T. Rowe Price has predicted that a difficult investment environment is likely to persist throughout the remainder of the year due to the ongoing war in Ukraine, COVID-19 restrictions in China and monetary tightening by central banks.
In its global mid-year outlook, T. Rowe Price suggested that this new era for investors would be characterised by less liquidity, higher inflation and higher interest rates.
According to the firm, continued earnings gains would be required to support positive equity returns amid rising rates while higher wage and input costs could eat into profit margins.
Inflation also raises the risk that the US Federal Reserve could hike rates too aggressively, T. Rowe Price warned, which may increase the cost of capital and bring on a recession.
“The inflationary ‘shock on shock’ has put more pressure on the major central banks to tighten monetary policy, while making it more difficult for them to tame inflation without choking off economic growth,” head of multi-asset solutions, APAC, Thomas Poullaouec.
“Now, with growth concerns rising, the focus is shifting to the “E” side of the price-to-earnings ratio. This could be the next shoe to drop in a challenging market.”
The firm highlighted that there is plenty of potential pent-up supply in the global economy that could help bring down inflation if supply chain bottlenecks are resolved, but noted that the question is whether fixing supply chains would help to control inflation.
During this challenging period, T. Rowe Price indicated that opportunities may emerge for those investors with the necessary skills and research capabilities to seek them out.
In particular, the firm pointed to China as offering potentially attractive valuations following a drop of nearly 50 per cent for the MSCI China Index from its peak in early 2021.
The portfolio manager of T. Rowe Price’s emerging markets discovery equity strategy, Ernest Yeung, predicted that China’s regulatory climate would continue to ease in the lead up to the Chinese Communist Party’s 20th Party Congress later this year.
He said that regulations in the country had a tendency to mean-revert with policy makers needing to balance both sides of the equation but added that Chinese equities are influenced by global factors as much as they are by local ones.
“In a world where many central banks are withdrawing liquidity to fight inflation, and governments in many developed countries are running deep fiscal deficits, China at least has scope to focus policy on supporting growth,” said Mr Yeung.
“Within global emerging markets including China, uptake of previously muted capital expenditure investment and green energy transition will drive a corporate spending cycle in sectors such as capital goods, banks, auto parts, natural gas, and materials.”
Elsewhere, T. Rowe Price said that, faced with slowing economic growth, US earnings would likely decelerate during the second half of the year.
