September 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
- Trends in recent data are more decisively pointing to slowing growth alongside easing inflation pressures, with a soft landing still within grasp as central banks pivot to easing.
- In the U.S., economic data showing signs of cooling, particularly in the labor market. European growth remains modest and bolstered by services, while manufacturing lags. Japanese growth rebounds from earlier in the year contraction supported by exports. Chinese growth remains stagnant, with policymakers remaining measured with stimulus support.
- Fed cut this September highly anticipated as focus shifts from inflation to the labor market. The European Central Bank looks to advance easing as inflation data provides support. Bank of Japan signals commitment to their divergent path of rates hikes, with a cautious eye on currency impacts.
- Key risks to global markets include a steeper decline in growth, central bank policy missteps, election calendar, geopolitical tensions, and trajectory of Chinese growth.
Portfolio Positioning
- While valuations are broadly extended, we remain modestly overweight equities that should benefit from easing monetary policy and still resilient economic growth albeit slowing.
- We maintain an overweight to cash relative to bonds. Cash yields should remain at attractive levels even as Fed embarks on easing as we expect a gradual path.
- Within equities, we remain overweight value, globally, based on more attractive relative valuations whereas narrowly led growth equities are extended and susceptible to weakness on earnings disappointment. Supportive global central bank easing should provide backdrop for broader market participation.
- Within fixed income, we continue to favor higher-yielding sectors including high yield, floating rate loans, and emerging markets bonds as fundamentals remain broadly supportive.
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Market Themes
What Lies Beneath?
U.S. consumer confidence rebounded in August on optimism about the resilience of the economy and easing inflation pressures. And while markets cheered the rosier outlook of the all-important U.S. consumer, a deeper dive into the survey data suggests there are growing concerns, particularly about declining labor market conditions. Employment data has turned decisively cooler recently, with the unemployment rate climbing and jobs becoming less abundant. With the survey data also showing consumers remaining very concerned about their personal finances, any further deterioration in jobs could lead to a quickening pullback in spending. This is particularly weighing on lower-income consumers facing higher prices and now turning more to credit cards as excess savings over covid has depleted. And while higher-income consumers have been buffered by rising 401k balances and elevated home prices, their propensity to consume could turn quickly as well if layoffs broaden. Let’s hope that rate cuts have been well timed to allow for a cooling of the labor market rather than too late and already facing the risk of a sinking U.S. consumer.
U.S. Unemployment Rate Has Been Ticking Up1
As of 31 August 2024
Past performance is not a reliable indicator of future performance.
Source: Bloomberg Finance L.P.
1 U-3 U.S. Unemployment Rate total in labor force is seasonally adjusted.
Sidelined
Despite market expectations for an unwind of the huge pile of money market assets to provide a tailwind as it flows back to risk assets, the category has continued to garner flows, hitting an all-time high of $6.6 trillion in August. Whether it’s extended equity valuations, concerns over bond market volatility, or simply still attractive 5% yields keeping investors on the sidelines, they have seemed wary to jump back into risk assets. Unfortunately, for those investors parked in money markets awaiting an opportunity have missed out on a huge equity rally, with the S&P 500 returning over 20% over the past year. And for those more conservative investors that may have considered inching out into longer-maturity bonds, they too have missed out more recently on a major rally in yields. Perhaps the start of rate cuts on the horizon could entice some investors to come off the sideline, but with a gradual path priced in, it is unlikely to have a huge impact. And for those that not too long ago remember earning 0% in money markets, still getting over 4% could remain compelling for a while longer.
Money Market Assets Reaching New Highs2
As of 31 August 2024
Past performance is not a reliable indicator of future performance.
Source: Bloomberg Finance L.P.
2 Assets are sourced from ICI Money Market Funds Assets.
Regional Backdrop
Click each region below for more details
- Monetary policy expectations improving
- Resilient corporate earnings
- Wage growth is moderating to sustainable levels
- Recent inflation reports have been favorable
Negatives
- Stock valuations have become challenging
- Economic data has been surprising to the downside
- Consumption trends are weakening
- Political uncertainty is heightened
- Bank of Canada has started cutting rates
- Wage growth has moderated to sustainable levels
Negatives
- Economic growth is fading
- Unemployment is rising
- Consumer savings balances have faded
- Consumer debt levels are elevated
- Monetary policy expected to ease further
- Inflation has been steadily declining
Negatives
- Economic growth remains weak
- Geopolitical uncertainty remains heightened
- Earnings growth remains weak, with minimal tailwinds from innovative technologies
- The Bank of England has begun cutting rates
- Inflation has been steadily declining
- Economic growth outlook has stabilized
Negatives
- Fiscal consolidation may need to be accelerated
- Tight labor markets could keep wage inflation stubbornly high
- Economic indicators are pointing to reflationary environment
- Corporate governance improvements are resulting in stronger company fundamentals
- Stock valuations are attractive
Negatives
- Heightened volatility may reduce investor appetite
- The Bank of Japan will maintain a hawkish bias due to inflation
- The unwind of the carry trade positions highlights the risk of the extreme positioning in the JPY
- Fiscal policy remains supportive
- Housing market strength continues to provide support
- Consumer spending is rebounding on resilient job market
Negatives
- Market pricing appears to be too sanguine about future rate cuts
- Valuations are not justified by strong earnings
- Iron ore prices are at risk due to Chinese property weakness
- Monetary policy is loosening in many emerging markets
- A weaker US dollar favors emerging markets
Negatives
- Chinese property deleveraging continues to weigh on activity
- Meaningful fiscal stimulus measures appear unlikely
- Export demand from developed markets has slowed
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
Potential for multiple expansion on anticipated Fed cuts, however, already elevated valuations may limit upside. Concerns about peaking AI spending and economic uncertainty could remain headwinds.
Markets have priced in weaker growth and moderating inflation, driving dovish central bank expectations. Credit fundamentals remain supportive; however, spreads remain tight.
Despite recent shift downward on the back of expectations for Fed cuts, cash still provides attractive yields as the yield curve remains inverted and offers liquidity should market opportunities arise.
Equities
Regions
Valuations elevated, particularly for mega-cap tech stocks. However, monetary policy easing could stimulate broader economic activity and earnings growth. Technology and pharmaceutical innovation remain key differentiators.
Valuations and dividend yields are attractive on a relative basis. Improving European inflation outlook with potential for further monetary easing is supportive. Structural improvements in Japan should continue.
Valuations are attractive, global trade is modestly improving, semiconductor cycle remains strong and monetary policy is easing. However, some areas, particularly China, remain challenged.
Style & Market Capitalization
Easing monetary policy expectations should be supportive of rate sensitive sectors. Meanwhile growth stocks face elevated expectations, challenging valuations, and growing AI skepticism.
Value stocks are cheap and could benefit from improving financial conditions. Growth stocks’ valuations are more expensive and they face headwinds from consumer weakness in China and Europe.
Small-caps offer attractive relative valuations and could continue to benefit from dovish tilt in Fed expectations. However, small-caps could be challenged by a cooling economic growth backdrop.
Small-caps offer very reasonable valuations and should benefit from monetary policy easing.
Inflation-Sensitive
Commodity-related equities are a good inflation hedge. Oil prices may ultimately be set for structural increases given trends in productivity and some industrial metals could benefit from demand due to AI and decarbonization.
Bonds
Uncertainty surrounding path of yields from here after largely pricing in slowing economic growth, moderating inflation, and dovish central banks. However, credit spreads remain tight.
Most global central banks have begun rate cutting cycles, with the exception of the BoJ. Yields remain attractive on a hedged basis, but could fade once the Fed begins cutting.
Longer term yields remain rangebound as slowing growth and moderating inflation contend with potential for further Treasury issuance, particularly if recession risks remain moderate.
Sector offers a hedge should inflation remain sticky or surprise higher if economic activity picks up in response to rate cuts, especially within services and goods, as well as against the risk for any escalation in geopolitics.
Overall yield levels remain attractive, fundamentals remain supportive, and default expectations are expected to remain near long-term averages. However, upside beyond carry from further spread compression is limited.
Sector’s overall yield and spread level remain attractive, and offer reasonable compensation for risk of potential defaults, although some of this potential premium is likely to erode with upcoming Fed cuts.
Despite tight spreads, the sector continues to offer pockets of attractive yields. Economic backdrop uncertainty highlight the importance of credit selection and underwriting.
Yields look modestly attractive, however, higher quality sovereign spreads look tight. Constructive backdrop as central banks embarking on easing cycles and inflation continuing to moderate.
Central bank easing and lower inflation could be tailwinds, along with increasing prospects of a rate cut.
*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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