BALTIMORE, June 14, 2016 /PRNewswire/ --
NEWS
The first half of 2016 has been volatile, with the global
economy facing several challenges that unsettled financial markets
around the world. Abrupt swings in sentiment created a difficult
environment for buy-and-hold investors, and markets were tested by
slow global growth, the potential for rising inflation and interest
rates in the U.S., and lingering concerns about China.
Despite these concerns, T. Rowe
Price experts expect to see modest revenue and earnings
growth. The fears plaguing the first half of the year are
being slowly alleviated; stabilizing markets, a pause in the Fed's
gradual monetary tightening, and easing fears of the financial
volatility of China could turn a
difficult start into a more promising finish. In this environment,
security selection will be key, both in stock and bond markets.
MIDYEAR MARKET AND ECONOMIC OBSERVATIONS
- Signs of financial and economic stabilization in both developed
and emerging markets appear to have set the stage for an improved
global equity climate in the second half of 2016. However, this
view depends heavily on stability in energy prices, the U.S.
economy, and the Chinese financial system.
- Emerging market stocks outperformed developed markets in the
first half of 2016. This has been a result of corporate earnings
showing signs of improvement, and a short-term revival in
commodities, oil, and currencies. In many cases, countries have
improved their fiscal and current account deficits, debt positions,
and inflation levels, leaving them in a better position to absorb
economic shocks.
- Among the most important risk factors for emerging markets is
the continued improvement of corporate earnings. Current valuations
reflect pessimistic estimates for earnings growth and any positive
surprises are likely to bring relief to markets. Companies will
need to deliver over the medium- and long-term, however, to allay
fears and bring about a re-rating of individual stocks and
markets.
- Economic environments globally are struggling against two
primary headwinds as they enter the second half of 2016: the need
for emerging market economies (EMs) to deleverage and the end of
the commodity "super-cycle." These winds are gusting forcefully
over China and Brazil. Given that EMs represent 40% of global
economic output, the impact is also being felt in developed
economies.
- The Brazilian and Chinese markets have been challenging for
investors. Brazil's economic and
political travails have created an uncertain environment, but there
is the potential for improvement with a transfer of political power
and a renewed focus on long-overdue micro- and macro-economic
reforms. The new government has an opportunity to achieve
significant steps toward structural reforms.
- China remains the largest
influence on EMs. Two key concerns have been the currency drop and
the amount of debt in the financial system. A further unexpected
and sharp decline in the renminbi could hasten capital outflows and
put more pressure on the economy.
- EM headwinds are also influencing U.S. interest rate policy.
Because global capital flows often have more influence on financial
conditions in emerging markets than do local policymakers, the U.S.
Federal Reserve has to tread lightly in order to avoid stressing EM
financial markets and economies.
- Fixed income markets appear to offer limited upside potential
and greater downside risk, but astute investors can use bouts of
risk aversion and subsequent rallies to their advantage.
China's economic deceleration, the
Fed's need to balance the risks of further tightening, divergent
central bank policies, and suppressed yields globally are signs of
caution. Investors are advised to consider a highly selective and
risk-aware approach to best exploit potential opportunities.
- Overall, the path appears clear for the global equity rally to
continue, especially as year-over-year earnings comparisons grow
less difficult in the second half and into 2017. However, the
election cycle in the United
States could produce short-term volatility.
QUOTES FROM T. ROWE PRICE INVESTMENT PROFESSIONALS
Ted Wiese, Head of Fixed
Income: "In coming months, fixed income markets seem likely
to generate coupon returns but have less potential for additional
price gains. Skittish investor sentiment, divergent central bank
policies, and conflicting macroeconomic signals leave markets
susceptible to bouts of risk aversion and subsequent relief
rallies. These episodes will provide nimble investors with
opportunities to profit from volatility, but strong macro and
credit research skills will be critical."
Alan Levenson, Chief U.S.
Economist: "While the U.S. economy has not been sheltered
from the global headwinds, they are taking a much smaller toll on
it. The weakness in commodities has led U.S. energy and mining
firms to cut back investment in plant and equipment spending, which
we calculate has reduced the annual rate of real GDP growth by 0.5%
since the end of 2014. That drag appears to be fading at midyear,
however. Following a weak first quarter, we expect a return to 2%
to 2ΒΌ% annual growth over the balance of the year."
David Eiswert, Portfolio
Manager, Global Stock Fund, on U.S. economic stability and U.S.
equities: "U.S. economic expansion appears intact,
although still subdued. The Federal Reserve's reluctance to force
the pace of interest rate hikes means monetary policy should remain
supportive, and U.S. consumers are in strong shape. Despite
industrial weakness, continued economic growth driven by consumer
spending should be supportive for equities in the U.S, A continued
'Goldilocks' economy (not too hot, not too cold) would also be a
strong positive for financial markets and the global economy.
However, the U.S. presidential election outlook reflects the
general rise of populism globally and presents some complicated
risks to sentiment."
Nikolaj Schmidt, Chief
International Economist, on China: "The world cheered in early
2016 as Beijing finally intervened
strongly enough to stop the downward growth spiral that has plagued
the economy over the past few years. Whether the bounce that
Chinese growth has experienced in recent months is more than
temporary is highly questionable, however, as the improvement is
largely the result of a more expansionary fiscal stance and an
unsustainable acceleration in the pace of credit expansion."
Nikolaj Schmidt, Chief
International Economist, on Europe: "EM headwinds are being felt
more strongly in Europe than in
the U.S., but these are being overcome by the domestic policy
tailwinds. The recent gain in both the euro and oil prices should
moderate growth in the second of the year, however, to an annual
rate of roughly 1.5%."
Nikolaj Schmidt, Chief
International Economist, on Brazil: "Brazil appears to have turned a corner. Higher
metals and oil prices have helped, but local asset markets caught
fire as the country moved toward removing President Dilma Rousseff and the Workers' Party from
power. We expect the new government to achieve significant steps
toward structural reform, including progress in breaking the link
between pensions and the minimum wage, which has drained government
finances."
Gonzalo Pangaro, Portfolio
Manager, Emerging Markets Stock Fund: "We continue to
witness great dispersion among advancing countries, which we have
highlighted for some time. The dispersion of EM fundamentals is as
great today as it has been for over a decade. Reflecting this
dispersion, valuation levels are mixed. EM equities are trading at
a significant discount to developed markets, creating pockets of
opportunity for us to identify quality businesses with reasonable
valuations that offer an attractive balance of compounding growth
potential and improving returns."
ABOUT T. ROWE PRICE
Founded in 1937, Baltimore-based T. Rowe Price Group, Inc. is a
global investment management organization with $764.6 billion in assets under management as of
March 31, 2016. The organization
provides a broad array of mutual funds, subadvisory services, and
separate account management for individual and institutional
investors, retirement plans, and financial intermediaries. The
company also offers sophisticated investment planning and guidance
tools. T. Rowe Price's disciplined, risk-aware investment
approach focuses on diversification, style consistency, and
fundamental research. For more information, visit troweprice.com or
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Information and opinions, including forecasts and
forward-looking statements, are derived from proprietary and
non-proprietary sources deemed to be reliable; the accuracy of
those sources is not guaranteed, and there can be no assurance that
actual results will not differ materially from expectations. This
does not constitute a distribution, an offer, an invitation, a
recommendation, or a solicitation to sell or buy any securities in
any jurisdiction.
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SOURCE T. Rowe Price Associates