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Investment Viewpoint

Global Asset Allocation Viewpoints

T. Rowe Price

PORTFOLIO POSITIONING

As of February 28, 2019 

Going to Growth as Growth Slows

  • We further reduced our exposure to developed market value stocks outside the U.S. in favor of growth as value-oriented sectors within those regions may be challenged by moderating growth.
  • We continued to add back to high yield bonds as they can offer attractive carry and potentially reduced downside relative to stocks.
  • We continued to pare floating rate loans as short-term rates in the U.S. may have limited upside with the Fed on hold.

MARKET THEMES

As of February 28, 2019 

Bonds vs. Stocks: Who’s got it right?

The bond market reflects a downbeat outlook with a flat Treasury curve and yields remaining well off their November highs, reflecting persistent uncertainty, weakening economic data, and that we are late in a protracted cycle. However, despite declining earnings expectations for this year, the MSCI All Country World Index is up almost 11% since the start of the year, led by cyclical stocks. Equity investors seem enamored with a more dovish Fed and progress toward a trade deal between the U.S. and China. Clearly, stock and bond markets are signaling a very different story, but which one of them will ultimately be right? 

U.S. (Earnings) Recession?

While the probability of a near-term U.S. recession remains low and fears of a policy mistake have subsided in light of the more dovish tone from the Fed, the earnings growth outlook remains in question. After growing more than 20% in 2018, boosted by strong topline growth and tax reform, analysts have been revising 2019 earnings growth estimates downward. Current expectations are for an outright decline in the first quarter and low single-digit growth for the following two quarters. Historically, earnings estimates trend lower as the quarter approaches, but this year’s revisions have been unusually sharp. With 2018 tailwinds fading, it’s challenging to identify a catalyst in the current environment for a reacceleration of earnings. 

ECB: No Dry Powder

It’s been a tough few months for the eurozone economy with growth at a four-year low and the ECB conceding that risks to growth have "moved to the downside." Economic data continue to disappoint as exporters have come under pressure from the slowdown in Chinese growth. Not only is growth weakening, but inflation remains subdued, leaving little room for the ECB to normalize the current ultra-loose monetary policy. With growth slowing and threats of U.S. tariffs on autos looming, there have been talks of a new round of stimulus to boost liquidity. Policymakers have very few tools remaining should the region’s economy come under further pressure, and Mario Draghi may end his term without ever raising rates. 

REGIONAL BACKDROP

As of February 28, 2019 

United States

Positives
  • More dovish Fed, stable inflation
  • Healthy consumer spending, improving wages
  • Positive tone on trade
  • Greater share of secularly advantaged companies than rest of world
Negatives
  • Moderating economic growth with fading fiscal stimulus
  • Late-cycle concerns: tight labor market, rising wages, and elevated margins
  • Political uncertainty and trade tensions
  • Deteriorating near-term earnings expectations

Europe

Positives
  • Highly accommodative monetary policy
  • Indirect beneficiary of China stimulus
  • Political headwinds in Italy and France have eased
Negatives
  • Eurozone economy struggling, with limited scope for ECB to respond
  • Export weakness, vulnerable to trade and China growth
  • Political unity remains a concern with Brexit looming
  • Banking sector remains challenged

Developed Asia/Pacific

Positives
  • BOJ committed to aggressive policy, RBA on hold in face of rising inflation
  • China stimulus could support regional trade
  • Broadly attractive valuations, particularly in Japan
  • Improving corporate governance trends in Japan
Negatives
  • Highly exposed to slowing global economic growth and trade tensions
  • Japanese economic and earnings growth have been weaker than hoped
  • Stronger yen on risk aversion could weigh on exports
  • Australia facing slowing economy with weakness in housing

Emerging Markets

Positives
  • Muted inflation, dovish Fed give central banks flexibility to ease
  • China stimulating in face of slowdown and trade
  • Idiosyncratic risks have faded (e.g., Brazil, Turkey)
  • With growth in tech sector, less tied to commodity cycle
Negatives
  • China growth trajectory remains a headwind
  • China stimulus more measured and domestically focused
  • Highly linked to global trade
  • Currencies face renewed pressure
  • Near-term earnings expectations deteriorating

ASSET ALLOCATION COMMITTEE POSITIONING

As of February 28, 2019 

PORTFOLIO IMPLEMENTATION

As of February 28, 2019 

1U.S. small-cap includes both small- and mid-cap allocations.
Source: T. Rowe Price. Unless otherwise stated, all market data are sourced from FactSet. Copyright 2019 FactSet. All Rights Reserved.
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. Figures may not total due to rounding. Neutral equity portfolio weights representative of a U.S.-biased portfolio with a 70% U.S. and 30% international allocation; includes allocation to real assets equities.
Core fixed income allocation representative of U.S.-biased portfolio with 55% allocation to U.S. investment grade.
Additional Disclosures:
Source for MSCI data: MSCI. 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.
Copyright ©2019, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of S&P 500 in any form is prohibited except with the prior written permission of S&P Global Market Intelligence (“S&P”). None of S&P, its affiliates or their suppliers guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions, regardless of the cause or for the results obtained from the use of such information. In no event shall S&P, its affiliates or any of their suppliers be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of S&P information. 


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 a 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 that 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.
USA: For Institutional Investor Use Only. T. Rowe Price Investment Services, Inc., and T. Rowe Price Associates, Inc.
©2019 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

201903-762735 

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