11 November 2020 / INVESTMENT INSIGHTS
Global Asset Allocation Viewpoints
November 2020
Portfolio Positioning
As of 31 October 2020
Quality Control
- We are adding back to quality in fixed income by moderating our underweight position to long-dated U.S. Treasuries as yields at the long end of the curve have moved higher off March lows. We are funding the trade from U.S. investment grade and emerging market (EM) bonds to increase ballast versus extended equity markets. We remain modestly overweight high yield bonds as relative yields and demand remain supportive and expectations for elevated default levels have moderated.
- We remain neutral stocks versus bonds as we balance broadly extended valuations in both markets against downside risks from increasing coronavirus cases and fallout from the U.S. elections versus ultra-supportive monetary policy, upside potential from fiscal policy, and the prospects for a vaccine early next year.
- Within equities, we have a modest tilt toward U.S. value-oriented equities as they may benefit from gradually improving economic growth and a steeping yield curve. We hold modest tilts to other cyclically exposed sectors, including U.S. small-cap and EM equities both of which are supported by attractive relative valuations and potential for further policy support.
Market Themes
As of 31 October 2020
Blue Ripple?
Although the results of the U.S. elections remain unknown, one outcome that is increasingly probable is a Biden presidency with Republicans maintaining control of the Senate. Most polls heading into the election were predicting the possibility of a “Blue Wave,” leading to a Democratic President, Senate and House that could have resulted in higher levels of fiscal spending countered by the potential for policies of higher taxes. As the counting continues, markets appear to be celebrating the potential for a divided government, tempering the chances for more aggressive policies by either party and hopefully leading to an environment of more compromise. One area that may come into focus is regulation, with a spotlight on the technology sector, as there appears to be bi-partisan support for such measures. If the increasingly likely outcome of a divided government holds, a more balanced political environment could potentially lead to reduced market volatility and a more supportive backdrop for risk assets.
VIX Index1
As of 5 November 2020
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg Finance L.P., Bloomberg Services Limited., Standard & Poor’s, NAREIT/FTSE. Please see additional disclosures on the final page.
1 VIX represents CBOE Volatility Index (VIX).
U.S. Home Builders Index is represented by the National Association of Home Builders Market Index. Retail REIT Index is represented by FTSE NAREIT Retail Property Sector Index. Grey shaded area represents the recent sell-off in S&P 500.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.
Insurance Canceled
Heading into the election, U.S. Treasury yields remained range-bound to slightly higher despite bouts of increased volatility and stocks selling off. While stock and bond correlations move around over time, their prices have historically been negatively correlated during periods of market stress where risk assets sell-off with investors fleeing to the safety of U.S. Treasuries. As volatility picked up, investors took notice as this reliable insurance policy did not respond. It appeared stocks were reacting to short-term risks of an unsettled, chaotic election, while bonds looked through to the potential for fiscal spending that could move yields higher. With yields hovering at record low levels, investors may not be getting compensated for the increased duration risk if rates were to revert higher. While investors may be rethinking how to hedge against their equity exposures, U.S. Treasuries still provide ballast even if their positive appreciation may be tempered at current levels, and importantly provide liquidity when it’s at a premium.
S&P 500 vs. U.S. 10 Year Treasury Yield
As of 31 October 2020
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg Finance L.P., Bloomberg Services Limited., Standard & Poor’s, NAREIT/FTSE. Please see additional disclosures on the final page.
1 VIX represents CBOE Volatility Index (VIX).
U.S. Home Builders Index is represented by the National Association of Home Builders Market Index. Retail REIT Index is represented by FTSE NAREIT Retail Property Sector Index. Grey shaded area represents the recent sell-off in S&P 500.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.
There’s No Place Like Housing
Amid the upheaval brought on by the coronavirus pandemic, real estate markets across the board have been impacted on an unprecedented scale. On one hand, the residential housing market continues to boom, spurred on by low rates and a resilient consumer. Many home buyers are fleeing big cities for more space, as several major companies have extended work from home provisions. However, in stark contrast, commercial real estate, particularly retail, office space and hotels have continued to face headwinds. Trends that began to take hold pre-coronavirus, such as moves towards online versus brick-and-mortar retail have been further perpetuated by the pandemic. Similarly, demand for office space could be impaired going forward as working from home trends may become more permanent. If these trends persist, areas of the market exposed to commercial real estate, such as office and retail REITs will remain challenged.
Residential vs. Commercial Real Estate
As of 31 October 2020
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg Finance L.P., Bloomberg Services Limited., Standard & Poor’s, NAREIT/FTSE. Please see additional disclosures on the final page.
1 VIX represents CBOE Volatility Index (VIX).
U.S. Home Builders Index is represented by the National Association of Home Builders Market Index. Retail REIT Index is represented by FTSE NAREIT Retail Property Sector Index. Grey shaded area represents the recent sell-off in S&P 500.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.
Regional Backdrop
As of 31 October 2020
United States
Positives
- Unprecedented levels of monetary and fiscal support
- Greater share of secularly advantaged companies (e.g., cloud computing, internet retail) than rest of the world
- Healthy consumer balance sheets prior to the crisis
Negatives
- Heightened political tensions
- Elevated corporate leverage going into the crisis
- Elevated government debt levels
- U.S. dollar strength has faded
Europe
Positives
- EU recovery fund provides significant fiscal stimulus and is the first step toward a fiscal union
- Monetary policy remains very accommodative
- Equity valuations are inexpensive
- Stronger long-term EUR outlook
Negatives
- Second wave of virus leading to new lockdowns
- Elongated process to enact further stimulus
- Brexit likely to negatively impact trade
- Lower share of secularly advantaged companies
- Banking sector weakened by negative rates
- Limited scope for ECB to stimulate further
Developed Asia/Pacific
Positives
- Outbreaks in this region have thus far been milder than in the rest of the world
- Strong fiscal and monetary support
- Smooth political transition in Japan gives hope that reforms will continue
- Equity valuations are inexpensive
Negatives
- Weak economic growth going into crisis, driven by long term 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 strength has eased
- Relatively high share of secularly advantaged companies (e.g., cloud computing, internet retail)
- 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
Asset Allocation Committee Positioning
As of 31 October 2020
Portfolio Implementation
As of 31 October 2020
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.
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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.
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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.
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6 November 2020 / ASSET ALLOCATION VIEWPOINT
