Global markets are in the midst of a transition to a new regime characterised by higher inflation and interest rates and slower economic growth, according to T. Rowe Price.
At its 41st annual global market outlook press briefing this week, the US$1.31 trillion asset manager said that the current “state of purgatory” in the global market environment calls for a prudent asset allocation approach by investors around the world.
“The global market environment is now in a state of purgatory, with continued uncertainty about both inflation and recession risks as the Fed considers its next move,” said Tim Murray, capital markets strategist in the multi‑asset division at T. Rowe Price.
“Stock/bond correlations are constantly shifting. Investors need to hedge their bets accordingly, taking advantage of attractive yields while choosing their stock, bond, and real asset allocations wisely.”
Reflecting these views, T. Rowe Price explained that its multi-asset portfolios are currently positioned around four key themes:
- Overweighting cash for liquidity and flexibility amid recession uncertainty.
- Seeking attractive yields through overweighting high yield, floating rate, and emerging market bonds.
- Mitigating inflation risks by overweighting real assets.
- Capitalising on selective opportunities in small-cap stocks with stabilising earnings estimates and attractive valuations.
“The old, pre-pandemic regime – characterised by efficient global trade, cheap abundant energy, and excess labour – was supported by low inflation and low interest rates,” he said.
“Fast-forward to today and we see a new regime unfolding, characterised by deglobalisation, peaking energy productivity, and tight labour, likely to result in higher-for-longer inflation and interest rates.”
In this new regime, the global asset manager asserted that equities are still the best place to be over the long term. However, it also warned that strategies that have worked in the past 10 years are unlikely to work over the next 10 years.
“A sensible investing approach to generating excess returns in the new regime is to balance growth and value style factor tilts, to invest in durable growth themes, to balance recession and macro risk, and to find companies with a positive catalyst for change,” said Mr Bates.
“In an uncertain world, areas of investment opportunity include artificial intelligence, such as the semiconductor ecosystem and AI infrastructure, health care innovation, such as obesity drugs and bioprocessing, and residential and commercial construction.”
Turning to fixed income, Steve Boothe, portfolio manager and head of global investment-grade debt in T. Rowe Price’s fixed income division, assessed that markets are at a “fragile equilibrium”.
“High-quality yields are attractive, but economic growth will eventually succumb to the Fed’s hiking cycle, so a mild recession is still possible. The open question is when, and to what degree,” he said.
While urging for a cautious approach in fixed income and drawing attention to the complicated environment, T. Rowe Price said that it is still a good time to be a bond investor.
“The historic sell-off in bonds in 2022 has created opportunities across various types of fixed income assets,” the firm said.
“Short duration and intermediate duration high-quality bonds offer attractive yields, providing opportunities for investors looking for income and potential for price appreciation.”
T. Rowe Price is also of the view that interest rates in the US have now peaked, with attention now shifting to how long they remain at the current level.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.