Sebastien Page of T. Rowe Price on huge threat investors are ignoring

Sebastien Page, T. Rowe
Price’s head of asset allocation.
Fortune

• In an exclusive interview, Sebastien Page, global head
  of T. Rowe Price’s Multi-Asset division, breaks down an
  overlooked risk he says could eventually derail
  markets.
• Page, who helps oversee nearly $300 billion, also
  expresses concerns over constrained liquidity, which Wall
  Street increasingly says will worsen any type of risk-off
  selling.

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With so much going on in the market right now, 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 continuous “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 growth had already peaked for the year.

And while these developments trouble Sebastien Page, 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, says Page.

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.

Bank of America Merrill Lynch

Page’s fears around liquidity also fit with a growing sentiment amongst
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 of 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 might pose the biggest
threat.