D. William Kohli

Don’t underestimate this economy

D. William Kohli, Chief Investment Officer, Fixed Income, 3/7/2016


As market volatility stretches deeper into the first quarter, it is worth revisiting our economic scenario to see what has changed and what hasn’t.

The impact of China and weak oil prices Two issues — China’s slump and the widening impact of low oil prices — have dimmed our outlook slightly. China’s economic data has disappointed, and policymakers have faced greater challenges in managing capital flight, spending more than $100 million to keep the currency’s exchange rate at acceptable levels.

Meanwhile, as U.S. energy producers are belatedly cutting production in response to oil prices that have fallen below $30 per barrel at times, the impact on the general economy has been somewhat worse than expected. As a result, we are seeing greater tightness in credit markets, where many participants have reduced the amount of risk they want to take and the liquidity they provide.

While these issues are significant, we believe their impact on the overall economy remains small. Our central outlook for the rate of economic growth in the United States remains in the range of 2%–2.5%, although we now see the lower end of that range as more likely than the upper end. We also have adjusted our global outlook a little lower.

Fundamental opportunities are becoming more attractive This modest adjustment in the global growth scenario does not change our fundamental outlook for the fixed income sectors that we favor in our credit and prepayment strategies. Many opportunities offer compelling return potential.

When we look at spread sectors on a fundamental basis, we think investors are very well compensated for the risks involved. Spread sectors could come under fundamental pressure given a moderately weaker economic outlook and a slight uptick in recession risk. Yet even in negative scenarios, the securities offer compelling positive return potential.

These conditions demand patience to see the benefits of an active strategy driven by fundamental research. Our approach gives us conviction that the opportunities we see in credit and prepayment risk can drive long-term returns.

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