The economic and market environment may indicate a shift more favorable to value over growth investing, T. Rowe Price's investment team said Wednesday, citing the heavy weight of technology stocks in the growth universe and various pressures on that sector.
Skilled worker shortages and salary inflation are hampering the tech sector, and consumer-focused technology platforms could be exposed to a cyclical slowdown in spending, the firm noted in its midyear outlook. These factors suggest that the investing style rotations seen since the pandemic recovery have tipped in favor of value.
"A shift in market leadership appears to be underway," Justin Thomson, head of International Equity and chief investment officer, said. "As we've seen from history, these cycles have tended to last a long time."
The new environment could bring opportunities for investors, he said, adding, "In volatile markets, active management can be your friend."
The firm suggested the "new era" is likely to be marked by less liquidity, higher inflation and higher interest rates, with investors possibly needing to rethink expectations that the Federal Reserve will pump liquidity into the market to prop up falling asset prices.
In fact, the Fed could hike interest rates more aggressively and cut off a second-half rebound "if risky assets rally too exuberantly," T. Rowe said.
Real Risk of Recession
T. Rowe's analysis came the same day that Federal Reserve officials raised benchmark interest rates by three-quarters of a percentage point — the biggest hike since 1994 — lowered their outlook for gross domestic product growth and signaled they will continue to aggressively raise rates by another 175 basis points in 2022 to reach 3.4% by year-end.
Arif Husain, T. Rowe's head of International Fixed Income and CIO, said the recession threat is real.
He suggested that the era of ample liquidity, low inflation and low interest rates in global markets has come to an end.
"With inflation pressures coming from both supply and demand, and driven by cyclical and structural factors, the forecast is exceptionally cloudy," Husain said. "I think that means that the Fed is going to keep raising rates. There will come a point where they'll want to pause and see what effect they are having. But my view is that we should be prepared for much higher rates going forward over the next few months.
"Over the medium term, I think there will be a level of yields that will make clients happy with the income they're getting from their bond portfolios," he added.
U.S. Treasurys and other developed nations' bonds "did an exceptionally poor job of offsetting equity volatility in the first half. This suggests that investors may need to expand their search for diversification across fixed income sectors and geographic regions," according to the outlook.
Sébastien Page, head of Global Multi‑Asset and CIO, said he thinks Treasurys "still have a role to play in portfolio allocations — especially if the next leg of the crisis is a recession. But I also think investors are going to want to consider other approaches to downside risk mitigation."
High Yields Make Bonds Attractive
Given high yields, Husain said T. Rowe considers this "the most attractive point to buy bonds that we've seen for several years. We think that over the next several quarters investors may want to consider adding duration." (Higher duration bond prices fall as interest rates rise.)
However, he added, with the Fed expected to keep raising rates this year, the firm didn't think bonds had reached peak yields yet in early June.
