Global Market Outlook Edition MULTI-ASSET INVESTING IN AN ... · 2017 Q4 2018 Q4 2019 Q4 2020 Q4...

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

For investment professionals only. Not for further distribution.

2

Agenda

01T. ROWE PRICE MULTI-ASSET INVESTMENT PROCESS

FRAMEWORK

02 2020 GLOBAL MARKET OUTLOOK HIGHLIGHTS

03T. ROWE PRICE MULTI-ASSET INVESTMENT CONSIDERATIONS


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


022020 GLOBAL MARKET OUTLOOK HIGHLIGHTS


5

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


6

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


7

▪ 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


8

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


9

Disruption 4.0

TWO YEARS AGO, ABOUT 20% OF THE

S&P 500 MARKET CAP WAS SUBJECT TO

DISRUPTION. TODAY THE NUMBER IS 30%.


10


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


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

11

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


12

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


03T. ROWE PRICE MULTI-ASSET INVESTMENT THOUGHTS


14

Two near term multi-asset tactical/strategic considerations

▪ Code REDD

▪ Equity Risk Premia analysis can be a great road map


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


16

Rising prices: Perspective on stock valuations

S&P 500 PRICE TRAILING 12-MONTH

EARNINGS

PRICE/EARNINGS1


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.


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


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.


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


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


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


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


21

Where to take equity-like risk? Loans, HY, or EM?


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


22

T. Rowe Price multi-asset positioning

As of November 30, 2019


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


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


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

be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of S&P information.

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.

T. Rowe Price Investment Services, Inc., Distributor.

© 2019 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.


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