Events and Webinars

Asset Allocation Viewpoints webinar

July 28, 2026

Sébastien Page, Rick de los Reyes, Christina Noonan (moderator)

Christina Noonan
Hello, everyone, and thank you for joining us for this quarter's Asset Allocation Viewpoints webcast, Powering What's Next, brought to you by T. Rowe Price's Multi-Asset Division. I'm Christina Noonan, a portfolio manager within Multi-Asset, and I'll be your host for today's discussion. It's been another fascinating quarter for investors. AI investment continues to drive strong earnings and market leadership, yet geopolitical tensions, inflation concerns, and the evolving energy landscape continue to challenge the outlook.

Today, we'll discuss how those forces are shaping our tactical views and where we're finding opportunities.

OK, so let's introduce today's panel. With me as always is Sébastien Page, who you may recognize from Bloomberg, CNBC, and LinkedIn. He is the chief investment officer and now the co-head of Global Investments. He is also the cochair of the Asset Allocation Committee (AAC), responsible for tactical investment decisions, and the author of Beyond Diversification and the Psychology of Leadership. Great to have you with us, Sébastien.

Sébastien Page
Thank you, Christina. As usual, I'm fired up, but especially fired up because we have Rick de los Reyes today. He's always compelling. He's a great writer. Now, you won't read his writing today, but he's also a great communicator, so I'm looking forward to it.

Christina Noonan
I'm excited. All right, so we're joined by our special guest, Rick de los Reyes, head of commodities and portfolio manager within the Global Equity Division. Rick's investment experience began in 1997, and he has been with T. Rowe Price since 2006. His experience also includes being a portfolio manager for the global metals and mining sector strategy within the Multi-Asset Division. Rick is also a member of the Asset Allocation Committee. And with nearly three decades of experience analyzing global energy and commodity markets, Rick is the perfect person to help us understand how today's geopolitical developments are affecting energy prices, inflation, and ultimately investment opportunities across all markets. So thank you for joining us today, Rick.

Rick de los Reyes
Thanks for having me.

Christina Noonan
So we have a lot to cover today from the latest Asset Allocation Committee discussions to energy markets, inflation, earnings, and what that all means for portfolio positioning. And we want this to be interactive. So please continue sending us your questions throughout. And we also keep an eye out for a few polls along the way. So let's jump in.

So Sébastien, over the past few months, the broad themes of inflation, geopolitical tensions and AI infrastructure build-out have remained largely the same, but a lot has shifted under the surface. The AAC recently met. What are maybe the top three factors in that discussion?

Sébastien Page
Top three. I can only choose three, right? So, OK, let me do three. Earnings, momentum, and AI. I'll leave inflation for Rick for another question. Earnings, momentum, and AI.

On earnings, it's fascinating how price momentum has stumbled. The momentum in July has basically crashed, but earnings momentum continues. So you have a little bit of a break between earnings momentum continuing and price momentum crashing. And this is price momentum specifically in semis and in specific parts of the AI supply chain. But let's talk about earnings momentum and how robust it's been. Let's go back to the beginning of the year. The forecast for the first quarter was that earnings would grow year over year compared to the same quarter the year prior by 13%. In the end, Christina, after the quarter was done and we reported on everything, earnings grew 27%. Remember, the expectation going in was that we would grow 13%. Now we're in Q2. We're reporting in Q2. The expectation going into Q2 at the beginning of the quarter was that earnings would grow 19%. By the way, these are big numbers, OK? 19%. And we're tracking at 26%. And breadth is improving too, with the 493, ex the Mag 7, tracking for Q2 at plus 23%. Earnings momentum is phenomenal. It's part of the reason why the Asset Allocation Committee has modestly added to stocks.

Second theme is momentum. There's a story, Christina— I don't know if you've heard this, I don't know if you've heard this, Rick. It's the story of a finance professor who's walking in the parking lot with one of her students. And there's a $20 bill on the sidewalk. And the student goes, “Hey, professor, here's a $20 bill.” And the professor, who's an efficient market theorist, says, “It can't be a real $20 bill because if it were, someone would have picked it up already.” And the reason why I tell that story, we've heard it before, but the reason why I bring it back, is that momentum, according to efficient markets, should not work. You should not be able to make money just by looking at the stocks that are doing well and buying them. And in fact, over time, it's proven that it doesn't make a lot of money. It makes a little bit, there's different versions of it, but it's not a highly profitable strategy.

Let's do a thought experiment, though. Imagine that every month you build a strategy that simply ranks the S&P 500 stocks based on their trailing one-year performance, past returns, what has just happened over the last 12 months, and you just pick the top 10 performing stocks. The following month, you do the same. Very simple momentum strategy.

My finance professor would say, “This will not work. Markets are efficient. This is not a true $20 bill. If it were, someone would have picked it up already.” Well, up until the end of June, if you had just picked the top 10 performing S&P stocks every month, you would have outperformed before fees. Because I didn't run the fees and the transaction costs, this is just an experiment. You would have outperformed the S&P 500 by 40% annualized, 40% per year. This is the biggest momentum rally that we've had over a three-year period in 25 years. Interestingly though, and we know a lot of this is driven by semis and by earnings too. Interestingly, that trade last time I updated it recently is down 20% in July.

So people may – go ahead, Rick.

Rick de los Reyes

It's more today, I was going to say.

Sébastien Page

It's down more today as we record this. We know a lot of people watch this live. It's down even more today.

So comparisons to the dot-com bubble to me are inappropriate, but interesting. They're not really good comparisons, but they're interesting. If I look at this return, chasing dumb momentum, just pick the top 10 performing stocks. If I look at that strategy, and I look at which stocks are in that basket right now, and I compare it to the same strategy if you'd done this at the peak of the dot-com bubble, I get hugely different fundamentals. The current momentum basket’s profit margins are 12 times higher, their ROE is eight times higher, the price to cash flow is less than a third of the peak of the dot-com bubble.

So some will say, are we having a bubble in earnings? And maybe Rick, we can discuss this, but these are not relevant comparisons. My point about momentum, you can go long momentum, you can underweight it, you can try to hedge it, but it's hard to ignore it as a trade currently in the market. And let's remember that the Nasdaq went up 300% in three years after Alan Greenspan said “irrational exuberance” for the first time in 1996.

Third theme is AI. Will the capex cycle slow down? Or, as we're discussing in the Asset Allocation Committee, what could derail the capex cycle? I think personally the capex cycle will continue. The forecast is $3 trillion of spending over the next three years, and the demand for the end product of AI is incredibly high and growing still in a quasi-vertical way. 1 billion users on ChatGPT. Claude is just gaining rapid, accelerating adoption inside the enterprises. We're deploying it, we're using it. So across our investment platform, we are long certain AI bottlenecks. But what we're learning, and especially with today, with the momentum crashing, it's not just the GPUs, it's not just the semis. The AI bottlenecks are expanding everywhere. So cooling equipment, memory, networking, aerospace, gas turbine, electrical infrastructure. Even small-cap companies can rally if they produce something that becomes part of the supply chain in building a data center.

So my view, and it's not necessarily a broad consensus on the Asset Allocation Committee, but probably the majority view is that the AI theme in terms of its build-out is sustainable, $3 trillion of spending in three years. And every time we get updates on these estimates, they're not going down, they're going up.

Christina Noonan
And we'll certainly talk more about the AI build-out next and very impressive rally. And this has all been with a war going on. So we're happy you're here, Rick, to help us break it down. So it's interesting that we haven't seen a stronger reaction in oil prices. So curious your thoughts on that and how the current situation in the Middle East factors into your longer-term views.

Rick de los Reyes
Thanks for the question. And I think it's good to distinguish between short term and long term right there because I think in the short term, clearly, it's been disruptive, right? I mean, you shut down the Strait of Hormuz, that was 20% of the world's oil supply. Clearly, that's going to have an impact. We originally had the oil price shoot up to above $120 a barrel. Since then, it's been kind of on and off, right? We've had periods where the Strait is open. Not long ago, actually, we had almost restored sort of normal shipments. Keep in mind, you don't even have to restore shipments all the way back because you do have pipeline capacity that's been opened in Saudi Arabia and UAE that's made up some of the difference. So, you know, it's definitely been disruptive.

I think when you ask, you know, why hasn't the price gone up even more, I think part of it is because we do have some supply getting through. I think the other thing to keep in mind is that even though oil kind of gets all the attention, I think it's really important also to pay attention to refined products. And that's something that doesn't get as much headlines.

But if you look at crack spreads— now, crack spreads are the difference between the price of taking oil and turning it into gasoline or diesel. Crack spreads have gone up and have stayed up. And so there's been no reprieve there. And I think that's a function of the amount of refining capacity that's been shut in in the Middle East, the amount of refining capacity that's been damaged in the Middle East. And Russia-Ukraine plays a factor there as well. The Ukrainians have become much more aggressive about damaging Russian refineries. And so we have seen a lot more refining capacity come off. And so I think the real potential for damage here to the economy is actually more probably on the refined product side than it is on oil at this point. That's the short term.

Now, I would say, if we're talking about the long term, my concern is almost the opposite. My concern is that coming out of this, assuming that we get an end to the war in the Middle East, assuming that the Strait of Hormuz opens, if we can get an end to hostilities in Russia and Ukraine as well, you eventually come out of this with oil supply actually being higher than it was prewar, right? We've seen how OPEC is increasingly starting to lose relevance. The UAE has already dropped out of OPEC. Iraq has threatened to drop out of OPEC. It is really getting to the point that most of these Middle East producers just want to produce as much as they can. Any supply discipline that we had in the Middle East prior to the war, I think, is less after the war. So you actually probably end up seeing more production eventually than you saw before. Add to that Venezuela, which we know the United States really wants to increase production coming out of Venezuela, restoring that to what it was historically, which was much higher than it is today. We're getting increased production out of some other places too. Canada is increasing production, is increasing egress out to the West Coast. The U.S. is trying to increase production.

And so you potentially get to a scenario where you actually have more supply than you had before the war, but your demand potentially is less. And that's the other thing that I think we have to keep a really close eye on is demand and how much demand destruction has resulted from this whole incident from countries around the world saying, maybe I just don't want to be dependent upon the Middle East for oil as much as I was. And so I'm either going to try to produce more domestically, do what I can, or I'm just going to try to decrease my consumption.

And the country I would keep your eye on the most here is China. The amount of apparent demand decline in China during this incident here in the Middle East has been very large. I mean, 4 to 5 million barrels a day out of a 100 million barrel global market is actually a very significant amount of apparent demand decline in China. Now, that apparent demand can decline for two reasons. One can be because you've just got a ton of inventory, and so you're running down your inventory so you're not buying. Or it could be because your actual demand is lower, right? They're just shifting more to EVs or more trucks using liquefied natural gas instead of oil. I mean, there's different ways that it can happen. We don't know the extent of the Chinese inventories. We don't know how much they've drawn down. We don't know how much they might have left. It's really going to take until after the war is over and things start getting back to normal that we will find out how much of that decline in apparent demand is actually a decline in real demand as well. And if you've got even 1 or 2 million barrels of decline in real demand from China, that's a significant demand decline for a market that, as I just said, potentially has even more supply.

So while we have all this disruption in the short term, and that's clearly keeping prices somewhat elevated, I think we could actually see a worse supply-demand situation after the war is over.

Sébastien Page
Rick, if let's say the war is over, the war is over in two or three months, how long does it take for the world to become oversupplied in oil?

Rick de los Reyes
I think the supply side can probably bounce back pretty quickly. And we saw that when the Strait of Hormuz was briefly open. Actually, the shipments bounced back pretty quickly. I think the demand side is more of an interesting timing issue because your demand coming out of the war, your apparent demand is likely to be higher because everybody's going to want to restock their inventories. So you think about the U.S. and the Strategic Petroleum Reserve. We've brought that down significantly. Clearly, the administration is going to want to increase that once they're able to. And I think other countries around the world are going to want to have more strategic reserves as well, just to protect themselves in case anything like this happens in the future. So I think your apparent demand will be high for a while. But once that inventory restocking is over and we go back to what is a normal steady state demand, and like I said, potentially supply is higher, then that's when you would see probably prices potentially go to a lower level than they were even before the war. And so that's probably sometime in 2027 if we were to resolve this soon.

Christina Noonan
It's very disruptive in the near term, but potentially higher supply over the long term. Want to stay in the current environment. What about gold? We're getting some questions from the audience. It started to act as a hedge but would love your thoughts on what's happening with gold.

Rick de los Reyes
I think gold is reacting far more to the trend in real interest rates, which is somewhat of a function of oil and of the war as well. But it's really a function of real interest rates.

Historically, gold trades inversely with real interest rates. So when real interest rates go higher, the price of gold goes lower and vice versa. What has happened ever since we got this new chairman of the Fed is I think he knows that it is in his best interest to sound hawkish early on. He wants to establish his credibility. He's going to try to sound hawkish. Whether he follows through on that or not is yet to be seen. I have my doubts about whether he'll actually follow through on that. I guess we'll find out tomorrow, at least a little bit more. Probably dangerous to even be talking about this the day before a Fed meeting. I think as soon as he came on as new chairman and started sounding hawkish, you saw interest rates start to go up a little bit.

In addition to that, you do have the impact of the war and the impact on oil. When oil goes up, oil and inflation tend to go hand in hand. When oil goes up, inflation goes up, interest rates go up. What I think is really happening to gold and the reason we've seen the pullback is that fear of higher real interest rates. We'll see what happens tomorrow. I think if the Fed comes off more dovish than expected tomorrow, you'll probably see the gold price actually rally. And I do think the longer-term trend for gold in terms of protecting you against currency debasement and whatnot, I think that's still intact. Our debt and deficits aren't getting any smaller. If anything, they probably get bigger as a result of the war. So I think thinking of gold long term as a hedge against that, I think is still the right call. I just think we're going through a bit of a phase right now where the concern is higher real interest rates and that's what's negatively impacting gold.

Christina Noonan
Makes sense. So that leads nicely into our first audience poll. So while oil prices have come back from their highs, inflation remains front of mind for many investors. So please answer our poll. What is the biggest risk to inflation over the next year? Oil prices, tariffs, labor (so wages and services), or food. So please let us know your thoughts. And as we hear from the audience, we'll also hear from Sébastien. So can you let us know how you are feeling about the inflation backdrop and positioning?

Sébastien Page
I'm peeking at the poll responses before I give my answer so I can be agreeable with our audience. But all joking aside, it's oil prices that's coming up. I don't think that's surprising. The thing with the Strait of Hormuz being closed again or near closed, would you say it's closed?

Rick de los Reyes
It's pretty closed right now.

Sébastien Page
It's pretty closed. Is that the reserves are much lower than they were when this first happened. So that worries me just mathematically in the short run. I agree with your distinction between short-run inflation pressure and long run, maybe we even end up with an oil glut. But in the short run, we just printed 3.5% on the headline CPI. The month-over-month print was soft, but that was driven by declining energy prices. And now they're going the other way. But what's interesting to me is that the inflation swaps, which aren't perfect, but they somewhat represent how investors price inflation when they trade derivatives. This basically represents a one-year forecast that's, quote, unquote, implied by the markets. They're at 2% for one year. That doesn't seem right to me. And the inflation breakevens, too, if you prefer to look at inflation breakevens, they're at 2%. So it's not just is inflation going to go back up to very high levels. I think it could go back up—not to 9% like we had—but it could go back up meaningfully in the short run.

It's also about what's the market pricing in? 2%? Maybe, maybe not. The surveys give you higher numbers, but that's an important question. If you're going to manage a portfolio, you probably want to, as I've said before, hedge the inflation risk at least for the next six months. Rick is on the Asset Allocation Committee and we discussed that a lot. And if I remember, your votes were in favor for now to continue to hedge that risk.

Rick de los Reyes
No, I definitely think that that's the correct call. And I would also say what I just said about oil is really specific to oil. I think there's a lot of other commodities out there that are going to continue to see tightening supply and demand. And so I think the use of commodities as an inflation hedge is still going to be a good one, even in a situation where the oil price has flattished down.

Sébastien Page
But to me, also, there's pent-up inflation in other areas. So fertilizer gets into the cost of food and then there's food inflation, freight, and insurance and just moving stuff around gets into the cost of manufacturing and then that creates inflation. This is the interesting part about inflation. So much of what we do in financial markets is difficult to predict, but there are easier-to-predict lagged effects with inflation that you can see coming from a mile away and there are some of those. And in general, you do have demand. The economy is doing fine, at least in the short run. And so you're left with the decision to hedge or not to hedge inflation risk. I would err on the side of hedging. At least think about it that way in the short run.

Christina Noonan
So hedging inflation risk. And we talked a little bit about the Fed meeting tomorrow have come out pretty hawkish. But we know they also look through the headline inflation, the higher energy price, oil prices. How do you think the Fed and Warsh are thinking about this? Or how should they be thinking about this?

Sébastien Page
I mean, I could maybe rephrase the question is, and I don't know, Rick, what you think, but is the question basically, do we think that the Fed is going to think this is—I'm going to drop the word transitory. Are they going to use that word again? I don't know. What do you think? Because that would be the argument for kind of ignoring those pressures, because those pressures are quite obvious right now.

Rick de los Reyes
And I think a lot of it really does depend upon the direction of these hostilities in the Middle East, because we saw a lot of those really. The inflation number that came out for June that was lower than expected, that was when all of a sudden we had the Strait open for a bit, oil prices came down. I think if we can get the oil price back down, then inflation ends up being pretty benign, and that takes a lot of pressure off the Fed, right? And so, as I kind of said before, I think Warsh has every reason to want to sound hawkish coming out of the gate. I think he wants to have that credibility.

But was he really hired to go raise rates? I don't think so, right? I think he wants to avoid raising rates if he can. And so it's really just going to depend on seeing that trend in inflation coming down. So we can see the trend continue to come down, even though it's not at target level yet. My guess is they try to avoid raising rates unless it reaccelerates. And a lot of that, like I said, actually depends on the war.

Sébastien Page
Yeah, look, I've made the point before, maybe even in this webcast, that inflation is potentially on a collision course with Fed policy. I still think that's possible. One way to look at this pressure between Fed policy and inflation is to look at the two-year yield compared to the fed funds rate. And the two-year yield is at 4.3% and the fed funds rate is at 3.7%. That gap is pretty wide. Historically, the Fed actually follows the two-year. The two-year is the leading indicator of the Fed. Now, we know all these relationships are circular. It's like in Excel, when you have a circular reference. A lot of the Fed watching markets, markets watching the Fed, a lot of this is going on. But watch that pressure point. If you're out there, if you're an advisor and your clients are asking, is there pressure here on the Fed? One good way to answer the question is look at the two-year and look at where the fed fund rate is. And the wider that gap, the more pressure there is.

Christina Noonan
And it is interesting how quickly we went from chance of cuts to hikes now.

Sébastien Page
And the market took it in stride.

Christina Noonan
Yes. And so, Rick, I want to come back to you. So say we are at peak inflation, maybe peak rates. Where does that leave you from a risk-taking perspective? And maybe what indicators are you looking at in the current environment?

Rick de los Reyes
Look, like I said, I think a lot of this still does come back and depend on the war. If we can get that to come down, then I think you probably have seen peak oil prices, the 120 that we got to earlier in the year. I think you have seen then probably peak inflation and then potentially peak rates as well, right?

Obviously, a lot can change. But that would be the direction if things can continue to move toward a path of peace. In that scenario, then I would say you actually want to start looking at parts of the market that have been neglected, the interest rate-sensitive parts of the market. Those are the areas that have been most hit.

Gold we already talked about, right? Gold has pulled back as a direct result of rising real interest rates and fear that interest rates are going to continue to rise even further. So, I would think gold having pulled back from $5,500 to around $4,000 starts to look like an interesting place to be adding if you think that we can stop seeing the increase in interest rates. I think there's some other interesting opportunities on the industrial metal side in construction materials.

I was just in Vancouver last week, actually, and met with some of the Canadian timber companies. If you're looking for deep value in the market, that is a great place to go. These stocks trade for a fraction of their book value. They've been in a depressed market for years now because lumber prices have been terrible. They've also suffered from tariffs. But there's been a tremendous amount of capacity that's come out of that industry. And so when demand does eventually return, I think it's a bit of a coiled spring, right? The supply is not going to be there to meet it because so much capacity has been shut down, much of it permanently, that you're not going to be able to get a supply response when lumber demand finally comes back. So if we were ever to get to the point that we were building 1.5 million homes a year in the U.S. like we used to, instead of building 1.1 or 1.2 [million], whatever we're building now, then that's the kind of market that I think you want to look at if you're thinking things are going to be peaceful and interest rates can start to calm down a little bit, mortgage rates can get down a little bit. I remind everyone, we actually had just gotten to a five-handle on the 30-year mortgage in the U.S. when the bomb started dropping in Iran. So we were on our way there, and it lasted about a day. Then the bomb started dropping and interest rates immediately went back up and mortgages went back up. But so you can see that in an environment more of peace and with declining inflation, we could get back to a lower mortgage rate and we could actually start to get a bit of a construction cycle.

Sébastien Page
OK. He's sounding bullish. I think that's like if you take an 18-month horizon, say, that's encouraging.

Rick de los Reyes
I think that's right. I mean, I think, I mean... Like I said, a lot is depending upon things playing out the right way. But if we can go back to a world of peace and all of a sudden, like I said, the oil price ends up going down because we get a big supply response postwar, then all of a sudden you're in an environment of lower inflation, but still very strong growth. I mean, that's a Goldilocks scenario. That gets back to kind of the ‘90s analogy you were talking about with Alan Greenspan. I mean, it ends up looking like this was just kind of a midcycle correction in what is otherwise still a massive growth cycle ahead of us due to AI and data center build-out and whatnot. And if we can do that, maintain that strong growth while inflation is actually still reasonably controlled, that's, I think, very bullish.

Christina Noonan
So a lot contingent on getting to the other side of the war. And so it's interesting, while inflation and rates have dominated the macro conversation, investors are continuing to reward companies heavily investing in AI. So we have another audience poll. What will be the biggest bottleneck to AI over the next five years? So electricity, so power needs for data centers, chips and infrastructure, capital spending, and the scrutiny that has come along with hyperscalers continuing to spend, as well as consumer demand. So please respond to the poll. Let us know what you think the biggest bottleneck will be over the next five years.

And so Sébastien, one of the themes you touched on earlier was AI investment as one of the strongest supports for earnings and markets. It's one of the things that the AAC had been looking for has been this broadening of markets, but a lot of that has been contingent on AI build-out. Can you talk about broadly your views on AI and where you see the future going from here?

Sébastien Page
AI is such a great topic because everybody lives it. We all interact with it and we all have opinions on it. But looking at the survey, I'm surprised there's 9%, 10% of the responses on low customer demand. That surprises me. I think that demand is even just starting in a way in our own company, how we implement it. But who knows? And then the point about electricity availability is interesting as well. I wonder what, Rick, you're going to want to say about this. But let me just answer the question.

First, AI is changing the way we work. At our company, for example, we're scratching the surface. The technology keeps improving and delighting users. None of the major players are willing to concede that they won't have the best model. We call it the intelligence frontier. So one of our portfolio managers in equities likes to say, this is game theory. Winner takes all. They're facing each other, and they want to have the best absolute LLM. That means more investment. That means the race continues. Financing remains readily available. And you see this. This is like the least of the concerns in the survey. And that makes sense. Of course, Oracle's debt spreads have gone up, but Alphabet, Amazon, Microsoft have borrowing costs 20, 50 basis points lower than average investment-grade company. And leverage ratios for these companies, yes, they're borrowing. Yes, they're borrowing big amounts. But the leverage ratios are about half of the investment-grade universe. So the hyperscalers’ desire to spend is not slowing any time soon. Any time soon, I'm going to say, is not slowing for the next 12 months. Seems like the survey agrees.

To be clear, earnings growth has been so impressive that it may not be sustainable, as we were talking about earlier. The market, though, seems to be pricing in the fact that the earnings growth is not necessarily sustainable. If you look at the spread on the price/earnings ratio for semis versus the price/earnings ratio for the market, it's very wide, and semis' price/earnings ratio is depressed. So the market is expecting that those earnings are not sustainable. The price/earnings ratio on the Russell 1000 Growth is 21. It was at 30 recent peaks. So the earnings opportunity is migrating to bottlenecks. As we've said, the game is to be long AI bottlenecks.

Compute demand still exceeds supply, but value is clearly broadening. I mentioned earlier, all these things, power, cooling, memory, networking, aerospace, gas turbine, electrical infrastructure. What's interesting is on the small-cap side. Some companies, as I mentioned earlier, can participate here.

Beyond that, I will say about AI that we're starting to see margin improvements by AI adopters. Now, this has to be the next leg of the trade. If you follow the bottleneck, if you follow the AI trade, at some point, the benefits have to translate to the AI adopters. If I scan our research platform, you know our analysts at T. Rowe Price proprietary research publish 10,000 research notes a year? We have one of the top five research platforms in the world, and I will argue the most integrated research platform in terms of how the pieces move together. We also do, as a research platform, 4,000 CEO-level meetings, all proprietary research. That's how you build an edge in an investment business, is broad investment in proprietary research.

So if I scan— this was a shameless plug for investment capabilities. But the point I wanted to make is I have the ability now with AI to scan our research notes. And I can go, of everything that's been published live over the last two weeks on our platform, what do you see around this theme? It's fascinating for someone who's got an asset allocation background to get micro bottom-up input from stock analysts, what they see in those 4,000 CEO meetings a year. And what I see is that the stories about AI adoption, building efficiency, are company specific. They're just starting.

Again, I'll use the term scratching the surface on AI-driven margin expansion for adopters, and of course, margin destruction for businesses that are being disrupted. AI is an expanding theme from GPUs to—and that trade is not working well right now—to other bottlenecks along the data center, the supply chain, and then to adopters.

I was going on Bloomberg TV recently, and as usual, I sent my notes to the producers and kind of half-jokingly, I was talking about how the AI trade continues and moves along the supply chain and ultimately to adopters. And I wrote in my notes, “’to infinity and beyond’, as Buzz Lightyear said.” And I got on the air. Jonathan Ferro, of course, has this big quote: “from Sébastien Page, to infinity and beyond!” So the lesson is, be careful what you put in your notes. They might put it in bold font in a live national audience.

Christina Noonan
It would have made a good webcast title. And yeah, this week, hyperscaler earnings will be very telling. It's interesting that our audience doesn't think lack of capital spending will be the biggest bottleneck. But certainly, we'll see this week. So that brings us to what a huge part the power and energy complex has been in AI. It started out largely as a technology story and has quickly shifted into the energy markets. Would love to hear your thoughts on that, Rick, and what it means for the future of energy too.

Rick de los Reyes
Absolutely. Very happy to hear that our audience thinks electricity is the big bottleneck because that's what I do for a living. So certainly happy to see the enthusiasm for that. It's really fascinating to see what's happening because we went through a good 15-to-20-year period in the U.S. where electricity demand was basically flat, right? And obviously GDP was growing during all that, but our energy efficiency kept increasing during that period, right? Everybody was switching to energy-efficient appliances, things like that. And so we were able to keep electricity demand largely flat for kind of the last 15 to 20 years.

And with AI data centers, that changes everything, right? All of a sudden now we're actually having growth in demand, and nobody was prepared for that. Nobody's been building new capacity. Nobody was prepared for that.

And so the question is, how do we meet that demand? And that's a big question that the hyperscalers have been having to tackle as they try to build new data centers is, how am I going to power this? And you can go through, kind of by process of elimination, the way that we generate electricity in this country to figure out how to do it, right? Coal is clearly not something that people want to do, right? I mean, existing coal-fired power capacity will probably be around maybe longer than we thought, but nobody's going to build new ones. I think renewables like wind and solar definitely can be part of the solution, but they can't be the entire solution because you do still largely have an intermittency problem where wind works when the wind is blowing, solar works when the sun is shining. And although some of the battery storage technology is improving, it's certainly not something that that most hyperscalers are going to be completely dependent upon. So it might be part of the solution, but not all of the solution. Natural gas, we have abundantly, certainly here in the U.S., and so that we would want to use. I'd say the biggest bottleneck there is the infrastructure part of it, trying to get a gas turbine right now. If you want to get a gas turbine to build a gas-powered power plant, call GE Vernova. They'll put you on the list for five or six years from now, because that's how backed up they are. Then you get to nuclear, right? Nuclear, once again, very interesting. I think particularly with the advent of SMRs, which are the small modular reactors. These are kind of the mini nuclear reactors that many companies are developing right now that can be produced more economically than the large-scale nuclear reactors. That could potentially be part of the solution as well, though I'd say there's also going to be a time lag. Certainly, if you want to build a large nuclear reactor, that can take a decade. The smaller ones, we'll see. If they start to work, we've got some that are scheduled to come online in 2028, 2029. We'll see how that goes. That could eventually be part of the solution as well.

I think in the end, it's really going to just kind of take everything, right? And we're even seeing a lot of new technologies coming out, new geothermal technologies, new battery storage technologies, lots of different efforts to try to kind of feed this beast of power demand that's coming from it.

Sébastien Page
Rick, do you have thoughts on fusion? Is it science fiction?

Rick de los Reyes
I can tell you. There's not a lot in the publicly traded markets that we can do in fusion right now. There are private companies, and we do look at these private companies. We meet with these private companies every now and then. They seem very optimistic. I think is it possible to do? The answer to that seems to be yes. Is it possible to do economically at scale? I think a lot of that is the question that still needs to be answered. And so we follow these private companies. We're obviously very interested in what they're doing, but it's not an area that we're invested in just yet.

Sébastien Page
And just a thought experiment, Rick, not a prediction, not an investment view, just a thought experiment. If fusion starts working at scale, what happens to the rest of the energy markets?

Rick de los Reyes
Yeah, if it starts working at scale and economically, and it can basically price out any other form of energy, then yeah, then it was going to end up taking a whole lot of share, right? And you're looking at a very different energy complex. But I think I will probably be retired before that happens. And so we'll continue to follow the companies and we will track them and see how they're doing. But I think getting to the point that they're actually going to be able to deploy at scale and replace other forms of energy is a long ways away.

And I think everyone knows that, which is why we've seen even the moves that the Trump administration has made on nuclear. There was an executive order mandating that we quadruple the nuclear power in this country by 2050, I think was the deadline. And to do that, you would need to build a large-scale nuclear reactor, multiple of them, like every year between now and then, more than we've ever built in the past, right? And so It would take a significant effort to reach that goal if we are going to reach it. We're seeing more companies trying to build out more gas turbine capacity, things like that, just efforts to try to boost the supply of other types of energy. I think if we thought the fusion was going to happen anytime soon, we probably wouldn't be doing that.

Christina Noonan
So yeah, so energy needs, huge challenge going forward, all hands on deck. So I want to take a quick step back. We talked about AAC has moved modestly overweight equities, still have inflation hedges on and now small-caps. So a trade that we put on, I think mid last year, successful trade small-caps. This may surprise some people have been up more than 40% over the past year. So Sébastien, can you talk about the small-cap trade and if it still has legs from here?

Sébastien Page
So we had a strategy meeting recently, and a small-cap portfolio manager started talking about what he called a golden screw. And I couldn't understand. I think, Rick, you were in that meeting. He said the golden screw. And what he was talking about was the golden component, like a small part of the supply chain that's in limited supply that's provided maybe by one company. Maybe they have a monopoly, and they build that little screw that goes into the bigger thing, and that becomes the golden screw because those companies then just go vertical. So he was explaining that as an example of how small and mid-cap companies can participate in the supply chain, to use a quantitative term, in a highly nonlinear way, in a highly explosive way.

So the Committee has been long small- and mid-caps in the U.S. for quite a while. Small companies have this opportunity to participate in the AI supply chain and benefit from adoption. Look, rates have been relatively stable. They're up the last few weeks, but we have had 175 bps of cuts in the short end already. From a long-term perspective, relative valuation is still favorable. If you look at profitable, higher quality small-caps, the S&P 600, it's still in the bottom 30% of its valuation range, despite that massive rally. Still in the bottom of its valuation range, bottom 30% relative to large-cap by long-term historical standards. You continue to see earnings growth converging.

And ultimately, I think Rick and I are both agreeing on this. The economy is doing fine. The economy, the economic surprises, whatever your favorite index of economic surprises, they're trending up, year to date. So this is all favorable for small-cap plus domestic. A lot of policy. The tariffs are back. I guess we didn't talk about it today. But those policies that favor domestic production ultimately are good for small-cap companies.

Christina Noonan
So I want to come back to something we talked about. So we talked about the constraints on energy for AI, but now I want to pivot also constraints on critical minerals and rare earths, an area of commodities that we haven't touched on yet. They were in the headlines last year, another area that your team has been constructive on. Can you talk about what you're seeing there?

Rick de los Reyes
Yeah, happy to. And speaking of the momentum unwind, I mean, the critical mineral stocks have definitely suffered from that. So many of these stocks are down 20, 30% just here in the month of July. So I think it does probably create an interesting opportunity because I don't think the story there has ended, right? I think there was a lot of excitement, particularly last year when the U.S. government announced kind of this landmark deal with MP Materials, which is a rare earths company in the U.S. And as part of that deal, they set price floors and provide financing and a Department of Defense contract. I think that sort of government support, particularly in rare earths, is not over. We've seen some other moves since then. We've seen the U.S. supporting USA Rare Earths and its acquisition of a rare earth battery company in Germany. There's been other moves as well. I don't think that's over. We are in discussions with these companies.

I think there's discussions happening at all levels, at the Department of War, at the Department of Energy and the Department of Commerce are all involved. And I think what everybody recognizes is that we do not want to be dependent upon anyone else if we can. I think the U.S. would like to be self-sufficient if it can, but at least not be dependent on non-Western countries, when it comes to critical minerals that we need. And rare earths is the one that gets all the attention, but I actually don't think it's going to stop there either, right?

I think uranium is going to be one. We've already talked about nuclear and the Trump administration's ambitions on building nuclear power. The U.S. produces something like 1% of the world's uranium, right? And so I think trying to support that industry. I think things like tungsten and antimony, which are things that are not household things that we talk about all the time, but those are very important for defense. And so I think we're going to see more government deals.

Sébastien Page
What is antimony?

Rick de los Reyes

It's a hardening agent. It's used in bullets, right? And so it's something that's very important. Tungsten as well. It's actually the second hardest element on Earth after diamonds. And so they're used in missiles. They're used in bullets and things like that. And so it's very important for defense. Tungsten, very similar to rare earths, a very large percentage, something like 80-90% of it comes from China.

And so there's a very strong desire to make sure that we have built up a Western supply chain, even if it's not U.S., at least countries that are friendly to the U.S. And I think you're going to continue to see a lot of government support and financing deals to make sure that happens. And so I think they've been probably distracted because they have a war going on. But I think, once again, if we can get that behind us, I think they probably start focusing again on some of these types of issues, such as critical minerals and securing supply chains. And you'll start to see more announcements along the lines of what you've seen already with a couple of rare earth companies.

Christina Noonan
So one theme that has emerged from today's discussion is how intertwined all of these forces are. So AI, energy, inflation, geopolitics, all kind of moving together, not independent forces. So Sébastien, as you put all of that together, I guess what is one investment theme that you think the market may not be fully appreciating today?

Sébastien Page
Based on what I said earlier with the inflation swap at 2%, with the breakeven at 2%, I'll pick that one. We hedge inflation risk. Treasuries still play a role in the portfolio, but it's diminished. Treasuries are not as good a hedge when you get inflation shocks. In the Asset Allocation Committee, we hold energy stocks, metals, cash, TIPS, hedged equity, different ways of protecting against inflation risk.

As I said earlier, inflation is likely to be on a collision course with Fed policy with the two-year yield at 4.3% and the target rate at 3.75%. This indicates pressure on the Fed to raise rates.

So to wrap it up, I'll tell you an anecdote that happened to me at our investor conference in Nashville a few months ago. I decided to come earlier and I was presenting the next day. I got in the elevator on floor two, two people got in and they were holding mugs. This was like early afternoon. So apparently Nashville is a fun place, kind of like Vegas, like they were having fun and they look at me. And one person, one lady, says, “We've been thrown out of the pool.” And then the other one says, “Well, you know, T. Rowe Price has reserved the whole conference area for their client conference and they even reserved the pool for their reception.” So I'm in the elevator there and she looks at me and she goes, “T. Rowe Price,” and she's visibly angry, “Do you know them?” And my answer was, “T. Rowe who?”

So this is an anecdote. Talk about, something I love to talk about, which is elevator pitches. How do you describe something, a concept, in an elevator where you have two floors to make your point? And I'll tell you how we're thinking in the Asset Allocation Committee as a pithy elevator pitch: stay diversified, stay invested, and hedge inflation risk.

Christina Noonan
Well said. And so on that hedging inflation risk, Rick, you've shared a lot of great insights with us on commodities. So say our viewers, investors, are looking to increase their exposure to commodities. What would you say the best way to do that would be?

Rick de los Reyes
Yeah, I mean, as Sébastien said, we really hedge inflation risk a lot through commodities. I think that is the best way to do it. I think if you look at the different choices that you have in ways of investing in commodities, I think commodity futures are probably not a great idea, particularly for people who don't know how to trade those. I mean, if you look at futures, they trade in different time periods and along a curve. Your typical commodity future trades in contango, which means the future price is higher than the spot price. And as a result, every time you roll that future, you lose a little bit of money, right? You're always kind of selling low and buying high. That's a really hard way to make money.

And so what we choose instead is really to focus on commodity equities. And what I would tell people, too, is really focus on the upstream commodity equities, right? Try to focus on oil and gas companies, mining companies, agriculture companies, companies that actually have the resource in the ground, because that's where I think the scarcity is going to be, right? I think the scarcity is going to be with the resources that you can. If it's not already there, you can't put it there, right? So if you're worried about inflation, if you're worried about resource nationalism, if you're worried about resource scarcity, if you're worried about the electricity and power demand from AI and from data centers, which we know you are because we saw it on the survey, then I would definitely focus on those upstream natural resources. And that's what we really try to do in our strategy.

Christina Noonan
Upstream natural resources, helpful advice. Great note to end on. Thank you.

And so this concludes this quarter's Asset Allocation Viewpoints webcast, Powering What's Next. Thank you to Sébastien and Rick for sharing their insights and thank you to everyone who joined us today. Thanks again for spending part of your day with us and look forward to seeing you next quarter.

202607-5632670

Investment Risks

Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each persons investing situation and circumstances differ. Investors should take all considerations into account before investing.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries.

Commodities are subject to increased risks such as higher price volatility, geopolitical and other risks. Commodity prices can be subject to extreme volatility and significant price swings.

TIPS In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities (TIPS).

Technology companies: A fund that focuses its investments in specific industries or sectors is more susceptible to adverse developments affecting those industries and sectors than a more broadly diversified fund. Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down. 

The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced.

Small-cap stocks have generally been more volatile in price than the large-cap stocks.

Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path.

Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Short duration bonds have more risk than cash/cash equivalents such as money markets. Equities have higher risk and are subject to possible loss of principal.

Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency.

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Glossary of Terms

A basis point (or bps) is equal to 0.01% or 0.0001. It is used to describe changes in percentages or interest rates.

Bullish is used when describing market sentiment; a bullish investor generally expects prices to rise; a bearish investor generally expects prices to fall.

Capex (capital expenditure) refers to a company’s spending in long-term assets such as property, technology, or equipment.

Consumer Price Index (CPI) measures the monthly average change in prices paid by urban consumers for a market basket of consumer goods and services.

Fed funds rate, or the Federal funds rate, is the interest rate at which banks and credit unions lend excess reserve balances to other banks overnight.

Gross Domestic Product (GDP) is a measure of total market value of goods and services produced within a country during a set time period.

Graphics processing unit (GPU) is a computer chip used in graphics rendering.

A hyperscaler is a company, often a technology or cloud services provider, that operates cloud infrastructure platforms.

An inflation swap is a type of contract between two parties that enables one party to transfer inflation risk to the other. One party will pay fixed payments and the other will make payments based on the floating rate on an inflation index. A floating rate will change based on market conditions.

A Large Language Model (LLM) is an AI system trained on a data, able to generate code based on instructions in a natural language.

The “Magnificent Seven” is Alphabet (Google), Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. The specific securities identified and described are for informational purposes only and do not represent recommendations.

The Nasdaq is an American stock exchange and lists many of the world’s largest technology companies.

Rare earths are certain chemical elements found in the Earth’s crust, typically not found in a concentrated form. They are used in high-tech applications.

Treasury Inflation-Protected Securities (TIPS) are U.S. Treasury bonds whose principal value is indexed to inflation.

Indices:

The Russell 1000 ^® Growth Index measures the performance of U.S. large cap growth stocks. The index includes U.S. large cap stocks with relatively higher price-to-book ratios, higher 2-year I/B/E/S forecast growth and higher historical 5-year sales growth.

The Standard & Poor’s 500^® Index (S&P 500) tracks the stock performance of 500 of the largest companies listed on stock exchanges in the United States.

The Standard & Poor’s SmallCap 600^® Index seeks to measure the small-cap segment of the U.S. equity market.

Metrics:

Book value of a company is assets minus liabilities.

Price to free cash flow (P/FCF) ratio compares a company’s market capitalization to free cash flow (FCF), or cash after operating expenses and capital expenditures.

Price-to-Earnings (P/E) ratio measures a company's current share price relative to per-share earnings.

Return on Equity (ROE) is a financial measurement that divides net income by shareholder equity.

Please also refer to troweprice.com/glossary for additional termss.

Hello and thank you for joining us for T. Rowe Price’s biannual fixed Income Roundtable Ahead of the Curve.

Now in today's roundtable titled “Our Bond Markets Nearing an Inflection Point”, we will discuss the evolving macro and market backdrop and what it means for fixed income positioning and portfolio construction this year.

My name is Amanda Stitt. I'm an investment specialist covering fixed income, and I'm delighted to be your host today.

If we rewind to the start of the year, markets were in a pretty comfortable place.

Volatility was low, yields were drifting down, and if you're a fixed income investor, value was, let's say, hard to find.

At the same time, demand for income remained very strong, and the thirst for yield help the market easily absorb newborn supply.

The consensus macro story also seemed fairly clear.

Inflation was falling, growth was holding up better than expected, the Fed was expected to cut rates at some point, and investors were broadly positioned for risk to outperform, with a weaker dollar a part of that narrative.

But over the past few weeks, that story has been challenged.

The conflict in the Middle East has injected a new layer of uncertainty into markets, and we've seen some of those consensus trades begin to unwind.

Volatility has picked up, positioning has shifted, and investors are reassessing their outlook.

Predicting markets is difficult at the best of times, and during periods of heightened geopolitical uncertainty, it's close to impossible.

In those moments, the best investment decision is often patience rather than trying to trade through the noise.

So today we want to step back and talk about where the real opportunities might lie.

So with all that out of the way, I'm delighted to be joined in the studio today by Arif Husain, Chief Investment Officer and Head of Fixed Income.

Welcome, Arif.

Hi, Amanda, Thanks for having me.

I'm also joined by our Baltimore studio by Robert Larkins, Head of Fixed Income Quant Portfolio Management and Adam Marden, Co Portfolio Manager for the Global Bond High Quality Strategies and Dynamic Global Bond Strategies.

Good to see you, Amanda.

Hello, good to be here.

I'm going to jump straight into it and I think my first question I'm going to ask to you, to you, Arif.

It's about government bonds.

Now we've had a obviously a little bit of a shock in the market more recently and we've seen what was traditionally perceived as safe haven assets like U.S., Treasuries, like bonds, like gilts sell off at the same time as equity markets have.

Now, does this mean that we need to question that safe haven status of government bonds at this point in time?

Well, Amanda, again, thanks for having me here today, but I think that question just annoys me.

Let me start by saying that because if you lazily expect Treasury's gilts to be your hedge, where have you been for the last 5-10 years?

You know, they didn't work in 2020, COVID, they didn't work in 22, they didn't work during liberation day.

So why would you expect them to work today?

I think really the safe has asset, the hedge really is cause and effect.

You've got to understand what's the underlying factors before you just naively assume something is going to work on the other side.

You know, reality is there's been very little proof of any safe haven in the last few weeks.

So your point is there's actually no safe haven asset.

Well, cash is still king.

OK.

It's a related question and it's something I wanted to ask Adam now if we came into the last couple of weeks with the US economy being strong, inflation being sticky, a lot of fiscal, fiscal's expense, if you like, or fiscal expenditure and a lot of Treasury supply coming onto the market.

My suspicion is if that was happening in any other market except U.S. Treasuries, you would have seen a response in the yield curve, but it really hadn't in U.S. Treasuries.

Is there something unique about the US?

Well, thanks, Amanda, I think there are two things that happened going into this.

One is simply because all these other countries that you spoke about did not have the inflationary impulses, did not have the fiscal impulses, positioning was heavy in those curves leading into this.

So what happens when we talk about these volatility events, the market goes into seek and destroy mission and knocks out every crowded position.

That's the first thing that happened that we saw.

The second thing that we have that we saw that happened is not necessarily US exceptionalism, but more national resilience.

If you look at the differences between the UK and how the US curves reacted, the UK has spent the past three decades gutting their energy infrastructure to where they are susceptible to these type of energy shocks.

The US is now a net oil exporter. So you have this situation.

So one, positioning for the rest of the world was very heavy versus the US because of those reasons.

And two, when you have these type of external shocks and this long term geopolitical shift that we've seen from globalism to more nationalism, more national resilience, you price in that national resilience premium.

And Amanda, can I maybe just jump in on what Adam said?

So I think it's really important, you know the last couple of weeks, the war has been a shock to markets.

But Adam seek and destroy comments in financial markets terms is really important.

You can explain pretty much all the price action that we've seen, whether it's in currencies, whether it's in bonds, credit, equities, simply based on positioning ahead of time.

The moves have not been huge.

You know, we're back where we were maybe 4 weeks ago, right?

It's not been a big move in markets.

So why do I say that?

Well, I think we have to think back to what we knew before the war started and then think forward, what are those factors are still going to play out?

Which of those factors do we believe beforehand are going to be emphasized, pushed forward and what's actually changed?

And if you know, inflation, fiscal deficits are only getting worse here.

So I think it's really important not to just get too myopic on the price action or the last couple of weeks.

I think it's, you know, we need to be thinking 6 months, 12 months forward and, and think what truly has changed?

And you coming into this were actually quite bearish on European rates as well as U.S. Treasury rates.

Where are you now?

Well, European rates are actually under form pretty substantially.

You had the ECB come out and actually become fairly hawkish.

Talk about rate rises. We haven't yet heard from the Fed.

That's kind of interesting.

But the main take away that I take from the price action is dispersion.

You know the true opportunity set for active management of rates now is more relative value between countries, dispersion between countries, one central bank hiking, one cutting, etcetera.

That's where I think the true game is now.

But back to your question, you know, I was bearish.

All the factors that made me bearish, I just got worse and worse.

But again, just as I said, the price action hasn't confirmed that.

So maybe there's something else out there, maybe, maybe there's a buyer of last resort in Treasuries that's holding yields down but hasn't entirely become clear yet.

So potentially this is an opportunity to buy a little bit of short term duration, but be totally clear, inflation is only getting worse now.

Fiscal deficits are getting worse and those are the reasons we're bearish in the first place.

I wanted to sort of get nailed down that sort of inflation question as well or that inflation comment.

Obviously the market is very clearly worried about the long term trajectory of inflation, particularly with oil prices how they are at the moment.

But when you think of your classic inflation hedge, most people think inflation linked securities, whether it be in Europe, whether it be in the US Adam, question to you is have they done their job?

Have inflation linked securities actually protected you against this inflation concern at the moment?

Short answer is no.

The longer answer with this is that at the end of the day, these inflation linked securities are somewhat risk instruments.

And as Arif and I spoke about later, when the market goes into this volatility, the moments where they're in seek and destroy mission, these do not act as inflation hedges over the short term.

They act as risk instruments.

That's one side of it.

The other side of it is over time, we haven't seen the inflation linked security, specifically breakevens work in the same way we have over the past, call it 5 to 10 years, over the past 6 months, going to the point that Arif noted we need to pay attention to this price action to see if there's something we don't know.

But over time it goes to the point that Arif was talking about early with safe haven status in terms of risk off instruments, in terms of how do you protect your portfolios.

The old playbooks that were used for 10 to 20 years just don't work anymore in this type of inflationary environment.

Overtime will those inflation leak securities tend to pay off with CPI? Yes. But what you're looking for is not necessarily getting paid off in CPI.

What you're looking for is the mark to market daily price action that protects portfolios overall.

And that's just not being done by the current plethora of instruments that we have.

I wanted to switch pace a little bit and address a question to Rob and I think a term that maybe a lot of people aren't familiar with, which is, is your investment process is the quantum mental approach to investing.

Can you first of all describe what that process is and how it applies to an environment that we're seeing at the moment?

Sure, I appreciate it Amanda and I'd love the opportunity to talk a little bit about quantum mental because it can mean different things to different people.

I think you know, at T. Rowe primarily we're a fundamental investment platform supported by a strong quantitative group in, in the more quantitative portfolios that my team manages, it's a little bit the opposite.

We're a quantitative process supported by the fundamental platform, which really works nicely.

And when I talk about the quantamental side or the quant side, our primary focus really isn't black box trading models or directional statistical models, but we're really more trying to focus on long term structural inefficiencies in the market and exploit those to give us some return.

And when I talk about that, you know especially in the high quality fixed income market, there's a very fragmented buyer base of people buy high quality fixed income for many different reasons.

You know, a good example of this is, you know, there's insurance companies that just buy purely for yield or pensions that buy strictly for maturity are trying to match their liabilities or others that are RV driven.

So because there's a lot of different forces that are buying for different reasons, they create some long term kind of persistent inefficiencies.

A quick example of some of these is long investment grade corporates.

So long investment grade corporates, insurance companies tend to buy those because they're seeking for highest yield and have book value accounting. Pension companies buy those because they want to match liabilities.

So those tend to be kind of rich.

You're not getting paid for the risk you're taking as far as risk versus reward.

And so on the quant side, we can tilt away from those inefficient parts of the market and towards like a more efficient shorter term investment grade corporates.

And these tilts over long periods of time tend to generate a modest positive alpha very consistently.

And so that's kind of the basis of our structure.

Now in volatile times like this, in some ways it's nice because I'm not trying to get the direction right, and so the volatility, you know, the model doesn't necessarily adjust to short term volatility like this.

We're looking really at long term relationships, but these tilts that I talked about can have some be affected by the near term volatility as far as some correlations might change and things like that.

And so it's important for us to kind of keep track of this and we can kind of take off the tilts a little bit or press them a little bit.

And that's where the fundamental side comes in.

And it's great to be at a place where there's strong fundamental research and have people like Arif and Adam, where then I have some insight into what the Treasury market's going to do or the Treasury curve and how is that going to affect the environment for these tilts, the structures that we're putting on and helps us to do that.

And so that's a little bit how I think about the short term volatility.

And so relating that to the current situation at the moment.

And obviously a lot of the volatility is coming from oil price.

How are you tilting at the moment given we are essentially experiencing some degree of an oil supply shock at the moment?

Well, certainly oil is an input into our breaking inflation models, obviously a direct input and you know, certainly that's giving us a signal about break evens being a positive signal for break evens and inflation.

You know the part about the fundamental side becomes really important in in shocks like this because again, the models can't necessarily pick up a war or volatilities that's happening.

That's where the fundamental analysts really kind of do their work.

You know, our structure that we put on are these tilts that we put on, we have to buy individual bonds.

And so in the oil sector, you know, their analysts can help us.

You know, Arif talked about the dispersion.

I think in volatile times like that, the dispersion starts to widen and you know, whether it's oil or whether it's AI related in the last few weeks that our analysts, we can invest in the bonds as we're building our structures that our analysts know and like and understand.

And that's the part that sometimes has a hard time catching turns or when there's volatility or exogenous things that the data can't necessarily pick up.

Where the fundamental side really comes and is very important to what I'm trying to accomplish because I can pick which oil companies are more exposed to the higher oil rates are less exposed or on the AI side, other things that, you know, help that I'm not in the bonds that are going to get beat up.

But it's a very important part of the fundamental side of that fundamental.

I'm going to switch a little bit.

And, and it's something not related to what's obviously been happening over the last couple of weeks, but it's something that the market was a little bit more concerned about maybe about a month ago.

And this is a question I have for Adam.

And it's related to a new Fed chair coming on.

And a few weeks ago, it was all about, you know, the AI story, whether it was going to be deflationary as Kevin Warsh suggested.

I wanted to hear your view on that.

Is that going to actually be in your mind a long term inflation suppressant, if you like.

So it's an interesting question.

I would say over the long term, I do believe it to be productivity positive.

And that tends to come in hand in hand with disinflation.

But now the time horizon is very important here.

And the real question that we get to is how does it affect longer term yields?

The only price target I've ever truly believed with longer term yields is longer term expectations, nominal growth.

When you have these productivity enhancements that are already happening as we're implementing AI, real growth should pick up faster than inflation comes down.

Specifically because you mentioned these worries about, you know, software and AI taking over and eating the world a month ago.

That was from a Substack article.

If that Substack article is actually correct, we're going to need somewhere between 100 to 1000 times more memory than we currently have in the market right now.

And we currently have a set of buyer bases in the hyperscalers that because of behavioral finance worries of their terminal value are going to spend money on it no matter what price it is.

And then the past probably call it six months.

We've already seen 2 to 300% increase in memory pricing and they're still hiking prices by the way this month.

So what we see in the short term is none of these, none of these disinflationary forces right now. We're not seeing that.

And there are worries about labor of course, but that's not truly affecting inflation that we're seeing right now.

So do I think it could have long term disinflationary impact?

Probably.

But for right now, it's actually more affecting real growth and higher to where it should be actually a boon for the longer term yields higher than it is lower right now, which is not in the market pricing at all.

The other question I had around change in central bank chairman is another belief that Warsh had and that is to reduce the Fed balance sheet.

It was very clear in the media that that's something that one of his objectives is to reduce the Fed's balance sheet.

But the reason why I find it interesting is given clearly in a period where maybe others aren't looking at treasuries as much and wanting to reduce the balance sheet, which I think is what, 6.5 trillion at the moment, who is going to be the buyer of those bonds?

Well, so first we start with, does Kevin Warsh want to make the balance sheet smaller?

10 years ago he did.

I'd say when questions around one of my friend of mine who's known Kevin for a while, he had the best quote on Kevin going into this.

If asked if Kevin Warsh is a Hawker, a dove, he said we'll see.

When you become the chairman of the Fed, you don't know what you're going to do.

Events will dictate what you're going to do.

And the same thing.

It's going to be the exact same thing with the balance sheet.

So start with the Fed's balance sheet.

They have the reserve management purchases they set up because of the volatility we saw in financing rates near the end of the year.

They basically have this set up to continue to buy until we get through April tax payments.

At that point in time, they'll reassess.

At that point in time, they probably weren't expecting to have an Iran war going on right now.

And given what we've seen, we don't know what's going to happen there.

But if that continues on with that type of volatility, odds are they're probably going to continue buying at that point in time over words.

So I will say two things.

One, the Fed probably will continue buying if there is continued volatility in the markets.

But B, the more important thing that you talked about was the other buyer list.

What we do know for sure is that the administration is deregulating the commercial banking sector at a pretty rapid pace.

And so in ways we haven't seen for decades. That buyer base, what they normally do when they get capital relief, they want to make loans, they want to make mortgages.

First thing they do want to do with extra capital is just put in higher yield and treasuries versus cash.

So you will get a buyer base of that very quickly.

Now, over time, that will spread because commercial banks love to hold mortgages over treasuries versus the Fed who's primarily in Treasuries and wants to get out of the mortgage business.

But over the short term, basically your two buyers are the commercial banks that are usually the buyer.

And we'll see what events can cause the Fed to stop buying.

But based off what we know right now, I see it unlikely over the next six months that the Fed will stop the reserve management purchase.

OK. Watch this space in six months.

Yeah.

I wanted to switch to corporate bonds and interestingly enough again over the last few weeks there has been some degree of a sell off, but it's been very, very minor.

We came into this, I want to call it a crisis or this war with potentially corporate bonds looking quite expensive.

They've cheapened up a little bit, but not really that much.

Is it still an asset class that we should be attracted to?

And Adam, why don't you just start that answer?

Let’s start with the widening of spreads that we saw in corporate credit over the past couple weeks up until probably Thursday or Friday.

That could be entirely explained by volatility and maybe a little bit of liquidity.

The market was not really pricing in fundamental stress outside of pockets of software.

So is it still an attractive asset class?

Yeah.

We still actually do believe fundamentals are still strong in the US given all the reasons we talked about earlier of the US versus the rest of the world in terms of rate curves.

So from a corporate buyer base for the credit markets, you have to price in higher spreads because you're going to see higher volatility.

That's just natural because credit is the most short of volatility asset clash you can find.

Is it attractive right here?

Yeah, in spots of course. Honestly some of the stuff that's been sold off a lot actually is fairly attractive right now too.

So I don't think, if you're looking at spreads, the market is still not priced in real fundamental stress.

And if that's your base case, then it's a very different story.

Rob, are you seeing the same sort of opportunity within your models or your process?

Yeah, I mean, going into the, the kind of the recent volatility, you know, valuations were very rich and valuations are a dangerous kind of metric to use because valuations have been rich for the last year and a half, particularly in the long investment grade part of the market, you know, where literally we're tighter than we've been since the early 90s.

And so it's, it's, it's been a challenging environment, but evaluations have said it's too rich, but they continue to perform well.

But kind of because of the backdrop and the positive credit environment.

But like Adam said, you know, we have had some widening.

So we've gone from the zero percentile evaluation to maybe single digit, low single digits, which provides a little opportunity.

And if you think about the background prior to the war and some of the oil volatility, it is a pretty positive environment.

So it kind of depends on if you view if this volatility is going to fade or not like Adam said of whether this is an opportunity.

You know, the credit curve is flattened a little bit here.

So in the quantamental space, it gives us an opportunity to put a little more of those tilts on into this volatility.

I wanted to talk about something that hasn't been one way is the US dollar, which was a very much a consensus short at the beginning of the year.

So most asset managers were short the dollar.

Over the course of the last three weeks that has dramatically changed, whether it be a position switch or it's just getting rid of your short position, who's to say?

But I mean, you said earlier that there hasn't been a safe haven trade.

Has the dollar been a safe haven trade?

So again, let's go back to what Adam said earlier.

So you can destroy. The dollar has been right in the crosshairs of that.

I think again we need to think about cause and effect.

Has the dollar strengthened because it's a safe haven or has it strengthened because it was over positioned and they've been unwound like you just talked about?

Or is it because oil, the scarce asset at the moment, is priced in dollars? Could be any of those.

Again, I think it'd be a really lazy assumption to make to think in the next crisis, if it's not oil related, that the dollar would be the safe haven.

Because again, my job, all our jobs, is to think what has fundamentally changed.

And actually, from a dollar perspective, I don't think much has.

I said earlier that we hadn't heard from the Fed.

We have heard from the president who encouraged the Fed to cut rates during the war.

So nothing really has changed from that perspective.

So I personally and the portfolios we invest in are actually pressing the US dollar position.

We think this is a great point in time to actually add to the position.

And longer term the factors that that we look at that determine currency movements still favour a weaker dollar, to be clear.

I was going to ask a question about emerging markets and this is again a asset class, whether it be locals, whether it be sovereign dollar, whether it be corporates, they've all had a very good run and again up until the last few weeks.

And this asset class potentially particularly the FX side of things has probably seen more volatility than others.

And I know you can't generalize emerging markets because they're very different particularly from their exposure to commodities.

But Adam, if you were going to say there is an area that is attractive within emerging markets, what would it be and is this an opportunity or not?

Thanks, Amanda.

So as one of my colleagues here at T. Rowe says, we're now in the fourth year of a two year cycle in emerging markets.

By that means, part of this is because the two things that generally I know you can't really call a monolith for emerging markets except for two things that affect them.

One, is the quantity global export cycle and two, is the dollar.

The commodity export cycle has been strong for about two or three years now and we talked about safe haven assets. What has proven to be a safe haven asset over this volatility time? Commodities. Oil is 40% of the cost curve for every other commodity and oil is a safe haven asset that's being priced right now.

So that's going well.

And also as Arif said, we do believe the dollar in the short term strength that we've seen is a good time to be faded because once again seeking destroyed dollar shorts were pretty crowded going into this.

So the two from a monolithic perspective and I want to get into specific parts of this, it's actually a very good setup for emerging markets.

Now there are different parts of this.

The part of the reason that it's held in so well of this past four years is just the markets are not that deep.

When we talk about you're investing in a bunch of U.S. Treasuries, we have a US$30 trillion market.

Some of these curves are only a couple US$100 billion max.

And these are the large curves.

So the actual flows into the asset class of the diversification from the dollar during this time period have just held in valuations now where are parts that are maybe not as well positioned.

We like EM local.

Now you do have to be very, very fundamentally focused in terms of who's going to be affected by this by, but the reason we like EM local is a couple reasons.

One, we talk about the fiscal concerns in developed markets.

Emerging markets had to be adults in the room about this for the past decade or several decades as well and then they know how to hike rates.

The developed markets still don't know how to do austerity.

We haven't figured it out yet.

The flip side of this too is on emerging market local bonds.

If you look at short term positioning indicators, they can look pretty stretched.

If you look at a 20 to 15 year positioning indicator, it is one of the most unloved asset classes you can possibly find.

It has been a downward trend of foreign ownership in any local rates for about 15 straight years and we're just now finding a bottom over the past two years.

So longer term, there's a lot of upside there within the asset class, especially if we get what we think that, what is not talked about, the US dollar getting weaker is not just a current administration issue.

It's actually fairly bipartisan in the US over a long period of time because people want jobs, people want reindustrialization.

And the way you do that is by having a more competitive currency over time.

I wanted to talk about market liquidity and I think again over the past couple of weeks, some particular markets, their liquidity has been tested.

And this is a question I wanted to have with you Rob, do you actually think liquidity is currently being mispriced into the market at all?

Well, I think the short answer coming into the volatility certainly there was very little liquidity premium priced in not enough at all.

I think there has been some priced into it.

But I'll and speaking to the high grade markets was, was more eye traffic, you know, let Arif and Adam maybe speak to the lower credit quality, but there still has been liquidity.

A good example is, you know, last week the investment grade market had new issuance of 120 billion roughly which I believe was the second largest week on record.

And this is in the midst of volatility.

So, clearly there's still liquidity in the investment grade market.

Now there probably should be more liquidity premium priced in now than there is because you know, that can change very rapidly if things were to deteriorate quickly or other things.

If you know, right now there's buyers on the sidelines for new issues.

And you know, but if that goes away and money starts moving out of the asset class, then the liquidity premium isn't enough to kind of account for those things.

So it probably should be a little higher than it is now.

And I mean, in these periods of uncertainty, it's really easy for investors, in my mind at least to get really caught up with the short term noise effectively.

Robert, in your mind, what are the key questions that investors should really be asking themselves right now?

Well, that kind of goes along with the philosophy of, of the quantitative, more structural investment style that we have.

But you know, on a broader sense, you know, I think Arif mentioned this earlier that the short term volatility we tend to focus on, but often what drives market is longer term relationships, longer term correlations and things that drive the markets.

You know, coming into this volatility, you know, there's a lot of things that were fairly positive.

The US economy was strengthening and getting better.

Fed was still kind of more on an easing bias.

You know, we had some of the stimulus in terms of tax rebates for personal people as well as for corporations.

So the, the environment's fairly positive for credit.

And so we've kind of lost sight of some of those things and you know, those longer term things may be more a driver of what happens in the future, you know, assuming this volatility kind of subsides, you know, that I guess that's kind of the big question though is this going to get worse or better?

But I think sometimes focusing on longer term relationships is what we tend to do and kind of what the big drivers are kind of in place that before this volatility happened.

I'm going to ask a very general question to you, Arif, and this is more about T. Rowe Price.

We've obviously heard from Rob and his approach to investing and his team approach is quantamental, whilst yours and Adam’s is high conviction, high alpha, very different to some extent.

How does that talk to or how does that speak to the T. Rowe Price fixed income platform?

So I  think the way to answer that, Amanda, is just step back.

What is fixed income?

Why do people invest in fixed income?

And the answer is to solve a problem. Diversification income, whatever it might be.

So fixed income at it's very, very hot is a solution.

It's a solution to a client's problem.

So we have very, very deliberately at T. Rowe Price under my leadership and before that we've been very, very clear that we wanted to build all the excellence and the components to provide solutions however the client wants them.

So that meant building a fundamental world class bottom up investing platform.

That meant building a world class top down macro platform.

That also meant building a world class best in the industry quant platform.

And so if you're a portfolio manager at T. Rowe Price, you have all that research and really the way we put it together and the way the portfolio managers put it together is they pick and choose.

They major minor on the different parts of the platform, but each of the underlying pillars is extremely strong and the culture binds it together globally collaborative.

So we have the tools to answer all those questions and solve the problems that the clients need us to solve, whether it's less tracking error or high tracking error.

I know we're running out of time and I always like to finish these sessions with a question, just a quick fire question.

I'm going to ask this to both Adam and Arif.

A wise portfolio manager once told me that often his best investment decisions were his most uncomfortable investment decisions.

So with that in mind, I'll start with you, Adam, what is your most uncomfortable investment decision at the moment?

So when time's in high volatility, it's very important to say the cop out for everybody, which is time horizon.

So I'm going to give you two answers.

Time horizon in the short term.

I actually, as Arif mentioned earlier, just over the short term a very uncomfortable trade is being very long duration right now, just some curves that have sold off.

And this is, I'm talking about just a couple weeks here.

Effectively what you're talking about is a volatility trade.

Usually what happens in this goes back to lack of safe haven status.

Whenever your volatility spikes is when rates rally.

When inflation is high, it's the exact opposite ball spikes mean rates sell off.

So in the short term, I actually do think we could see some volatility being sucked out of the market.

The longer term more uncomfortable trade, and we've had a lot of debate about this internally is over the next 12 months I think you have the possibility of a pretty strong rates flattener globally.

I think what's not being talked about enough is that Xi Jinping has been the best Fed governor of our lifetimes.

Over the past 3.5 years, China has been exporting disinflation to the entire globe because they focused on the internal export driven model or national resilience and they don't care if the companies are making money or not.

They just keep exporting over and over again.

That is slowly coming to a close with the anti evolution measures.

Not saying that they're going to be cutting capacity like they were in 2015 and 16, but that disinflationary pulse was coming to a close before Iran happened.

Now Iran and now oil has a huge correlation with the underlying Chinese PPI.

So when you have that inflationary impulse, it tends to correlate and lead flatteners in global rates curves.

And I'm not talking about a bull flattener, I'm talking about a bear flattener where you have very uncomfortable conversations in central banks.

Now this is not something I think we're going to be talking about in the next several months, but I think over the next 6 to 12 months, there's a very high probability that we have some very, very uncomfortable conversations and maybe we get a little bit of buyer's remorse from Kevin Warsh going into the job at the time he did.

They're flatteners very rare.

OK, we'll see what happens in the next 6 months.

Arif yours?

So Adam already stole my stock response of time horizon.

So I'm not going to go there.

I actually think the most the most uncomfortable times for portfolio manager are when they are being proved wrong by markets, right?

And so put that into context.

I've been very vocal about higher yields, very vocal.

And actually it's playing out nicely.

So slightly contradicting myself, I'm really kind of uncomfortable with that view right now.

So not because I think the factors have changed.

In fact, as I said earlier, it's got more and more, you know, there's more and more strength behind the factors for higher yields.

Why I'm feeling so uncomfortable is do I use my risk budget there or are there better places to use my risk budget?

So actually where I feel most and comfortable is I have a very strong view of higher yields.

But actually from a portfolio perspective, I'm dialing down that position because firstly on the short term side as Adam talked about, but also because I think this dispersion idea, whether it's in currencies or different rates markets or even credit markets is just so powerful and is likely to be a much higher risk adjusted return over time.

So for me, the most uncomfortable thing is almost recognizing I still have a strong view, but actually saying there's something better over there.

So it's not, you know, it's just moving on.

OK. Speaking of moving on, that's all we've got time for.

This brings us to the end of our panel discussion.

Thank you to Arif for joining me here in the studio in London and to Robert and Adam for joining from Baltimore.

And thanks to everyone who took the time to join us today.

We hope you found the session useful.

As I mentioned earlier, there are additional materials that you can download and review.

And please do share your feedback with us.

We'd love to hear from you.

Finally, please do join us for our next webinar in the series in the Autumn, where Arif and I will be once again looking to answer some of your biggest questions in fixed income.