Global Asset Allocation: The View From Australia

Contributing Author

May 20, 2024

Featured

Global Asset Allocation: The View From Australia

Global Asset Allocation Viewpoints and Investment Environment by T. Rowe Price Australia Investment Committee, as at 30 April 2024.

MARKET PERSPECTIVE

Global growth outlook remains positive against a backdrop of gradually easing inflationary pressures across most economies.

U.S. growth continues to be resilient, buoyed by a strong consumer, while optimism around European growth is building. Japanese growth remains challenged, and in China, there are signs that policy support is helping stabilize the economy, although risks remain. Australian growth remains positive due to solid population growth and upcoming fiscal stimulus, despite some early signs of weakness from the consumer side.

U.S. Fed is still looking towards rate cuts this year, but sticky inflation and resiliency in the economy have tempered expectations. Meanwhile, the European Central Bank (ECB) appears closer to easing given progress with inflation. After hiking in March, the Bank of Japan (BoJ) continues to assess further hikes. Markets are now pricing a hike for the Reserve Bank of Australia.

Key risks to global markets include a retrenchment in growth, stubborn inflation, volatility surrounding central banks’ policy divergence, geopolitical tensions, and trajectory of Chinese growth.

MARKET THEMES

Green Shoots?

Economic growth in Europe is showing signs of life after several years of teetering near recessionary levels, with better-than-expected first quarter GDP growth, largely driven by a services-led revival. Muted foreign demand especially from China, fears around a natural gas shortage and decades-high inflation had all weighed on European sentiment in recent years. But the tide appears to be turning on the back of a milder-than-expected winter and falling inflation, increasing the odds for an upcoming rate cut by the ECB in June. This has given way to an uptick in consumer spending and provided a boost to Europe’s tourism and hospitality sectors—notably coming from countries like Spain, Portugal, and Greece. However, it’s Europe’s manufacturing powerhouse, Germany, that continues to struggle given its dependence on exports to China and consequences of having relied on Russian energy, with no quick fix on the horizon. But for now, positive sentiment on the heels of better-than-expected growth, lower inflation, and hopes for near-term rate cuts may draw investors’ attention, but questions remain whether these green shoots will lead to a broader and more sustainable recovery.

Also read: Time To Start Preparing For Rate Cuts

The Almighty Dollar

Despite multiple calls for the end of the U.S. dollar’s dominance over recent years, it remains near all-time highs and has strengthened against every major currency in the world so far this year. Its most recent push higher has stemmed from resilient growth in the U.S. sustained in part by elevated fiscal spending along with sticky inflation, causing a shift to less aggressive Fed rate cut expectations. Meanwhile, many other countries have seen a faster decline in inflation, which has put downward pressure on their currencies versus the dollar on expectations their central banks move sooner on rate cuts. The strong dollar has many countries seeing their currencies falling to multi-decade relative lows, with talk of intervention, like in the case of Japan struggling with a slumping Yen. While a weaker currency has aided many of these countries’ exporters, it comes with other consequences including capital competition versus higher yielding markets such as the U.S., import inflation and raising dollar-denominated borrowing costs for countries that are funding in U.S. dollars. With the Fed expected to move slower on rate cuts, U.S. growth remaining resilient, a packed election calendar and still unsettled geopolitical environment, it’s hard to see what breaks the buck, before it may break something else.

PORTFOLIO POSITIONING

We remain modestly overweight equities, supported by resilient economic growth, positive earnings trends, and areas with more reasonable valuations.
Within equities, we tilt the portfolio to markets more sensitive to the upturn in economic momentum, such as value oriented sectors and Japan.
Within fixed income, we continue to underweight duration as yields move higher on a repricing of future central bank policies. We remain overweight high yield and emerging markets 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.