T. Rowe Price began lowering some of its equity positions in 2017, but the firm says the economy is not necessarily headed into recession.
“We don’t expect a recession in the next couple of years,” said Rob Sharps, T. Rowe Price’s head of investments and group CIO, speaking at Pershing Advisor Solutions' RIA Symposium on Tuesday morning. “While I think the odds of recession before 2020 are low, they are probably rising.”
Sharps said the outlook is becoming a little more fragile as the Fed raises rates and central banks around the world are starting to drain liquidity out of the system.
“That said, the fundamentals around the globe, particularly in the United States right now are remarkably strong. … If you look at consumer confidence, small business optimism, they are at levels they haven’t reached in this recovery since the global financial crisis.”
He points to the working age labor participation rate, which he says is starting to increase for the first time during the recovery from the Great Recession. The question is can fundamentals be sustained and how might they deteriorate. Sharps says that the Trump administration’s policies are mixed blessings—on the one hand, deregulation in financial services and other areas and corporate tax cuts have been catalysts for the economy. On the other hand, protectionist policies, including tariffs, erode that confidence; though Sharps says they will have only a small direct impact on GDP, they could affect confidence and decision making.
The only way for companies to prepare for another downturn is to have strong balance sheet, he said. Right now, he said, T. Rowe Price has about $3 billion in cash and investments and an additional $1 billion in seed capital on its own balance sheet and no net debt. That gives the firm the ability to invest in downturns.
The firm is a more high-profile symbol of the active management holdout in an investment world dominated by passive investing and low-cost index funds and ETFs. T. Rowe has helped hold out against that, particularly with its substantial target-date fund retirement business. Those funds saw $6 billion in net cash inflows in the first quarter of 2018, according to the firm’s 10-Q form.
Active management, though, says Sharps, is something that can’t easily be commoditized. “I think there are a dearth of people who do it well. But I think that for [financial advisors], active management would be one of the key sources of differentiation that you would deliver.” And he said that value will become lot starker when the next recession hits and the virtuous rise of all asset classes suddenly turns into a chaos of assets moving in uncorrelated ways—a perfect time for active management.
Sharps made the comments in a one-on-one session with Pershing Advisor Solutions’ CEO Mark Tibergien.