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January 2022 / INVESTMENT INSIGHTS

Global Asset Allocation Viewpoints

Our experts share perspective on market themes and regional trends, plus insights into current portfolio positioning.

Market Perspective

As of 31 December 2021

  • Despite omicron variant weighing in the near-term, growth should remain above potential with inflation likely to moderate this year amid central banks tightening and improvement in supply chains.
  • Developed market central banks further advance tightening policy, with the Federal Reserve paring back quantitative easing and Bank of England raising rates. Emerging market central banks may be nearing peak tightening, with China already taking steps towards easier policies.
  • Yield curves likely to flatten as global short-term rates biased higher with central banks tightening, while long-term rates likely capped by easing inflation concerns and moderating liquidity.
  • Key risks to global markets include omicron variant, persistent inflation, supply chain disruption, central bank missteps, China growth trajectory, and increasing geopolitical concerns.

Portfolio Positioning

As of 31 December 2021

  • We increased our underweight to equities relative to bonds and cash given stocks’ less compelling risk/reward profile, balancing elevated valuations against a backdrop of moderating growth and tightening central bank policies. 
  • Within equities, we further increased our underweight to U.S. growth stocks. We continue to tilt toward cyclicality, maintaining overweights to value-oriented equities globally, U.S. small-caps, and emerging market stocks, where valuations are more reasonable and which should benefit from a continued path of recovery. 
  • Within fixed income, we modestly added to U.S. Treasury Long to provide ballast to the overall portfolio given more cautious view on equity valuations and more hawkish Fed that may limit further upside to interest rates. 
  • Broadly across our fixed income allocation, we continue to favor shorter duration and higher yielding sectors through overweights to floating rate loans and high yield bonds supported by our constructive credit outlook.

Market Themes

As of 31 December 2021

Holiday Rush

The Federal Reserve turned decisively more hawkish at its December meeting, announcing an acceleration of the pace of tapering, which will now end asset purchases by March, and guided towards a mid-year start of rate normalization. From a timing standpoint, these policies will be taking hold just as growth and inflation are expected to be moderating and amid a spike in the Omicron variant across the globe. Given these factors, the market seems to be calling into question how far the Fed can tighten policy before being forced into retreat, looking for the Fed Funds rate to be 1.6% at the end of 2024, well below the Fed’s target of 2.1%. With other developed market central banks on the move, such as the Bank of England’s recent surprise rate hike, the Fed seems eager to join the holiday rush, perhaps worried that if they don’t move fast enough while they can, they may be vulnerable to respond to the next economic downturn.

Fed Funds Rate Projections

As of 31 December 2021

Fed Funds Rate Projections

Source: Bloomberg Finance L.P.
For illustrative purposes only. Actual future outcomes may differ materially.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.

A New Year Resolution

A confluence of events weighed on Chinese growth last year, including its crackdown on the massive property sector—making up nearly 25% of its economy, increased regulations particularly in the technology and education sectors, and market disruption caused by shuttering coal production to meet its clean energy agenda. In response to the weakness, China is acting, having cut its reserve requirement ratio by 50bps, lowering its prime loan rate, and accelerating loans for infrastructure projects. As China looks to balance their economy more towards consumption and to be less reliant on the speculative property sector, estimates are suggesting that growth targets for 2022 could beas low as 5.5% to 6%, down from 8% in 2021. Albeit lower, a more stable growth trajectory for China could be beneficial for investors and trading partners, who have had to navigate the recent volatility. But for now, China needs to focus on this year’s resolution to engineer a soft landing in the property market to shore up the economy for years to come.

China’s Growth Slowdown

As of 31 December 2021

China’s Growth Slowdown

Source: Bloomberg Finance L.P.
For illustrative purposes only. Actual future outcomes may differ materially.
FOR INVESTMENT PROFESSIONALS ONLY. NOT FOR FURTHER DISTRIBUTION.

Regional Backdrop

As of 31 December 2021

  Positives Negatives
United States
  • Healthy consumer balance sheets and high savings rate
  • Strong earnings growth
  • U.S. dollar likely to remain strong
  • Supply chain issues are weighing on economic growth
  • Significantly elevated inflation
  • Elevated stock and bond valuations
  • Fed accommodation has peaked
  • Fiscal stimulus has peaked
Europe
  • Higher exposure to more cyclically oriented sectors that should benefit from economic recovery
  • Monetary policy remains accommodative
  • Fiscal stimulus likely to increase further
  • Equity valuations remain attractive relative to the US
  • Elevated energy prices and supply chain issues are weighing on economic growth
  • Limited long-term catalysts for growth
  • Demand from China fading
  • U.S. dollar strength likely to remain a headwind
Developed Asia/Pacific
  • Cyclical orientation should benefit from economic rebound
  • Strong fiscal and monetary support
  • Improving corporate governance
  • Attractive equity valuations
  • Weak economic growth going into crisis, driven by long-term demographic headwind
  • Demand from China fading
  • Limited long-term catalysts for growth
  • Elevated energy prices and supply chain issues are weighing on economic growth
  • U.S. dollar strength likely to remain a headwind
Emerging Markets
  • Attractive equity valuations
  • Exposure to cyclical areas of economy should benefit from broad global recovery
  • Chinese regulatory actions likely to have peaked
  • Vaccination rates are improving
  • Omicron variant remains a notable threat due to relatively low vaccination levels
  • Heightened political and regulatory risk
  • Accommodation from central banks is fading
  • U.S. dollar strength likely to remain a headwind

Asset Allocation Committee Positioning

As of 31 December 2021

Portfolio Implementation

As of 31 December 2021

Asset Allocation Committee Positioning

1For pairwise decisions in style & market capitalization, positioning within boxes represent positioning in the first mentioned asset class relative to the second asset class.
The asset classes across the equity and fixed income markets shown are represented in our Multi-Asset portfolios. Certain style & market capitalization asset classes are represented as pairwise decisions as part of our tactical asset allocation framework.

Portfolio Implementation

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 2022 FactSet. All Rights Reserved.
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.
Source: MSCI. MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have noliability 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. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.
“Bloomberg®” and Bloomberg Indices are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administratorof the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by T. Rowe Price. Bloomberg is not affiliated with T. Rowe Price,and Bloomberg does not approve, endorse, review, or recommend Global Asset Allocation Viewpoints. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to Global Asset Allocation Viewpoints.

IMPORTANT INFORMATION

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 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.

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