Global Asset Allocation Viewpoints and Investment Environment by T. Rowe Price Australia Investment Committee, as at 31 October 2023.
MARKET PERSPECTIVE
- Global central banks’ emphasis moving towards growth stabilization with increasing evidence that both growth and inflation trending lower.
- European and UK economic growth nearing recession levels, putting central banks on hold, while the U.S. and Australia economies remain resilient, supported by a strong consumer. China seeks to stabilize weakening growth through increased policy support.
- While global central bank tightening has likely peaked, the U.S. Fed’s pledge for “higher for longer” rates has had worldwide impact on raising longer-term yields that could create vulnerabilities.
- Key risks to global markets include impacts of the sharp move higher in rates, a deeper than expected decline in growth, central bank missteps, reacceleration in inflation, trajectory of Chinese growth, and geopolitical tensions.
MARKET THEMES
Goldilocks
Earlier this year positive economic data was welcomed as it meant that the U.S. economy could possibly be skirting past an inevitable hard landing. Now similar good news is seemingly too hot for the markets, raising concerns that the Fed may keep their foot on the brakes for longer. Surprisingly strong third quarter growth of over 5%, a still tight labor market, and unrelenting U.S. consumer spending are all helping fuel the Fed’s “higher for longer” narrative. In reaction, bond yields have spiked to decade-high levels, tightening financial conditions and in a way helping advance the Fed’s cause. Since the end of July, equity markets have declined over 10%, largely driven by the sharp rise in yields and anticipated impacts should they stay at these levels for longer. For now, too hot data seems unwelcome, and too cold is likely to reignite fears of a hard landing. A good balance of declining inflation and not collapsing growth data ahead may prove just right for investors’ appetites.
Also read: How to Integrate Green Bonds in a Global Allocation
Collateral Damage
While the U.S. economy continues to show resilience in the face of higher interest rates, growth across many parts of the world is showing signs of weakness. Europe looks to have slipped into recession, the UK is not far behind and Chinese growth has disappointed. The emphasis on fighting inflation is steadily being replaced by the need to stabilize declining growth, at least outside the U.S. Unfortunately, for the rest-of-the-world, the U.S. Fed’s policy has far reaching impacts as seen by the recent spike in longer-term yields globally. With many regions seeing weakening growth, higher yields may not be a welcome sign as global central banks are starting to downshift interest rate policies. The move higher in yields has also sent the U.S. dollar even higher, proving especially painful for many emerging markets economies, their currencies and dollar-denominated bond markets. Should the rest of the world continue to slow while the Fed keeps rates elevated, more collateral damage may be instore for vulnerable economies needing to stabilize growth, defend currencies and compete for capital flows.
PORTFOLIO POSITIONING
- We closed our underweight to equities and are now neutral, taking advantage of recent declines amid the rise in yields. Declining inflation trend amid still stable growth supportive for end of Fed tightening cycle, while equity valuations beyond narrow leadership are attractive.
- As a hedge against inflation remaining above central bank targets, we hold a modest overweight to real assets-related equities such as REITs.
- Within fixed income, we remain modestly overweight cash relative to bonds. Cash has provided attractive yields and liquidity to take advantage of recent market dislocations.
- Within fixed income higher-yielding sectors, 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.
