Western Asset Management, a global fixed income manager wholly-owned by Legg Mason, believes the tighter fiscal and monetary policies carried out by Asian policymakers in response to inflationary pressures will progressively become more appropriate for the region.

ôGiven the continued threat of higher inflationary expectations in Asia, and the potential impact from a more prolonged slowdown in the US economy and a weaker Eurozone economy, we have reduced risk and are overall more defensive in Asian credit,ö says Singapore-based Rajeev De Mello, head of Western AssetÆs Asian investment team.

Western Asset remains invested in selective high-grade and high-yield corporate bonds that it says offer good relative value underpinned by good credit fundamentals and healthy earnings outlooks. The firm also maintains a slight underweight duration in the Asian US dollar sector. Its outlook on the Asian investment-grade credit sector is more bearish as it believes risk aversion appears to have firmly taken over, leading to spread widening.

ôWe maintain our structural view that most Asian currencies will continue to perform well over the longer term under the influence of strong external balances, although sentiment has deteriorated due to inflationary concerns,ö De Mello says. ôOur strategy continues to be one of diversifying our Asian currency exposure given the potential for volatility in some currencies.ö

Western Asset expects tighter monetary policy in most South and Southeast Asian countries due to fresh concerns about increasing inflationary pressures. It also anticipates the monetary policy to remain tight in the northeastern markets, especially China and Taiwan.

ôWe continue to favour the Indian market as the Reserve Bank of India has demonstrated its ability to tighten policy,ö De Mello says.

Western Asset believes that US monetary policy will remain stable and is consistent with a gradual economic recovery later this year with core inflation remaining contained. The firm is more concerned about growth outside the US given hawkish policy stances by European central banks and the lack of fiscal policy flexibility. Emerging markets should continue to grow but could slow too given the impact on consumption of elevated levels of oil and food prices and tighter monetary policies.

Western Asset is one of the worldÆs leading money managers with more than $632 billion in assets under management. Legg Mason, its parent, is one of the worldÆs largest global investment management firms with assets of more than $950 billion.