As of February 28, 2019
Going to Growth as Growth Slows
- We further reduced our exposure to developed market value stocks outside the U.S. in favor of growth as value-oriented sectors within those regions may be challenged by moderating growth.
- We continued to add back to high yield bonds as they can offer attractive carry and potentially reduced downside relative to stocks.
- We continued to pare floating rate loans as short-term rates in the U.S. may have limited upside with the Fed on hold.
As of February 28, 2019
Bonds vs. Stocks: Who’s got it right?
The bond market reflects a downbeat outlook with a flat Treasury curve and yields remaining well off their November highs, reflecting persistent uncertainty, weakening economic data, and that we are late in a protracted cycle. However, despite declining earnings expectations for this year, the MSCI All Country World Index is up almost 11% since the start of the year, led by cyclical stocks. Equity investors seem enamored with a more dovish Fed and progress toward a trade deal between the U.S. and China. Clearly, stock and bond markets are signaling a very different story, but which one of them will ultimately be right?
U.S. (Earnings) Recession?
While the probability of a near-term U.S. recession remains low and fears of a policy mistake have subsided in light of the more dovish tone from the Fed, the earnings growth outlook remains in question. After growing more than 20% in 2018, boosted by strong topline growth and tax reform, analysts have been revising 2019 earnings growth estimates downward. Current expectations are for an outright decline in the first quarter and low single-digit growth for the following two quarters. Historically, earnings estimates trend lower as the quarter approaches, but this year’s revisions have been unusually sharp. With 2018 tailwinds fading, it’s challenging to identify a catalyst in the current environment for a reacceleration of earnings.
ECB: No Dry Powder
It’s been a tough few months for the eurozone economy with growth at a four-year low and the ECB conceding that risks to growth have "moved to the downside." Economic data continue to disappoint as exporters have come under pressure from the slowdown in Chinese growth. Not only is growth weakening, but inflation remains subdued, leaving little room for the ECB to normalize the current ultra-loose monetary policy. With growth slowing and threats of U.S. tariffs on autos looming, there have been talks of a new round of stimulus to boost liquidity. Policymakers have very few tools remaining should the region’s economy come under further pressure, and Mario Draghi may end his term without ever raising rates.
As of February 28, 2019
- More dovish Fed, stable inflation
- Healthy consumer spending, improving wages
- Positive tone on trade
- Greater share of secularly advantaged companies than rest of world
- Moderating economic growth with fading fiscal stimulus
- Late-cycle concerns: tight labor market, rising wages, and elevated margins
- Political uncertainty and trade tensions
- Deteriorating near-term earnings expectations
- Highly accommodative monetary policy
- Indirect beneficiary of China stimulus
- Political headwinds in Italy and France have eased
- Eurozone economy struggling, with limited scope for ECB to respond
- Export weakness, vulnerable to trade and China growth
- Political unity remains a concern with Brexit looming
- Banking sector remains challenged
- BOJ committed to aggressive policy, RBA on hold in face of rising inflation
- China stimulus could support regional trade
- Broadly attractive valuations, particularly in Japan
- Improving corporate governance trends in Japan
- Highly exposed to slowing global economic growth and trade tensions
- Japanese economic and earnings growth have been weaker than hoped
- Stronger yen on risk aversion could weigh on exports
- Australia facing slowing economy with weakness in housing
- Muted inflation, dovish Fed give central banks flexibility to ease
- China stimulating in face of slowdown and trade
- Idiosyncratic risks have faded (e.g., Brazil, Turkey)
- With growth in tech sector, less tied to commodity cycle
- China growth trajectory remains a headwind
- China stimulus more measured and domestically focused
- Highly linked to global trade
- Currencies face renewed pressure
- Near-term earnings expectations deteriorating
ASSET ALLOCATION COMMITTEE POSITIONING
As of February 28, 2019
As of February 28, 2019
Source: T. Rowe Price.
Neutral equity portfolio weights broadly representative of MSCI All Country World Index regional weights; includes allocation to real assets equities. Core global fixed Income allocation broadly representative of Bloomberg Barclays Global Aggregate Index regional weights.
Information presented herein is hypothetical in nature and is shown for illustrative, informational purposes only. It is not intended to be investment advice or a recommendation to take any particular investment action. This material is not intended to forecast or predict future events and does not guarantee future results. These are subject to change without further notice.
Please see "Additional Information" on final page for information about this MSCI information.
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