Divergence In Global Economic Growth, Geopolitical Risks, Market Volatility Take Center Stage As T. Rowe Price Investment Professionals Look To 2015
At annual outlook press briefing investors cautioned to temper performance expectations, keep an eye on risk management
BALTIMORE, Nov. 19, 2014 /PRNewswire/ --
News
T. Rowe Price held its annual Global Market Outlook press briefing today for financial journalists. The company has been conducting an outlook briefing for more than 30 years.
T. Rowe Price's speakers advised investors to moderate their expectations for investment returns in the years ahead, despite the markets' impressive resilience during the past 12 months. The message echoed sentiments expressed at last year's briefing, when investors were told that risks in the financial markets were building and it was time to be careful.
A key theme for 2015 is that investors should see more divergence than usual among global economies, central bank policy responses, and market performance. Although the world is increasingly interconnected, world trade has been decreasing in the years since the global financial crisis. As countries have become more insular, domestic factors will be more likely to drive financial markets going forward.
T. Rowe Price believes that conditions are ripe for further stock gains in the U.S., although the upside is likely limited due to moderately high valuations and already high company profit margins. By contrast, emerging stock markets, which have underperformed developed markets since 2011, have more compelling valuations, and the structural growth evident in many frontier markets continues to be underpriced.
More information on the T. Rowe Price 2015 Global Market Outlook press briefing, including speaker biographies and presentations, can be found at www.troweprice.com/pressbriefing. Additional content from the briefing, including videos of the speakers, will be posted to this site in the coming days.
Investment and Economic Observations
In the years since the global financial crisis, slower growth has been pervasive among world economies. Real GDP growth among advanced economies has slipped from an annual average of 3.0% in the few years (2004-2007) preceding the crisis to 1.8% in 2014. Among emerging economies, growth has slipped from an annual average of 8.0% to 4.4% over the same time periods. Looking to 2015 and 2016, T. Rowe Price is expecting average growth of 2.4% and 5.1% for advanced and emerging economies, respectively. This is better than 2014 but somewhat below norm.
In the U.S., fiscal headwinds are easing, business capital expenditures are on the rise, and the labor market recovery is driving income and spending. Together, these signals are pointing to the possibility of the economy reclaiming its historic annual growth rate of approximately 3%. However, the Euro region is lagging badly, with unemployment and Eurozone bank assets trending unfavorably, leading to an outlook that is more uncertain and divergent from the U.S. than usual. Despite Europe's challenges, the region has six of the world's ten most competitive economies and boasts companies whose debt and equity offer opportunities for investors willing to look beyond gloomy headlines.
Driven by strong corporate earnings, U.S. stocks have made a remarkable recovery in recent years. Since bottoming in March 2009 in the wake of the global financial crisis, U.S. stocks are up 198%[1]. Europe and Japan have seen slower earnings and stock-price recoveries, and emerging markets have been less synchronized than usual.
In global fixed income markets, exceptionally loose monetary policy around the world has led to a feeling of relative certainty for a period of years. But with interest rates on the rise in some markets and higher rates on the horizon in other markets, including the U.S., investors can expect more uncertainty and volatility moving ahead. This is likely to result in a greater dispersion of returns among various markets, but it should also provide investors with more opportunity.
The high yield bond sector in the U.S. has enjoyed an impressive multi-year run. Though valuations are somewhat stretched as a result, a favorable credit environment remains given the prevailing low interest rates around the globe. In many situations, the U.S. high yield market is offering less compensation for risk relative to high yield markets outside of the U.S. In Europe, the high yield market has more than tripled in size over the last five years, which has created more liquidity, depth, and diversity for investors.
Quotes from Press Briefing Presenters
Bill Stromberg, Head of Equity:
"Coming out of the global financial crisis, economic healing has taken place at different paces in various markets around the world. Stock prices in the U.S. have soared while they have lagged in Europe, Japan, and some emerging markets. U.S. stocks can continue to advance, though likely at a more moderate pace, and the potential exists for positive earnings surprises in Europe and Japan. We expect more volatility in 2015 and investors will need to be selective. Fundamental equity research and individual stock selection will be more important than ever."
Arif Husain, Head of International Fixed Income:
"The U.S. and Europe seem to be on different paths at the moment, with the U.S. economy gaining steam and Europe trailing. As economic reports between the two regions continue to diverge, investors should expect yield spreads to keep widening and central bank responses to differ. Emerging markets still offer pockets of opportunity and relatively attractive valuations, especially in sovereign and corporate investment-grade debt and in certain areas of the high yield market."
Oliver Bell, Portfolio Manager, T. Rowe Price Africa & Middle East Fund and the Institutional Frontier Markets Equity Fund:
"The structural drivers for an extended period of strong economic growth across many frontier markets, such as Vietnam, Sri Lanka, Pakistan, and most of Africa, remain in place. As each year passes, these drivers – peace, democracy, better economic management, and booming investment – become more entrenched. Of course, geopolitical risks are still present and moving ahead there may be some headwinds brought on by rising U.S. interest rates and a stronger dollar. However, we are confident that frontier markets in the aggregate should perform relatively well."
Mark Vaselkiv, Portfolio Manager, T. Rowe Price High Yield Fund and Institutional High Yield Strategy:
"High yield bond investors increasingly need to think globally. U.S. credit markets are somewhat overvalued as a result of an influx of new investors and a limited supply of quality bond issuers. By contrast, international opportunities are expanding with the growth of European high yield and emerging markets corporate bonds alongside the leveraged loan asset class. Strong credit research can help investors profit from dislocations and volatility driven by economic and geopolitical uncertainties."
About T. Rowe Price
Founded in 1937, Baltimore-based T. Rowe Price Group, Inc. is a global investment management organization with $731.2 billion in assets under management as of September 30, 2014. The organization provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The company also offers sophisticated investment planning and guidance tools. T. Rowe Price's disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research. For more information, visit troweprice.com, Twitter (twitter.com/troweprice), YouTube (youtube.com/trowepricegroup), LinkedIn (linkedin.com/company/t.-rowe-price), or Facebook (fb.com/troweprice.com).
[1] Standard & Poor's 500 Index, March 9, 2009 – November 3, 2014
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SOURCE T. Rowe Price Group, Inc.
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