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Investment Viewpoint

Global Asset Allocation Viewpoints

T. Rowe Price

PORTFOLIO POSITIONING

As of 31 December 2018 

TAKING ANOTHER STEP IN

  • We moved from underweight to neutral in stocks as lower valuations better compensate for uncertainty related to geopolitical risks and late economic cycle concerns.
  • Within regions, we reduced our underweight to U.S. equities and added to our overweight in emerging market equities that could find support from attractive relative valuations, a more dovish Fed and lower U.S. dollar.
  • Within both U.S. and developed markets outside the U.S., we reduced our exposure to value stocks in favor of growth as a moderating growth outlook could challenge cyclically oriented sectors.
  • We reduced our overweight to U.S. long Treasuries which have performed well in the current environment as a safe-haven against increased volatility and adverse equity markets.
  • We continued to pare floating rate loans as short-term rates may be near peak as the Fed becomes more data dependent.
  • We reduced our underweight to high yield bonds as the recent sell-off provided an opportunity to add back at more attractive levels. While the credit cycle is extended, default expectations are low and corporate fundamentals remain broadly supportive.

MARKET THEMES

As of 31 December 2018

A DECEMBER TO REMEMBER

December’s U.S. equity market slide – the worst in nearly 80 years – closed in on “correction” territory and exacerbated a decline that started in October. Higher volatility and large intraday swings capped off the month amid a period of seasonably low liquidity. While the market ended the year still facing the same risks that fueled the decline – trade wars, slowing growth, shrinking liquidity, political tensions, Fed rate hikes – valuations have fallen to levels not seen in nearly five years, offering a better risk-return proposition for investors. 

BREXIT: DEAL, NO DEAL, REVOTE?

Uncertainty surrounding Britain’s exit from the EU continues following Prime Minister May’s decision to pull a parliamentary vote on the current plan in December. With time running out before the March 29 deadline, political division remains intense. Politicians are set to reengage in early January following the holidays with no clear path in sight. Although difficult to gauge the outcome, a “no deal” exit could create major dislocation for the British and EU economies. European and UK markets are likely to remain volatile as they react to Brexit progress, or lack of, over the coming quarter.

U.S. FED: NINE AND OUT?

The Fed announced a “dovish” ninth rate hike this cycle to end the year. While the latest hike proved the Fed was steadfast in its path for 2018, their updated rates forecast for 2019 softened, suggesting three rather than four hikes. With growth slowing, inflation low, oil prices slumping, and credit conditions tightening, markets are doubting they’ll get there. At year-end, Fed funds futures are pricing in less than one hike in 2019 and a possible cut by 2020. As the Fed weighs the data going into 2019, will a pause refresh or scare the markets? 

Past performance is not a reliable indicator of future performance.
Sources: Financial data and analytics provider FactSet. Copyright 2018 FactSet. All Rights Reserved. Haver Analytics/International Monetary Fund. Standard & Poor’s.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION. 

REGIONAL BACKDROP

As of 31 December 2018

United States

Macroeconomic

  • Economic growth is likely to moderate in 2019
  • Capex spending growth has been disappointing, as businesses remain cautious amid trade policy uncertainty
  • Inflation and labor costs are rising only gradually despite tighter labor markets, keeping recession risks relatively low, despite the aging cycle

Equity Fundamentals

  • Valuations are now more in-line with underlying fundamentals taking into account macro risk levels
  • Earnings expectations declining, driven by tariff fears and the sharp drop in oil prices
  • Margins likely to face headwinds from higher wages and input costs

Interest Rates

  • Short-term rates may be close to peaking as Fed shifts toward data dependent policy
  • Longer rates well off recent peaks as growth moderates and inflation remains modest 

Currencies

  • The USD has been stable, despite downward pressure from fundamentals
  • Valuations remain rich, growth and interest rate exceptionalism appear to be peaking, and rising deficits are long-term headwinds 

Developed Europe

Macroeconomic

  • The eurozone PMI measures continue to decline, with manufacturing data now consistent with a downturn
  • Political headwinds have eased after the EU and Italy reached a budget agreement 

Equity Fundamentals

  • Valuations are modestly attractive relative to the U.S.
  • Earnings results have been disappointing in 2018, but forward growth expectations remain positive

Interest Rates

  • The ECB confirmed that it will halt its multi-trillion euro stimulus program in January, despite concerns that the economy is poised to slow down
  • Fading economic growth and political uncertainty have pushed the German 10-year yield significantly off recent highs 

Currencies

  • Political headwinds in Italy and France have eased recently, but weakening economic indicators continue to hold the currency back
  • Expectation of QE unwind, and supportive valuations are likely to be tailwinds in 2019

United Kingdom

Macroeconomic

  • The economy has softened after a strong summer
  • Brexit uncertainty remains a significant headwind, with intense political divisions enduring and no clear path forward

Equity Fundamentals

  • Valuations continue to trade at a discount to global equity markets
  • Allocations to UK equities by global investors are at extremely low levels
     

Interest Rates

  • Near term direction of rates likely to be driven by Brexit outcome
  • The Bank of England has suggested that it would need to hike rates in a “no deal’ Brexit; however, this view would be challenged if growth deteriorates 

Currencies

  • Weak economic growth and an uncertain political outlook continue to weigh on the GBP
  • Valuation is attractive, but is unlikely to matter without political clarity 

Developed Asia & Pacific

Macroeconomic

  • Trade tensions remain a key issue within the region, with business confidence beginning to fade
  • The Japanese economic slowdown is expected to continue into 2019, but fiscal stimulus capex may limit the slowdown
  • The Australian economic outlook is mixed, with consumer confidence high, but housing prices are weak and business confidence is waning

Equity Fundamentals

  • Valuations within the region remain attractive relative to other developed markets, but earnings are vulnerable to a slowdown in global trade
  • Japanese equities offer attractive relative valuations, but the earnings outlook has been deteriorating
  • Australian profit margins are being squeezed by rising input costs, but revenues have been strong 

Interest Rates

  • Long yields in the region are being impacted by falling yields in the rest of the world
  • The Bank of Japan continues to hold its highly accommodative policy, but the long-term consequences of artificially low rates are uncertain
  • The RBA maintains a hawkish lean to combat a tight labor market, despite concerns about a pullback in global trade 

Currencies

  • Despite limited change in economic growth or monetary policy, the JPY has rallied due to risk aversion and growing USD uncertainty
  • Trade and commodity prices will remain important drivers of the Australian dollar 

Emerging Markets

Macroeconomic

  • Emerging market economies face a potential slowdown in export demand from trade tensions
  • Chinese growth remains a significant concern, with mixed signals about the severity of the slowdown, magnitude of stimulus measures, and likelihood of a trade deal with the U.S.

Equity Fundamentals

  • Valuations are attractive, as markets have sold off sharply on trade concerns, U.S. dollar strength, and currency weakness
  • Earnings growth remains reasonably healthy, but expectations are falling

Interest Rates

  • U.S. Fed policy remains a key wildcard
  • Many central banks have shifted toward a tightening bias, but this is partially offset by the PBOC easing 

Currencies

  • Currency volatility has endured, despite stability in bellwethers of risk sentiment (Turkey, Argentina, and Brazil)
  • Valuations are broadly attractive versus history, with a more balanced tone regarding U.S. monetary policy and U.S./China trade tensions providing additional support 

ASSET ALLOCATION COMMITTEE POSITIONING

As of 31 December 2018 

PORTFOLIO IMPLEMENTATION

As of 31 December 2018

1 U.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 2018 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: 

Copyright ©2018, 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.
201901-704869

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T. Rowe Price ("TRP") claims compliance with the Global Investment Performance Standards (GIPS®). TRP has been independently verified for the twenty one- year period ended June 30, 2017 by KPMG LLP. The verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation.

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