Global Asset Allocation Viewpoints and Investment Environment by T. Rowe Price Australia Investment Committee, as at 29 February 2024.
MARKET PERSPECTIVE
- Firming in global growth expectations, with recent data tilted more positively, while inflation continues to decelerate across most regions.
- U.S. growth remains most resilient amongst developed economies while weak European growth potentially bottoming. Emerging markets growth outlook improving, with hopes for stabilization in China driven by policy support. Australian growth remains positive due to solid population growth and upcoming fiscal stimulus.
- While progress on inflation gives support for the U.S. Fed to pivot towards cuts, resiliency in the economy could delay the start. European Central Bank moving closer to easing amid fragile growth and as inflation has moved past its peak. Bank of Japan cautiously eyes exiting negative rate policy in the first half of this year. The Reserve Bank of Australia should be a laggard in the easing cycle.
- Key risks to global markets include impacts of geopolitical tensions, central banks’ policy divergence, a retrenchment in growth, resurgence in inflation, and trajectory of Chinese growth and policy.
MARKET THEMES
Getting Back Together
Heading into 2024, the consensus view was the U.S. Fed was going to be the leader in cutting interest rates among developed market central banks, given its progress on inflation and higher current rates, while the ECB was seen as a laggard given stickier inflation and despite weaker growth. Fast forward to today, U.S. growth has surprised to the upside and the pace of disinflation has slowed, and the labor market has remained resilient, pushing out rate cut expectations. Conversely, a quickening in disinflation, now below the U.S., and fragile growth in the Eurozone, has pulled forward expectations of an ECB rate cut. Although, the ECB appears to also be taking a patient approach, cautiously monitoring wage growth and upcoming labor negotiations to assure that inflation pressures are abating. Ironically the diverging dynamics between the two appears to be bringing the Fed and ECB back together again at least from a timing standpoint, with markets now pricing in rate cuts to start in June for both. And while more synchronized moves by the central banks could help mitigate volatility, there remains a lot of uncertainty between now and June, that could push them back apart.
Also read: Five Takeaways From US Soft Landings
No Bull!
Within fixed income markets, the bull steepening of the yield curve has been a consensus trade among bond managers that has proven elusive thus far this year. With everyone betting that the Fed would soon be embarking on cutting rates, sending short-term yields falling faster than longer-term yields–a positive for short-term bond prices–as the curve re-steepened. The yield curve has now been inverted for a record number of months, typically a harbinger of an impending recession. The resilience of the U.S. economy and still gradual progress with disinflation is increasing the odds that the economy skirts a recession this time around. While welcomed news on the economic front, it has given the Fed breathing room to stick with the “higher for longer” plan to ensure inflation is indeed under control, and an unwelcome development for those betting short rates were coming down soon. Those hopes also extended to equity investors, bullishly expecting falling short-term yields would entice the over US$6 trillion pile of cash parked in money market funds back into risk assets. While the bet on the bull steepening has proven elusive thus far, we do expect it–albeit later and more gradually playing out.
PORTFOLIO POSITIONING
- We shifted to a modest overweight position in equities, funded from cash and bonds, supported by a firming growth and disinflation backdrop, positive earnings trends, and reasonable valuations outside of large-cap growth.
- We continued to add to large-cap value across global developed markets as we think a firming cyclical environment, where both growth and inflation stabilize from here, could favor value stocks.
- Within fixed income, we remain overweight high yield and emerging market bonds on still attractive absolute yield levels and reasonably supportive fundamentals.
Note: T. Rowe Price’s Australia Investment Committee comprises local and global investment professionals who apply views from the firm’s Global Asset Allocation Committee to make informed asset allocation views from an Australian investor perspective. The Committee is led by Thomas Poullaouec, Head of Multi-Asset Solutions APAC, based in Singapore.
