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UBS CEO Ermotti says it is too early to talk about a U.S. recession

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Sergio Ermotti, chief executive officer of UBS Group

Stefan Wermuth | Bloomberg | Getty Images

ZURICH, Switzerland ꟷ UBS CEO Sergio Ermotti said Wednesday that market volatility could intensify in the second half of the year, but he does not believe the U.S. is heading into a recession.

Global equities saw sharp sell-offs last week as investors digested weak economic data out of the U.S. which raised fears about an economic downturn in the world’s largest economy. It also raised questions about whether the Federal Reserve needed to be less hawkish with its monetary policy stance. The central bank kept rates on hold in late July at a 23-year high.

When asked about the outlook for the U.S. economy, Ermotti said: “Not necessarily a recession, but definitely a slowdown is possible.”

“The macroeconomic indicators are not clear enough to talk about recessions, and actually, it’s probably premature. What we know is that the Fed has enough capacity to step in and support that, although it’s going to take time, whatever they do to be then transmitted into the economy,” the CEO told CNBC on Wednesday after the bank reported its second-quarter results.

UBS expects that the Federal Reserve will cut rates by at least 50 basis points this year. At the moment, traders are split between a 50 and a 25 basis point cut at the Fed’s next meeting in September, according to LSEG data.

Speaking to CNBC, Ermotti said that we are likely to see higher market volatility in the second half of the year, partially because of the U.S. election in November.

“That’s one factor, but also, if I look at the overall geopolitical picture, if I look at the macroeconomic picture, what we saw in the last couple of weeks in terms of volatility, which, in my point of view, is a clear sign of the fragility of some elements of the system, … one should expect definitely a higher degree of volatility,” he said.

Another uncertainty going forward is monetary policy and whether central banks will have to cut rates more aggressively to combat a slowdown in the economy. In Switzerland, where UBS is headquartered, the central bank has cut rates twice this year. The European Central Bank and the Bank of England have both announced one cut so far.

“Knowing the events which are the unknowns on the horizon like the U.S. presidential election, we became complacent with a very low volatility, now we are shifting to a more normal regime,” Bruno Verstraete, founder of Lakefield Wealth Management told CNBC Wednesday.

“In the context of UBS, [more volatility is] not necessarily a bad thing, because more volatility means more trading income,” he added.

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TMUS, GOOGL, TSLA, INTC and more

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T. Rowe Price likes stock picking now

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One of the largest active ETF managers on leveraging fund tactics in new ways

It appears T. Rowe Price is benefitting from the record growth in actively managed exchange traded funds.

Tim Coyne, the firm’s head of ETFs, reports the firm is seeing significant growth in the area — listing the T. Rowe Price Capital Appreciation Equity ETF (TCAF) and T. Rowe Price U.S. Equity Research ETF (TSPA) as two established strategies that can satisfy investor demand.

“I think having that professionally managed portfolio is really beneficial to clients,” Coyne told CNBC’s “ETF Edge” this week. “We’re seeing just… greater volatility [and] uncertainty across both the equity and fixed income markets.

According to Coyne, the T. Rowe Price Capital Appreciation Equity ETF suits investors who are looking for long-term growth.

“The objective of the fund is to outperform the S&P 500 with lower volatility and greater tax efficiency,” he said. “It’s also a more concentrated portfolio, typically holding around a hundred names.”

As of April 24, the fund’s top holdings include Microsoft, Amazon, and Apple according to the T. Rowe Price website. But it’s not all Big Tech. The ETF also features smaller positions in companies like Becton Dickinson and Roper Technologies.

The T. Rowe Price Capital Appreciation Equity ETF is down about 5% so far this year while the S&P 500 is off about 7% However, the ETF is up close to 8% over the past year — roughly identical to the S&P 500’s performance.

Coyne notes the T. Rowe Price U.S. Equity Research ETF follows a similar strategy, but with a heavier weighting in top tech stocks.

“This is more of a large-cap growth product [T Rowe Price U.S. Equity Research ETF],” he said. “There are components of characteristics of both passive and active here. This fund is actually managed by our North American directors of research. So again, strong fundamental research is going into the stock selection.”

Both the T. Rowe Price U.S. Equity Research ETF and S&P 500 are down around 7% since the beginning of the year. Meanwhile, the fund is up almost 9% over the past year. That’s less than one percent better than the S&P 500’s performance.

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T. Rowe Price U.S. Equity Research ETF vs. S&P 500

‘Some form of bear market’

Strategas Securities’ Todd Sohn thinks investment demand for active managers will continue to be strong.

“This is the type of the environment where it [active management] can actually shine,” the firm’s senior ETF and technical strategist said. “We are in some form of bear market. This is where the active manager really can come into hand and offer their solution they are doing right.”

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