April 28, 2026

Sébastien Page, Colin McQueen, Christina Noonan (Moderator)

Christina Noonan

Hello, everyone, and thank you for joining us for this quarter's Asset Allocation Viewpoints webcast, “Uncovering Value Across Markets,” brought to you by T. Rowe Price's Multi-Asset Division. I'm Christina Noonan, a portfolio manager within Multi-Asset, and I'll be your host for today's discussion. We'll cover our outlook, including views on recent market volatility, market dispersion, and opportunities ahead.

So let's introduce today's panel. With me, as always, is Sébastien Page, who you may recognize from Bloomberg, CNBC, and LinkedIn. He is the chief investment officer and Head of Global Multi-Asset. He is also the co-chair of the Asset Allocation Committee, responsible for tactical investment decisions, and the author of two books, “Beyond Diversification” and “The Psychology of Leadership.” Thank you for being here with us, Sébastien.

Sébastien Page

Thank you, Christina. As always, I'm super excited, but especially today because we have Colin McQueen. He's in studio from London. This is going to be awesome. He's a member of the Asset Allocation Committee, so I'm super happy to have him.

Christina Noonan

Yes, looking forward to it. So also with us today is our special guest, Colin McQueen, Portfolio Manager within the Global Equity Division, joining us here in Baltimore from our London office. He has more than 35 years of investment experience, including the past six years with T. Rowe Price. And he focuses on our international value equity strategies. And as Sébastien mentioned, he's also a member of the Asset Allocation Committee. So looking forward to hearing his views. And thank you for being here with us, Colin.

Colin McQueen

Great. Thank you very much, Christina, Sébastien. It's a pleasure to be here for my inaugural time on the Asset Allocation quarterly meeting.

Sébastien Page

It's great to have you.

Christina Noonan

Great. So as I mentioned, we have a lot to cover today, especially on how we're navigating the current environment and our thoughts on tactical asset allocation. We also want your input, so please keep an eye out for polls, and please continue to also share your questions with us.

So with that, let's start with you, Sébastien. So we came into the year expecting the broadening from Q4 to continue, and we did start to see that, and then the backdrop got more complicated with the backdrop in the Middle East. Can you talk about some of the changes that you have made recently in the Asset Allocation Committee?

Sébastien Page

I've been thinking about our audience as I was preparing for this. And I want to give you and the audience the arguments you need to defend your position. And here's why I'm saying this.

We're still long the broadening. We're still long international and small-cap stocks in the

U.S. But we're reducing the positions, which means I can give you arguments for why we're moving money towards the U.S. or arguments for why you would remain long the broadening. It's nuanced.

What we're doing is managing our risk. We decided to remain long international and small stocks but take some profits. Let's do a little bit of math. The Russell 2000 is up. This is staggering, Colin, like 44% in one year. It has outperformed the S&P 500 by 13% over the last year. So small-caps have been on fire.

Here's the math. If you go back to 1980, you have 555 rolling 12-month periods. And my puzzle for all of you in the audience is how often have small-caps outperformed large-caps by 13% or more out of all these possible 555 rolling 12-month periods since 1980? That's the puzzle. The answer is only 10% of the time. Actually, it was a little bit more than I expected, but it has happened before. Here's the thing, though. This is a massive rally. On average, when small-caps have outperformed large-caps by 13% or more over any rolling 12-month periods, they have then underperformed by 3% over the next 12 months. Every event in the market is different. Every period is different. But here we have the historical averages against us, so we're taking some profits.

Now, emerging market stocks, like I said, small-caps are up 44% in the last 12 months. Emerging market stocks, up 50%. And what's the best performing country of all developed markets? I'm full of puzzles today. Best performing—can you say, Colin, best performing country of all developed markets?

Colin McQueen

I would have to go with Japan. Sébastien Page

Japan, the Nikkei, is up 72% over the last 12 months in U.S. dollars. So again, reasons to

take profits in international stocks relative to U.S. stocks.

We're also establishing a small underweight in loans to manage our credit risks. So maybe we'll talk about fixed income a little bit today, as we always do, but we remain long high yield.

Look, it's a change in conviction, but not a change in direction, at least for now, towards broader markets. We're still in the direction of broader markets, but with a little bit less conviction. Another way of saying this is it’s about risk management. Look, I hate using the word uncertainty. Everyone uses the word uncertainty all the time. Investing involves uncertainty. Things are always uncertain.

But let's just talk about the latest news flows, for example, on Iran. Right now, Iran maintains a blockade of Hormuz and says it will not fully reopen the strait while the U.S. blockade is on. So we have a blockade on the blockade. We have a ceasefire now that's kind of shaky, but holding between the U.S. and Iran, but it has not led to a reopening.

Washington has extended the ceasefire while waiting for Iran's proposal. But again, the president's saying we don't even know who we're negotiating with on the Iran side, through mediation from Pakistan. Iran has floated a new proposal to the U.S. So their proposal is about reopening this trade of Hormuz in exchange for a deal. But the talks are stalled. I mean, everyone's head is spinning because we go back and forth, open, close, open, close. I hate to use the word. It is an uncertain environment from a geopolitics perspective.

I think the market is underappreciating, though, the risk of a collision between Fed policy and inflation. You know, so we're reducing active TAA risk, tactical asset allocation risk. I would say, though, and Colin, you're in the Committee, you may want to agree or disagree. We have some of our members who are kind of ready to pounce. “Hey, let's go long risk.

Let's add to equities.” So if we see a pullback, those voices on our Committee might get louder. So here we are. I can give you to the arguments for why we're moving money to the U.S., why we like U.S. large-cap, or why we remain long the broadening trade. In the end, we're just managing our risk down, given the current environment.

Christina Noonan

A lot of nuance there, as you touched on, but essentially dialing back risk rather than changing direction. So let's stay with that broadening theme. And a big piece of that has

been international markets. Big shift there away from U.S. exceptionalism, finally seeing some tailwinds in international markets. So Colin, can you take a step back and walk us through what's driven the recent strength we've seen in international?

Colin McQueen

Yes, certainly. I guess it's felt like a long time coming, particularly for somebody that's managing an international equity strategy. We've seen international underperform the U.S. pretty consistently almost since the great financial crisis. But international markets have outperformed the S&P over the last two years. And if we peel back the onion a layer further, we see within international in contrast to the U.S., value stocks have outperformed growth quite comfortably. So, kind of international value stocks have actually outperformed the S&P 500 over 1-, 3-, and 5- years. And so, I think what's driving that is sort of important, because I think it probably has durable elements to it. We obviously started with international equities cheaper, but we could have said that pretty much any time for the last 20 years.

Sébastien Page

It's been a value trap. Colin McQueen

It's been a value trap. It's not been sufficient to generate outperformance. But I think what has caused the sort of shift in sort of the performance of international markets is really, I think of it as a regime shift between the environment we saw post-GFC through to the environment sort of post kind of COVID, post the Ukraine war. And if you like, leading up to the pandemic, we had a decade of pretty persistent deflation, ever lower interest rates kind of almost across the world, 30% of the world's government bond markets into negative territory. And the profit growth that we did see was really getting concentrated into a handful of companies, driven by Internet stocks and principally domiciled in the U.S.

So international underperformed for quite a while. Post the pandemic and post the Ukraine war, I think we've seen some significant changes, though, that have kind of leveled the playing field a little bit further.

So firstly, deflation has very obviously changed to inflation. We've seen interest rates go from negative to positive pretty much everywhere around the world. And that's had a significant impact on financial companies, particularly financial companies in Europe and Japan. So, I think bank business models really aren't designed to work with negative interest rates. Positive interest rates has been a major driver in improving ROE and improving returns to shareholders.

We've also, I think, had a broadening in the sources of growth and the sources of economic profit within the economy. So again, the prior decade was driven by companies really fueled by intangible assets. We started to see better conditions for companies that kind of make stuff, specifically industrial stuff more than consumer. So coming out of the pandemic, we found that a lot of supply chains didn't work as well as we would have liked, a lot of infrastructure perhaps didn't live up to what we wanted from it. So we're seeing significant expenditure on those fronts, significant expenditure to reshore, to sort of bring supply chains in some ways back from China, more to the West. We're also seeing expenditure around power generation, power grids, defense, and I guess AI is now proving to be the kicker again. So a lot of the companies sort of making industrial products are looking at record order books, and that's dragging through a lot of materials to support those. And those companies tend to be sort of heavier into the indices in international. So we've broadened the source of profits growth.

I think the third factor that's been there for international is perhaps not a macro factor, but we've seen a change towards corporate restructuring, particularly in Japan, where we've started to see through a mixture of sticks and carrots, more focus on ROE for companies, release of excess assets. And that's sort of driven earnings growth as well.

So the combination of those three things have kind of seen international earnings growth go from kind of pitiful 1% per annum levels up to about five, still below the U.S. But again, the gap is roughly halved. And that sort of allowed the valuation discount to come through.

Sébastien Page

Yeah, and well done on bringing this straight to the Committee early. To me, it's a great illustration of the Committee taking bottom-up input from some of our members, because your arguments were, I'm looking at these companies and they're in better shape and I'm seeing an opportunity, which is rare. Asset allocators looking at bottom-up insights, not every, and now I'm tooting our own horn, but not every asset allocator has this integration between bottom-up and top-down. So thank you. This was a great trade.

Christina Noonan

Great point. And so, Colin, you lay a very compelling case for international markets. And I mean, the question’s already coming in. What about the here and now, the conflict in the Middle East, how we've seen it weigh on international assets, energy shock. But what if this continues? The market seems to think it will not. But do you see that as a huge risk? And could that derail the positive catalyst that you just walked through? How detrimental do you think that could be?

Colin McQueen

I think, again, it depends on, there's degrees, all these things. It depends how far we go. I think suddenly coming out of the crisis or out of the conflict, we will see higher energy prices almost permanently, I think, at least as far permanently as we can sensibly talk about. Even if we get a resolution tomorrow, we will see higher energy prices. And that sort of, we'll see an impulse towards inflation. We're seeing higher interest rate expectations. And again, that's not necessarily bad for the international trade. As we said, higher interest rates has been a positive factor, provided we don't tip into recession. I think that sort of takes the edge off the trade rather than reducing it totally. I guess the bigger question probably is what happens if we don't get to that position? We end up having to sort of ration energy by price, in which case, probably Europe and Asia go into recession first, but in my mind, probably the U.S. is some period behind it.

Christina Noonan

Yeah, and certainly tough to predict. Doesn't seem like anyone has an edge on the situation in the Middle East. So we have an audience poll. Would like your thoughts. Same one that we had in February. Will international outperform U.S. assets? If you can remember, the results were about 75% of our respondents thought that international would outperform

U.S. Clearly, a lot has changed since then. So please share your thoughts with us as we hear from Sébastien to make the case for U.S. assets. You mentioned we're remaining overweight international, but there are still some positive reasons to like the U.S.

Sébastien Page

I'm trying to see the result of the vote, but it's frozen on my screen, so I can't... I would love to see the result before I give my arguments. But let's talk about why we're moving money back to the U.S. and U.S. large-cap. Do you see the results yet?

Christina Noonan Not yet.

Sébastien Page

We got one vote. We got one vote for the U.S. so far.

Let's just talk about the fact that Europe faces greater exposure to higher energy prices, which Colin just talked about, while the U.S. is a net oil exporter. And total production in the

U.S. is over 13 million barrels a day. I heard a strategist say the war is stimulative for the

U.S. That's one way to think about this. There is a stronger growth impulse in the U.S., and I'm pounding the table for those who want to put more money in U.S. large-cap.

The Bloomberg Economic Growth Surprise Index has been trending up all year. PMIs, also retail sales. Also, nonfarm payrolls. They all are coming out above expectations over the last few days. Manufacturing PMI at 54; anything above 50 is an expansion on the manufacturing side. Jobless claims are low. Unemployment is low. Retail sales, again, just beat expectations. Fiscal stimulus is expected to more than offset the tax, quote, unquote, of higher prices at the pump.

You have two forces here. You have the K-shaped economy and lower-wage consumers having to buy gas. And that goes up. It's a direct tax. The rest of their consumption goes down. But let's just remember that 80% of consumption in the U.S. comes from the top 50% of earners. In fact, if you just look at the top 20% of earners, they will generate about half the consumption. So yes, the K-shaped economy is real, but from a macro perspective, really, consumption is driven by the high earners. A lot of them own stocks, by the way, so there's so-called wealth effect.

Let's continue in favor of the U.S. Earnings. We're currently on six consecutive quarters of double-digit S&P 500 earnings growth. Six consecutive double-digit year-over-year earnings growth for the S&P 500. Q1 2026, right now is tracking at plus 13%.

So why don't we put all our money in the U.S. markets? Well, a lot of this is built into the price. S&P 500 is up 30%. The price to trailing cash flows is higher than it was during the dot-com bubble. Now, let's remember that margins are also about double what they were during the dot-com bubble. But still, if I just compare a simple price to cash flow measure for the U.S. to the rest of the world, All Country World Index, ex U.S. Yes, international has outperformed the U.S., but the price to cash flow in the U.S. is 22, and for the rest of the world, it's half, it's 11.

So a lot of what I talked about, economic momentum, and I didn't talk about, but dominance for AI, all these things, a lot of these things are in the price at the moment, even though the relative valuation spread has somewhat normalized. The important part here that we discussed in the Asset Allocation Committee, and I don't know, Colin, if you want to add anything, but that was a big part of our discussion at the last meeting. U.S. large companies are the best way to express, in our view, a positive view on AI.

So these are my arguments in favor of the U.S. over Europe. We recognize that Europe is a bit challenged right now because of its dependence on energy, despite everything you said earlier. I guess we're having a debate now.

Colin McQueen

Indeed. I certainly would agree the AI theme is best placed by the U.S. And if you like, we've seen earnings growth with prices moving down. So we've seen some de-rating. I guess you also, within international, the other place you can find AI is China. And you've been able to buy AI exposure in China at a fraction of the valuations that we've seen in the U.S. So that's been an important area for us instead of wanting to maintain some of the emerging markets exposure and some of the sort of international exposures. So I think, to my mind, in this environment, I hate to say, but you want a bit of diversification.

Sébastien Page

Yeah, we love diversification.

Christina Noonan

Yeah, that makes sense. And Sébastien, I think you were convincing. We now see about

60% of the audience agrees that U.S., so it flipped from-

Sébastien Page

so but did people vote before I made the pitch for the U.S.? It's hard to know the timing, right?

Christina Noonan Yeah, it was frozen. Sébastien Page

I'd like to know the delta, before Seb speaks in favor of the U.S. and after. If anybody changed their votes, let us know. I'm surprised.

Christina Noonan

We'll look into it. And so Colin, now let's shift back to international, see if we can sway the vote. You touched on the corporate restructuring, especially in areas like Japan. We're also seeing fiscal initiatives with the new prime minister. Can you expand a little bit on the

corporate restructuring, ROE, return to shareholders, and how much of that has been priced in?

Colin McQueen

Certainly. I guess for somebody that spent a lot of my career kind of traveling to Japan and visiting companies, you kind of had the long experience of sitting in front of companies with huge amounts of cash on the balance sheet, excess shareholdings, real estate, in many cases sometimes even more than the market cap of the company, and coming back and tearing your hair out that somehow that never found its way back to shareholders. That started to change about sort of five years ago, and it changed through a combination of pressure from the governments.

The Tokyo Stock Exchange has actually been incredibly proactive in terms of creating what they call their prime index. And for companies to be included in that, you needed to have tangible plans around improving return on equity, particularly if you have a low book value. We've seen pressure coming from insurance regulators to unwind cross-shareholdings.

And again, in Japan, it's just become sort of societally kind of normalized that there's now pressure to reform rather than pressure not to reform. So we're seeing a lot of cross-shareholdings getting unwound in the market. We're seeing spin-offs. We've seen a couple of sort of hostile takeovers. We're seeing more and more companies producing reports and targets really related around ROE, which wasn't always the case. So that's translating into proved return on equity. It's translating into more cash coming back to shareholders. The payout ratio has gone from the high 20s to 40%. We're seeing share buybacks. So a lot has been going on. I think there's still more to come. I mean, if you look at the aggregate net debt in the S&P 500, net debt to equity is about 64%. So companies kind of quite sensibly funding themselves with a mixture of debt and equity. The number in Japan for the TOPIX Index is pretty easy to remember. The net debt is approximately 0. So we have a bunch of companies with under-levered balance sheets. So there's a lot of potential for that still to come. I think we would say in some of the larger cap stocks, it started to come through a bit more. The market has sort of seen this theme at work.

Where we found perhaps more exciting opportunities actually have been in Korea. So Korea has seen what's going on in Japan. They've launched their own restructuring initiative that they've called Value Up, which has been driven principally by the government. And it's again aimed at raising ROE, improving capital allocation, improving returns back to shareholders. So Korea has actually outperformed Japan for the last couple of years. It's been a very strong market. We're coming from a very cheap base. But again, two-thirds of the companies on the Korean exchange are still trading below book value. So we can see quite a lot of potential for value to get released in Asia through some of these corporate restructuring measures.

Christina Noonan That makes sense. Sébastien Page

I think he was more convincing than me, but I don't know. We'll see. We should take the vote again. I don't know.

Christina Noonan Held steady.

Sébastien Page

I don't think we can logistically. So where is the vote? Christina Noonan

About 60%.

Sébastien Page

60% the U.S. outperform. Christina Noonan

Let's talk about emerging markets. We saw an audience question also come in. Can you talk a little bit about emerging markets also, we touched on earlier, extremely strong performer. Do we still see room to run across EM?

Colin McQueen

Yes, we do. Again, emerging markets, if we look compared to other international markets, the valuations are very similar. They've kind of tracked each other in terms of relative valuation over time. So there wouldn't be that much to choose between them. I think, though, when we talk to portfolio managers on the ground and we sort of look the opportunities beneath the surface. In some ways, it feels like there's a lot of scope to add value through active management in emerging markets. They're not all sort of moving to the same drumbeat over time.

So we've seen a lot of opportunity, as we say, in terms of expressing views on the tech chain in Taiwan and Korea. Some of the cheapest ways to play the growth of AI have been through companies like TSMC in Taiwan. We've also seen the ability to buy the Chinese tech chain very cheaply. We're seeing a lot of change kind of coming in China in terms of companies moving up the tech spectrum. And that's particularly noticeable actually in pharmaceuticals, where our healthcare team recently spent a couple of weeks in China and came back sort of really amazed by the quality of research pipelines and the fact that the companies were able to research and launch new drugs in a fraction of the time that we're seeing in the West. So we're seeing a lot of kind of change in technology. And that's really not reflected yet in the valuations in China. The domestic economy has been somewhat of a headwind. Obviously, we've been digesting the property market. We're probably not quite at the bottom, but I don't think we're a million miles away from it. So there's sort of a lot of opportunity there.

We've similarly found markets where there are kind of simply different points of the economic cycle. Brazil with interest rates hitting 14, 15, we've been able to opportunistically pick up companies that will benefit as those rates start to come down. So I think there's opportunity within emerging markets and a lot of opportunity to add value sort of through individual selection rather than just a blanket buy.

Sébastien Page

Are there GLP-1’s being developed originally out of China? Colin McQueen

There are some. But they weren't the ones that we were excited about in terms of the team. It was kind of more around sort of some of the oncology products that specifically looked excellent. But it's really kind of a broad swathe of drugs coming out. And we've seen some of those getting licensed by Western players. But again, you find it's just much, much easier to recruit people for drug trials in China. There's more people to recruit effectively. So people are able to do that in a fraction of the time, at a fraction of the cost. And the technology and the science just seems to be improving very rapidly there.

Christina Noonan

Appreciate those insights. Certainly nuance, but still a lot of opportunity in emerging markets, but importance of active management, being selective there. Let's zoom out a little bit, Sébastien. So coming into this year, we saw strong economic growth, strong earnings tailwinds, but seemed like nothing could stop markets. But now we've seen complicated backdrop from energy, inflation, and whether that does start to weigh on growth. Kind of a broad question, but how should investors be thinking about that balance of such a promising backdrop coming into the year and now the energy shock?

Sébastien Page

There's a chain from an energy shock to, from geopolitics to oil prices or an energy shock, to inflation, to interest rates, to valuation, and ultimately a growth shock. And it's like that chain's going in slow motion, and that's what we have to worry about. My view, as I said earlier, is that we should watch the risk of a collision between Fed policy and inflation, futures markets indicate a cut is more likely than a hike, but the base case is still that rates remain flat, but future markets, futures markets seem optimistic if you just or the view of monetary policy seems optimistic to me.

The one-year inflation swap. Now my colleagues tell me sometimes, don't look the inflation swap is not that good of a data point. I use the data I have and I think directionally it's helpful. The one-year inflation swap was 2.3% so this is In a way, the market's view of inflation for the next 12 months, based on people who are trading swaps on inflation on CPI, it was 2.3% at the beginning of the year. It's trending up and up and up. It's at 3.4%. So the swap market and inflation, again, not perfect data, is pricing at 3.4% inflation for the next 12 months.

How does that jibe with a 2% inflation target and rate cuts? So this is the collision that's possible that we should worry about. And let's all remember that in the U.S., there is a housing shortage, several million homes short. So that can create stickiness in housing prices, even though that's the rate of inflation there has been coming down. The labor market remains fairly tight. We're at 4.3% unemployment. The long run average is 5.7%.

So Colin, I don't think we have a debate here as much on the Asset Allocation Committee about keeping our inflation hedges in place. You know, we debate a lot of things. And in fact, when we all agree on something, we start worrying whether we got something wrong. But on the inflation side, it's worth hedging this. It's worth hedging this by taking shorter duration, maybe some cash, maybe some TIPS, maybe some real asset equity strategies, maybe a diversified portfolio of hedges. But I don't see, I see an asymmetry here where the probability of an upside surprise and inflation is greater than the probability of a downside surprise. I don't think we have a debate here.

Colin McQueen

I don't think we have a disagreement. That seems to be, as you say, a frighteningly unanimous view on the Committee.

Sébastien Page

And how's it looking to you in Europe in terms of the inflation there?

Colin McQueen

I think we're certainly seeing inflation impulses coming through in Europe. Again, labor markets have tightened. Housing markets are relatively short. So, we're seeing inflation kind of proving to be sticky. And I guess, if anything, higher energy prices will probably impact that as well. And maybe sort of into next year, potentially into food prices, because as well as restrictions on oil coming through the Straits of Hormuz, we've seen a significant reduction in the world's fertilizer supply, which won't affect this year's crops, but potentially next year. So, again, it's likely that we see upside surprises more in inflation in Europe also. I think with energy being the sort of critical pivot point to that, how that sort of then responds kind of going forward is probably the more open question.

Sébastien Page

And again, the dependence of Europe on energy is greater than the U.S. overall. I just want to say something about inflation, because sometimes we'll say, oh, we'll just brush it up and say, this is headline because it's gas prices and headline is volatile. And the Fed looks at core. Look, we know from Ukraine, we know from macroeconomics that energy is essential to delivering almost all goods and services. So it will spill into core inflation. It has to. I mean, you need energy to deliver goods and services. It's that simple.

Christina Noonan

Yeah, only a matter of time before jet fuel then flows into airline prices. And then, yeah, so. Yeah, and not to mention a new Fed chair will be interesting. Our economist does still think two cuts by the end of the year, but it will be interesting. You've mentioned a few times this collision of the Fed and inflation, how that plays out later this year.

Sébastien Page

Yeah, I mean, look, I'm watching the inflation swap go from 2.3% to 3.4%, and the oil price is still above 100, and then the Fed cuts expectations remain flat. Something's going to give.

Christina Noonan

All right, let's shift gears, come back to you, Colin. So international markets outperformed, as we mentioned last year, particularly value, over 40%. Financials were a key area, the lending that we've seen around spending, banks, and also a large part of the index. Can you help investors understand, one, the nuances between international value and U.S. and some of the sectors and opportunities that you're seeing in your space.

Colin McQueen

OK, certainly. Again, it's been very stark to see sort of value outperforming dramatically outside the U.S., whilst the U.S. has been the opposite. Historically, they've kind of tended to be more coincident. We did see value internationally kind of reaching discounts that we'd previously only seen at the dot-com boom back during COVID. So we were sort of well set up as a coiled spring for better news to kind of come through. As we said, we've seen a lot of that come through in financials.

So, return on equity for European banks kind of around 2019, if you sort of poll people in the market, you'd be getting numbers of 8 to 10. Today, a lot of the companies are reporting somewhere between 12 and 20, and generally shooting higher. Intriguingly, we haven't seen the full impacts of interest rate hikes kind of come through yet. There's a lot of lags in terms of passing that through into loan spreads and into customers, particularly in France, the process is very slow. So we're seeing a kind of upward movements in return on equity.

We're seeing companies, again, having perhaps reached the point where regulators have decided that we have enough capital. So we're starting to see capital coming back to shareholders in meaningful amounts. And that's been a big driver for value internationally. If we look at valuations relative to ROEs, we still look out of kilter in the international markets compared to pre-GFC conditions or compared to how banks are valued in the U.S. So we still see some mileage there.

We still see mileage in some of the areas like aerospace, which kind of got really beaten down during COVID. But we're starting, interestingly, to see a sort of flow of opportunities coming in different areas.

And energy has been a particularly interesting area. I think from our bottom-up research, we've been looking for higher energy prices anyway, with the needing to navigate the near-term overhang of inventories. And obviously, that's largely gone. So what's been causing pressure on oil prices has really been the deterioration in the sort of productivity boom we've seen in U.S. shale. And the supply response out of U.S. shale in the recent sort of energy price spike is nowhere near the levels we've seen recently. So this suggests we need higher prices to drive investment in the rest of the world. If you probably picked the place that you wanted to get energy exposure around the world, I think Canada would be the hunting ground to look for. People used to pay premiums for Canadian oil sands companies because you had 30, 40 years of reserve life. And unlike shale, the production doesn't decline for decades. You have a very durable plateau. You can still buy those companies today at a discount to U.S. stocks, even though we're looking at 30, 40 year production lives and less capital reinvestment.

I think we also see opportunities kind of around utilities, around the sort of power infrastructure grid. Again, one of the consequences I think we've seen thematically, perhaps through time, is kind of countries wanting more kind of security in certain areas. Defense has clearly been top of the priority list. But I think we're seeing the same around energy. So we're seeing big investment around renewables, nuclear, as companies are trying to sort of wean themselves from dependency on imported energy. So I think that will prove to be an interesting thematic to invest in.

And the other one, which we found interesting recently, is after several years of booming equity markets, we're starting to see opportunity in some of the kind of what have almost become the forgotten sectors, the kind of high-quality, noncyclical compounders. So we're seeing companies like Unilever, really the Procter & Gamble of the international world, probably at the cheapest valuation we've seen across my equity career. So the valuations there are really at about 70% of the level of Procter & Gamble. The gap's never been this wide.

So we have opportunity to sort of pick these companies up with minimal growth embedded in the share prices and with enough pricing power to give us some protection in a higher inflation environment. So we still see opportunities across international. The structure of international, again, I think offers advantage in terms of diversification in that technology is really a 9% weighting in international developed indices, much, much less exposure than the U.S. Now, obviously, If you're a big believer in the growth of AI.

Sébastien Page

That could be good or bad. Colin McQueen

That can be good or bad. But in terms of offering you diversification from that main driver,

it's a pretty good place to get it. Sébastien Page

You know what we haven't talked about yet, which if you step back and think about how that topic dominated headlines up until recently, is trade.

And if you were to hear a fortune teller tell you a few years ago, “hey, Colin, we're going to have basically the highest—a big trade war, highest tariff rates in 80 years, and it's really going to hurt Europe's exports to the U.S.,” I think anyone's conclusion would have been, “this is going to be bad for the European economy.” But it seems like what's happened, and I'd love to hear your thoughts, is it's actually just stimulated Europe for domestic investments.

Colin McQueen

It's kind of done both at the same time. So these things are never sort of one-sided coins. So we have seen impacts on exports. We've seen impacts on profitability of companies, particularly say the auto sector, that have had to swallow a lot of the tariffs. But again, we've seen something of a pressure sort of really throughout the rest of the world to sort of rethink self-sufficiency, rethink kind of sovereignty. So we've seen that coming in defense. Again, if your fortune teller had told us that the Germans were going to gear up and go on a spending binge, they would have been a pretty prescient fortune teller.

Sébastien Page Increased debt to GDP. Colin McQueen

By a record stimulus level. Yes, I think there are kind of changes coming. There are sort of reforms coming in Europe that are positive. I think one of the nice things, I guess, from my perspective as a relatively contrarian type of investor, is one of the nice things in the sort of more negative environment is we're getting another crack at buying into some of those things at reasonable valuations. And we think particularly if you look at activities around construction and infrastructure build, I mean, Europe has been sort of flat as a pancake for five years. Building materials usage is still 15% below 2019. So at the same time, savings rates are high. Company balance sheets are strong. Consumers' balance sheets have improved. So there is potential there for increased expenditure. We just need the animal spirits to release it. But if we do so, then I think it's going to flow through in quite a dramatic way for domestic profitability in Europe.

Christina Noonan

It sounds like still a lot of opportunities, even after coming off of such a strong year in 2025

but still seeing opportunities across many sectors in the value space.

We have another audience poll. Given what we've heard so far, wanted to see what allocation changes you would consider as a result of recent market events, what you've heard, what you're already doing in your portfolio. So please share with us your thoughts. Seeing some of the votes coming in now. Looks like many people inclined to be adding inflation hedges and trimming risks. Risk are the leaders right now.

Sébastien Page

I love this. People agree with us. We must be compelling. Trim risk, add inflation hedges.

Christina Noonan

Let's touch on one of the options here, which is add to small-cap. So, Sébastien, an area that the Committee did lean into early and got right. Small-caps, middle of last year, we added to that position, went overweight, an area where we've seen fits and starts largely around monetary policy, but it always seemed to fade. But this time, it seems like It's been durable, lasting, but we've trimmed some of our exposure there.

Sébastien Page

Yeah, as I said in the intro, small-caps have outperformed large-caps by 13%. And historically, when they've outperformed by 13% or more, they've then on average underperformed by 300 basis points. So maybe that explains why I'm looking at the vote. We only have 5% of the vote of what would you change that would be add to small-caps. So while people are still voting, I don't know if it's too late. I'm going to give the pitch for small-caps, because we're still long.

We’ve trimmed the position, but we're still long small-caps. They offer triple merits, policy, valuation, and rates. Policy in the U.S. is tilted towards domestic growth. Relative valuation, despite the rally of small-caps versus large-caps, are still attractive. What? They are up 44, the S&P is up 30. Yes, they're still in the bottom 20% of their historical range. If you look at the S&P 600, which is earning small-caps with earnings with revenues, versus Russell 1000. It's only been this favorable less than 20% of the time over the last 27 years. So there's still valuation room. And we know that lower rates—rates have come down in the front end—lower rates ease financing condition more for small-caps than large-caps.

And by the way, in the policy thing, if you look at the Big Beautiful Bill, it's interesting when you dig into it a little bit, you'll see that there are deductions that go up to a certain amount. So if you're a small company, whatever deduction you're going to use, it's going to impact your bottom line a lot more than a large company. And overall, we know that earnings are converging with these massive cap expense on the large-cap side. And you have small-cap earnings coming up relative to the spread with the earnings growth for the large-cap.

Where could we go wrong? I don't know if people were still voting and if I moved the vote, I lost it. We should time the surveys together with our pitches. But that was my short pitch for small-cap. There are risks. They have outperformed by a wide margin. over the past 12 months. And positioning has shifted pretty quickly. So this aligns with the pretty large survey response, trimming some active risk here, taking some profits.

Christina Noonan

OK, that makes sense. And certainly, the collision of the Fed and inflation impact on rates could be impactful in the space as well. Let's hear from you, Colin. What about another position that we're overweight, international small-caps? What are you seeing in that space?

Colin McQueen

Certainly, I think a lot of the case around international small-caps has echoes of what Sébastien was talking about for the U.S. So from a valuation perspective, I mean, typically, historically, you've paid about an 8% to 10% premium for small-caps relative to large-cap indices. Today, we're getting them at an 8% discount. And that's in the 13th percentile of kind of history. So valuation is on our side. We also get more domestic exposure with small-cap stocks. And as we're doing that internationally, that's actually exposure to a number of different economies. So in the scenario where we see an improvement in domestic spending conditions in Europe, small-caps would benefit.

Similarly in Japan, where we're seeing more stimulative fiscal policies from the new government. And also that would also apply to China, where again, we've not seen much, we've seen a relatively tepid domestic economy. If that were to turn, we would see benefit kind of coming in earnings for small-caps. That really sort of remains as optionality. I think maybe it's fair to say that with the current energy price climate, the sort of trajectory towards interest rate cuts in some international markets may be postponed for a little bit this year. So that maybe rolls a little bit back against that. But also within small-caps, we pick up a lot of opportunity on that Asian restructuring side that I was talking about before. Whereas the market is now kind of got to grips with the idea that Sony is going to restructure itself, that the big caps are changing. The process is still far less advanced in the smaller and mid-cap space. And there's a lot more kind of opportunity sitting on the ground there.

Christina Noonan

So not only cheaper valuations, but certainly a lot of catalysts there for international small-caps as well. Let's pivot to fixed income. We've seen some headlines around private credit, but not seeing much spillover into public markets. Still overweight high yield, attractive spreads or attractive yields, tighter spreads. Can you talk about credit, how we're positioned in credit today, Sébastien?

Sébastien Page

We've scaled back on loans. We now have a small underweight that also indirectly adds a little bit of duration, although we remain underweight duration. Loans are more exposed to software than high yield. It's at least double the exposure. And high yield is more energy exposure, which is favorable right now. You'll hear often from maybe your clients, spreads are near an all-time tight. And you said it well, which was yields are still attractive, but spreads are compressed. But also, spreads for high yield right now are at 260 basis points. This is similar to back in 2004. Let's compare, though, the quality of the high yield index.

OK, same spread level, near all-time tights. But in 2004, high yield had 35% of BB, which is higher quality bonds. Now, so 35% in 2004. Now, 60% of BB. So in my mind, saying all-time tight is naive to the fact that we're looking at a different asset class. So we're still on high yield.

Christina Noonan

OK. And let's... As we're getting towards the end, Colin, I want to give you a chance. You've mentioned a lot of positive reasons to still like international. But if I was listening to this, I may say, had such strong performance last year, some risks there. Have I missed the boat? What would you say to an investor today considering stepping into international or emerging markets today?

Colin McQueen

I guess the answer from my perspective is no, we haven't missed the boat. I mean, if you do you want to convince yourself of that? Pull up a chart of the last 20 years of relative market movements. And you'll see we've-

Sébastien Page There's still room. Colin McQueen

We've come down and we've kind of come up for two years. So I think some of the things we talked about at the start of sort of a regime shift that sort of potentially, I think, benefits the outlook for more tangible goods-based companies versus intangible. And if anything, maybe AI potentially accelerates that theme, the change from sort of deflation to inflation. I think those sort of have leveled the playing field a lot more between international and the

U.S. So that still leaves us sitting with attractive valuations on the international side. So we've come from being kind of a 20-year low back in November of 2024 for international valuations versus the U.S., and we're now in the 25th percentile. So we're still getting healthy discounts. And against my mind, in a world where we have even the best fortune tellers are going to struggle to predict what the headlines are going to be for the rest of the year. With a wide range of outcomes, we get a degree of diversification and international sort of beyond the exposures you get in U.S. domestic markets.

Sébastien Page

Yeah, I guess you'd rather make ‘stuff’ than—this is a technical word, “stuff.” You'd rather make ‘stuff’ than software, right? Or a service like, I don't know, legal consulting, that can be ChatGPT-ed away, maybe 80%, once it stops hallucinating, maybe more.

Christina Noonan

That's actually a good segue to the next question I was going to ask you, Sébastien. AI, we talked about it from a market perspective, but a question we're getting from a lot of our clients is how are we using it in our business today? And how do we see that playing out going forward? Could you talk a little bit about how you're saying AI?

Sébastien Page

That's a great question. I want to plug Eric Veiel, our head of investments. His podcast, he interviewed Jensen Huang, for example. This tells you the level of the podcast. It's an, I think, an undiscovered gem. It's called The Angle. In the podcast, he also interviewed Sarah Friar, CFO of OpenAI. Those interviews are awesome. I mean, this is one of the best undiscovered podcasts out there, The Angle by T. Rowe Price. Eric Veiel does outstanding interviews.

So he asked Sarah Friar the question that we all get, which is, “will we all lose our jobs and be replaced by AI?” Her answer was, “you're not going to lose your job to AI, but you might lose your job to someone using AI. So get to it.”

So on that note, earlier I talked about small-caps outperforming 13% large-cap over the last

12 months. So yesterday I'm sitting at my desk. And I realized, wow, that's a large number. And I want to know how often that's happened historically and what happened after. I was just preparing for this. So I won't name and shame. I went into one of the AIs. I won't name which one, but there was some data behind it. So I just asked it to run it and it ran it like this. And the answer was very convincing. And I almost came to this webinar with those numbers. But before I did, I thought, hmm, I should send, I didn't have, I could probably run this in Excel in 40 minutes or something. I'll just send it to an analyst. So I sent an analyst the same question, right? And I go, I just ran this in AI. It looks like the 13% outperformance has happened X number of times, and that the subsequent return was about flat, and the analyst ran the numbers. And the AI analysis was completely wrong.

So I don't know what happened, but the idea is that a big challenge with AI is connecting to data.

And this is where in our process, we're investing. Now I'm giving you an example where it didn't work, but what we're doing is building the infrastructure to make this really work. And I'm sure like the punchline is the analyst probably ran it in an AI that worked and that was already connected to the data because he sent it back to me in about a minute. Right. So throughout our investment process, I think we're gearing up to be the most AI-forward investment team out there, or at least one of them. That's how we're approaching this. We get all the technology, we deploy it prudently, we’re hooking up all the data. I want an Asset Allocation Committee member to be an AI, participate live in the debates. I think that's going to enrich our discussions. And on and on and on. There are lots of examples.

But I go back to Eric Veiel’s podcast, The Angle, interviewing Sarah Friar and her saying, “you probably won't lose your job to AI. You'll just lose your job to someone using AI.”

Christina Noonan

Yeah, it's crazy how powerful it is and how early days, even if you think back just last year, how quickly it has advanced already. So any final thoughts from our panelists before we wrap up?

Sébastien Page

I just want to thank Colin. This was awesome. It's great to have you here in Maryland. Colin McQueen

Nice to be here. Christina Noonan

All right, great note to end on. This concludes the second quarter's Asset Allocation Viewpoints webcast, Uncovering Value Across Markets. I want to extend a big thank you to our panelists and to you, our audience, for joining us today. Thank you, and we hope to see you again next quarter.

202604-5331282

Investment Risks

Active investing may have higher costs than passive investing and may underperform the broad market or passive peers with similar objectives. Each persons investing situation and circumstances differ. Investors should take all considerations into account before investing.

International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. The risks of international investing are heightened for investments in emerging market and frontier market countries. Emerging and frontier market countries tend to have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed market countries.

Commodities are subject to increased risks such as higher price volatility, geopolitical and other risks. Commodity prices can be subject to extreme volatility and significant price swings.

TIPS In periods of no or low inflation, other types of bonds, such as US Treasury Bonds, may perform better than Treasury Inflation Protected Securities (TIPS).

Technology companies: A fund that focuses its investments in specific industries or sectors is more susceptible to adverse developments affecting those industries and sectors than a more broadly diversified fund. Investing in technology stocks entails specific risks, including the potential for wide variations in performance and usually wide price swings, up and down.

The value approach to investing carries the risk that the market will not recognize a security’s intrinsic value for a long time or that a stock judged to be undervalued may actually be appropriately priced.

Small-cap stocks have generally been more volatile in price than the large-cap stocks.

Because of the cyclical nature of natural resource companies, their stock prices and rates of earnings growth may follow an irregular path.

Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Short duration bonds have more risk than cash/cash equivalents such as money markets. Equities have higher risk and are subject to possible loss of principal.

Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency.

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Glossary of Terms

Animal spirits refers to the emotional forces that influence economic behavior, to include

spending, saving, or investing.

A basis point (or bps) is equal to 0.01% or 0.0001. It is used to describe changes in

percentages or interest rates.

Consumer Price Index (CPI) measures the monthly average change in prices paid by urban consumers for a market basket of consumer goods and services.

Fiscal policy refers to the use of government spending and tax policy to influence

economic conditions.

The Global Financial Crisis (GFC) was a worldwide economic crisis of the financial

markets and banking systems between mid-2007 and early 2009.

An inflation swap is a type of contract between two parties that enables one party to transfer inflation risk to the other. One party will pay fixed payments and the other will make payments based on the floating rate on an inflation index. A floating rate will change based on market conditions.

Gross Domestic Product (GDP) is a measure of total market value of goods and services produced within a country during a set time period.

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Indices:

The Bloomberg US Economic Growth Surprise Index (ESI) indicates the degree to which actual economic data releases exceed to fall short of market expectations. A positive reading can suggest that economic data is better than expected; a negative reading can indicate data is worse than expected.

The MSCI All Country World Index (ACWI) Ex-US Index is an equity index that captures large and mid-cap representation across 22 of 23 developed market countries, excluding the U.S., and 24 emerging market countries, covering 85% of the global equity opportunity set outside of the U.S.

The Nikkei 225 Index is a stock market index for the Tokyo Stock Exchange, measuring the

performance of 225 publicly owned companies in Japan.

The Russell 1000® Index measure the performance of the large-cap segment of the U.S. equity universe. It includes approximately 1,000 largest U.S. stocks, representing more than 90% of investable U.S. equities by market capitalization.

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe and includes approximately 2,000 of the smallest securities, based on a market cap and current index membership.

The Standard & Poor’s 500® Index (S&P 500) tracks the stock performance of 500 of the

largest companies listed on stock exchanges in the United States.

The Standard & Poor’s SmallCap 600® Index seeks to measure the small-cap segment of the U.S. equity market.

Metrics:

Book value of a company is assets minus liabilities.

Price to cash flow (P/CF) ratio compares a company’s market price per share to its

operating cash flow per share. It is a measure of a company’s financial health.

Price-to-Earnings (P/E) ratio measures a company's current share price relative to per-share earnings.

Return on Equity (ROE) is a financial measurement that divides net income by shareholder

equity.

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