New regime of "higher for longer" inflation, elevated
interest rates, and slower economic growth are setting the context
for stock and bond markets
BALTIMORE, Nov. 14,
2023 /PRNewswire/ -- T. Rowe
Price held its 41st annual global market outlook press
briefing today in New York City,
with a panel of the firm's experts sharing their expectations for
global financial markets in 2024.
Chief U.S. Economist Blerina Uruçi spoke about the Fed's
challenges managing a broad range of risks, the impact of inflation
and rising rates, the cooling of the U.S. labor market, and the
outlook for high deficits and debt levels going into 2024.
Steve Boothe, portfolio
manager and head of global investment-grade debt, said that fixed
income markets currently exist in a fragile equilibrium but that
the historic sell-off in bonds in 2022 has created opportunities
for all types of investors. Peter
Bates, portfolio manager of the Global Select Equity
Strategy, believes that the market environment in the next 10 years
could be fundamentally different than the pre-pandemic period,
transitioning from a higher-growth regime supported by low
inflation and low interest rates to a new, lower-growth regime
characterized by higher inflation and higher rates. Capital markets
strategist Tim Murray opined
that we may well avoid a recession but that there will be no real
recovery until the Fed pivots; in the meantime, investors'
portfolios need to account for both inflation and recession risk.
Dom Rizzo, portfolio manager of the Global Technology Equity
Strategy, discussed the investment opportunities in artificial
intelligence (AI), which he thinks may be the biggest technological
innovation since the advent of electricity.
Quotes and Key Observations
Global Economy
Blerina Uruçi, Chief U.S. Economist, Fixed Income
Division
- "The major takeaway from recent economic data is a resilient
U.S. economy supported by a resilient consumer. Inflation has
decelerated, and the labor market is gradually cooling through
slower employment growth and a decline in the job vacancy rate, but
it is not rolling over."
- Based on Fed Chair Jerome
Powell's and other hawkish Federal Open Market Committee
(FOMC) members' responses to the rise in yields, the Fed has likely
reached a peak in interest rates, and the next decision will be for
how long to keep interest rates at the current level.
- My view that interest rates have peaked goes counter to the
September Summary of Economic Projections, which indicated that
another rate hike was likely this year. This expectation is driven
by the recent tightening in financial conditions. Many in the FOMC
will eventually conclude that higher yields and tighter financial
conditions may be a substitute for further increases in the policy
rate. If the economy remains resilient, the market will gradually
price in fewer rate cuts in 2024.
Global Fixed Income
Steve Boothe, Portfolio
Manager, Head of Global Investment-Grade Debt, Fixed Income
Division
- "Fixed income markets sit at a fragile equilibrium.
High-quality yields are attractive, but economic growth will
eventually succumb to the Fed's hiking cycle, so a mild recession
is still possible. The open question is when, and to what
degree."
- It's a good time to be a bond investor, but it's a complicated
environment. The temporary benefits of looser financial conditions
and U.S. fiscal spending in 2023 will soon wear off. We have
reached "peak everything"—as all the factors (fiscal policy,
liquidity, China growth, housing,
credit, and employment) that have contributed to the global
economy's resilience are showing signs of weakness.
- Liquidity remains a concern: Money markets have absorbed the
heavy supply of U.S. Treasuries in 2023, but Treasury supply in
2024 is expected to remain heavy due to deficit spending, so that
capacity for absorption is likely to change.
- Households are significantly underinvested in fixed income
relative to long-term patterns, and cash holdings are near all-time
highs. The historic sell-off in bonds in 2022 has created a buying
opportunity for investors of all kinds. Short duration and
intermediate duration high-quality assets, among other sectors of
the bond market, offer both income and the potential for price
appreciation.
Asset Allocation
Tim Murray, Capital Markets
Strategist, Multi-Asset Division
- "The global market environment is now in a state of
purgatory, with continued uncertainty about both inflation and
recession risks as the Fed considers its next move. Stock/bond
correlations are constantly shifting. Investors need to hedge their
bets accordingly, taking advantage of attractive yields while
choosing their stock, bond, and real asset allocations
wisely."
- Mega-cap tech stocks—"The Magnificent Seven" (Apple, Alphabet,
Amazon, Meta, Microsoft, NVIDIA, and Tesla)—have distorted
valuation metrics to the extent that they have become, in effect, a
separate asset class.
- Tactical positioning: Reflecting these trends, T. Rowe Price's multi-asset portfolios are
currently positioned around four themes:
- Recession uncertainty: Overweight cash for liquidity and
flexibility.
- Attractive yields: Overweight high yield, floating rate, and
emerging market bonds.
- Inflation mitigation: Overweight real assets as a hedge against
sticky inflation; commodity and real sectors attractively
priced.
- Selective opportunities: Overweight small cap amid stabilizing
earnings estimates and attractive valuations.
Global Equities and the Evolving New Regime
Peter Bates, Portfolio
Manager, Global Select Equity Strategy, Equity Division
- "The old, pre-pandemic regime— characterized by efficient
global trade, cheap abundant energy, and excess labor— was
supported by low inflation and low interest rates. Fast-forward to
today and we see a new regime unfolding, characterized by
deglobalization, peaking energy productivity, and tight labor,
likely to result in higher-for-longer inflation and interest
rates."
- Equities are still the best place to be for the long term, but
the playbook that worked for the last 10 years won't work for the
next 10. In a more uncertain environment, valuations will become
even more important.
- A sensible investing approach to generating excess returns in
the new regime is to balance growth and value style factor tilts,
to invest in durable growth themes, to balance recession and macro
risk, and to find companies with a positive catalyst for
change.
- In an uncertain world, areas of investment opportunity include
artificial intelligence (the semiconductor ecosystem and AI
infrastructure), health care innovation (obesity drugs and
bioprocessing), and residential and commercial construction.
Artificial Intelligence Investing
Dom Rizzo, Portfolio Manager, Global Technology Equity
Strategy, Equity Division
- "Artificial intelligence is a big deal, in both the
boardroom and in the public's imagination. We can all feel it – AI
is going to proliferate in nearly every facet of our daily life.
This unique technology has the potential to be the biggest
productivity enhancer for the global economy since electricity, and
we're positioning our strategy to navigate this rapidly changing
environment responsibly."
- The digital semiconductor ecosystem remains the most attractive
place for investors in tech. The total addressable market for AI
chips is expected to rapidly grow from $30
billion dollars this year to $150
billion in 2027, an approximately 50% compound annual growth
rate (CAGR). This AI buildout is completely revolutionizing the
$1 trillion data center market.
Digital semiconductors provide the linchpin technologies that will
power this artificial intelligence revolution.
- AI is a sustaining innovation and benefits those companies that
already have the compute resources, talent, data, and distribution.
The big may still get even bigger.
- There is no shortage of places to look for good ideas that
benefit from this and many other megatrends. The global technology
opportunity set extends across all geographies, all markets, and
all major subsectors of tech—hardware, software, internet, and
payments.
About T. Rowe Price
Founded in 1937, T. Rowe Price
(NASDAQ - GS: TROW) helps people around the world achieve their
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management approach of equity, fixed income, alternatives, and
multi-asset investment capabilities. T. Rowe Price manages $1.31
trillion in assets under management as of October 31, 2023, and serves millions of clients
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SOURCE T. Rowe Price Associates, Inc.