current US$48 trillion outstanding sovereign bonds are in negative-yielding securities.
While a rapid reversal in monetary policy could trigger further market ructions, the December quarter report says any unwinding of central bank support “is going to be very slow” regardless of moderate inflation data.
“We could review the global landscape but simply put, central banks are going to be late to tightening in this expansion. They want to see the ‘white of the eyes’ of inflation before they move,” the December report says. “Inevitably there will be a point where capital markets may compete with the real economy for liquidity, as central banks gradually go into reverse. In the meantime, negative real rates and low volatility are like two peas in a pod. The reversal is a story for the second half of 2018.”
The Legg Mason Brandywine Global strategy, which follows a ‘benchmark agnostic’ style investing across international fixed income securities, derivatives and cash, has attracted over $800 million of NZ wholesale money.
Globally, the Philadelphia-based firm manages over US$74 billion across various strategies, sourced almost equally between US and international clients.
According to the PIE product disclosure statement released last week, “Brandywine Global is not afraid to uncover investment potential where others see risk with a central objective to maximise risk-adjusted returns over an investment cycle”.
The strategy has returned 7.8 per cent annually for NZ investors over the five years to December 31, 2017, compared to the benchmark 5.5 per cent, according to Melville Jessup Weaver data.
Most NZ investors would likely shift to the new PIE structure, Legg Mason said following the product launch last week.