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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 2022

  • Volatility likely to remain elevated in the new year as central bank policy expectations diverge amid evidence of slowing growth and moderating inflation.
  • While slowing the pace of tightening, the U.S. Federal Reserve reinforced its commitment to taming inflation, signaling policy rates may need to stay higher for longer despite the negative impacts on growth and employment.
  • The European Central Bank (ECB) struck a hawkish tone amid its battle against inflation despite acknowledging the likelihood of a near-term recession. The Bank of Japan made a surprise move toward policy normalization by adjusting its yield curve controls to provide flexibility for yields to move higher.
  • Moderating pressures from higher U.S. rates and a strong U.S. dollar could become tailwinds for emerging market economies and a reprieve for their central banks. While uncertainty remains, sentiment towards China could improve following easing of zero-Covid restrictions along with signaling from policymakers that more stimulus measures are on the way.
  • 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 December 2022

  • We remain underweight stocks. Earnings estimates remain too optimistic, not yet reflecting the potential for weaker demand and higher input prices weighing on profit margins.
  • We remain modestly overweight cash relative to bonds, reducing portfolio duration while earning attractive yields and providing liquidity should market opportunities arise.
  • 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 are overweight high yield, where valuations offer reasonable compensation for risks. While fundamentals remain generally supportive, default rates are expected to rise from historically low levels towards longer-run averages. We also hold a modest overweight to long-term U.S. Treasuries as a risk-off ballast to equities and other risk assets.

Market Themes

As of 31 December 2022

Re-Open for Business

In early December, Chinese policymakers surprised markets by announcing a pivot away from strict zero-Covid policies. The measures had been effective in containing the virus through targeted lockdowns, testing, and quarantines but at high economic and social costs. The reopening announcement partially removed virus testing requirements, restrictions on domestic travel and production stoppages. The news was welcomed by those impacted and championed by the markets as the world has been awaiting China’s reopening to provide a lift to global growth. Unfortunately, the reopening has been met with a wave of infections across the country resulting in the population being cautious to reengage in outside contact and travel. While China’s reopening should ultimately be a positive for growth in 2023, it is likely to unfold over the balance of the year. As more of the population reengages it will provide a boost for domestic growth, fueled by pent-up demand and savings accumulated over the shutdown. Additionally, a re-emergent Chinese economy should be supportive for broader emerging markets and commodities as growth and trade rebound. As investors happily leave 2022 behind, China’s success this year in reopening its economy, stabilizing growth, and addressing risk in its property sector could be positive catalysts that help turn market sentiment around.

China: Awaiting Turnaround in Domestic Growth

31 December 2020 to 31 December 2022

China: Awaiting Turnaround in Domestic Growth - graph

Sources: Haver Analytics/China National Bureau of Statistics, Caixin/S&P Global. Haver Analytics/Bureau of Labor Statistics. Please see Additional Disclosures for more information about this S&P Global information.

No Quick Fix

While there has been a growing number of companies announcing layoffs and hiring freezes over recent months, notably across technology and financial services sectors, the unemployment rate remains anchored near historically low levels with millions of job openings still in the economy. Consumer demand remains strong across services sectors of the economy, including transportation and leisure. However, employers are dealing with a shortage of workers, resulting in the need to offer higher wages to attract and retain talent. On the labor supply front, Covid resulted in an increased amount of people exiting the workforce, particularly in sectors that were shut down entirely over the course of the pandemic. Workers have also been more willing to quit jobs in search of higher wages and better benefits, including flexibility to work remotely. The tightness of the labor market and rising wages has the Fed’s attention, and while the decline in goods inflation amid improving supply chains has been a welcomed sign, services inflation is likely to be more of a challenge. Unfortunately for the Fed, there is no quick fix for improving the labor supply chain, leaving them more likely to keep policy tighter for longer until they see a cooling in demand for jobs.

U.S.: Goods vs. Services Inflation

Last Five Years Ending 30 November 2022

U.S.: Goods vs. Services Inflation - graph

Sources: Haver Analytics/China National Bureau of Statistics, Caixin/S&P Global. Haver Analytics/Bureau of Labor Statistics. Please see Additional Disclosures for more information about this S&P Global information.

Regional Backdrop

As of 31 December 2022

  Positives Negatives
United States
  • Strong corporate and consumer balance sheets
  • Resilient labor market
  • Supply chain issues improving rapidly
  • Persistent demand for services
  • Stubbornly high inflation
  • Restrictive monetary policy
  • Labor supply shortages
  • Deteriorating corporate margins
  • Fiscal spending likely to increase
  • Attractive equity valuations
  • ECB bond-buying backstop
  • Historically warm winter has eased energy costs
  • Recession risk is very high
  • Industrial production will be curtailed by energy shortages
  • ECB remains hawkish
  • Sovereign debt risks are rising
  • Limited long-term catalysts for earnings growth
Developed Asia/Pacific
  • Attractive equity valuations
  • Improving corporate governance
  • Fiscal policy remains accommodative
  • Global trade volumes are slowing
  • Limited long-term catalysts for earnings growth
  • Monetary policy no longer supportive
Emerging Markets
  • Chinese authorities are easing monetary and credit conditions and providing housing market support
  • Equity valuations are attractive relative to the US
  • COVID restrictions have been loosened
  • High likelihood of near-term COVID disruptions in China
  • Global trade volumes are slowing
  • Chinese housing concerns have impacted industrial activity
  • Geopolitical risks are elevated

Asset Allocation Committee Positioning

As of 31 December 2022

Portfolio Implementation

As of 31 December 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 2023 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.
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