T.Rowe Price remains underweight to equities in favour of FI

T.Rowe Price has maintained a cautious stance with an underweight to equities in favour of fixed income assets as global macro backdrop remained uneven with an expected slowing growth in the second half of the year.

In its outlook on global asset allocation and investment environment the manager said that a slowing economy and weaker earnings were expected to weigh on equities, while persistent inflation could keep government bonds vulnerable to further central bank tightening.

At the same time, T.Rowe Price stressed that while Europe entered a mild recession with still elevated inflation levels and China’s reopening was lagging expectations, the US economy surprised to the upside.

“Within equities, we closed our underweight the US markets sourced from Europe. Despite still favorable relative valuations outside of the US, slower economic momentum in Europe and less stimulus from China could weigh on markets outside the US, while US markets could benefit from their less cyclical, more defensive growth bias and recent trends in AI,” the manager said.

T.Rowe Price also shifted to a modest overweight position in real estate investment trusts (REITs) as a hedge against a risk of a potential rebound in inflation and, within fixed income, the firm positioned itself with overweights to return-seeking sectors through high yield, and emerging market bonds and duration ballast through long-term US treasuries.

The manager remained its neutral outlook for Australia, helped by a tight job market and first signs of a housing rebound but, it warned, that consumers might start to feel the effects of the tightening cycle and the Reserve Bank of Australia (RBA) may need to hike more in the face of accelerated wage growth data, with base case scenario remaining bearish with an economic slowdown, margin headwinds and a hawkish central bank.

On the positive side, according to T.Rowe Price’s outlook, the pain trade for Aussie stocks was offset by how low the expectations were reset on the back of the China re-opening disappointment.