BALTIMORE, Nov. 19, 2019
/PRNewswire/ --
NEWS
T. Rowe Price held its annual
Global Market Outlook press briefing today in New York City, during which several of the
firm's experts reflected on key market drivers in 2019 and shared
their expectations for various asset classes in 2020. Speakers
included Alan Levenson, chief U.S.
economist; John Linehan, portfolio
manager and chief investment officer, Equity; Justin Thomson, portfolio manager and chief
investment officer, Equity; Mark
Vaselkiv, portfolio manager and chief investment officer,
Fixed Income; and David Giroux,
portfolio manager, chief investment officer, Equity and
Multi-Asset, and head of Investment Strategy.
KEY OUTLOOK OBSERVATIONS
Global Economy
- Although growth has slowed, the U.S. economy is in a late-stage
expansion, a scenario that can potentially last for a long
time.
- Globally, a near-term economic pickup is on the horizon as
global trade concerns ease and manufacturing economies
stabilize.
- The U.S. and China, two of the
world's dominant economies, are expected to slow further even if a
trade truce holds.
- Inflation is broadly low around the world relative to central
bank targets, though pockets of wage pressure are emerging.
- For 2020, the upside for global growth is limited, with risks
skewed to the downside.
U.S. Equity
- The slowing economic environment and concerns around the
ongoing China tariff war this year
led to high demand for safety. Investors were therefore attracted
to lower-beta companies with high valuations for much of the year.
However, that trend began to reverse in early September this year,
with investors rotating back to high-beta, more cyclically oriented
stocks amid easing monetary policy and optimism for a new trade
agreement between the world's largest economies.
- Despite the market reaching new highs, investors are grappling
with elevated risks. Geopolitical uncertainty has increased, and
not only because of the tariff war. Brexit, discord in the
Middle East, unrest in
Hong Kong, and the impending U.S.
presidential election are among many factors contributing to
elevated geopolitical concerns for the market to digest.
- While the S&P 500 gained 449% from its trough in
March 2009 through September 30, 2019, there is little sign that
company valuations have become extended. With some exceptions, such
as defensive parts of the market, valuations are roughly in line
with historical norms around the world.
- Widespread innovation and automation have created winners and
losers in many industries, including health care, media, energy,
and the internet, among others. We believe this dynamic will
persist.
- Corporate fundamentals are slowing while the range of potential
outcomes is wider, creating the likelihood for muted returns in
2020 with more volatility.
International Equity
- International equity markets have serially lagged U.S. markets
over the last 10 years. This was the result of a combination of
structural factors, currency (U.S. dollar strength), widening
valuation disparities, and cyclical factors.
- This year has seen a continuation of underperformance as global
economies have slowed and international earnings have been
disproportionately affected by the U.S.-China trade dispute.
- Considering markets are 18 months into a capital expenditure
recession, are eight months into an inventory correction, and have
been facing political headwinds from the U.S.-China trade war and Brexit, there is reason to
believe that growth and inflation expectations have now bottomed.
Given these circumstances and undervalued currencies, it's our view
that the cyclical conditions for international equities to
outperform are present.
- Structural merits for international markets, both developed and
emerging, include rising innovation, better corporate governance
models, better demographics (emerging markets), and the potential
for valuation to catch up.
Global Fixed Income
- The year 2019 has been a strong one for fixed income, with
healthy bond returns across the quality spectrum, especially in
investment-grade corporates given the decline in rates this
year.
- Around the world, central banks have generally renewed
accommodative policies, extending the current cycle with cautious
optimism about reflation.
- The low-/negative-yield environment strengthens the case for
higher-income areas of the global market, particularly as high
yield has migrated up in its quality composition.
- High yield and emerging markets debt have generated strong
risk-adjusted returns over the last 10 years, and core bonds, such
as U.S. investment grade debt, have posted annual losses in only
three of the last 40+ years, justifying a permanent fixed income
allocation even if 2020 gains are not as strong as this year.
- Key market risks include trade wars, political uncertainty,
yield curve inversion, a sharper-than-expected global slowdown,
earnings disappointments, and deteriorating business confidence and
spending.
Special Topic: Utilities—The Most Underappreciated
Sector
- As we head into 2020, utilities appears to offer the best
potential for risk-adjusted returns of any sector over the long
run. The best entry point would have been last year, but we believe
the long-term opportunity is still very attractive.
- From 1986 to 1998, the S&P 500 earnings per share grew 159%
while utilities earnings did not grow. This was due to poor
regulatory structures, higher inflation and rising natural gas
prices, cost overruns on large projects, and the constant battle
between utilities wanting to grow their rate base and regulators
wanting to limit the impact on customer bills.
- Lower natural gas prices, the conversion from coal to gas
generation, and lower-cost renewables have enabled utilities to
grow their rate bases and profits without driving up costs for
customers.
- Earnings growth rates have converged as S&P 500 growth has
slowed and utilities growth has accelerated. With the higher
dividend yields on utilities versus the S&P 500, the total
return profiles of the two are now similar. This gives utilities
investors the opportunity to pursue S&P 500-type of returns
without the economic, foreign exchange, and secular risk of the
index and with approximately only one-quarter of the index's
volatility.
- Potential concerns about this thesis: a fracking ban, which
would raise natural gas prices and put pressure on customer bills;
poor regulation; a significant increase in inflation or interest
rates; and a reduction in allowed returns on equity.
Please see link here for more information from the T.
Rowe Price 2020 Global Market
Outlook press briefing, including speaker biographies and
speaker presentations.
QUOTES
Alan Levenson, chief U.S.
economist:
"I anticipate the fiscal policy impulse next year broadly to be
neutral, though the potential for further interest rate cuts varies
across global economies. Inflation is generally and stubbornly low,
which sustains a bias toward monetary accommodation. Europe is seeing cyclical headwinds to core
demand, while the U.S. economy should slow as 2020 progresses. The
slowing economy in China is here
to stay, even without a trade war, as urbanization slows. We expect
stimulus to China to be restrained
to contain the growth of debt in the country."
John Linehan, portfolio
manager and chief investment officer, Equity:
"The current bull market is the longest, but not the strongest, in
modern history. Bull markets typically don't die of old age, but
rather from a combination of factors including an economic
downturn, Federal Reserve policy errors, regulatory and political
uncertainty, and valuation excess. Elevated risks are present for
2020, and there is a wide range of potential outcomes. But in
aggregate, we expect to see positive returns, with opportunities in
nondefensive companies with high dividend yields as well as
attractively priced platform companies."
Justin Thomson, portfolio
manager and chief investment officer, Equity:
"I anticipate that the cyclical conditions are right for
international equities to outperform. A series of factors have
contributed to the lagging of international equity over the last 10
years, but we may be on the verge of a shift. The burden of
political headwinds from the U.S., the China trade war, and Brexit have been more
heavily felt across international markets. The tide may be turning
as these could give way to the tailwinds of rising innovation in
developed and emerging markets, better corporate governance models,
and better demographics in emerging markets. There is also the
potential for valuation to catch up in international equities."
Mark Vaselkiv, portfolio
manager and chief investment officer, Fixed Income:
"While fixed income returns may not be as strong in 2020 as we have
seen in 2019, the case remains for core bonds being an important
investment within your asset allocation mix. Low defaults and
extended maturities bode well for credit, but markets are
unforgiving for fragile businesses, including the energy companies
that are so much a part of the high yield bond market. Duration is
a double-edged sword. Even though we're not expecting to see rates
go meaningfully higher, even slightly higher rates would negatively
impact bond performance."
David Giroux, portfolio
manager, chief investment officer, Equity and Multi-Asset, and head
of Investment Strategy:
"The conventional wisdom about utilities—that companies' fortunes
are tied to the direction of interest rates and not earnings
growth—is outdated. Industry dynamics are changing rapidly for
multiple reasons, and earnings are growing at a faster rate than
before. In our view, this is the only defensive sector without the
risk of secular disruption. Utilities' strong investment in
renewables creates a flywheel that can benefit everyone. Companies
get faster growth and improved regulatory relations and the public
and politicians get more clean energy without negatively impacting
customer bills."
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