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April 2024
Global Asset Allocation Viewpoints
Welcome to our latest Asset Allocation Viewpoints - your monthly source for actionable insights on portfolio positioning from our Asset Allocation Committee and Multi-Asset team.
Market Perspective
- Constructive near-term outlook on global economic growth against a backdrop of gradually easing inflationary pressures across most economies.
- U.S. growth remains the most resilient amongst developed economies while European and Japanese growth teeter near recession. Outlook for many emerging markets’ economies improving supported by easing inflation and lower rates, with signs that policy support is helping stabilize growth in China, although risks remain.
- U.S. Fed looking towards rate cuts this summer, but sticky inflation and resiliency in the economy have tempered expectations for an aggressive start to the cutting cycle. The European Central Bank appears closer to easing amid fragile growth and continued progress with inflation. Bank of Japan (BoJ) took its first step in unwinding ultra-easy monetary policy, although the path remains uncertain.
- Key risks to global markets include a retrenchment in growth, stubborn inflation, volatility surrounding central banks’ policy divergence, geopolitical tensions, and trajectory of Chinese growth.
Portfolio Positioning
- We remain overweight equities, supported by firming growth and moderating inflation, positive earnings trends, and reasonable valuations outside of large-cap growth.
- We shifted to a neutral position in U.S. small-caps, balancing valuation considerations against the likelihood interest rates remain higher-for-longer weighing more on smaller companies.
- Within fixed income, we remain modestly overweight cash relative to bonds. Cash continues to provide attractive yields with Fed rate cuts pushed further out and the yield curve remaining inverted.
- We added to U.S. Treasury Inflation-Protected Securities (TIPS) funded from long-term U.S. Treasuries, adding inflation protection should inflation settle higher, while reducing exposure to long-term yields that are likely to remain biased higher.
- Within fixed income, we remain overweight high yield and emerging markets bonds on still attractive absolute yield levels and reasonably supportive fundamentals.
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Market Themes
Gimme Some Credit!
Since the 2008 financial crisis, private credit markets have grown to nearly 1.7 trillion USD and are expected to double over the next five years, as investors continue to recognize the potential benefits from diversification and enhanced income offered by the asset class. Recent interest has not just been driven by investors, but by borrowers seeking flexible financing arrangements amid a backdrop of rising rates and fewer options as banks have stepped back from lending. This retreat by banks has been due to a confluence of factors including recent losses, exposure to commercial real estate, tightening regulations, and de-risking following the 2023 regional bank failures. Private credit firms were able to fill the void in lending, expanding their market share and moving up in deal sizes. With the higher-for-longer rate environment persisting, many existing borrowers are feeling the stresses, notably those with floating rate obligations or those needing to refinance. Private credit firms’ expertise in lending across different quality and types of companies, including distressed, and commercial real estate could prove beneficial as these areas could see increasing opportunities in the near term.
Private Credit Market’s Rapid Growth1
As of 31 December 2023
1 Source: Federal Reserve.
Back In-the-Money?
U.S. equity markets are trading close to record levels fueled by a 10%+ gain in the first quarter. While the equity rally began with the “Magnificent 7” stocks and euphoria around Artificial Intelligence (AI) companies, markets are starting to broaden out. Worries about the Fed delaying the start of interest rate cuts following recent rounds of disappointingly sticky inflation data hasn’t slowed the momentum. Rather, equity investors have chosen to focus on the positives including better-than-expected economic growth, a broadly resilient job market and rising earnings estimates. Perhaps the biggest positive of all is signs that the “Fed put” may soon be back in-the-money, after having been abandoned as the Fed focused solely on fighting inflation, no matter the downside risks. Now, despite inflation still above target, Chairman Powell seems pretty intent on getting started on rate cuts this year. Perhaps the motivation is to get ahead of the elections or a worry that the lagged effects of tightening will finally start to crack the labor market. Whatever the reason, for now, equity investors seem to have yet another reason to rally, believing the Fed may be back to help mitigate downside risk.
Equities Undeterred by Fewer Cuts2
As of 31 March 2024
2 Source: Bloomberg L.P. and S&P. Please see Additional Disclosures page for additional legal notices & disclaimers.
Regional Backdrop
Click each region below for more details
- Expectations are for favorable earnings growth
- Consumer spending remains strong
- Labor market has been very resilient
- Fed expected to cut rates this year
Negatives
- Stock valuations have become challenging
- Lagged effects of monetary policy remain a risk
- Wage growth could pressure corporate margins
- Political uncertainty heightened
- Bank of Canada expected to cut rates this year
- Inflation is gradually moderating
- Labor market has been resilient
Negatives
- Economic growth has slowed significantly
- Consumer savings balances have faded
- Elevated interest rates remain a drag on spending
- Inflation has been steadily declining
- European Central Bank expected to cut soon
- Labor market has been resilient
Negatives
- Monetary policy is restrictive
- Economic growth remains weak
- Geopolitical uncertainty is heightened
- Inflation has been steadily declining
- Bank of England likely to cut this year
- Labor market has been resilient
Negatives
- Fiscal consolidation may need to be accelerated
- Tight labor markets could keep wage inflation elevated
- Economy welcomes inflation after decades fighting deflation
- Corporate governance continues to gradually improve
- BoJ remains accommodative despite recent hike
Negatives
- Earnings expectations are high, raising the bar for upside surprises
- Yen weakness could raise pressure on the BoJ to hike
- Labor market tightness may have peaked
- Fiscal stimulus to alleviate loss of real income
- Economic data appears to be bottoming
Negatives
- Reserve Bank of Australia remains hawkish
- Equity market valuations are rich
- Earnings likely to disappoint due to lack of pricing power
- Monetary tightening in most emerging markets has peaked
- Equity valuations are attractive relative to the U.S.
- Chinese economy incrementally improving
Negatives
- Chinese property deleveraging continues to weigh on activity
- Chinese consumer and business confidence fragile
- Meaningful fiscal stimulus measures appear unlikely
Asset Allocation Positioning
These views are informed by a subjective assessment of the relative attractiveness of asset classes and subclasses over a 6- to 18-month horizon.
Asset Classes
Sentiment remains positive as firming economic growth and inflation outlook should continue to drive earnings higher. Valuations are challenging, meaning earnings growth is needed to drive further upside.
Yields remain attractive but could be volatile as central bank expectations continue to shift on growth and inflation backdrop. Credit fundamentals remain supportive; however, spreads remain tight.
Cash continues to offer attractive yields as the yield curve remains inverted and continues to offer liquidity should market opportunities arise.
Equities
Regions
Earnings expectations improving as economic activity remains resilient and financial conditions are loosening. Technology and pharmaceutical innovation is a key differentiator. However, valuations may limit upside from here.
Valuations are attractive on a relative basis. European equities remain challenged but improving with easing inflation and most economic indicators bottoming. Chinese economic growth appears to have stabilized.
Valuations and currencies are attractive and monetary policy easing could provide support. Chinese equities face headwinds from housing, employment, and consumer sentiment. However, the outlook for other regions (notably Korea and Taiwan) is improving.
Style & Market Capitalization
Improving economic outlook and further broadening of equity market performance could be supportive for value. Higher-for-longer rates and improving prospects for energy demand should be positive for value-oriented sectors.
Value stocks are cheap and could benefit from a rebound in economic growth. Growth stocks are challenged by consumer weakness in China and Europe.
Small-caps offer attractive relative valuations but are more challenged by higher-for-longer rates. Profit margins and leverage are also becoming more of a concern, warranting a higher quality bias.
Small-caps offer very reasonable valuations against a muted global growth profile and could benefit from an improvement in economic growth.
Inflation-Sensitive
Commodity-related equities are cheap and offer an attractive hedge to stickier inflation. Additionally, oil prices may be set for structural increases due to peaking productivity over an intermediate-term and over the near-term could be driven higher by rising geopolitical tensions.
Bonds
Yields remain broadly attractive. Favoring core/shorter end of the curve given prospects for Fed cuts, while long-term bonds could remain vulnerable to increased supply. Credit fundamentals remain supportive.
Global central banks cautiously eyeing rate cuts as inflation and growth continue to slow. Yields look attractive on a USD-hedged basis.
Longer term yields biased higher on increased supply, resilient growth, and stickier inflationary backdrop.
Sector offers a hedge should inflation settle at, or move higher, than current levels, especially within services.
Attractive absolute yield levels remain supportive, but tight spreads may be reflecting too optimistic of a backdrop. Default rates likely to rise to historical long-term averages although much appears to be priced in.
Yields could remain elevated for longer on less aggressive Fed cut expectations. Default rates expectations expected to rise but should be contained to certain names.
Yields still look modestly attractive. With central banks embarking on easing cycles and inflation continuing to moderate, EM bonds may benefit.
Yields close to historical averages as expectations for central bank easing and lower inflation. While a softer dollar could be supportive of local rates and currencies.
*For pairwise decisions in style & market capitalization, positioning within boxes represent positioning in the first mentioned asset class relative to the second asset class.
The asset classes across the equity and fixed income markets shown are represented in our Multi-Asset portfolios. Certain style & market capitalization asset classes are represented as pairwise decisions as part of our tactical asset allocation framework.
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Portfolio Implementation
Equity
Tactical Allocation Weights
Fixed Income
Tactical Allocation Weights
1 U.S. small-cap includes both small- and mid-cap allocations.
Source: T. Rowe Price. Unless otherwise stated, all market data are sourced from FactSet. Copyright 2024 FactSet. All Rights Reserved.
These are subject to change without further notice. Figures may not total due to rounding.
Neutral equity portfolio weights representative of a U.S.-biased portfolio with a 70% U.S. and 30% international allocation; includes allocation to real assets equities. Core fixed income allocation representative of U.S.-biased portfolio with 55% allocation to U.S. investment grade.
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Important Information
Any specific securities identified and described are for informational purposes only and do not represent recommendations.
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and 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.
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