In its latest Global Asset Allocation: The View from Australia report, the fund manager acknowledged that while key risks such as elevated equity valuations, sticky inflation and geopolitical uncertainty persist, financial markets have rallied.
“One would think the prevailing narrative of ongoing trade disputes, intensifying geopolitical tensions, ballooning fiscal deficits, and rising interest rates would cast a shadow over risk assets. That hasn’t been the case as markets are now trending near record highs and have not looked back since the post Liberation Day trough,” T. Rowe’s Australian investment committee wrote.
It added that over the past month, investors appear to have brushed off risks, instead focusing on resilient earnings, easing AI concerns, steady inflation, rising fiscal spending and a measured trade policy approach.
But despite lifting its overall risk stance, T. Rowe Price said it maintains an underweight position in equities while continuing to favour opportunities outside of the US on more compelling valuations as well as improving sentiment.
“While more moderate tariff expectations have reduced recession probabilities, we remain cautious on equities given extended valuations and potential for slowing economic and earnings growth,” the fund manager said.
The firm did, however, modestly reduce its underweight to growth equities, reflecting stronger-than-expected earnings forecasts from AI-related sectors.
At the same time, T. Rowe Price confirmed it remains overweight fixed income but has rebalanced from Australian bonds to credit sectors, citing “too aggressive” rate cuts being priced in for the Reserve Bank of Australia.
While maintaining an underweight stance on global bonds, it has upgraded high-yield credit to overweight, citing its income advantage in a potentially sideways market, “as fundamentals remain broadly supportive and default risk remains low even in a slower economic environment”.
Last month, T. Rowe Price announced it had reduced its cash weighting down from a neutral to underweight in order to “add the proceeds to stocks”. At the time, the fund manager said the RBA’s recent easing bias is “a headwind for cash returns”.
In wrapping up its July outlook, the fund manager said that while markets have shrugged off risks like trade disputes and fiscal deficits, underlying vulnerabilities remain unresolved and warrant caution.
“Equity market valuations are back to reflecting a very rosy outlook, despite very few of the downside risks having gone away, warranting caution should things disappoint.”
