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BlackRock, T. Rowe: Recession Fears Are Overblown

By Dinah Wisenberg Brin

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What You Need to Know

  • The market has priced in a downturn that may not happen, T. Rowe Price's David Giroux says.
  • It's a tough time for 60-40 portfolios, according to BlackRock strategist Kate Moore.
  • T. Rowe has lowered cash holdings this year while BlackRock has added significantly to its cash position.

As inflation, war in Ukraine and the COVID pandemic stir economic and market uncertainty, investment managers are looking for opportunity, safety and alternative assets. 

Kate Moore, managing director and head of thematic strategy at BlackRock, and David Giroux, portfolio manager at T. Rowe Price, shared their views and market approaches at the Morningstar Investment Conference this week.

While they agreed the market may be overly pessimistic about recession prospects, they’ve pursued contrasting portfolio strategies. Here are some of their insights, offered in a conference session and a separate talk with reporters.

Recession Fears Overdone?

Data suggest a recession is unlikely in the next four quarters, according to BlackRock’s Moore.

“BlackRock is squarely in the no-recession-at-this-moment camp,” even with anticipated pressures from inflation, higher interest rates and threats to growth from geopolitical disruptions in Ukraine and China, she said. 

“We feel very encouraged, frankly, by the health of the consumer balance sheet, the health of the corporate balance sheet, and think we’re going to be able to weather the storm,” said Moore.

Macroeconomic data show a slowing economic growth trajectory but, barring an exogenous shock, a recession doesn’t appear imminent, she said. 

The market has gotten too pessimistic about a significant economic contraction, she said. Moore expressed concern over a potential “feedback loop” between negative headlines, negative sentiment, a change in consumer or corporate behavior “and that feeding through into the real economy.”

Economic uncertainty, high inflation and geopolitical events are leading many corporate leaders to ask themselves whether they should be spending now, said Moore, who predicted at least a slight pause in corporate planning, “and that won’t be great for the cycle.”

People are extrapolating out CEO comments to apply to an industry or market, but “the plural of anecdote is not data,” she said.

Even if the U.S. economy does enter into a modest recession, the market appears to have accounted for it already, T. Rowe’s Giroux noted.

“Stocks are pricing in a recession that may or may not show up,” he said. If a recession doesn’t materialize, valuations will return to normal as earnings grow at a healthy pace, he said.

“The macroeconomic consensus is often wrong, it may be wrong more than it’s right,” Giroux said. “Recessions are rare, calling for recessions is a constant.”

Bank reserves are in good shape, Giroux noted. He doesn’t see a massive recession looming, and if a downturn does come, he expects it will be mild.

Nor does Giroux expect inflation to remain at 8.5% long term, although he predicted it will be slightly higher than pre-pandemic levels, likely at 2.5% to 3.5% after 2023. Working-age population growth will slow from 2022 to 2030, putting upward pressure on wages, but productivity should improve in the next five to 10 years, he said.

Challenging Time for 60-40 Investors

Today’s market environment is challenging for the traditional 60%-40% stock and bond portfolio, with neither side working as the perfect hedge, Moore noted.

BlackRock believes managers need to be creative about building a multi-asset portfolio, she said, noting the firm has invested in private, pre-IPO companies, commodities and derivatives, among other moves.

“We’re really trying to balance out across the suite of asset classes” and not rely on “the set-it-and-forget it” strategy, she said.

Differing Strategies

T. Rowe Price and BlackRock both have made significant portfolio changes this year, although their strategies differ.

BlackRock started raising cash early this year, before Russia invaded Ukraine, and removed risk from its equities portfolio in February and March.

“We are actually sitting on a significantly higher level of cash than (historically); it is close to 30% in our portfolio. It is an expression of both our shorter duration view as well as our desire to keep a lower equity risk than we have,” said Moore.

“We want to be really prudent,” and while some high-quality stocks are trading lower than they have in several years, “we don’t see a lot of positive catalysts in the near term to deploy a lot of that cash,” she said.

BlackRock is “taking a more cautious approach over the next couple months” and using options strategies to address risk, Moore added, noting that valuations and positions have gotten overextended and need to reflect a more challenging growth environment. The firm does expect to see opportunities open up and should be adding to risk over the next 12 months, she said.

Despite its caution, BlackRock owns longer term, high-quality growth companies, and raised cash while holding on to its “highest conviction bets” for the medium term, Moore explained. 

She cited the agricultural complex, including seeds, fertilizer, crop protection and ag technology, as a new short-term call, given the Ukraine crisis and weather changes, and said she’s positive on enterprise software in the medium term. Moore cited “incredibly interesting” opportunities in cyber software for longer term investors.

T. Rowe Price’s portfolio mix has shifted notably in recent months. 

The firm started the year conservatively positioned with more than 12% in cash and an underweight in equities, Giroux said. Now, cash holdings stand at roughly 3% and the firm has put the cash to work in equities, he said. T. Rowe is overweight in equities and has started adding Treasurys as yields have risen, he said. 

As the macroeconomic narrative has changed, T. Rowe has dramatically changed the composition of its equities portfolio, with an overweight in IT stocks for the first time in about 15 years and an underweight in utilities for the first time in a long time, Giroux noted.

While T. Rowe has sold down utilities, health care stocks and consumer staples, the firm has invested in semiconductors, industrial conglomerates and hard-hit tech stocks with good fundamentals, Giroux said.

The firm doesn’t invest in profitless tech equities, he noted.

Both industrial conglomerate and semiconductor stocks are 25% to 30% off their highs, with many good companies available, Giroux said. “That’s really where we’re adding a lot of dollars today to take advantage of these dislocations,” he said.

In general, T. Rowe likes high-quality GARP (growth at a reasonable price) stocks, Giroux said.

In fixed income, T. Rowe has long favored leveraged loans, which Giroux called the best performing asset class year-to-date and one that usually does well when interest rates rise.

T. Rowe Price has been underweight in energy for years and remains so, with Giroux noting higher prices are pressuring demand. 

BlackRock, in contrast, initiated an energy position earlier this year and expects to stay overweight near-term, said Moore, citing the importance of traditional energy sources in the transition to more sustainable energy.

Global Concerns

International opportunities are difficult now, Moore noted, citing stringent pandemic-related policies in China and war in Ukraine. BlackRock is underweight in European assets given growth challenges there and is being more selective about what it owns, she said.

In China, “we’ve been somewhat discouraged by the continued walkback of the COVID policy,” including cancellation of a summer 2023 soccer event, said Moore. “I think China’s a more challenging but a more interesting opportunity at this point given the declines in the market.” 

Dinah Wisenberg Brin

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