With so much going on in the market, it's easier than ever to overlook potential threats percolating under the surface.
You have President Donald Trump roiling markets on a weekly basis with his latest trade-war actions. That, in turn, spurs retaliation from China, which also throws investor sentiment for a loop.
There's also the continual "bubble watch" playing out, as investors wary of overextended conditions sell at the first sign of any slowdown. Look no further than Facebook's recent plunge, which came after the company warned that growth had already peaked for the year.
And while these developments trouble Sebastien Page, the global head of T. Rowe Price's Multi-Asset division, he's also keeping an eye on the more overlooked risks that — if left unaddressed — could wind up taking everyone by surprise.
Page, whose asset-allocation team helps oversee nearly $300 billion, is specifically focused on the historically large debt burdens being held by both governments and corporations. That, coupled with more restrictive monetary policies worldwide, is creating a potentially perilous situation, Page says.
He spoke with Business Insider in an exclusive interview and shared the following thoughts (emphasis ours):
"The level of government and corporate debt right now is quite high by historical standards. You do have tightening financial conditions, so rates are going up. The servicing cost of that high-debt, highly-levered economy can go up, and have an impact."
"It can also have an impact on markets outside the US, such as EM, where they issue debt in US dollars. That tightening can create issues in the market with liquidity and risk aversion. Tightening financial conditions are something to watch, coupled with levels of corporate and government debt.
Page's warning would seem to match the findings in a recent Bank of America Merrill Lynch survey, for which the firm solicited feedback from 235 panelists who manage $684 billion.
BAML found that a record 42% of large money managers think corporations are excessively levered, as indicated by the chart below.
Page's fears around liquidity also fit with a growing sentiment among investors: that they're increasingly unable to transact without distorting markets.
It's a concern that stretches well beyond the stock market, and far outside the US. And one of the root causes is the same as what Page outlines above: tightening monetary conditions.
Beyond Page and the asset-allocation team at T. Rowe, the issue has caught the attention of Goldman Sachs. The firm finds that investors are paying near-record premiums for bonds issued by companies with the worst credit — a situation so mispriced that it allows very little room for error.
So as you traverse the investment landscape, keep in mind that the risks lurking in the market extend far beyond the news headline du jour.
Sure, the stock market tape may ebb and flow based on the latest trade-war rhetoric, but it's the larger systemic pressures — like exorbitant debt — that may pose the biggest threat.
Article by [author-name] (c) Finance - Read full story here.