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January 2024 / ASSET ALLOCATION VIEWPOINT

Global Asset Allocation: The View From Europe

Discover the latest global market themes

1. Market Perspective

  • Global growth and inflation expectations are broadly lower, with divergence across economies. 
  • We expect US growth to moderate but remain resilient, while the interconnected economies of Europe and China lag.
  • The US Fed has signalled a pivot towards rate cuts in 2024, with the trajectory unclear. The European Central Bank balances fragile growth and inflation. The Bank of Japan cautiously eyes exiting negative rate policy in the first half of this year. Chinese growth remains challenged, with a new year’s pledge to offer more stimulus support.
  • Key risks to global markets include impacts of geopolitical tensions, central banks divergence, a deeper retrenchment in growth, sticky inflation and trajectory of Chinese growth and policy.

2. Portfolio Positioning

As of 31 December 2023

  • We have a balanced view on equities, supported by positive earnings trends and more attractive valuations beyond narrow leadership, against a backdrop of softening growth and still high interest rates. We remain overweight areas of the market with supportive fundamentals, such as small‑caps, Japanese equities, global high yield bonds and emerging market debt.
  • Within equities, we remain overweight US large‑cap growth due to the continued strength of technology and artificial intelligence, US small‑caps because of attractive valuations, and Japan because of the reflationary story and governance improvements. Europe ex UK remains an underweight due to slowing economic growth and restrictive monetary policy.
  • Within fixed income, we remain modestly overweight cash relative to bonds. Cash continues to provide attractive yields and liquidity to take advantage of potential market dislocations.
  • Within fixed income, we remain overweight high yield and emerging market bonds on still attractive absolute yield levels and reasonably supportive fundamentals..

3. Market Themes

Ka‑Powell!

Stock and bond markets soared at the end of 2023 following Chairman Jerome Powell’s surprise pivot in policy at the December 13th press conference. Investors were left scrambling to adjust their 2024 rates forecasts as just a month prior, Powell talked down any suggestions that they were close to considering rate cuts. His message at the press conference appeared to be an about‑face as he laid out expectations for lower rates next year. While not taking a victory lap, Powell acknowledged that their aggressive policies were indeed having the intended impacts of helping rein in inflation while surprisingly having little impact thus far on employment. With the markets celebrating the ‘soft landing’, they quickly priced in six rate cuts, double what the Fed has laid out. Given the wide divergence in views, every data point ahead is likely to drive volatility. With US economic growth having proved so resilient and the consumer and unemployment still far from broken, upside surprises to growth or inflation could have markets running back their rate cut views.

Sea‑ing Red

Just as inflation is falling closer to central bank targets, investors are seeing red as hopes of impending rate cuts could be delayed as unexpected supply chain disruptions are once again impacting goods and transportation prices. Recent events in the Red Sea have been an unwelcome reminder of the impact that shipping delays related to COVID shutdowns had on supply and goods prices, coupled with the inflationary trends in 2022 as energy prices rose following Russia’s invasion of Ukraine. The conflict in Israel and Gaza is having spillover effects across the Middle East, a vulnerable region, where a significant portion of global trade passes through. While the immediate impacts on energy and transportation prices have been mild in comparison to the earlier spike in inflation, it’s a reminder that we are on a fragile path back to target level inflation given the heightened geopolitical risk in the world. While goods inflation has come down significantly, post‑COVID, and the focus has been on services‑related inflation, investors will be keeping an eye on the broadening impacts that geopolitical risks could have on global trade and inflation.

 

For a region-by-region overview, see the full report (PDF).

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 written 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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