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August 2022 / GLOBAL ASSET ALLOCATION

Global Asset Allocation: September Insights

Discover the latest global market themes

1. Market Perspective

  • While seeing increasing evidence of moderating inflationary pressures in some countries, central banks likely to remain steadfast in tightening policies as inflation is not likely to return to target levels in the near term.
  • The US Federal Reserve (Fed) strongly reinforced its commitment this past month to its tightening policy, prioritising inflation fighting over economic growth. Despite facing prospects of weaker growth, the European Central Bank (ECB) is expected to ramp up rate hikes to fend off energy-driven inflation pressures, while the Bank of Japan (BoJ) remains on the sidelines.
  • Several emerging markets (EM) are being forced to tap in to reserves to defend their currencies against the rallying US dollar and elevated import costs, while China continues to try and incrementally bolster growth through supportive policies as the country contains the spread of the coronavirus.
  • Key risks to global markets include central bank missteps, persistent inflation, potential for a sharper slowdown in global growth, China’s balance between containing the coronavirus and growth and geopolitical tensions.

2. Portfolio Positioning

As of 31 August 2022

  • We remain moderately cautious on risk through our underweight to equities and overweight to fixed income. Slowing growth and declining earnings remain a challenge for equities, while persistent inflation and higher rates could weigh on fixed income.
  • Within equities, we are nearly balanced between value and growth. The slowing growth backdrop is unfavourable for cyclicals, while higher rates weigh on growth-oriented equities. 
  • Within fixed income, we added exposure to euro government bonds, moving duration similar to that of the benchmark, in preparation for an economic slowdown or recession.

3. Market Themes

It Fooled You Once…

Coming out of the annual Jackson Hole meeting, Fed Chairman Jerome Powell’s speech, unsurprisingly, had a strong tone reinforcing the Fed’s intention to fight inflation at any cost, a 180-degree reversal of his ‘inflation is transient’ tone delivered the same time last year. But, just like last year when the Fed misread the growing threat of persistent inflationary forces and underacted, they may be misreading the trajectory of inflation once again. While lingering supply chain impacts from the pandemic and the Russia-Ukraine conflict over the past year further exacerbated inflationary pressures, we are now starting to see key input costs—such as oil, lumber and copper—sharply decline. Recent jobs data have also pointed to higher participation rates, which should help ease the tight labour market and pressure on wages and while other ‘stickier’ components of inflation—such as rents and owners’ equivalent rents—are still on the rise, the pace has moderated in recent months. Although it is unlikely that inflation returns to the Fed’s 2% target anytime soon, it could be falling a lot faster than suggested by the Fed’s tightening, leaving markets to wonder if next year’s speech will be about rate cuts.

House of Cards

Pandemic-fuelled demand for space, ultralow mortgage rates and low supply proved the perfect mix that set the US housing market on fire, with home prices surging over 40% since the start of the pandemic. Unfortunately, the tides have turned amid tighter Fed policy, as mortgage rates have spiked higher, with the 30-year fixed rate moving from below 3% up to 6% since early 2021. That abrupt leap in rates has quickly stifled demand, sending prices and sales lower, and is already forcing some mortgage lenders to begin layoffs amid the downturn. While there is clearly some excess in home valuations, particularly in certain regions that saw the strongest demand, it may be a stretch to draw parallels to the 2008 house of cards that came crashing down, as credit fundamentals of borrowers today are less of an issue. In fact, many buyers, and particularly first-time home buyers, have been sidelined as climbing financing costs are continuing to keep affordability out of reach and more than offsetting the recent softness in home prices. However, going forward, the real impact of a weakening housing market may be on sectors of the economy, such as construction spending and mortgage lending, as well as broader consumer spending.

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.

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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 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.

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