2024 Global Market Outlook Webinar: Tectonic Shifts Create New Opportunities

Ritu Vohora: Hello, and thank you for joining us, for T. Rowe Price’s Global Market Outlook – Tectonic Shifts Create New Opportunities. I'm Ritu Vohora, an investment specialist covering global capital markets. My role is to provide clients with a broad perspective into the views of our multi-asset, equity, and fixed income investors at T. Rowe Price.

I'm delighted to be joined in the studio today by Justin Thomson, head of International Equity and Chief Investment Officer. Welcome, Justin. Also joining us Arif Husain, head of International Fixed Income and CIO. Welcome, Arif.

And joining us from Baltimore, Sebastien Page, head of Global Multi Asset and CIO. Sebastien is also the author of Beyond Diversification. Thank you all for joining us today.

It's been an extraordinary year since we were here last year when the outlook was bleak, and markets were bracing for the most anticipated recession. The pandemic continues to distort economic data and we have seen tectonic shifts in the global investment landscape. Investors have had to navigate conflicting macroeconomic signals and a market narrative that has gyrated almost every few weeks. However, many economies have demonstrated remarkable resilience in 2023, despite aggressive rate hikes and tightening liquidity. This is fueled hopes of a soft landing as we look forward to 2024, though uncertainties remain.

So, Sebastien, maybe I could start with you. When we sat here in our midyear market outlook, you said you were reluctant bear. Is that still your view today?

Sebastien Page: So, Ritu, I think there's an unwritten rule that says the less you like a nickname or moniker, the most likely it is that it will stick. I think I learned that in kindergarten, so I've had to embrace the reluctant bear expression.

Thank you, Ritu, for reminding our audience. I love it.

But in any case, I'm no longer a reluctant bear in the asset allocation committee. We recently bought stocks and we're now neutral on stocks versus bonds. We have some interesting positioning under the hood, but the word of the day Ritu for audience today that I want to leave with all of you is balance.

We started buying stocks at the bottom on October 27th and we were done by the following Monday's close. We managed very large portfolios, so even though we were closing a small 75 basis points underweight, we actually bought 3 billion worth of stocks at an average S&P level. Smidge above 4100. Now this looks like very timely execution. I want to remind everybody that our horizon is still 6 to 18 months for tactical asset allocation, but this is an example of how we allow for aggressive, timely execution in markets.

Ritu the triggers for us to close our underweight and for me to go from reluctant bear to neutral were the following, first stocks were down 10% from peak. Second, our indicator of sentiment and positioning was down one standard deviation, and you know we too we like to be contrarian. Third valuations were, are perhaps more reasonable than it looks, if you consider the high return on equities of the Magnificent Seven and the price earnings ratio on the S&P equal weight, which at the bottom at the end of October was at 15 1/2. Which you know is very close to the bottom of its 10-year range. Believe it or not. So, you know Ritu on CNBC, I have become a semiofficial reluctant bear. But I'm going to say now for this outlook right now and aligned with our asset allocation committee - I am confidently, aggressively, enthusiastically neutral.

Ritu Vohora: Well, thank you for Sebastien. There lots of adverbs for neutral. I'm not sure that will stick quite as much as reluctant bear.

But you know, Justin, maybe we can bring you into the conversation, you know, so Sebastien talked there about a neutral position now between stocks and bonds. And when we look at equity markets, you know where we were here a year ago, things looked pretty bleak, and we were all anticipating a Black Swan event. And I think we got lucky with maybe even a rarer golden swan in terms of generative AI, which has propelled the Magnificent Seven that Seb talked about. But I think it's also been a definitive driver of the equity rally as we look to 2024. What's your view of stocks?

Justin Thomson: Well, if we're giving ourselves nicknames, which we seem to be, and Sebastien was the reluctant bear, I'd say I was the careful contrarian. I mean, you talk about black Swans. I always find it amazing how frequently black Swans appear in markets, but there's the GFC. Quantitative easing. Trade tariffs COVID. Response to COVID. I think the collective noun for Swans is a wedge where we've had a wedge of a wedge of black Swans. The Golden Swan scenario that you've that you refer to, you know? If we look back. At this year for equity markets? At the beginning of the year, I think, I think most forecasters were forecasting equities down. In fact, we've had. At least on the face of it, we've had a. Strong year for equities. And I guess there's been 3 surprises here, one. Earnings have held up well, partly because developed market economies have held up well surprised too, but I guess it also speaks to the fact that equities are a are a call on real assets. So, they are something of an inflation hedge, but earnings have been much better than we feared when we were sitting here this time last year.

And the third surprising thing was the emergence of a strong market narrative, which was the AI narrative. And that's driven equity markets. In a surprising way, at least empirically surprising way, because the market has funneled into a limited number of stocks in the US, we're referring to them as the Magnificent Seven and to give you some statistics around that, the Magnificent Seven or up approximately 100%. The SPS 493 the rest of the SPS S&P 500 is up 4%, so the median stock therefore has done worse than cash. These are remarkable statistics. And it's driven largely by AI, which is considered to be at the moment an arms race, the arms race is manifesting in the war for silicon, the war for infrastructure. And that takes resources. So, the market has placed their bets at this stage on mega cap tech. It has meant that returns in markets are very concentrated, and I think, that in itself represents a risk.

Ritu Vohora: And I guess as we look forward to 2024 resilience of our earnings is going to be critical to make sure that they can sustain those level of earnings as well.

Justin Thomson: I think resilience of the Magnificent Seven is important. I think our view is that the Magnificent Seven themselves become less of a factor and there'll be more dispersion of returns within them. So, stock picking will be more important rather than the overall factor risk. In as much as we think the market broadens, so we could have a scenario where the headline indices in the US is down, but the medium stock is up, which is an atypical environment, but in a slightly shameless plug for active fund management, it should be a better environment. For active fund management.

Ritu Vohora: Great. And we can touch on some of those opportunities later.

Arif, I want to bring you into the conversation. Now Sebastien's neutral. Justin sounds a bit more optimistic on equity markets and we look at bond markets. You know bond yields have been on a roller coaster this year. I mean, the US 10-year Treasury yield reached 5% as well you know, are you buying into this soft-landing narrative or you know how are you sort of looking at the view?

Arif Husain: First of all, I'm not going to give myself a nickname. Let's move on from there. I'll allow others to do that for me. So, I think when we spoke last, I didn't believe in the soft landing and that is still the case. Ultimately what I look at is several 100 rate hikes basis points of rate hikes across the world, not just in the US, everywhere has been raising rates, quantitative tightening and effectively the end game is a hard landing. The question is when.

As you asked Justin, you know that we didn't have that Black Swan event and I think there was a reason for that. There was a lot of one-off effects. Whether it was nice weather in Europe or actually a lot of fiscal stimulus came out of the US which kept things going pretty nicely. And then we saw a big easing of financial conditions after the SVB banking crisis. So there there's a bunch of reasons to understand why that Golden Swan has dominated, but ultimately the long term is these rate rises quantitative tightening and I'm going to take a guess that most countries are pretty much done with fiscal.

Now I think that's subtle because we're heading into an election year and actually rather than soft landing what next year may even be a “no landing.” You know as I don't think many politicians are going to go to the polls threatening to cut spending. I don't think that's a good way to get voted. Everyone's going to want to spend something. We may have the same situation rolling over year over year, but eventually you know we know where the destination is. It's just plotting that journey.

Ritu Vohora: I think it's that long and variable lags are going to bite at some point. It's just a matter of when.

Arif Husain: Exactly.

Ritu Vohora: And so, Sebastien, maybe I can come back to, you know, given what you know, Justin's talked about and Arif and its concerns around that hard landing coming at some point. If you were to highlight the top three risks that investors should be worried about in 2024, what would they be?

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