December 2021 / GLOBAL MARKET OUTLOOK
Playbook for a Shifting Economic Landscape
Looking for Growth in Challenging Markets
Key Insights
- The global economic recovery appears on track, but policymakers may be challenged to restrain inflation without stifling growth.
- Equity valuations are vulnerable to rising interest rates. Slower U.S. earnings growth could favor less expensive, more cyclical ex-U.S. markets.
- Risk of central bank missteps could keep bond markets volatile in 2022. With U.S. credit spreads tight, investors may want to cast wider global nets.
- Investment in global supply chains, public infrastructure, and renewable energy development could benefit capital goods and related industries.
Looking for Growth in Challenging Markets
After back‑to‑back years of strong performance across most equity and credit sectors, global markets face more uncertain prospects in 2022, according to T. Rowe Price investment leaders. Investors will need to use greater selectivity to identify potential opportunities, they say.
Higher inflation, a shift toward monetary tightening, and new coronavirus variants all pose potential challenges for economic growth and earnings—at a time when valuations appear elevated across many asset categories.
On the positive side, household wealth gains, pent‑up consumer demand, and a potential boom in capital expenditures could sustain growth even as monetary policy turns less supportive.
“Over the next year, I think the bottom line is that we will face slowing growth, but still very high growth,” predicts Sébastien Page, head of Global Multi‑Asset.
But strong growth and rising wages also could put further upward pressure on U.S. commodity and consumer prices, which accelerated sharply in the second half of 2021.
Mark Vaselkiv, CIO, Fixed Income, worries that the U.S. Federal Reserve may have fallen behind in the fight against inflation. As of mid‑November 2021, interest rate futures markets indicated the Fed wasn’t expected to begin raising rates until mid‑2022.
“The Fed may already be behind the curve,” Vaselkiv warns. “That could be the biggest risk for 2022.”
Economic growth should continue to support corporate earnings and credit quality in 2022. But the earnings momentum seen in 2021 is unlikely to be repeated, suggests Justin Thomson, head of International Equity and CIO. “It seems highly unlikely that positive [earnings] revisions will be of the same level of magnitude as we’ve been seeing.”
This could make the interest rate outlook an even more critical factor for equity performance. “If U.S. rate expectations get brought forward, I think equity markets will take their cue from that,” Thomson says.
The Global Recovery Has Slowed but Still Appears on Track
(Fig. 1) U.S. and global Purchasing Managers’ Indexes (PMI) for manufacturing
As of November 30, 2021. Sources: Institute for Supply Management and J.P. Morgan/IHS Markit/Haver Analytics (see Additional Disclosures).
Explore our four themes:
Growth Delayed, Not Derailed
The global economic recovery appears on track, but policymakers may be challenged to restrain inflation without stifling growth.
Focus on Fundamentals
Equity valuations are vulnerable to rising interest rates. Slower U.S. earnings growth could favor less expensive, more cyclical ex‑U.S. markets.
Navigating Policy Shifts
Risk of central bank missteps could keep bond markets volatile in 2022. With U.S. credit spreads tight, investors may want to cast wider global nets.
Path to Global Sustainability
Investment in global supply chains, public infrastructure, and renewable energy development could benefit capital goods and related industries.
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Sébastien Page is head of Global Multi-Asset and chief investment officer. He is a member of the Asset Allocation Committee, which is responsible for tactical investment decisions across asset allocation portfolios. Sébastien also is a member of the Management Committee of T. Rowe Price Group, Inc.
Justin Thomson is the head of International Equity. Justin is a member of the Management Committee and the chairman of the International Equity Steering Committee. He is a member of the Asset Allocation and ESG Committees. He also is the chief investment officer for International Equities. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price International Ltd.
Mark Vaselkiv is the chief investment officer of the Fixed Income Division. He is a member of the Asset Allocation Committee.
