Cash rate expectations and stretched valuations underpinned the firm’s underweight stance in its latest global allocation outlook.
T. Rowe Price has taken a balanced stance on risk assets overall, maintaining a modest overweight to equities with the exclusion of US and Australian stocks.
In its January Global Asset Allocation: The View from Australia report, the firm said that despite extended valuations, earnings trends and economic growth “remain favourable” in most regions, supported by fiscal and monetary policies.
However, inflation concerns underpinned the firm’s decision to remain underweight Australian equities.
“The hawkish RBA [Reserve Bank of Australia] and stretched valuations against weak earnings growth pose challenges to Australian equities in 2026,” the firm stated.
While markets are pricing in two cash rate rises this year, T. Rowe Price said firm domestic data, including household spending, has reinforced its view that the RBA will remain on hold in the first half.
In November 2025, household spending rose 1 per cent month-on-month and 6.3 per cent compared with the previous year, according to Australian Bureau of Statistics (ABS) data.
Writing in a note this week, HSBC chief economist, Paul Bloxham said the bank’s central case is also for the RBA to hold until Q3 2026, adding that a February hike would be “painful”.
“A rate rise in February would not be because growth is in a strong upswing – which is typically the less painful explanation.
“Instead, it would be because the economy is prematurely running up against its capacity constraints due to low productivity and strong public spending,” Bloxham said.
He added that it would also raise questions as to whether the RBA had cut rates a bit too far in 2025. The cash rate, currently at 3.6 per cent, began 2025 at 4.35 per cent.
AMP chief economist, Shane Oliver said earlier this week that he expects rates will stay on hold all year.
Meanwhile, T. Rowe Price was more positive on European and Japanese markets, citing fiscal stimulus, lower inflation and reduced trade risks as key supports, and is overweight equities in both those regions.
On the other hand, the firm said it was steering clear of REITs – especially in the US – as policy uncertainty and yield pressure persist and data centres underperform elevated expectations.
The firm maintained its underweight cash position.
In bonds, T. Rowe Price also held a modest overall overweight to Australian bonds. Contrary to equities, it kept a modest overweight long/underweight short stance on domestic bonds, while remaining underweight in overseas bonds amid inflation and funding requirements associated with the US fiscal stimulus.
“We expect a flattening of the Australian government bond curve, with long-end yields declining as markets price a slowdown in growth while the front end remains largely unchanged,” it stated.
State Street’s latest institutional risk indicator similarly showed a preference for sovereign bonds, with Australian government debt seeing its strongest inflows in five years even as investors continued moving away from fixed income in December.
Meanwhile, given the ongoing risk of sticky inflation, T. Rowe Price said it also favoured inflation-linked bonds and also overweighted emerging market local currency debt.
