September 2023
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
- Global economic growth was mixed across regions, with inflationary pressures and central bank policies starting to diverge.
- U.S. and Japanese economies are proving more resilient, although the U.S. is seeing evidence of cooling amid recent jobs data. While weakness is seen across Europe as they work through a mild recession and elevated, albeit softening inflation, Chinese growth is mixed as recent slowing is being met with stimulus measures amid growing concerns surrounding its property sector.
- While global central bank tightening is likely peaking, the paths and rates of disinflation vary across regions, which is likely to lead to divergence in policy ahead.
- Key risks to global markets include a deeper than expected decline in growth, central bank missteps, reacceleration in inflation, trajectory of Chinese growth, and geopolitical tensions.
Portfolio Positioning
- We maintain a balanced view on risk with a modest underweight to equities as valuations remain elevated amid a less dire outlook for growth and expectations for peaking central bank policy.
- We added to our overweight position in real assets-related equities, sourcing from emerging market and small-cap equities, as a hedge against inflation settling in above central banks’ targets, as well as the potential for higher commodity prices over the intermediate-term reflecting reduced capex and moderating productivity trends.
- Within fixed income, we remain underweight bonds in favor of cash as cash offers attractive yields and liquidity should market opportunities evolve. We also have a modest overweight to long-term U.S. treasuries as ballast to risk assets.
- Within fixed income yield-seeking sectors, we remain overweight high yield, floating rate loans, and emerging market bonds on still attractive absolute yield levels and reasonably supportive fundamentals.
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Market Themes
A Jolt of Confidence
The most recent JOLTS1 data, a measure of labor demand, showed job openings have come down significantly and are now the lowest since March 2021, a welcomed sign for the Fed that excess demand in the labor market may finally be starting to cool. The data also showed that fewer workers were quitting their jobs and hiring broadly moderated, both moving in favorable directions for balancing the labor market and easing wage growth concerns. Layoffs were relatively flat, meaning that the labor market has cooled by removing some of the froth in demand without increasing unemployment, helping support the narrative of a soft landing. However, while wage growth data has showed evidence of slowing it is still elevated, the number of job openings per unemployed person is still high, and the labor market remains tight by historical measures with the unemployment rate at just 3.8%. So, while the recent softening jobs data has provided a jolt of confidence that the Fed may navigate a soft landing, we still have a ways to go to align the jobs market and wages with the Fed’s 2% inflation target.
Job Openings Less Unemployed Workers2
As of 31 July 2023
Past performance is not a reliable indicator of future performance.
1 Job Openings & Labor Turnover Survey.
2 Source: Bureau of Labor Statistics. Unemployed is defined as looking for full-time work.
Diverging Markets?
After a strong start to the year surrounding optimism around China’s reopening, recent emerging markets’ performance has disappointed. Although there have been some bright spots across EM, as some Latin American countries have successfully brought down inflation, Mexico seeing the benefits from nearshoring, and India’s growth surprising to the upside, they have largely been overshadowed by doubts surrounding China’s growth trajectory. Concerns surrounding China’s troubled property sector have re-emerged and weighed heavily on household confidence and willingness to spend. This comes at the same time as structurally rising unemployment weighs against Chinese policymakers’ multi-year efforts to move the economy away from an export-driven economy into a more sustainable, consumption-driven and domestically focused economy. In response to today’s issues, policymakers have been targeted in deploying stimulus measures such as liquidity support for property developers, relaxing some housing policies, and incremental cuts to its key policy rate, as a conscious effort to not reinflate a bubble. So, while there are pockets of opportunity in EMs, it’s likely that the broader group’s outlook will largely depend on China’s ability to restore confidence domestically and globally.
China Underperforming Other Emerging Market Countries3
As of 31 August 2023
Past performance is not a reliable indicator of future performance.
3 Source: Bloomberg L.P. Country returns are represented by the following MSCI Indices: MSCI Mexico Index, MSCI India Index and MSCI China Index. Please see Additional Disclosures for more information about this MSCI information.
Regional Backdrop
Click each region below for more details
- Consumer spending remains strong
- Labor market has been resilient
- Manufacturing appears to be stabilizing
- Artificial intelligence related spending powerful tailwind
Negatives
- Monetary policy remains very tight
- Banking sector concerns will impact credit availability
- Equity valuations are elevated
- Monetary tightening is close to a peak
- Wage growth has moderated
- Commodity prices could see support against constrained supply (OPEC+)
Negatives
- Consumer savings balances are fading sharply
- Consumer leverage is elevated
- Inflation showing signs of cooling
- European Central Bank close to peak tightening
- Oil and gas prices have eased over the last year
Negatives
- Inflation remains elevated, particularly core inflation
- Economic growth is slowing
- Monetary policy is restrictive
- Inflation has begun to moderate
- Labor market remains strong
- Economy has proven more resilient
Negatives
- Wage inflation is very elevated
- The BoE may be forced to hike rates further
- Fiscal consolidation may need to be accelerated
- Uptick in inflation catalyst for increase in wages
- Corporate governance continues to gradually improve
- Equity valuations remain very attractive
Negatives
- Businesses and consumers more cautious given return of inflation
- Earnings expectations may need to be revised lower
- Easing inflationary pressures allowing central bank to pause
- Housing market has been resilient despite higher rates
- Stabilization in global growth
- Commodity demand from clean energy/EV
Negatives
- Consumer savings balances are deteriorating
- Upside economic surprises keeping yields higher for longer
- Soft demand for materials from continued weakness in Chinese property
- Monetary tightening in most emerging markets has peaked
- Equity valuations are attractive relative to the U.S.
- Further Chinese stimulus is expected
Negatives
- Global trade could suffer with tighter monetary conditions
- Chinese consumer and business confidence is fragile
- Geopolitical risks remain elevated
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
Slowing global growth balanced with reasonable valuations in many markets. In the U.S. valuations less compelling, however, a resilient labor market, supportive fiscal policies, and positive sentiment about AI supportive.
Central banks continue to balance lingering inflation and growth concerns, which could keep rates volatile. Yields look attractive across fixed income and credit sectors continue to offer broadly supportive fundamentals.
Cash currently offers attractive yields, a shorter duration profile if rates drift higher, and provides liquidity should market opportunities arise.
Equities
Regions
Despite expensive valuations, earnings expectations appear to be improving, economic activity is stabilizing, market breadth has widened, while technology innovation remains a key differentiator.
Valuations are attractive on a relative basis and local currencies have room to appreciate. However, the macroeconomic backdrop remains concerning amid a stumbling recovery in China and still tight global monetary policy.
Valuations and currencies are attractive and central bank tightening is peaking. However, Chinese equities a significant concern amid housing and consumer confidence weakness as well as ineffective stimulus thus far.
Style & Market Capitalization
A tilt towards higher quality businesses is warranted given elevated valuations and lingering economic concerns. Momentum surrounding AI could provide a structural tailwind to growth.
Value stocks offer attractive valuations. Cyclical and geopolitical risks remain a concern, but higher oil prices could offer a tailwind.
Small-caps offer attractive relative valuations but face margin concerns due to higher exposure to interest rates and higher input costs. Given heightened economic uncertainty, higher-quality bias is warranted.
Small-caps offer reasonable valuations against a slowing growth backdrop. However, caution is warranted due to a potential flight to quality that could favor large-caps.
Inflation-Sensitive
Commodities are cheap and offer an attractive hedge to potentially stickier inflation and energy price shocks. Additionally, oil prices may be set for structural increases due to peaking productivity.
Bonds
Sector pressured by potential for further Fed hikes as inflation remains above Fed’s 2% target, while spread and duration profile less attractive relative to sub-IG credit.
Developed ex-US yields could remain volatile as global central banks continue to balance lingering inflation versus slower growth.
While yield volatility could persist on mixed growth, inflation and technical backdrop, however, longer duration Treasury bonds should offer ballast amid a decelerating macro backdrop.
Although inflation is showing signs of slowing and lower inflation is already priced into breakeven levels, risks of inflation reaccelerating still remain.
Credit fundamentals and higher yields remain supportive. Default rates are rising from historically low levels, but are not likely to spike.
Valuations and yields remain attractive, but as the Fed moderates its tightening path the benefits of loans’ rate resetting feature and lower duration profile become less compelling.
Valuations and yields remain attractive, but as the Fed moderates its tightening path the benefits of loans’ rate resetting feature and lower duration profile become less compelling.
EM local yields at fair values, reflective of cautious sentiment. A weaker U.S. dollar would also be supportive of EM 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 2023 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.
Source: MSCI. MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
Important Information
Any specific securities identified and described are for informational purposes only and do not represent recommendations.
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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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