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June 2023 / ASSET ALLOCATION VIEWPOINT

Global Asset Allocation: June Viewpoints

Discover the latest global market themes

1. Market Perspective 

  • The macroeconomic outlook remains mixed as data have been surprising to the upside, despite evidence of tightening financial conditions that are still expected to weigh on economic growth in the back half of the year.
  • Global central banks are approaching peak tightening in the face of lower inflation, with the Federal Reserve (Fed) closer to pausing as it moves to data dependency, while the European Central Bank (ECB) and Bank of England remain on course as inflation remains stickier. Meanwhile, expectations for the Bank of Japan shifting yield curve control policy have been pushed out later into the year.
  • Key risks to global markets include a deeper‑than‑expected decline in growth, central bank missteps, persistent inflation and geopolitical tensions.

2. Portfolio Positioning 

As of 31 May 2023

  • We maintain a cautious stance with an underweight to equities and government bonds in favour of cash. Equities remain vulnerable to a slowing economy and weaker earnings backdrop, while central banks’ bias, albeit moderating, towards inflation‑fighting remains a potential headwind to bonds. Cash offers liquidity in an uncertain environment and still attractive yields.
  • Within equities, we reduced our modest overweight to US value and are now neutral between US growth and value. Despite still favourable relative valuations, cyclical value sectors could face headwinds amid lower growth. However, growth stocks, albeit with extended valuations, could remain supported by declining rates and investors seeking secular growth trends, such as artificial intelligence (AI), amid weakening economic backdrop.
  • Within fixed income, we continued to increase the overweight to global high yield bonds to benefit from the attractive yield the asset class offers. We maintain overweights to emerging market dollar sovereigns and local currency because of their yield levels, potentially peaking central bank tightening and expectations of a weaker US dollar.

3. Market Themes 

Back in Business

With the Japanese equity market trading near 30-year highs, investors are questioning if it has staying power this time. Japan has been on a long climb back since its ‘asset bubble’ burst in the early 1990s and was hampered by decades of weak growth and low inflation. However, today does seem different, underpinned by both structural changes and cyclical tailwinds, with inflation finally showing up—a good problem for Japan, unlike others—which can help stimulate consumption through higher wages. Corporate governance reforms, a key part of ‘Abenomics,’ are also starting to show real progress in improving shareholder value through higher buybacks and dividends. A weaker yen, pent-up demand from reopening, record foreign inflows and still relatively cheap valuations have been strong tailwinds. Despite the optimism surrounding Japan’s comeback, the months ahead will be closely watched as the more cyclically oriented economy navigates slower global growth and the Bank of Japan looks to unwind ultra-easy policy. For now, though, Japan looks back in business.

Finding an Uneasy Balance

Mega-cap technology stocks have powered the broader market higher this year, with the top five largest companies accounting for most of the S&P 500’s 8%+ return, supported by a decline in rates and expectations that the Fed is nearing the end of its tightening cycle. Better-than-expected earnings, cost‑cutting measures as well as the euphoria surrounding AI‑related technologies have super-charged the rally, prompting investors to come off the sidelines despite the sky-high valuations. Typically, such narrow market breadth would be a cautionary sign as it masks the broader markets’ concerns about weaker growth and earnings ahead. Ironically, those reasons for caution could continue to propel these mega-cap tech stocks higher as they are perceived as more defensive given their secular growth drivers. With the risks of growth stocks’ valuations becoming even further extended and challenging economic growth ahead weighing on cyclical sectors, investors are facing a tough balancing act today between value and growth.

For a region-by-region overview, see the full report (PDF).

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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