March 2023 / ASSET ALLOCATION VIEWPOINT
Global Asset Allocation: March Viewpoints
Discover the latest global market themes
Please note, the below commentary and data reflects our asset allocation positioning as at end of February. We are, of course, closely monitoring events surrounding volatility in the US and European banking sectors and will provide asset allocation perspectives on that in our next month's Viewpoints update.
1. Market Perspective
- Global growth is proving resilient in the face of tighter monetary policies; however, impacts of central banks’ tightening are still expected to weigh on the economic growth and earnings outlook in the back half of the year.
- Despite declining goods inflation, services inflation remains sticky on the back of higher wages, keeping the US Federal Reserve and other central banks hawkish.
- While uncertainty remains, optimism surrounding China’s reopening and resilient growth in Europe, supported by declining energy costs, could help buoy the global economy.
- Key risks to global markets include central bank missteps, resilient inflation, steeper growth decline resulting in a hard landing and geopolitical tensions.
2. Portfolio Positioning
As of 28 February 2023
- We remain underweight equities and bonds in favour of cash. Equity valuations remain extended in the face of tightening liquidity and slowing growth. Bond yields are likely to remain volatile amid mixed economic data and central bank policy shifts, while cash offers attractive yields and stability.
- Within equities, we are overweight areas with more attractive valuation support such small‑/mid‑caps, Japan and emerging markets (EM). We also maintain a broad balance between value and growth—with a modest overweight to value—to reduce exposure to extreme interest rate sensitivity and cyclicality.
- Within fixed income, we remain overweight emerging market bonds, where yields still offer reasonable compensation for risks despite persistent market volatility.
3. Market Themes
Too Hot to Handle
Recent good news on consumer spending, sentiment and employment has been bad news for the US Fed as they are not seeing evidence that aggressive rate hikes are having the intended impacts in slowing growth and reining in inflation. Markets had started the year positively on signs of peaking central bank tightening; however, the positive sentiment quickly faded as expectations for the path of future rate hikes jumped in response to the hotter data. Over the course of February, the futures market went from projecting the fed funds rate to peak at 4.90% in June to a projected peak of 5.41% in October. Having already raised rates by 450 basis points over the past year, the Fed is hopeful that the lagged effects will help them reach their inflation target of close to 2%, but if the economic data keep coming in strong, the Fed may find it too hot to handle and need to step up the tightening. The months ahead are likely to be volatile as every bit of data will be scrutinised by investors hoping for just enough bad economic data to please Fed officials, yet not bad enough to signal that a hard landing is imminent.
Last One Standing
Bank of Japan (BoJ) Governor Haruhiko Kuroda is set to step down in early April after a decade in office, with markets speculating that ultra‑easy monetary policies he oversaw may be ending. The bank had already surprised markets when it eased yield curve controls at the end of last year, allowing rates to rise more. With inflation running near 4.3%, a 40‑year high, the BoJ has been the last major central bank standing firm with ultra‑easy policy, while almost all others pivoted to aggressive rate hikes to fend off high inflation. With his expected replacement, Kazuo Ueda, coming into office amid high inflation, it is likely Mr Ueda will begin to take further steps to unwind ultra‑easy policy. While stocks and bonds have broadly declined in the face of higher inflation and rates, Japanese markets may benefit as assets are repatriated back home, where they are now able to earn higher yields. For investors outside of Japan, a stronger yen supported by higher yields could provide a further boost to Japanese market returns. Although inflation has not been a friend to investors elsewhere, the Japanese market may be one area where investors welcome it.
For a region-by-region overview, see the full report (PDF).
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.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.