It's a strange time for the Fed to cut rates, says T. Rowe Price's Sebastien Page

Averages did finish off their worst levels of the trading session, but joining us now is T Rowe Price, Head of Global Multi Assets Sebastian Page. Sebastian, it’s good to have you on. You know, I’m, I’m looking at these notes from you and one of the things you point to is the fact that the most important chart in capital markets from your perspective is the one year break events. And the big move that we’ve seen in just a couple of months on that, on a day where you have markets grappling with the stickiness of inflation amid what I’ll call resilient economic data and what’s been easing financial conditions as of late. How does that call into question the timeline of the Feds rate cuts and how important is that too in I guess the investing thesis and how you’re positioned this year? Yeah, I think it could jeopardize the timeline for the Fed cuts. Look, markets are near an all time high. Financial conditions when you look at a broad index, they’re looser than they were back when rates were at 0. So financial conditions are incredibly loose and unemployment is below 4%. So to me it’s a strange time for the Fed to cut and this inflation number is critical. These are break evens. So it’s kind of what the market this pricing in. You take a normal nominal bond and you subtract the yield on an inflation protected bond. That number went from 2% a few months ago to 4% now and Morgan wages are growing at 5% still. So I don’t know how that’s consistent with 2% inflation. I’m not saying we’re going back to 9% like 22, but I think the risk is to the upside, OK. So what does that mean in terms of how you position in this market? If the risk is to the upside, What do you buy here? What do you stay away from? There are several ways to hedge against the upside risk and inflation. Let me give you a few. First, in the fixed income portion of our portfolios, we’re short duration now. I don’t expect a hard landing. So we’re actually long credit and we’re long cash. It’s a barbell, but short duration overall in stocks we’ve been adding to value stocks which was they respond much better to upside surprises and inflation. And then we have a dedicated allocation to real asset equities. This is diversified portfolio of real estate securities of metals, mining and energy companies. So we’ve been long energy from a broad asset allocation perspective for a little while now. So these are all ways to protect against it. And stocks versus bonds, you mentioned earlier, I call myself a reluctant bear. I haven’t called myself a reluctant bear in quite a while. We’re actually aggressively convinced convincingly Morgan neutral between stocks and bonds and we’re comfortable there. OK, Sebastian, I hear what you said about value there. But then at the same time, you say AI should continue to deliver efficiency gains because it’s real. And you say the market is due for a broadening. But thus far in recent quarters, those two ideas almost seem to be at odds, because when people get excited about AI, they’re buying mega caps and small caps are lagging. How are both of those things going to be real at the same time? Look, I think the AI is real, but the large gap tech companies have run really hard. I think you should own them. It’s not a large overweight to value. It’s not completely going out of the growth part of the markets. But if you look at the valuation case, John, it’s really interesting right now. Value stocks are in the bottom 20% of their valuation range, historically last 30 years relative to growth stocks. And when they’re in that bottom 20%, historically, they tend to outperform growth stocks by about 7% in the following 12 months. That’s the long run historical average. So you have a valuation opportunity that you can combine with the macro factors that we’re just talking about upwards pressure and inflation and also upwards pressure on rates, which will ultimately put pressure on longer term growth companies. So it’s a nuanced picture, but on the margin, we end up being long value, OK. You’re also long real asset equities. You mentioned energy, commodities, real estate specifically on real estate, how careful do you have to be to protect yourself from any dangerous exposures in office or regionally? It’s definitely a risk. Our analysts have done a really comprehensive risk assessment of the commercial real estate space and the losses there could be as high as 300 billion over the next five years under different scenarios. So you want to allocate to real estate through active management, not just the passive index exposure, definitely pick your spots, but if you pick your spots you get some longer on inflation protection and you get some value out of some companies in there. Now I’m an asset allocator, I don’t pick those stocks myself, but I have confidence that I I’m better off investing in an actively managed strategy in the real estate space. But yes, commercial real estate is a risk and you know if with upward pressures on rights that risk increases as refinancing you know as we hit the maturity wall if you will.

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