July 2023 / ASSET ALLOCATION VIEWPOINT
Global Asset Allocation: The View From the UK
Discover the latest global market themes
1. Market Perspective
- The global macro backdrop is uneven as some regions are proving more resilient in the face of tighter financial conditions, although the broad trend remains for slowing growth in the back half of the year.
- The US economy surprises to the upside, while Europe slips into a mild recession, challenging the European Central Bank (ECB) as inflation remains elevated. Meanwhile, hopes for a strong global impact from China’s reopening are lagging expectations, prompting fresh policy support.
- While global central banks are likely nearing peak tightening, they remain vigilant on inflation as it is proving stickier in some regions and are at the ready to take further steps towards tightening, depending on trends in the data.
- Key risks to global markets include a deeper‑than‑expected decline in growth, central bank missteps, persistent inflation and geopolitical tensions.
2. Portfolio Positioning
As of 30 June 2023
- We maintain a cautious stance with an underweight to equities and bonds in favour of cash. A slowing economy and weaker earnings could weigh on equities, while persistent inflation could keep bonds vulnerable to further central bank tightening. Cash offers liquidity in an uncertain environment and still attractive yields.
- Within equities, we reduced our modest overweight to global ex-US equities and are now neutral between US and global ex-US markets. Despite still favourable relative valuations outside of the US, slower economic momentum in Europe and less stimulus from China could weigh on markets outside the US, while US markets could benefit from their less cyclical, more defensive growth bias and recent trends in artificial intelligence (AI).
- Within fixed income, we are overweight return‑seeking sectors such as high yield and emerging market bonds, with duration ballast through inflation-linked government bonds.
3. Market Themes
Out of Gas
At the start of the year, it looked like the stars were aligning for markets outside of the US to finally outperform, supported by China’s reopening from COVID lockdowns, Europe staving off an energy crisis due to a mild winter, moderating inflation pressures, expectations for a weaker US dollar and benefitting from much more attractive relative valuations than the US. However, those tailwinds have faded as China’s reopening has disappointed and inflation is proving to be more persistent across Europe and the UK, leading markets outside the US to underperform by over 7% year-to-date. At the same time, the US has surprised to the upside on many fronts, bolstered by a still strong labour market, resilient consumer and housing market strength. With a lot more positives supporting US markets, not to mention the euphoria around AI, it’s very possible that if global economic growth falters in the back half of the year, the US’s outperformance may continue given its defensive characteristics. For now, it looks like markets outside the US have run out of gas, and it’s difficult to identify near-term catalysts that may turn that around.
Homebuilder confidence has moved sharply higher into expansion territory, benefitting from strong consumer demand, improving supply chains and, most notably, limited competition from the existing home sales market. With 30-year US fixed mortgage rates hovering around 7%, and the average outstanding mortgage rate at just 3% levels, current homeowners are feeling like they’re under house arrest, unwilling to leap into the expense of a much higher mortgage. This dynamic has led to much lower existing home inventory, that typically dominates the market, and created the perfect environment for new home sales and US homebuilders. Outside the US, in countries such as the UK and Canada, existing homeowners don’t have the same luxury of staying put and avoiding the higher expenses as their mortgage markets are dominated by loans linked more closely to market rates. This dynamic is leading to much higher mortgage payments for homeowners, higher rates for new buyers and is directly flowing into inflation pressures, all putting more strain on consumers in these regions. With housing such a key driver within these economies and a large portion of consumer expenses, hopes for relief are only likely to come with lower rates, which are likely to come with their own set of problems.
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.