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Investment Viewpoint

Global Asset Allocation Viewpoints

T. Rowe Price

PORTFOLIO POSITIONING

As of March 31, 2019 

Exuberance May be Overdone

  • We moderated our position in small-cap stocks in the U.S. given recent strength and favorable liquidity in the face of moderating domestic growth.
  • We continued to reduce our exposure to developed market value stocks outside the U.S. in favor of growth as value-oriented sectors within those regions, such as financials, may be challenged by moderating economic growth.
  • We added to hedged international bonds as they offer an attractive hedged yield for U.S. dollar investors.

MARKET THEMES

As of March 31, 2019

Risk On!

On the back of the Fed’s dovish pivot, risk assets are off to a banner start with the MSCI AC World (on a local currency basis) and the S&P 500 indexes returning 12.4% and 13.6%, respectively over the first three months of the year. This is their strongest quarterly return since September 2009 and the best first quarter since 1998. Commodities were also up strongly as oil had its best quarter in almost a decade. Does this foreshadow significant upside for the remainder of the year, or will markets trade sideways from here? Unusually strong starts have historically led to further strength, but with the bond market signaling that the end of the cycle may be near, markets may need another catalyst to carry the torch from here.

Asset Class Performance

Price Return in USD as of March 31, 2019

Past performance is not a reliable indicator of future performance.
Sources: J.P. Morgan Chase & Co., Standard & Poor’s, Haver Analytics / People’s Bank of China, Caixin / IHS. Financial data and analytics provider FactSet. Copyright 2019 FactSet. All Rights Reserved.
Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
Source for Bloomberg Barclays index data: Bloomberg Index Services Ltd. Copyright® 2019, Bloomberg Index Services Ltd. Used with permission.

Return to New Normal

Government bond yields around the world continued to slide as dovish signals for both the Fed and the ECB sent the yield on the 10-year U.S. Treasury note to its lowest level since December 2017. While the U.S. Fed sees solid underlying economic fundamentals, they have indicated their willingness to be patient in the face of low inflation and slowing growth, and the bond market is pricing in an outright cut in 2019. At the same time, the ECB has further delayed its timeline for policy normalization and announced additional stimulus, highlighting concerns about slowing global growth. Is the recent rally in rates simply an extension of the cycle or a harbinger of recession?

10-Year Government Bond Yields

March 31, 2009 to March 31, 2019

Past performance is not a reliable indicator of future performance.
Sources: J.P. Morgan Chase & Co., Standard & Poor’s, Haver Analytics / People’s Bank of China, Caixin / IHS. Financial data and analytics provider FactSet. Copyright 2019 FactSet. All Rights Reserved.
Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
Source for Bloomberg Barclays index data: Bloomberg Index Services Ltd. Copyright® 2019, Bloomberg Index Services Ltd. Used with permission.

Coming in for a (Soft) Landing

China’s recent economic slump appears to be stabilizing as the effects of stimulus measures begin to filter through the economy. Chinese fixed-asset investment and manufacturing purchasing managers’ index (PMI) beat expectations last month thanks to infrastructure spending, with the PMI posting the biggest increase in seven years and the first significant monthly improvement since mid-2018. Additionally, despite ongoing posturing from negotiators from the U.S. and China, both sides seem keen to broker a deal to head off an escalation of a trade war that has been weighing on global sentiment. While clearly positive, will these green shoots be enough to stabilize global growth?

China Credit Growth vs. China PMI

January 1, 2015 to March 1, 2019

Past performance is not a reliable indicator of future performance.
Sources: J.P. Morgan Chase & Co., Standard & Poor’s, Haver Analytics / People’s Bank of China, Caixin / IHS. Financial data and analytics provider FactSet. Copyright 2019 FactSet. All Rights Reserved.
Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
Source for Bloomberg Barclays index data: Bloomberg Index Services Ltd. Copyright® 2019, Bloomberg Index Services Ltd. Used with permission.

REGIONAL BACKDROP

As of March 31, 2019 

United States

Positives
  • More dovish Fed, stable inflation
  • Healthy consumer spending, improving wages
  • Trade deal with China appears likely
  • Greater share of secularly advantaged companies than rest of world
Negatives
  • Moderating economic growth with fading fiscal stimulus
  • Late-cycle concerns: tight labor market, rising wages, and elevated margins
  • Political uncertainty and trade tensions
  • Deteriorating near-term earnings expectations

Europe

Positives
  • Highly accommodative monetary policy
  • Indirect beneficiary of China stimulus
  • Political headwinds in Italy and France have eased
Negatives
  • Eurozone economy struggling, with limited scope for ECB to respond
  • Export weakness, vulnerable to trade and China growth
  • Political unity remains a concern with Brexit looming
  • Banking sector remains challenged

Developed Asia/Pacific

Positives
  • BOJ committed to aggressive policy, RBA on hold in face of rising inflation
  • China stimulus could support regional trade
  • Japanese fiscal stimulus to be implemented in April
  • Broadly attractive valuations, particularly in Japan
  • Improving corporate governance trends in Japan
Negatives
  • Highly exposed to slowing global economic growth and trade tensions
  • Japanese economic and earnings growth continue to be much weaker than hoped
  • Stronger yen on risk aversion could weigh on exports
  • Australia facing slowing economy with weakness in housing
  • Australian earnings down sharply

Emerging Markets

Positives
  • Muted inflation, more dovish Fed give central banks flexibility to ease
  • Chinese stimulus appears to be taking hold
  • U.S.-China trade deal appears likelyGlobal trade indicators appear to be stabilizing
  • With growth in tech sector, less tied to commodity cycle
Negatives
  • Long-term China growth trajectory remains a headwind
  • China stimulus more measured and domestically focused
  • Highly linked to global trade
  • Currencies face renewed pressure
  • Near-term earnings expectations deteriorating
  • Instability in Turkey could persist

ASSET ALLOCATION COMMITTEE POSITIONING

As of March 31, 2019 

PORTFOLIO IMPLEMENTATION

As of March 31, 2019 

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 2019 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:
Source for MSCI data: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein.The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
Copyright ©2019, 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.

201904-804595

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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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