Interview with Bill Campbell: how is macroeconomics affecting markets?
16 OCT, 2024
By Jose Luis Palmer from RankiaPro Europe
We interview Bill Campbell, Portfolio Manager for the DoubleLine Global Bond Strategy and a permanent member of the Fixed Income Asset Allocation Committee. In our interview, Bill Campbell shares his insights on the macroeconomic outlook and the current investment landscape.
Inflation, growth, central banks, yield curves, portfolio allocation, debt and defaults… Discover Bill Campbell's strategic vision.
Bill Campbell is portfolio manager of the DoubleLine Global Bond Strategy and a permanent member of the Fixed Income Asset Allocation Committee. Prior to joining DoubleLine in 2013, he worked for Peridiem Global Investors as a global fixed income research analyst and portfolio manager. Before that, he served as a vice president in Nuveen Investment Management’s Taxable Fixed Income Group, following his role as a quantitative analyst in their Risk Management and Portfolio Construction Group, preceding which he worked as an investment analyst at John Hancock Financial.
How do you assess the current global macroeconomic environment, particularly with inflation, growth and central bank policies? How are these factors influencing fixed income?
Global economies continue the path toward normalization after the inflation spikes over the past 2 years. As supply-chain pressures and fiscal policies ease, lower inflation is allowing central banks to normalize interest rates. Goods-price disinflation has been the main driver of this normalization amid sticky services inflation. Labor markets are loosening but remain tight, keeping upward pressure on wages and hampering inflation’s return to target bands. The European Central Bank and the Bank of England will likely continue to ease, possibly at a faster pace due to economic weakness, while in the US, the Federal Reserve will probably slow its rate cutting to a 25bps pace.
With the Fed and ECB beginning to cut rates, how do you see this impacting global fixed income markets? Are there specific sectors or geographies where you're finding greater opportunities as rates start to come down?
The ECB will likely cut rates 25bps at their October 2024 meeting and cut another 25bps in December. But the outlook for Europe remains challenging with growth driven by services in Spain and Italy while industrial economies in the north are experiencing subdued activity. Given the risk growth will remain weak, I like government bonds in core European countries such as Germany.
DoubleLine is also looking to Eastern Europe for interesting places to deploy capital. Czech and Hungary should recover as they reach the latter part of their cutting cycles, while reviving household consumption helps support growth outlooks. Poland should also benefit from investments flows on reform progress under Donald Tusk and improving investor confidence.
We’ve seen significant movements in yield curves recently. How would you position your portfolio in terms of duration and curve exposure in this environment?
While interest rate markets have been volatile over the past several quarters, global disinflation has allowed central banks to ease. A recent back-up in rates followed better-than-expected labor reports in the US. Consequently, markets dialed back the aggressive pricing for front-loaded cutting cycles that had been kicked off by the Fed’s starting its cutting cycle with a 50bps cut in September. So markets now are pricing in a reasonable cutting cycle.
We see more risk in the longer duration bonds. Rate curves remain very flat; an increase in term premium likely needs to be priced into markets. In addition, we see continued risk around the fiscal outlook for many developed market economies, including the US, increasing the need for future increased government bond issuance. In all probability, this will raise term premium to curves over time. Our favored positioning is mainly in the front end of the curve, and to some extent the belly of the curve. Here central bank cutting cycles should support rates at current or lower levels.
Given rising concerns about corporate debt and potential defaults, how would you navigate credit risk within global fixed income? Are there any sectors or regions where you see potential for distress?
Markets have rallied aggressively following the turn in the inflation environment last year. Credit spreads across all sectors are near their tights, as market participants chase the move lower in yields. I see this environment as frothy, warranting caution in deployment of capital. DoubleLine favors moving up in quality given spreads near historically tight levels. This is not the time to stretch for yield. Credit underwriting needs to be a focus at this point in the cycle. As rates come down, refinancing and M&A activity is likely to pick up, which we expect to create opportunities for astute credit investors. With defaults near historic lows, some pick-up is to be expected. But we see the bigger risk being a macro event that widens spreads in the near to medium term as compared to a default cycle.
In most developed economies, sovereign issuers face deterioration in fiscal outlooks.These countries continue to run wide budget deficits, many with debt-to-GDP ratios above 100%. This risks long-term government interest rates moving higher over time. Governments will need to continue to borrow from markets to support their spending. This increased issuance, although managed for now, will put upward pressure on bond yields.
What are the primary risks you're monitoring in global fixed income markets today, and how are you mitigating them within your portfolio?
Geopolitical risks remain at the forefront with escalating tensions in the Middle East, the protracted conflict in Ukraine and risk around an escalation in the South China Sea or over Taiwan between China and the West. These hotspots pose risks to energy markets, global supply chains and regional economies, which could accelerate inflation and curtail economic activity.
It’s an open question whether China’s recent policy announcements can generate a meaningful turnaround in that country’s stagnating economic trajectory. The overheating of China’s housing market has dented individual wealth, hurt domestic consumption and depressed land sales, the main source of revenue for local governments. The world’s second-largest economy likely will remain restrained over the coming years.
Finally, the US election; There is a high degree of uncertainty around the outcome of the election, the policies of Harris and Trump and the prospective market reaction to those policies.
Several countries might be facing sovereign debt challenges. How do you assess the risks and opportunities in investing in distressed sovereign debt, and what factors help you determine whether it’s worth the risk?
Emerging markets face headwinds from tepid global growth. In order to get comfortable with a distressed economic situation, DoubleLine analyzes the structural outlook for a country and considers its options in the event of a liquidity shock. What is the internal capacity to withstand the storm? Would such a scenario necessitate liquidity from external sources? Without confidence in a country’s long-term trajectory and ability to withstand liquidity shocks, we will steer clear. Even with official sector support, if a country does not take the steps to ensure a positive structural outlook, it will likely default after exhausting its official support package.
Views and opinions expressed herein are those of the individual portfolio manager and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
