BALTIMORE, Nov. 17, 2016 /PRNewswire/ --
Global equity market sentiment has become increasingly divided as the bull market has matured. In the U.S., S&P 500 earnings should rebound in 2017 and 2018, reflecting a sharp improvement in energy prices, but stock selection will be increasingly important. In fixed income markets, low but discernible policy tightening in the U.S. and a firm anchoring of Japanese and core European bond yields suggests significant opportunities to exploit the move in spreads between markets. Sovereign macroeconomic fundamentals in emerging markets have gradually improved thanks to significant political reforms in key markets, tighter fiscal budgets, healthy current account balances, and strengthening growth prospects.
These and several other observations were made today at T. Rowe Price's annual Global Market Outlook press briefing, held in New York City. Speakers at the press briefing included Alan Levenson, chief U.S. economist; Larry Puglia, portfolio manager, Blue Chip Growth Fund and U.S. Large-Cap Core Growth Equity Strategy; Chris Alderson, head of International Equity; Quentin Fitzsimmons, co-portfolio manager, Global Aggregate Bond Strategy; and Samy Muaddi, portfolio manager, Emerging Markets Corporate Bond Strategy. In addition, Sebastien Page, Co-Head of Asset Allocation, provided an asset allocation outlook for 2017 in a breakfast session before the main briefing.
Brian Rogers, who recently announced his plan to retire as T. Rowe Price chief investment officer in March 2017, made a special appearance at the event to share lessons learned from a career in investing.
KEY OUTLOOK OBSERVATIONS
Global Economic Outlook
- Interest rate normalization by the Federal Reserve Board will continue at a gradual pace, and further progress toward "full employment," reinforced by the November 4th payroll numbers, is keeping the Fed on course for a December rate hike.
- Deleveraging has taken divergent paths within developed markets, as the U.S. and the U.K. trend lower, and the rest of the developed markets, excluding Japan, trending sideways or higher. By contrast, China and several other emerging markets economies have witnessed a post-financial crisis debt surge, with China's debt currently representing more than 200% of gross domestic product (GDP).
- Developed market monetary policy is testing its limits, with policy rates broadly at or close to zero.
- Developed market inflation remains broadly below central bank targets. Emerging markets inflation will follow developed markets lower as currencies stabilize.
- Equity market sentiment has become increasingly divided as the bull market has matured. This is an opportunity for the well-informed stock picker but implies rising market risks.
- Political uncertainty and popular protest have become mainstream as economic inequality is called into question. Fiscal stimulus is one potential outcome of these trends.
- Reasonable valuations, modest global profit growth, and cash- rich balance sheets should provide support to global equities, but it is important to temper return expectations.
- Emerging markets equity fundamentals are as dispersed as ever and selectivity is critical. Emerging markets-listed stocks delivering long-term growth should regain and retain a premium in a lower growth world.
- Rising interest rates can be accompanied by rising stock prices, especially when yields are less than 5%.
- Defensive, low-volatility sectors (utilities, telecom and consumer staples) have outperformed in 2016, but this trend may be changing.
- The Russell 1000 Growth, Russell Mid-Cap Growth, and Russell 2000 Value Indexes appear to have the most attractive valuations. Information technology and health care are the industry sectors with the most attractive valuations.
- S&P 500 earnings should rebound in 2017 and 2018, reflecting a sharp improvement in energy prices. However, some caution is warranted. Dividend yield is near an all-time high relative to the 10-year Treasury yield.
- Earnings growth is expected to remain in negative territory for the remainder of 2016, but a strong rebound is expected for 2017.
Global Fixed Income
- The interplay between slow but discernible policy tightening in the U.S. and a firm anchoring of Japanese and core European bond yields suggest significant opportunities to exploit the move in spreads between international markets as well as to exploit the variations in the shapes of yield curves.
- Global fixed income investors will continue to be rewarded for blending different country economic cycles together, especially in certain sovereign bond opportunities that are not traditionally part of global fixed income sovereign benchmarks.
- Credit markets remain supported by central bank balance sheet expansion and purchase programs as well as the abeyance of the energy- market scare. If volatility also remains suppressed in this environment, security selection can be fruitful.
Emerging Markets Fixed Income
- Sovereign macroeconomic fundamentals in emerging markets have gradually improved thanks to significant political reforms in key markets, tighter fiscal budgets, healthy current account balances, and strengthening growth prospects, arguing for long-term support as investors gradually address their underinvestment to the asset class.
- From a fiscal standpoint, emerging markets are less vulnerable today with public debt-to-GDP forecasts to be significantly less than those of the G7 economies.
- Emerging markets monetary policies and inflation expectations are increasingly unsynchronized with countries like Russia, Brazil, and India set to cut interest rates, while others like South Africa and Colombia are likely to increase them.
- New political leadership in markets such as Brazil, Argentina, and Indonesia is helping to drive positive market changes in those countries.
- China's economic adjustment and significant debt load is a key global risk to monitor. We expect growth to slow toward a more sustainable long-term trend, but volatility will continue as the effectiveness of government stimulus wanes.
Alan Levenson, chief U.S. economist
"Economic growth has improved in the second half of 2016 as the impact of the commodity price plunge fades. The U.S. expansion has room to run, and the near-term risk of recession is low. We expect a slight improvement in the global economic environment in 2017, helped by the growth rebound in the U.S., Canada, Brazil, and Russia, but deleveraging and restructuring headwinds persist."
Chris Alderson, head of International Equity
"As the bull market ages, top-down macroeconomic and political news – including the outlook for China, concerns over Europe, and volatility in energy and commodity prices – is dominating the global equity markets like never before. For patient, long-term investors, such uncertainty typically creates buying opportunities. We remain constructive on global equities, but market returns are likely to be more modest. Stock selection, in both developed global equity and emerging markets, will become even more crucial in generating positive returns."
Larry Puglia, portfolio manager, U.S. Large Cap Growth Equity Strategy
"S&P 500 earnings should rebound in 2017 and 2018, reflecting a sharp improvement in energy; however, analyst projections have sometimes been optimistic, so some caution is warranted. We do not expect gradually rising interest rates over the next 12-18 months to be a stumbling block for equities. In the U.S. equity markets, defensive low-volatility sectors like utilities, telecom, and staples have outperformed, but this trend may be changing as we enter 2017. Information technology and health care are the industry sectors with the most attractive valuations."
Quentin Fitzsimmons, co-portfolio manager, Global Aggregate Bond Strategy
Historically low yields continue to be evident in many international fixed income markets, pointing to divergence away from the U.S. where policy rates are being very gradually increased. Around the world, political patience with accommodative monetary policy is wearing thin as economic growth remains low. Investors are questioning the balance between monetary and fiscal policy and how a greater reliance on the latter may impact fixed income opportunities. At the same time, the rebound in oil prices is causing subdued inflation rates to change and challenge fixed income valuations."
Samy Muaddi, portfolio manager, Emerging Markets Corporate Bond Strategy
"Building on a very strong year to date, both international and domestic emerging markets investors are generally bullish on the asset class going into 2017. After several years of relatively low growth, emerging markets have started to outpace developed markets by a large margin, aided by economic recoveries in Brazil and Russia, rebounds in several smaller countries, and improving sovereign macroeconomic fundamentals. U.S. political risk, Chinese growth, and the direction of the dollar remain risks. Investors increasingly recognize that in an ultra low-yield environment, adding exposure to emerging markets corporate bonds can help further diversify fixed income allocations and increase portfolio yield."
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