July 2022 / GLOBAL ASSET ALLOCATION
Global Asset Allocation: July Insights
Discover the latest global market themes
1. Market Perspective
- Inflation concerns remain at the forefront for central banks and investors as global growth continues to trend lower amid supply disruptions, geopolitical challenges and reduction of liquidity, setting the stage for a challenging macro backdrop.
- The US Federal Reserve (Fed) remains committed to its tightening policy, hinting at a steady path forward to further combat inflation. The European Central Bank (ECB) has telegraphed its plan to end asset purchases and begin raising rates despite a fragile macro backdrop, while the Bank of Japan (BOJ) remains steadfast on its policy of yield curve control.
- While most emerging market (EM) central banks continue to tighten policy in response to heightened inflation and weak currencies, China policies remain supportive following the easing of pandemic-related lockdowns to help bolster growth.
- Key risks to global markets include central bank missteps, persistent inflation, impacts of the Russia-Ukraine conflict, potential for a sharper slowdown in global growth and China’s balance between containing COVID‑19 and growth.
2. Portfolio Positioning
As of 30 June 2022
- Despite more attractive valuations following recent declines, we remain cautious on equities given a more challenging earnings environment amid slowing growth and tighter financial conditions. We retain our overweight positioning in fixed income.
- We reduced our overweight to value stocks as the first half of the year concluded. Energy has strongly outperformed, while supply issues are easing and demand is weakening as growth slows and prices increase. The cyclical nature of value may fall from favour.
- 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.
- Holdings of inflation-linked bonds were trimmed as inflation expectations seem to be moving past their peak.
3. Market Themes
For the last several decades, the Fed has had the luxury of pursuing its dual mandate—maximum employment while maintaining price stability—amid anchored low inflation. Major shocks to the economy and markets, including the global financial crisis and outbreak of COVID, could be combatted with aggressive rate-cutting and trillions of dollars in quantitative easing with little fear of stoking inflation. This environment was beneficial for the Fed and investors who became complacent in expecting a Fed “put” would be there to provide a backstop when a crisis occurred. Unfortunately, the Fed’s aggressive easing this time around came alongside unprecedented fiscal stimulus, flooding consumers and corporations with cash and the release of pent-up demand colliding with severe supply shortages related to COVID lockdowns. Add in the energy and agricultural shortages tied to the Russia-Ukraine conflict and you have the perfect storm for runaway inflation. Unfortunately for the Fed, they can’t fix supply and will likely remain steadfast in tightening policy to combat inflation, even if it risks pushing the economy into recession—meaning for now that the Fed “put” is kaput.
Change of Tone
China’s stock market had fallen by nearly 24% towards the end of April this year as strict lockdowns related to the country’s zero-COVID policy weighed on the growth outlook. With evidence now showing that COVID-19 infections are abating, lockdowns have been eased and inbound traveler quarantine requirements have been halved, allowing China’s economy to gradually reopen. This shift in sentiment comes at a time when the People’s Bank of China has pledged to maintain supportive monetary policy to aid the country’s recovery, with a cautious eye on stability. Recent statements from President Xi Jinping pledging government support for parts of the technology sector, citing their larger role in the economy’s future, also seemed to suggest an easing of regulatory crackdowns experienced last year. In a matter of months, the negative sentiment surrounding China has shifted to it being the “new bull market,” with Chinese stocks up close to 20% off April’s lows. While still early in reopening and with China’s economic data just starting to show signs of improvement, the tone inside and outside China suggests that the worst may be past, at least for now.
For a region-by-region overview, see the full report (PDF).
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.
July 2022 / INVESTMENT INSIGHTS
July 2022 / VIDEO