T.Rowe Price remains underweight US and Europe

Oksana Patron

17 May 2023

Slowing economic growth, lingering inflation and declining liquidity has seen asset manager, T.Rowe Price, stay cautious with asset allocation across regions and remain underweight US and Europe, neutral Australia and overweight China and Japan.

“Key risks to global markets include a sharp decline in growth, central bank missteps, persistent inflation, liquidity shock, and geopolitical tensions,” T.Rowe Price said in its outlook for asset allocation outlook.

Thomas Poullaouec, T. Rowe Price head of multi-asset solutions APAC, said in a note that US  outlook was clouded by its banking sector which had an impact on credit availability, more persistent than expected inflation, scarce labour supply and debt ceiling stand-off adding to uncertainty.

On the same note, Europe saw elevated levels of inflation, on top of restrictive monetary policy and heightened geopolitical uncertainty.

On the positives, the consumer spending in the US remained strong, with robust service sector, while European equity valuations remained attractive and manufacturing PMIs were improving.

As far as Australia’s negatives and investment environment were concerned, the manager said consumer spending remained at risk due to mortgages being reset throughout 2023, followed by concerns on margins as per the latest earning results.

At the same time, T.Rowe Price in its outlook warned that China recovery was different this time due to “limited ripple effect on commodities”.

China, on the other hand, experienced the ongoing recovery, with solid data from the service sector, helped by the tone of policy makers supportive of restoring confidence for investors. On top of that, valuations were undemanding, followed by surprising earnings and the real estate sector bottoming, which could boost consumer confidence further.

The negatives for China included mixed signals casting doubts on the sustainability of its economic rebound, particularly related to exports, with the US-China tensions’ remaining the top geopolitical risks.

“While the market narrative is that a recession is inevitable, especially in the U.S., economic data continues to be mixed with seemingly sufficient evidence to support both bulls and bears’ outlook for the markets,” the manager said.

“Bulls continue to lean on evidence of a still robust labor market, strong consumer and corporate balance sheets, a better-than-expected earnings season, and signs of moderating inflation supporting a pause in central banks’ tightening.

“Meanwhile bears cite lagging impacts of central bank tightening, regional banking turmoil, contractionary manufacturing data, still high inflation, and a deeply inverted yield curve as top reasons why a deeper recession is coming.”