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December 2021 / MARKET OUTLOOK

Global Asset Allocation: December Insights

Discover the latest global market themes

Market Perspective

  • Although expected to moderate from current levels, global growth and inflation remain above trend. New threats from coronavirus variants and continued supply chain disruptions and energy shortages could pose headwinds to growth, while placing upward pressure on inflation.
  • Global monetary policy to continue path towards tightening with US Fed appearing more hawkish, while the European Central Bank and Bank of Japan maintain policy. Meanwhile, rate hikes continue to advance across emerging markets in response to higher inflation and to defend their currencies.
  • Global short‑term rates likely to trend higher with central bank tightening, while long‑term rates react to lingering inflation pressures and renewed concerns about growth and policy missteps.
  • Key risks to global markets include new variants, persistent inflation, supply chain disruption, energy shortages, central bank missteps, a downshift in China growth trajectory and increasing geopolitical concerns.

Portfolio Positioning

As of 30 November 2021

  • We remain modestly underweight equities relative to bonds and cash given stocks’ less compelling risk/reward profile, balancing elevated valuations against decent but moderating growth and potentially persistent inflation. Higher rates, rising input costs related to supply chain bottlenecks and fading monetary and fiscal policy could pose challenges to the near‑term earnings outlook.
  • Within equities, we continue to tilt towards cyclicality, maintaining overweights to value‑oriented equities globally, US small‑caps and emerging market stocks, where valuations are more reasonable and which should benefit from a continued path of recovery.
  • We shifted a portion of our US value exposure into growth equities, where we find more companies with the potential to do well in a moderate growth environment and to moderately reduce the cyclicality of our positioning.
  • Within fixed income, we continue to favour shorter‑duration and higher‑yielding sectors through overweights to high yield and emerging market debt supported by our constructive credit outlook.
  • This month, we removed the partial hedge on the US dollar. The euro may weaken due to new pandemic‑related restrictions in Europe, a more dovish European Central Bank compared to the US Fed and growth in Europe may slow at a faster pace compared to that in the US.

Market Themes

Not Too Hot, Not Too Cold

While stocks have broadly rallied nearly 80% off the lows of March 2020, leadership within has flip‑flopped between expensive, defensive growth names to cheaper cyclicals and back again. The roller coaster ride has been driven by rotations from COVID‑on to COVID‑off, China regulatory fears and worries over Fed tapering. As we move into 2022, expectations are for moderating growth—yet still above potential—and easing inflationary pressures. Companies offering ‘growth at a reasonable price’ could be in vogue—where growth is not hot enough to drive the deepest cyclicals and not cold enough to need the defensiveness of high‑flying growth companies. Reasonably priced, higher‑quality companies that find themselves in the ‘core’ of the market are looking more attractive, particularly those paying dividends as forward return expectations are well below the more‑than‑15% annualised returns we’ve seen over the last decade.

Fed Up!

The Federal Reserve looks likely to accelerate its tapering of asset purchases when it meets later this month as it faces the risk that inflation does not recede as quickly as policymakers had hoped. With inflation at levels not seen in three decades, a tightening labour market and strong consumer spending, conditions seem to warrant tighter policy. Fed Chairman Jerome Powell and other committee members have increasingly hinted at accelerating the process, admitting that elevated inflation could persist longer than initially anticipated. Ending asset purchases earlier would give the Fed more flexibility to pull rate hikes forward, although Powell said the market should not link the two. While the Fed finally seems fed up with lingering inflation, the emergence of the omicron variant is a wild card that could weigh on growth, slow the nascent recovery in supply chains and add to inflation worries. Already a challenge unwinding policy at a pace not to destabilise growth, things have become a bit more tricky for the Fed.

 

For a region-by-region overview, see the full report (PDF).

 

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. 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.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

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 written 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.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

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