Produced in partnership with T. Rowe Price.
The next six to 18 months are a critical period for asset allocators and will highlight the value of diversification, particularly geographical diversification, according to Sébastien Page, chief investment officer and head of global multi-asset at T. Rowe Price.
While geographically diverse portfolios have suffered in recent years, due to the dominant performance of US equities, diversification is starting to pay off and this will continue, at least in the short term, Page tells Top1000funds.com.
“For the past 10 to 15 years, US large cap equities have dominated the world and, at the moment, looking out six to 18 months, portfolio diversification is going to work, it has been working,” he says, citing T. Rowe Price’s tilt towards non-US stocks including Europe and emerging markets.
“We’re not calling for a large overweight to emerging markets as there are structural issues in some markets, which makes us cautious and we’re being selective but, broadly speaking, we’re in favour of diversification and believe [emerging markets] should be part of a diversified portfolio.”
“We’re comfortable continuing to add non-US stocks but not because we see an end to US exceptionalism or think investors should make a major strategic asset allocation shift. This is a tactical call because our long-term view is still that the US economy will continue to be the engine of growth for the world.”
Page rejects the suggestion that the market’s sudden and severe reaction to the US administration’s additional tariffs in early April, and the recent sell-off of the US dollar, signalled a potential regime change that challenged the position of the US as a global safe haven.
He believes the US will deliver strong capital growth for investors with a time horizon of 10 years or longer, despite a potential short-term valuation advantage for non-US stocks and bonds.
“The dynamism, risk-taking, entrepreneurship and sheer size of the US capital market, and the liquidity of that market, makes it a meaningful force,” he says, acknowledging that US equity valuations currently appear high.
T. Rowe Price has been trimming its exposure to US equities, and equities in general, but remains modestly overweight equities, supported by solid earnings growth and potential for pro-growth fiscal policies.
According to Page, the $1.61 trillion manager is taking a more cautious stance in the current economic environment, listing heightened trade policy angst, subdued US growth expectations and reaccelerating inflation as key risks to the resilience of global growth.
Cautious of ‘fat tails’
For Page, the biggest concern is not overinflated equity valuations or the risk of inflation eroding long-term real returns. Rather, he’s most concerned about “fat tails,” referring to extreme and unexpected market swings and black swan events.
Given the unpredictability of extreme events and the magnitude of fat tails, they can have a severe impact on portfolio returns.
“Geopolitical headlines are driving day-to-day market volatility and we’re seeing extreme days on the upside and the downside, and these fat tails are unpredictable,” Page says, careful not to use the word uncertain to describe the current situation.
Based on an analysis of recent media articles, Page says the word uncertain or uncertainty has been used more in the past few months than in any other period, including during the COVID-19 pandemic.
Under more normal market conditions, T. Rowe Price would see a sharp market downturn as an opportunity to buy the dip, assuming the fundamentals have not been impaired, but the firm is not doing that right now.
“We tend to be contrarian so [ordinarily] we’d be buying stocks but we’re not which is saying something,” Page says.
“We bought a lot during COVID; $3 billion of stock exposures on the way down and on the way back up, but right now we’re neutral between stocks and bonds because the tails are fat and you can get really sharp counter rallies.”
“This is not the time to be a hero. We just want to make our tactical asset allocation bets. We’re being active in our portfolio diversification, being overweight Europe, overweight value and overweight real assets.”
In times like these, Page believes institutional investors, including pension funds and asset managers, can play a leadership role in helping clients and investors navigate markets, accept a degree of stress, and stay on course.
“You don’t want to miss [market rallies] but you don’t want to panic and sell [at the bottom] either, that’s not the strategy,” he says.
Following the release of his third book in April, The psychology of leadership, Page says stress is an unavoidable part of life and essential for optimal performance.
“Stress and resilience are super important topics for me and I wrote this book because I was feeling stressed at work,” he says.
“I think we all have to stop stressing about stressing, and accept that optimal performance does not happen at a zero-stress level.”
Drawing on the field of sports psychology, Page says stress boosts performance but only up to a point, after which it can be detrimental to one’s health.
“When you’re overstressed you don’t make the right decisions but we shouldn’t go through life trying to live with zero stress because it’s impossible and that doesn’t lead to optimal performance,” he says.
