Asset Allocation Committee Strategy

Asset Allocation Committee Strategy

Executive Summary

The T. Rowe Price Asset Allocation Committee evaluates the relative attractiveness of major asset classes over a 6- to 18-month time horizon. These positions are currently reflected across our suite of asset allocation portfolios accounting for approximately $314 billion in assets under management as of September 30, 2018.*

November 2018 Positions

  • All Asset Classes
  • Equities
  • Fixed Income
Current Position (as of November 2018)
Bonds
Neutral
Stocks

Equity valuations are more attractive after the market decline, but the environment remains fragile.

Equity valuations are more attractive despite late-cycle pressure on profit margins, slower earnings growth, and trade tensions. Bond yields declined from recent highs amid speculation of a more dovish Fed but are still supported by moderating growth and low inflation.

Equities

U.S.
Neutral
International

Despite fading economic growth and trade tensions, international equities offer attractive valuations relative to the U.S.

International markets are in the earlier stages of the economic cycle. Political risk in Italy, moderating growth, and banking system weakness are mitigated by potentially higher earnings. While still supportive, strong earnings growth in the U.S. has likely peaked.

Developed
Neutral
Emerging

Emerging markets (EM) offer compelling valuations, and idiosyncratic risk could moderate.

Buoyed by healthy corporate earnings, relative valuations for EM equities are attractive after the widespread yearlong sell-off. Country-specific risks are unlikely to become systemic, and pressure from a stronger U.S. dollar could abate with moderating U.S. growth.

Global Equity
Neutral
Real Assets

Slower global growth and oversupply weigh on energy and commodity prices.

Excess supply due to efficient oil and gas production and moderating global growth make long-term prospects for energy and commodity prices challenging. Valuations for real estate investment trusts have become less appealing, but their fundamentals remain broadly positive.

Large-Cap
Neutral
Small-Cap

U.S. small-cap valuations are lower and could benefit from capital spending and mergers and acquisitions.

Extended valuations for U.S. large-caps have declined after the correction, but fading tailwinds from a weaker dollar and trade policy remain threats. U.S. small-cap valuations are more reasonable, but small-caps are vulnerable to higher borrowing costs and wage pressures.

U.S. Value
Neutral
U.S. Growth

U.S. growth stocks are priced more reasonably after the recent market correction, while value stocks lack a catalyst to advance.

With global risks still elevated, secular growth companies could benefit from a low-growth environment, although the impact of trade policy on some global supply chains remains a risk. The late-stage credit cycle and moderating global growth pose headwinds for value stocks.

Int'l. Value
Neutral
Int'l. Growth

Valuations for international value stocks remain attractive, but fundamentals have weakened.

Valuations for growth stocks outside the U.S. remain extended, particularly within cyclical sectors like industrials and business services. Fundamentals for international value stocks have weakened, most notably within European financials.

Fixed Income

U.S. Investment Grade
Neutral
U.S. High Yield

There is limited upside potential for high yield bonds, despite low default risks in the near term.

U.S. investment-grade bond yields are more attractive amid slowing growth and modest inflation. Investment-grade corporate spreads have widened but are still relatively tight. Current valuation levels for high yield bonds appear elevated late in the credit cycle.

U.S. Investment Grade
Neutral
Emerging Markets

Emerging markets (EM) debt offers very attractive yields.

Broad EM debt fundamentals remain attractive. Many EM currencies have been unduly punished due to contagion fears, creating attractive opportunities in select areas. U.S. dollar strength and country-specific risks pose potential risks but are unlikely to become systemic.

U.S. Investment Grade
Neutral
Ex U.S. Investment Grade

International bonds have a less attractive outlook given their sensitivity to interest rate changes.

Yields for U.S. investment-grade bonds are more attractive year-to-date amid slowing economic growth and modest inflation. Hedged yields outside the U.S. are favorable for dollar-based investors, but durations remain extended.

*The combined asset allocation assets managed by T. Rowe Price Associates, Inc. and its investment advisory affiliates. This figure includes assets that are held outside of T. Rowe Price but where T. Rowe Price influences trade decisions.

This material represents the views of the T. Rowe Price Asset Allocation Committee only and may not reflect the opinion of all T. Rowe Price portfolio managers. This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are as of November 2018 and may have changed since that time. Information and opinions, including forward looking statements, are derived from proprietary and non-proprietary sources deemed to be reliable but are not guaranteed as to accuracy.

There are inherent risks associated with investing in the stock market, including possible loss of principal, and investors must be willing to accept them. The stocks of larger companies generally have lower risk and potential return than the stocks of smaller companies. Since small companies often have limited product lines, markets, or financial resources, investing in them involves more risk than investments primarily in large, established companies. The value approach carries the risk that a stock judged to be undervalued is actually appropriately priced. International investing involves unique risks, including currency fluctuation. Bond yields and prices will vary with interest rate changes. Investments in emerging markets are subject to abrupt and severe price declines, and should be regarded as speculative. High yield, lower-rated bonds generally involve greater risk to principal than investments in higher-rated securities.

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