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10 December 2020 / INVESTMENT INSIGHTS

Global Asset Allocation Viewpoints

December 2020

Portfolio Positioning

As of 30 November 2020

Going Global for Value

  • Within equities, we continued to lean into more cyclically exposed sectors by tilting toward value globally, including the U.S., developed ex-U.S., and emerging markets (EM) as more cyclically oriented companies may benefit from gradually improving economic growth and a steepening yield curve.
  • We tilted to an overweight position in markets outside the U.S., particularly within EM, as the combination of favorable valuations, prospects for improving global growth profile, and favorable currency trends should be supportive.
  • Within fixed income, we pivoted a portion of our below investment-grade exposure in high yield bonds into floating rate loans based on loans’ more attractive relative valuations, higher standing in the capital structure, and shorter duration profile.
  • Overall, we remain neutral stocks versus bonds as we balance broadly extended valuations in both markets and near-term risk of increasing coronavirus cases versus ultra-supportive monetary policy, upside potential from fiscal policy, and potential for a vaccine early next year.

Market Themes

As of 30 November 2020

Digging for Value

Promising news on COVID-19 vaccines has triggered optimism for a return to normal next year, buoying deeply cyclical segments of the market that have been the hardest hit by shutdowns. November saw a strong rebound in many of these unloved sectors, including materials, energy, financials, and industrials. Following a period of meaningful underperformance, a significant beneficiary from the abrupt rotation away from technology-heavy growth sectors has been EM value stocks, which have more than 50% exposure to these sectors. Expectations in 2021 for unleashed pent-up global demand, increased fiscal spending, aggressive monetary policies, and higher energy prices could provide a strong backdrop for cyclical companies in EM. An additional boost could come from a rebound in EM currencies, as they face less depreciatory pressure versus the U.S. dollar. Ignored for nearly a decade, EM value companies may finally see more interest from investors as they dig for cyclical opportunities with very attractive valuations.

10 Year Cumulative Total Return (USD) by Regional Style

As of 30 November 2020

10 Year Cumulative Total Return (USD) by Regional Style

Past performance is not a reliable indicator of future performance.
U.S. Growth = Russell 1000 Growth Index, U.S. Value = Russell 1000 Value Index, EAFE Growth = MSCI EAFE Growth Index, EAFE Value = MSCI EAFE Value Index, EM Growth = MSCI Emerging Markets Growth Index, EM Value = MSCI Emerging Markets Value Index.
Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”), MSCI, Bloomberg Finance L.P, Bloomberg Index Services Limited., SurveyUSA. Please see Additional Disclosures for information about this FTSE Russell and MSCI information.
1Chinese Corporate Bond Index represented by Bloomberg Barclays China Aggregate Corporate Bond Index.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.

Cleaning House

A wave of defaults across some highly rated—including AAA—Chinese companies with perceived state support have shaken local markets causing investors to reassess risk in the growing Chinese bond market. The Chinese corporate bond market has grown substantially over the past decade since the Global Financial Crisis as China sought to open its capital markets to foreign buyers and increase its representation in the Bloomberg Barclays Global Aggregate Index. Although there were signs of bond market weakness heading into the coronavirus pandemic, China policy makers were forced to pull back on credit reform initiatives as economic conditions deteriorated, temporarily masking potential solvency issues. However, with the recent improvement in economic growth, policy makers have begun re-tightening financial conditions, exposing the overhang of weak corporates, many of which have been kept alive by forbearance. Chinese authorities may see the current economic strength as an opportunity to clean up weak companies, which, in the long run, could improve the perception of Chinese corporate credit markets.

Chinese Corporate Bond Index1 Yield to Worst

As of 30 November 2020

Chinese Corporate Bond Index Yield to Worst

Past performance is not a reliable indicator of future performance.
U.S. Growth = Russell 1000 Growth Index, U.S. Value = Russell 1000 Value Index, EAFE Growth = MSCI EAFE Growth Index, EAFE Value = MSCI EAFE Value Index, EM Growth = MSCI Emerging Markets Growth Index, EM Value = MSCI Emerging Markets Value Index.
Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”), MSCI, Bloomberg Finance L.P, Bloomberg Index Services Limited., SurveyUSA. Please see Additional Disclosures for information about this FTSE Russell and MSCI information.
1Chinese Corporate Bond Index represented by Bloomberg Barclays China Aggregate Corporate Bond Index.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.

Feeling Blue?

After Democratic candidate Joe Biden won the U.S. presidential election and Democrats retained control of the House of Representatives last month, markets seemingly cheered the prospects of a split government, with the U.S. Senate likely to remain controlled by the Republicans. However, the balance of power remains uncertain, hinging on the result of two very close runoff elections in Georgia on January 5. If Republicans win either of the Georgia runoff races, they will retain control of the Senate. However, if they were to lose both seats to the Democrats, the result would be a 50-50 split in the Senate with the tie-breaker vote going to the new vice president, tipping power in favor of the Democrats. With Democrats in control of the presidency, House of Representatives, and Senate, markets may begin to factor in the likelihood of more progressive policies on taxes and tighter regulation. Given the market’s strong rebound in November, driven by positive vaccine news and prospects for a balanced political environment, the market could be in for a negative shock.

Georgia Senate Race Election Poll

As of 2 December 2020

Georgia Senate Race Election Poll

Past performance is not a reliable indicator of future performance.
U.S. Growth = Russell 1000 Growth Index, U.S. Value = Russell 1000 Value Index, EAFE Growth = MSCI EAFE Growth Index, EAFE Value = MSCI EAFE Value Index, EM Growth = MSCI Emerging Markets Growth Index, EM Value = MSCI Emerging Markets Value Index.
Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”), MSCI, Bloomberg Finance L.P, Bloomberg Index Services Limited., SurveyUSA. Please see Additional Disclosures for information about this FTSE Russell and MSCI information.
1Chinese Corporate Bond Index represented by Bloomberg Barclays China Aggregate Corporate Bond Index.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.

Regional Backdrop

As of 30 November 2020

United States

Positives

  • Potential for additional round of fiscal support
  • Monetary policy remains very accommodative
  • Healthy consumer balance sheets and high savings rate
  • Low rates driving strong housing market

Negatives

  • Heightened political uncertainty
  • Increasing COVID-19 cases
  • Elevated corporate and government debt levels
  • U.S. dollar weakness

Europe

Positives

  • Higher exposure to more cyclically oriented sectors that should benefit from economic recovery
  • Monetary and fiscal policy remain accommodative
  • Equity valuations remain attractive
  • Stronger long-term euro outlook

Negatives

  • Second wave of virus leading to new lockdowns
  • Elongated process to enact further stimulus
  • Brexit likely to negatively impact trade
  • Limited scope for European Central Bank to stimulate further

Developed Asia/Pacific

Positives

  • Outbreaks thus far have been milder than in the rest of the world
  • Strong fiscal and monetary support
  • Smooth political transition gives hope for continued reforms
  • Equity valuations are inexpensive

Negatives

  • Weak economic growth going into crisis, driven by longterm demographic headwind
  • Highly sensitive to global industrial production, trade trends, and natural resource prices, which have improved but remain low
  • Experiencing a weaker recovery than other developed regions

Emerging Markets

Positives

  • Chinese economy has largely rebounded
  • U.S. dollar weakness
  • Exposure to cyclical areas of economy should benefit from broad global recovery
  • Equity valuations attractive relative to developed markets

Negatives

  • Limited ability to enact fiscal stimulus (excluding China)
  • Highly sensitive to global industrial production and trade trends, which have improved but remain muted
  • Capacity and infrastructure to combat COVID-19 varies

Asset Allocation Committee Positioning

As of 30 November 2020

Portfolio Implementation

As of 30 November 2020

Portfolio Implementation

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.
Source for Bloomberg Barclays index data: Bloomberg Index Services Limited. Please see “Additional Disclosures” on final page for information.

Additional Disclosures

Certain numbers in this report may not equal stated totals due to rounding.
Source: Unless otherwise stated, all market data are sourced from FactSet. Financial data and analytics provider FactSet. Copyright 2020 FactSet. All Rights Reserved.

The S&P 500 is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500.

FTSE is a trade mark of the LSE Group and is used by FTSE International Limited (“FTSE”) under license. “NAREIT” is a trade mark of the Nareit. All rights in the FTSE NAREIT Retail Property Sector Index. (the “Index”) vest in FTSE and Nareit. Neither FTSE, nor the LSE Group, nor Nareit accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the FTSE or Nareit is permitted without the relevant FTSE’s express written consent. FTSE, the LSE Group, and Nareit do not promote, sponsor or endorse the content of this communication.

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.

Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Key risks –The following risks are materially relevant to the information highlighted in this material:
Even if the asset allocation is exposed to different asset classes in order to diversify the risks, a part of these assets is exposed to specific key risks.
Equity risk – in general, equities involve higher risks than bonds or money market instruments.
Credit risk – a bond or money market security could lose value if the issuer’s financial health deteriorates.
Currency risk – changes in currency exchange rates could reduce investment gains or increase investment losses.
Default risk – the issuers of certain bonds could become unable to make payments on their bonds.
Emerging markets risk – emerging markets are less established than developed markets and, therefore, involve higher risks.
Foreign investing risk – investing in foreign countries other than the country of domicile can be riskier due to the adverse effects of currency exchange rates; differences in market structure and liquidity, as well as specific country, regional, and economic developments.
Interest rate risk – when interest rates rise, bond values generally fall. This risk is generally greater the longer the maturity of a bond investment and the higher its credit quality.
Real estate investments risk – real estate and related investments can be hurt by any factor that makes an area or individual property less valuable.
Small- and mid-cap risk – stocks of small and mid-size companies can be more volatile than stocks of larger companies.
Style risk – different investment styles typically go in and out of favour depending on market conditions and investor sentiment.

IMPORTANT INFORMATION

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and 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.

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