January 2025 / INVESTMENT INSIGHTS
Global Asset Allocation Viewpoints
Our experts share perspective on market themes and regional trends, plus insights into current portfolio positioning.
Market Perspective
As of 31 December 2024
- While global growth remains broadly resilient, with inflation trending lower, paths forward to vary as uncertain policy impacts create divergence.
- U.S. growth expectations higher on the back of pro-growth policies, despite concerns they could be inflationary and disrupt recent trends lower. European and Japanese growth remain soft. Chinese policymakers pledge additional stimulus and reforms to support the economy in the new year.
- U.S. Fed delivers a hawkish cut, pivoting back to inflation concerns, while ECB likely to act faster amid economy facing weaker growth and lower inflation. The BoJ anticipated to remain on its divergent path, with incoming inflation data supporting further hikes.
- Key risks to global markets include elevated uncertainty around policy changes, central bank missteps, geopolitical tensions, and are acceleration in inflation.
Portfolio Positioning
As of 31 December 2024
- We maintain a modest overweight to equities versus bonds given a favorable fundamental outlook, although constrained by valuation considerations and potential policy cross-currents.
- Despite broadly elevated equity valuations, we find opportunities beyond large-cap growth attractive, while bonds remain vulnerable to higher rates.
- Within equities, we favor more cyclical, value-oriented areas of the market supported by easing monetary policy and resilient growth, notably in the U.S., that could see further support through policy changes.
- We maintain an overweight to cash relative to bonds. Cash yields remain attractive, particularly with Fed easing expected to be more gradual.
- Despite rich valuations, all-in yield levels remain compelling and provide a buffer should spreads widen. Fundamentals remain attractive, with still modest default expectations.
Market Themes
As of 31 December 2024
Finding Middle Ground
Entering the new year with U.S. large-caps continuing their dominance, led by a narrow set of names, has investors once again asking when, if ever, a broadening in participation will take hold. We’ve certainly had fits and starts last year with smaller companies outperforming in July when markets were expecting a very dovish Fed, only to quickly unwind. They again came to life post-election on hopes for supportive policies, including deregulation and lower corporate taxes, only to fade once again as large-caps dominated into year-end. As we face heightened uncertainty around policy changes, inflation, rates and the Fed’s reaction to each, mid-cap equities stand out. Mid-cap relative valuations remain attractive vs. large-caps and relative to small-caps they are less vulnerable to higher rates, deliver more profitability and have less exposure to concentrated sectors. As we continue to anticipate a broadening in the market, the “middle ground” should be well-positioned to participate.
False Starts1
As of 8 January 2025
Performance data quoted represents past performance which is not a guarantee or a reliable indicator of future results.
Source: Bloomberg Finance L.P., S&P and Russell. Please see Additional Disclosures for more information.
1 Shaded areas represent periods of outperformance of small-caps. U.S. small-caps and U.S. large-caps are represented by the Russell2000 and S&P 500 indices, respectively.
Flip-Flop
Just a few months ago, the Fed’s narrative around easing policy began to shift toward stabilizing the labor market as it showed comfort with the decelerating path of inflation. The Fed seemed to flip-flop on that at their December meeting, taking a more hawkish tone on inflation, even as they lowered rates. The seemingly abrupt shift in tone caught markets a bit by surprise as they expected the “data-dependent” Fed to need a more notable reversal in trends for such an abrupt change. What was notable before they met was the outcome of the U.S. election, which markets quickly reacted to, speculating on the future impacts of policy changes. It seems like the Fed is now taking these risks into consideration as they make their policy decisions, which could further increase uncertainty on the path for rates.
Not So “Easy” Anymore
As of 31 December 2024
Regional Backdrop
As of 31 December 2024
| Views | Positives | Negatives | |
|---|---|---|---|
| United States | N |
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| Canada | N |
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| Europe | U |
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| United Kingdom | N |
|
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| Japan | O |
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| Australia | U |
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| Emerging Markets | O |
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O = Overweight
N = Neutral
U = Underweight
Views are informed by the Asset Allocation Committee and Regional Investment Committees (United Kingdom, Europe, Australia, Japan and Asia) and reflect the equity market.
Asset Allocation Committee Positioning
As of 31 December 2024
1 For pairwise decisions in style & market capitalization, positioning within boxes represent positioning in the first mentioned asset class relative to the second asset class.
The asset classes across the equity and fixed income markets shown are represented in our Multi-Asset portfolios. Certain style & market capitalization
asset classes are represented as pairwise decisions as part of our tactical asset allocation framework.
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 2024 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 representa- tions 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.
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.
ESG and Sustainability risk - May result in a material negative impact on the value of an investment and performance of the portfolio.
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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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.
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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.
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