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November 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 October 2022

  • The outlook for the global economy remains uncertain as central banks navigate battling stubbornly high inflation in the face of weakening growth expectations.
  • Taming inflation remains the US Federal Reserve’s number one goal despite the risk of creating more economic pain. Energy-driven inflation gives the European Central Bank a more challenging task amid a divergence in fiscal flexibility across the Union’s members. While having held steadfast, the Bank of Japan may be forced to ease yield curve controls as inflation has started taking hold.
  • Emerging market central banks are ahead in the global tightening cycle but may need to hold rates high to defend weak currencies. In contrast, China eases policy to balance growth risk from COVID-lockdowns.
  • Key risks to global markets include central bank missteps, persistent inflation, potential for a sharper slowdown in global growth, China’s balance between containing the coronavirus and growth, and geopolitical tensions.

Portfolio Positioning

As of 31 October 2022

  • We are underweight stocks as we remain cautious on the environment for equities given still-aggressive central bank tightening and a weakening outlook for growth and earnings.
  • We remain modestly overweight cash relative to bonds given risk of higher rates weighing on bonds, while cash offers safety and more attractive yields given the push higher in short-term policy interest rates.
  • Within equities, we are nearly balanced between value and growth. The slowing growth backdrop is unfavorable for cyclicals, while higher rates weigh on growth-oriented equities.
  • Within fixed income we increased our high yield allocation, funding from floating rate loans, as most of the benefit from rising short-term rates has passed. High yield bonds yields offer reasonable compensation for risks while fundamentals remain supportive. Defaults rates are expected to rise from today’s historically low levels, although yields at current levels help provide a buffer. We also hold a modest overweight to long-term US Treasuries as a risk-off ballast to equities.

Market Themes

As of 31 October 2022

When Bad News is Good

On the surface, the better-than-expected rebound in U.S. GDP growth in the 3rd quarter would reinforce the Fed’s need to remain aggressive on tightening policy. However, looking at the details, there is growing evidence the economy is feeling the bite of sharply higher rates. Consumer spending, comprising nearly 70% of GDP, declined while residential fixed investment, a broad measure of housing activity, slumped by more than 26%. Consumer confidence data last month also flashed warning signs that consumers were increasingly concerned about the impact of high inflation and are growing worried about the job market ahead. Signs of slowing were seen in the October ISM Manufacturing index that fell to levels last seen in May 2020, although did show promising signs on the inflation front with supplier deliveries and prices paid easing. U.S. markets have responded positively to the batch of bad news, with U.S. Treasury yields easing and equity markets higher. While the Fed remains vigilant in their battle to fight inflation, evidence is building that their front-loaded rate hikes are having an impact, at least on growth and potentially preceding softer inflation data. Meanwhile, investors are likely to continue to cheer bad economic data in hopes it brings good news of a Fed pivot in policy.

Real Private Residential Investment

As of 31 October 2022

Real Private Residential Investment graph

Source: Haver Analytics / Bureau of Economic Analysis.
Source: FiveThirtyEight.com

Divided, We Rally?

U.S. markets have historically championed periods of divided government and with the mid-term elections imminent, polls suggest that may occur with increasing odds that Republicans take control of the House of Representatives - and the Senate now a toss-up. Amongst voters’ top issues are record high inflation and slowing economy which are weighing on Democrats, whose two-year reign saw them advance progressive policies and spending that voters may now blame for fueling inflation. Historically, a divided government has been seen as a positive providing checks and balances of power, reducing the likelihood of extreme policies being passed and for legislation that does requiring more bi-partisan compromise. Similarly, uncertainty that impacts corporate and household spending plans eases as the likelihood of significant changes to spending, taxation, and regulatory policies ebbs. However, while gridlock may be welcomed by the markets, a divided government could raisethe potential for volatility in other areas such as raising the debt ceiling limit, support for Ukraine, and regulation of the technology sector. China policy has been an area which has witnessed broader bipartisan agreement representing a potential risk to markets. So, while markets could rally on news of a divided government, we shouldn’t expect political uncertainty to go away, particularly in today’s world.

Chances of Controlling the Senate

As of 31 October 2022

Chances of Controlling the Senate graph

Source: Haver Analytics / Bureau of Economic Analysis.
Source: FiveThirtyEight.com

Regional Backdrop

As of 31 October 2022

  Positives Negatives
United States
  • Strong corporate and consumer balance sheets
  • Resilient labor market
  • Supply chain issues improving rapidly
  • Persistently high inflation
  • Restrictive monetary policy
  • Labor supply shortages
  • Deteriorating corporate margins
Europe
  • Fiscal spending likely to increase
  • Very attractive equity valuations
  • ECB sovereign bond-buying backstop
  • Recession risk is very high
  • Industrial production will be curtailed by energy shortages
  • ECB is tightening
  • Sovereign debt risks are rising
  • Limited long-term catalysts for earnings growth
Developed Asia/Pacific
  • Very attractive equity valuations
  • Improving corporate governance
  • Monetary and fiscal policy remains accommodative
  • Low inflation relative to the rest of the world
  • Limited long-term catalysts for earnings growth
  • Global trade volumes are slowing
  • Extreme Yen weakness due to interest rate differentials
Emerging Markets
  • Chinese authorities are easing monetary and credit conditions
  • Equity valuations are attractive relative to the US
  • EM central banks further along in tightening cycle
  • Attractive currency valuations
  • Global trade volumes are slowing
  • COVID policy remains a headwind to economic growth
  • Chinese housing concerns have impacted industrial activity
  • Chinese regulatory actions are weighing on confidence
  • Geopolitical risks are elevated

Asset Allocation Committee Positioning

As of 31 October 2022

Asset Allocation Committee Positioning chart

1 For 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

As of 31 October 2022

Tactical Allocation Weights: Equity
Tactical Allocation Weights: Fixed Income

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.

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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