Post on 25-May-2020
THE FULL STORY LIES BENEATH.
MULTI-ASSET INVESTING IN AN UNCERTAIN WORLD
Global Market Outlook Edition
Christopher Dillon, CFA
Investment Specialist, Global Capital Markets
December 2019
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2
Agenda
01T. ROWE PRICE MULTI-ASSET INVESTMENT PROCESS
FRAMEWORK
02 2020 GLOBAL MARKET OUTLOOK HIGHLIGHTS
03T. ROWE PRICE MULTI-ASSET INVESTMENT CONSIDERATIONS
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3
Strategic Portfolio Design (SAA)Use a range of analysis based on each strategy’s unique
objectives, targeted risk/return profile, client’s guidelines and
underlying asset classes.
Tactical Asset Allocation (TAA)Global tactical decisions to overweight and underweight asset
classes and sectors based on relative valuation opportunities
over a range of time horizons.
Security SelectionSpecialists oversee and manage each underlying strategy
through diversified approaches, with an emphasis on actively
managed strategies benefitting from T. Rowe price’s team of
global analysts.
Overlays/AlternativesWide range of overlay capabilities and alternative strategies
aimed at controlling risks and adding independent sources of
return to portfolios.
Investment process and sources of value added
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022020 GLOBAL MARKET OUTLOOK HIGHLIGHTS
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Four themes expected to drive markets in 2020
Sources: Bloomberg Finance L.P., Standard & Poor’s, T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.
A Challenging
Macroeconomic Environment
▪ Stabilizing fundamentals
▪ Improving liquidity
▪ The U.S. dollar plays a role
Disruption 4.0
▪ Over 31% of the S&P 500 Index is subject to disruption
▪ Some of the “disrupted” are fighting back
▪ Utility stocks offer attractive opportunities, as do select
international investments
Central Banks and the Search
for Yield
▪ Global central banks have been active
▪ A mountain of negative-yielding debt…until recently
▪ Opportunities in a yield-hungry world
Politics, Populism, and Policy
▪ U.S. presidential election looms in 2020
▪ Brexit update
▪ China 2025 and other U.S.-China considerations
▪ Populism has become a global force
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44%
46%
48%
50%
52%
54%
56%
58%
60%
62%
15 16 17 18 19
Net
Perc
en
t In
cre
asin
g (
%)
48%
49%
50%
51%
52%
53%
54%
55%
56%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
12 13 14 15 16 17 18 19
Net P
erc
en
t Incre
asin
g (%
)
Perc
en
t C
han
ge,
(%)
Year
Ag
o,
of
3-M
on
th A
vera
ge
As of October 31, 2019
1 United States, China, South Korea, Hong Kong, Singapore, Vietnam, India, Brazil, Taiwan, Japan, European Union, Canada, Mexico.2 PMI readings below and above 50 typically indicate contraction and expansion, respectively.
Sources: JP Morgan, IHS Markit, Haver Analytics. Analysis by T. Rowe Price.
Near-term stabilization in global trade and manufacturing…
WORLD TRADE AND
MANUFACTURING STABILIZING
MANUFACTURING PURCHASING
MANAGERS’ INDEXES 2
World Exports1 (L)
Global Manufacturing
Purchasing Managers’
Index (R) 2
China
U.S.
Japan
Euro Area
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▪ IMF forecasts stable-to-stronger global growth in 2020, driven by idiosyncratic stories
▪ U.S. likely to slow further due to late-cycle constraints
▪ China likely to slow further structurally: Potential growth is falling, and deleveraging imperative persists
▪ Risks skewed to the downside for G3 countries growth
REAL GDP (PERCENT CHANGE, YEAR AGO)
2017 Q4 2018 Q4 2019 Q4 2020 Q4
World 4.1% 3.2% 3.2% 3.4%
Advanced Economies 2.8 1.8 1.6 1.8
United States 2.8 2.5 2.4 2.0
Euro Area 3.0 1.2 1.0 1.8
Emerging Market and Developing Economies 5.2 4.5 4.5 4.7
China 6.7 6.4 6.0 5.7
Sources: International Monetary Fund, World Economic Outlook, October 2019. Analysis by T. Rowe Price.
Medium-term constraints persist
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The global search for yield continues
As of October 31, 2019
Past performance is not a reliable indicator of future performance.
Sources: Barclays (10-year Treasury rates), S&P, J.P. Morgan, U.S. Energy Information Administration, T. Rowe Price.
Bloomberg Barclays Indices : U.S. Treasuries: U.S. Treasury Index; U.S. Aggregate: U.S. Aggregate Bond Index; U.S. Corporates: U.S. Corporate I.G. Index; Global Corporate I.G.: Global Aggregate-Corporate Index; Global
Agg. Ex-U.S.: Global Aggregate ex- U.S. Index; Euro Agg.: Euro Aggregate Index; Euro Corporate I.G.: Euro Aggregate-Corporates Index; Euro HY: Pan-European High Yield; Jap Govt Bond: Asian Pacific Japan Index; Bunds
and Gilts: Global Aggregate-Treasury Index; Global HY: Global High Yield Index
J.P. Mogan Chase Indices: EM Sovereign Hard Currency: Emerging Market Global Diversified Index; EM Sovereign Local Currency: GBI-EM Global Diversified Index; EM Corporates: CEMBI Broad Diversified Index
S&P/LSTA: Bank Loans: Performing Loan Index
Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
*Municipals represented by the Bloomberg Barclays Municipal Bond Index; taxable-equivalent yield assuming a 40.8% tax rate.
U.S. Treasuries
U.S. Corp I.G.
U.S. HY
EM Sov Hard CurrEM Corp
EM Sov Local Curr
Global Corp I.G.
Global Agg. ex-U.S.Euro Corp I.G.
Euro HY
U.S. Agg.
Euro Agg. Jap Govt BondBunds
UK GILTS
Global HY Bank Loans
U.S. Municipal Bonds*
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Yie
ld t
o M
atu
rity
(%
)
Duration (Years)
Global High Income Sectors
Other Fixed Income Sectors
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Disruption 4.0
TWO YEARS AGO, ABOUT 20% OF THE
S&P 500 MARKET CAP WAS SUBJECT TO
DISRUPTION. TODAY THE NUMBER IS 30%.
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Past performance is not a reliable indicator of future performance.
Source: Bloomberg L.P.
Stock return based analysis that compares share price returns of the respective companies depicted on a performance index that starts at 100 on 12/31/2014
Disruption comes in many forms
IBM VS. MICROSOFT INTEL VS. ASML SEMI
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As of December 31st, 2019
50
100
150
200
250
300
350
Microsoft
IBM
Sh
are
Price
Pe
rce
nt R
etu
rn ASML
Semiconductor ADR
Intel
75
95
115
135
155
175
195
215
235
255
275
Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
Sh
are
Price
Pe
rce
nt R
etu
rn
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Sources: Strategas Research Partners and US Census Bureau, https://www.census.gov/data/tables/time-series/demo/income-poverty/historical-income-inequality.html 1 The GINI Coefficient is a summary measure of income inequality, which details the dispersion of income across the entire income distribution. The coefficient ranges from 0, indicating perfect equality, to 1, perfect inequality.
A higher index reflects high income persons receiving much larger percentages of the total income of the population. It is not an absolute measure of income or wealth.
Politics, populism, and policy loom as catalysts for heightened volatility
INCOME INEQUALITY STEADILY INCREASING,
AS MEASURED BY THE GINI COEFFICIENT1
1947 through 2018
BETTING ODDS OF 2020 DEMOCRATIC
PRESIDENTIAL NOMINEEAs of October 31, 2019
The increasing GINI Coefficient has contributed to the popularity of populist policies among political
contenders.
0.45
0.34
0.36
0.38
0.40
0.42
0.44
0.46
0.48
1947 1957 1967 1977 1987 1997 2007 2017
GIN
I C
oeff
icie
nt
36
22
1215
70
10
20
30
40
50
60
Jan 2019 Apr 2019 Jul 2019 Oct 20192018
Warren
BidenButtigiegSandersYang
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Final thoughts
▪ Thanks to an accommodative Federal Reserve and global central banks with other
considerations, deteriorating U.S. and global growth has stabilized
▪ With economic traction, global rates have risen recently, but look to still be range
bound into 2020
▪ Disruption continues to impact global business models and reinforces the importance
of strategic fundamental research and security selection
▪ While general fundamentals have improved, much uncertainty remains in 2020 with
a U.S. presidential election, Brexit, trade tension, and global populism all looming over
the year to come
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03T. ROWE PRICE MULTI-ASSET INVESTMENT THOUGHTS
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14
Two near term multi-asset tactical/strategic considerations
▪ Code REDD
▪ Equity Risk Premia analysis can be a great road map
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15
“Code REDD” risks seen on the horizon
▪ Reflation—Watch for value / growth style rotation
▪ Election—And other global political risks
▪ Duration—Risk of rates rising from lows
▪ Disruption—From secularly challenged companies
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16
Rising prices: Perspective on stock valuations
S&P 500 PRICE TRAILING 12-MONTH
EARNINGS
PRICE/EARNINGS1
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg, L.P., analysis by T. Rowe Price using data from FactSet Research Systems Inc. All rights reserved.1 Price/Earnings is defined as nominal S&P 500 price divided by the trailing 12-month nominal S&P 500 earnings per share using monthly data. It is the same as the trailing S&P 500 P/E ratio.
As of January 31, 2020
Current Value:
24.6x5Y 25Y 119Y
Percentile Rank 95% 69% 93%
Index L
evel
Cum
ula
tive E
arn
ings
Price to E
arn
ings M
ultip
le
1
2
4
8
16
32
64
128
256
512
1,024
2,048
4,096
1900 1920 1940 1960 1980 2000
0
1
1
2
4
8
16
32
64
128
256
1900 1920 1940 1960 1980 2000
0x
10x
20x
30x
40x
50x
1900 1920 1940 1960 1980 2000
17
A race to the bottom: Perspective on bond valuations
Past performance is not a reliable indicator of future performance. 1Ex-U.S. majors include Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, United Kingdom. 2 Maturity range for non-U.S. bonds is 8.5 to 11.5 years.
Sources: Bloomberg, L.P., T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.
As of January 31, 2020
U.S. TREASURY 10-YEAR VERSUS GLOBAL DEVELOPED (EX-U.S.) GOVERNMENT BOND 10-
YEAR YIELDS (MAJORS EX-U.S.)1
10-Year U.S. Treasury Global Gov’t Bond Yield (Ex-U.S. Majors) – 10-Year Range 2
Yie
ld (
%)
-2
0
2
4
6
8
10
12
14
16
18
1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018
18
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
1990 1995 2000 2005 2010 2015
Perc
ent
(%)
Stock vs. bond signals
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg, L.P., T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.1 The T. Rowe Price Multi-Asset Group measures equity risk premium by subtracting the real yield on the Bloomberg Barclays Aggregate Bond Index from the earnings yield of the S&P 500 Index. A higher percentile ranking
suggests stocks are cheaper relative to bonds. 2 High percentile rank favors equities over fixed income.
As of January 31, 2020
STOCK VERSUS BOND RELATIVE VALUATION1
Forward Earnings Yield (inverse of Price/Earnings) Versus Real Yield to Worst
2019
Current Value:
5.2%5Y 10Y 25Y
Since
January 1, 1990
Percentile Rank1 76% 66% 86% 86%
19
As of January 31, 2020
What a difference a year makes:Forward earnings yield (EY) less real yield to worst (YTW) vs. forward 3 year (one year also illustrated in table) relative return1
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg, L.P., T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.1 The T. Rowe Price Multi-Asset Group measures equity risk premium by subtracting the real yield on the Bloomberg
Barclays Aggregate Bond Index from the earnings yield of the S&P 500 Index. A higher percentile ranking suggests
stocks are cheaper relative to bonds.
Current value is 5.2, with a Forward EY (S&P 500) of 5.1 and a Real YTW (the yield to worst of the Bloomberg Barclays
Aggregate Bond Index less Core CPI Inflation) of negative 30 bps. Regression based on monthly data from January 1990
through January 2020
Three year forward perspective
One year forward perspective
20
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
Jan 2016 Apr 2016 Jul 2016 Oct 2016 Jan 2017 Apr 2017 Jul 2017 Oct 2017 Jan 2018 Apr 2018 Jul 2018 Oct 2018 Jan 2019 Apr 2019 Jul 2019 Oct 2019
Perc
en
t (%
)
The flow of equity premia relative to T. Rowe Price multi-asset tactical allocationAs of December 12, 2019
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg, L.P., T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.
The analysis takes the Equity Risk Premium that has been defined in slides 19 and 20 of this deck as a guide to reference where T. Rowe Price Multi-Asset is adding or subtracting from its allocation to stocks and bonds in its
general 60% global stocks / 40% global bonds portfolio
4.91%December 12, 2019
5.29%October 31, 2019
Added to Bonds
Added to Equities
Bonds Attractive
Stocks Attractive
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21
Where to take equity-like risk? Loans, HY, or EM?
Past performance is not a reliable indicator of future performance.
Sources: Bloomberg, L.P., T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Representative fixed income indexes include JP Morgan High Yield Index, JP Morgan Floating Rate Index
(referenced as “Loans”), JP Morgan EMBI Core Index (referenced as “Emerging Markets”) and JP Morgan GBI-EM Local Index (referenced as “Emerging Markets LC”, an abbreviation for Emerging Markets Local Currency
Index).
As of December 12, 2019
CORRELATION WITH EQUITYUsing Monthly Returns
YIELDS
6.7%Floating Rate
6.1%Global High Yield
4.9%EM–$
2-Y
ear
Ro
llin
g C
orr
ela
tio
n
0.75
0.50
0.25
0.00
2005 2010 2015 2019
4%
5%
6%
7%
8%
9%
10%
11%
12%
2009 2011 2013 2015 2017 2019
Emerging Markets
Emerging Markets - LC
High Yield
Loans
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22
T. Rowe Price multi-asset positioning
As of November 30, 2019
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This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
23
T. Rowe Price multi-asset positioning
As of November 30, 2019
For investment professionals only. Not for further distribution.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
24
▪ In an extended cycle, low growth investment environment, T. Rowe Price
Multi-Asset is beta neutral between stocks and bonds, tilted toward growth
overall and constructive on spread sectors such as High Yield, Emerging Market
Debt and Bank Loans
▪ Active management is embedded within our globally diversified portfolios and
becomes increasingly important moving forward
▪ Extra considerations, with regard to diversification, are warranted at this stage
of the cycle
Final thoughts
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25
Important InformationThis material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of December 2019 and are subject to change without notice. These views may differ from those of other T. Rowe Price associates.
International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets.
This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal.
Index performance is for illustrative purposes only and is not indicative of any specific investment. It is not possible to invest directly in an index. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.
All charts and tables are shown for illustrative purposes only.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
The specific securities identified and described are shown for illustrative purposes only and do not necessarily represent securities purchased or sold by T. Rowe Price. This
information is not intended to be a recommendation to take any particular investment action and is subject to change. No assumptions should be made that the securities identified and
discussed were or will be profitable.
Copyright © 2019, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of S&P 500 in any form is prohibited except with the prior written permission of S&P
Global Market Intelligence (“S&P”). None of S&P, its affiliates, or their suppliers guarantee the accuracy, adequacy, completeness, or availability of any information and is not
responsible for any errors or omissions, regardless of the cause or for the results obtained from the use of such information. In no event shall S&P, its affiliates or any of their suppliers
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Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission.
Copyright © 2019, Markit Economics Limited. All rights reserved and all intellectual property rights retained by Markit Economics Limited.
Information has been obtained from sourced believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan's prior written approval. Copyright © 2018, J.P. Morgan Chase & Co. All rights reserved.
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