June 2024
Global Asset Allocation Viewpoints
Welcome to our latest Asset Allocation Viewpoints - your monthly source for actionable insights on portfolio positioning from our Asset Allocation Committee and Multi-Asset team.
Market Perspective
- Global growth outlook remains positive against a backdrop of gradually easing inflationary pressures across most economies.
- While resilient, recent evidence suggests some cooling in U.S. growth. European growth stabilizing helped by services, with manufacturing still a laggard. Japanese growth remains stagnant, while Chinese growth shows signs of improvement supported by recent stimulus measures.
- U.S. Fed rate cuts look to be still in play later this year with recent signs of moderating growth and inflation. The European Central Bank appears likely to lead on cuts amongst major central banks. After hiking in March, Bank of Japan (BoJ) is still expected to take additional steps toward tightening.
- Key risks to global markets include a steeper decline in growth, stubborn inflation, central bank policy divergence, election calendar, geopolitical tensions, and trajectory of Chinese growth.
Portfolio Positioning
- We remain modestly overweight equities, supported by a still resilient economic backdrop, positive earnings trends, and reasonable valuations beyond heavily concentrated areas of the market.
- We maintain an overweight to cash relative to bonds. Cash provides liquidity and attractive yields with Fed rate cuts still not expected until later in the year.
- Within equities, we are balanced between U.S. and global ex-U.S. markets, with a preference toward areas with more attractive valuations and potential for cyclical tailwinds including value in the US and globally as well as global ex-U.S. small-cap stocks, where we recently moved to an overweight.
- Within fixed income, we continue to favor higher-yielding sectors including high yield, floating rate loans, and emerging markets bonds as fundamentals remain broadly supportive.
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Market Themes
Home Improvement
In its latest measures to stabilize the economy, Chinese policy makers took further steps targeted at improving sentiment within its challenged housing sector. These measures included reducing downpayment requirements, lowering the floor on mortgage rates, and providing low-cost funding to help state-owned enterprises buy unsold homes. Hopes are for these measures to restore some confidence in the housing market, which has continued to see price declines amid outsized supply. On a positive note, economic growth did surprise to the upside in the first quarter, expanding by 5.3%. However, much of the growth was driven by exports and infrastructure spending, while hopes for a rebound in consumption and business spending continue to be held back by housing market woes. While recent measures to expand their economy into higher value-add sectors, including electronic vehicles (EVs) and semiconductors, will help diversify their economy in the long-run, the property sector will likely need a much larger renovation before it turns around.
Hoping to Build Back Confidence in China’s Housing Market1
As of 30 April 2024
1 Source: Bloomberg Finance L.P. Chart represents year over year changes in commercial residential property prices, based on the average of the price change in each city in the National Bureau of Statistics 70 City Index.
Big Spenders
While the Fed’s battle with inflation has been the leading driver in the direction of yields, the move higher over recent weeks was attributed to weaker treasury auction demand as buyers became wary of even more supply ahead. With the U.S. election looming in the back half of the year, few are expecting either political party to significantly rein in spending or address U.S. debt, now above 120% of GDP. The unbridled spending has been flagged by the ratings agencies and is causing investors, particularly foreign investors, to demand higher yields to compensate for the risk of more supply. While some argue the big spending in Washington is growth supportive and nothing to worry about, its spillover effects on the private sector can crowd out demand and raise everyone’s cost of borrowing. So for those hoping for lower rates ahead as the Fed finally reins in inflation, it could be the big spenders in Washington that end up keeping rates higher-for-much-longer.
Spend Now, Pay Later?2
As of 1 October 2023
2 Source: St. Louis Fed. Most recent data available.
Regional Backdrop
Click each region below for more details
- Labor market has been resilient
- Strong corporate earnings driven by AI spending
- Wage growth is moderating to sustainable levels
Negatives
- Stock valuations have become challenging
- Inflation remains sticky
- Economic data has been surprising to the downside
- Political uncertainty is heightened
- Monetary policy expected to ease
- Commodity price strength could boost earnings
Negatives
- Economic growth is modest
- Consumer savings balances have faded
- Elevated interest rates remain a drag on spending
- Monetary policy expected to ease
- Inflation has been steadily declining
- Economic sentiment is improving
Negatives
- Economic growth remains weak
- Geopolitical uncertainty is heightened
- Earnings growth remains weak, with minimal tailwinds from innovative technologies
- Monetary policy expected to ease
- Inflation has been steadily declining
- Labor market has been resilient
Negatives
- Fiscal consolidation may need to be accelerated
- Tight labor markets could keep wage inflation stubbornly high
- Economic growth is improving sharply
- Corporate governance continues to gradually improve
- BoJ remains more accommodative
- Yen weakness is a tailwind for export businesses
Negatives
- Sentiment may have peaked
- BoJ may become more hawkish stance due to higher inflation prints
- JPY weakness creates volatility and uncertainty for domestically oriented businesses
- Fiscal stimulus is supporting the economy
- Commodity price strength could boost earnings
Negatives
- Reserve Bank of Australia remains hawkish
- Earnings expectations are weakening
- Consumer spending is showing early signs of weakness
- Macro data and sentiment are marginally improving
- Equity valuations are attractive relative to the U.S.
- Regulatory concerns are easing
Negatives
- Chinese property deleveraging continues to weigh on activity
- Chinese consumer and business confidence fragile
- Meaningful fiscal stimulus measures appear unlikely
Asset Allocation Positioning
These views are informed by a subjective assessment of the relative attractiveness of asset classes and subclasses over a 6- to 18-month horizon.
Asset Classes
Earnings continue to be driven by AI spend, but face elevated expectations and moderating growth. Potential for broader market participation if economic conditions remain favorable.
Yields remain attractive but volatility could persist due to global divergence in growth, inflation, and central bank expectations. Credit fundamentals remain supportive; however, spreads remain tight.
Cash provides attractive yields as the yield curve remains inverted and offers liquidity should market opportunities arise.
Equities
Regions
Earnings growth expectations dependent on continued AI momentum, as economic activity has yet to broaden. Technology and pharmaceutical innovation remain key differentiators. However, valuations may limit upside from here.
Valuations are attractive on a relative basis. European equity outlook improving with falling inflation, industrial indicators bottoming, and easing monetary policy. Chinese economic growth appears to have stabilized.
Valuations are attractive, but earnings delivery remains in question and monetary policy easing could provide further support. Chinese equities finding some footing; however, elsewhere in EM political outcomes not favored by markets have contributed to volatility.
Style & Market Capitalization
Continued economic resiliency and further broadening of equity market performance could be supportive for value. Cyclical strength and improving prospects for energy demand should be positive for value-oriented sectors.
Value stocks are cheap and could benefit from recession concerns fading. Growth stocks’ valuations are more expensive and they face headwinds from consumer weakness in China and Europe.
Small-caps offer attractive relative valuations but are more challenged by higher-for-longer interest rates. Profit margins and leverage are also becoming more of a concern, warranting a higher quality bias.
Small-caps offer very reasonable valuations and should benefit from monetary policy easing, cyclical tailwinds, and broadening global growth.
Inflation-Sensitive
Commodity-related equities offer an attractive hedge to stickier inflation. Oil prices could be set for structural increases on peaking productivity and some industrial metals could benefit from AI and decarbonization trends.
Bonds
Yields could be biased higher on stickier inflation and tempered Fed cut expectations. Fundamentals remain supportive, but spreads are tight.
Global central banks eyeing rate cuts as inflation and growth continue to slow, with the exception being Japan looking to tighten policy. Yields look attractive on a USD-hedged basis.
Longer term yields biased higher on increased supply, still resilient growth, and sticky inflationary backdrop.
Sector offers a hedge should inflation settle at current levels, or move higher, especially with continued upward pressure on inflation from housing and services.
Attractive absolute yield levels remain supportive, but spread compression is limited from here. Default rates likely to rise to historical long-term averages although much appears to be priced in.
Sector attractive as interest rates are biased higher for longer on less aggressive Fed cut expectations. Default rates are expected to rise, although only to historically average levels.
Despite tight spreads, sector offers pockets of attractive yields given favorable supply/demand dynamics. Higher rate environment and economic uncertainty highlight the importance of credit selection and underwriting.
Yields look modestly attractive. With central banks embarking on easing cycles and inflation continuing to moderate, EM bonds may benefit.
Central bank easing and lower inflation could be tailwinds, but a higher-for-longer Fed could sustain dollar strength.
*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.
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Portfolio Implementation
Equity
Tactical Allocation Weights
Fixed Income
Tactical Allocation Weights
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 2024 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
Any specific securities identified and described are for informational purposes only and do not represent recommendations.
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