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10 February 2021 / INVESTMENT INSIGHTS

Global Asset Allocation Viewpoints

February 2021

Portfolio Positioning

As of 31 January 2021

Bumpy Road to Recovery

  • Within developed market equities, we further increased our exposure to Japan, funded from Europe, while remaining underweight U.S. equities. Japan should benefit from its leverage to global trade as the global economy improves later this year. Advancements in shareholderfriendly reforms and a new focus on productivity-enhancing initiatives also provide tailwinds.
  • We remain neutral stocks versus bonds as we weigh broadly extended valuations in both markets against mixed signals surrounding progress toward coronavirus containment and timeline for a wider recovery.
  • Early-year optimism surrounding progress on vaccines has been stymied by a resurgence in coronavirus cases and virus mutations, pushing out recovery expectations. Given the renewed uncertainty, the rotation seen in recent months toward more cyclically oriented sectors has faced setbacks.

Market Themes

As of 31 January 2021

Mutating Expectations

Optimism surrounding the global economic recovery is beginning to change as potentially deadlier variants of the coronavirus found in the UK, Brazil, and South Africa are spreading just as vaccine rollout efforts have gotten underway. The potentially more transmittable and harmful mutations have led to renewed lockdowns, particularly in the UK and eurozone, and are threatening to push some regions into double-dip recessions. Current vaccines such as the one produced by Moderna are reported to still be effective against the new variants, but the pressure is on nations around the world to advance vaccinations to control the virus as it has shown the ability to aggressively mutate. The concerning mutations come as many regions are facing vaccine shortages and challenges surrounding vaccine storage and distribution. The next few months will be a critical race against the virus, as the longer it takes to control, the more damage it will have on lives and expectations for a global recovery.

U.S. Hospitalizations & Cumulative Vaccinations

As of 31 January 2021

U.S. Hospitalizations & Cumulative Vaccinations

1These figures are in USD and annualized.
Sources: CDC, Covid Tracking Project (covidtracking.com), Bureau of Economic Analysis/Haver Analytics, U.S. Treasury/Haver Analytics.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.

Leaping Ahead

As the rest of the world struggles to get back on its feet, China reported that its economy grew 2.3% last year, making it the only major economy to report positive growth in 2020. After posting a strong 6.5% year-over-year growth rate in the fourth quarter, supported by investment spending and export growth, China’s economy leapt back to pre-pandemic levels and made strides toward becoming the world’s largest economy. China’s V-shaped recovery can be attributed to the early, stringent lockdown measures put in place to control the spread of the virus and the deployment of significant fiscal and monetary stimulus. A focus on infrastructure and a surge in pandemic-related demand—from masks to home office equipment—helped propel export demand, while domestic consumption contracted by 3.9% as retail sales remain one of the hardest-hit sectors amid the pandemic. China has worked for years to reduce its dependence on trade and grow domestic consumption, so the setback is likely to be temporary.

Nominal GDP by Country (in trillions)1

As of 31 December 2020

Nominal GDP by Country (in trillions)

1These figures are in USD and annualized.
Sources: CDC, Covid Tracking Project (covidtracking.com), Bureau of Economic Analysis/Haver Analytics, U.S. Treasury/Haver Analytics.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.

Off to a Quick Start

While the Biden Administration put eradicating the coronavirus at the top of its agenda, taking action on regulations with executive orders has also been a top priority. Deregulation was a defining focus of the prior administration, notably within the energy sector; however, Biden has rapidly revisited a wide range of regulations emphasizing climate change and green energy, as well as equality. On his first day, Biden temporarily suspended new permits for oil and gas leases on U.S. properties, shut down the Keystone XL pipeline, and rejoined the Paris Climate Agreement. Democrats in Congress have also been swift to act on their agenda, pushing an additional USD 1.9 trillion stimulus package, on top of last year’s USD 4 trillion, and may look to use reconciliation, allowing for a simple majority in the Senate, to avoid requirements for a 60-vote threshold. While still early in the new government, Democrats are acting quickly and independently on advancing their agenda–perhaps more than the market may have anticipated when it expected a divided government.

U.S. Federal Government Budget Surplus/Deficit (as % of GDP)

As of 31 December 2020

U.S. Federal Government Budget Surplus/Deficit (as % of GDP)

1These figures are in USD and annualized.
Sources: CDC, Covid Tracking Project (covidtracking.com), Bureau of Economic Analysis/Haver Analytics, U.S. Treasury/Haver Analytics.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.

Regional Backdrop

As of 31 January 2021

United States

Positives

  • Stronger probability for more fiscal support
  • Vaccination roll-out under way
  • Monetary policy remains very accommodative
  • Healthy consumer balance sheets and high savings rate

Negatives

  • Elevated stock and bond valuations
  • Corporate and government debt at high levels
  • U.S. dollar weakness continues
  • Unemployment remains elevated

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

  • New lockdowns amid second wave of virus
  • Vaccination effort facing supply shortages
  • Brexit likely to negatively impact trade
  • Limited scope for European Central Bank to stimulate further
  • Limited long-term catalysts for growth

Developed Asia/Pacific

Positives

  • Outbreaks milder than in the rest of the world thus far
  • Cyclical orientation should benefit from economic rebound
  • Strong fiscal and monetary support
  • Improving corporate governance

Negatives

  • Weak economic growth going into crisis, driven by longterm demographic headwind
  • Economic recovery remains fragile with manufacturing indicators still below pre-pandemic levels

Emerging Markets

Positives

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

Negatives

  • Stimulus from China likely to fade going forward
  • Limited ability to enact fiscal stimulus (excluding China)
  • Vaccine supply and distribution infrastructure are well behind developed markets

Asset Allocation Committee Positioning

As of 31 January 2021

Asset Allocation Committee Positioning

Portfolio Implementation

As of 31 January 2021

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 2021 FactSet. All Rights Reserved.

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 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 noted on the material 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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