Global Asset Allocation: The View From The UK - August Insights
Don’t Fight the FAANGs?1
Year-to-date growth stocks have outperformed value by over 30%, not only in the downturn given their defensive characteristics, but also during the recovery. While growth stocks have benefited from secular trends, as well as asset-light business models and less cyclical exposure, for more than a decade, the recent shutdowns have actually benefited many growth companies due to accelerated trends in areas such as online shopping, video streaming, and cloud computing. With S&P 500 earnings expected to be down close to 35% in the quarter, the FAANGs are expected to report an average growth of 20% in earnings. Although growth stock valuations appear stretched, fundamentals remain strong and many expect the current low growth and low rate environment to continue, which has historically favored growth stocks. While value stocks have been written off by the market, progress on a coronavirus vaccine or signs of a rebound in global growth could have them poised for a much overdue rally—but it is unlikely to be the start of a new value cycle.
Not So Fast on That “V”
Global growth came in at record‑low levels in the second quarter, with output in the U.S. contracting by nearly 33% and the eurozone down over 40% (on an annualised basis). While the headline gross domestic product numbers were not unexpected, hopes in the U.S. that the rapid recovery that we saw in May and June would continue through the rest of the year have been called into question by the recent mixed jobs data. The two consecutive weeks of increasing initial jobless claims in July challenged the labour market recovery, although the most recent week’s initial jobless claims data showed a bit of a reversal. If this “muddle through” environment continues and the federal government reduces additional support for unemployed Americans—which has kept many Americans afloat during the crisis—the equity market’s hopes for a V-shaped recovery in the back half of the year may be dashed.
Dollar Can’t Buy EM Relief
In July, the U.S. dollar (USD) and U.S. Treasury yields both fell to multiyear lows, pressured by a resurgence in coronavirus cases and the Fed’s pledge to keep monetary policy loose. Normally, this backdrop would be supportive for higher‑yielding emerging markets (EM) amid a low yield environment and provide a boost to their currencies. However, continued economic impacts of the current crisis and limited capacity for fiscal and monetary stimulus, except for China, have weighed on sentiment despite the slump in the USD. This has been evident in the divergence in EM regional currency performance during the virus-related sell-off and recovery. Idiosyncratic issues including financial instability continue to hinder some Latin American countries, leading to significant underperformance versus their more stable, Asian EM counterparts. While a lower USD removes a significant headwind for EM assets, bigger risks abound for broader EM as they continue to weather the crisis.
For a region-by-region overview, download the PDF.
Source: Unless otherwise stated, all market data are sourced from FactSet. Financial data and analytics provider FactSet. Copyright 2020 FactSet. All Rights Reserved.
J.P. Morgan Chase & Co.: Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2020, J.P. Morgan Chase & Co. All rights reserved.
The S&P 500 is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500.
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.
DIFC—Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd. by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only.
EEA ex-UK—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
© 2020 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.