Asset Allocation Committee Strategy

Asset Allocation Committee Strategy

Executive Summary

The T. Rowe Price Asset Allocation Committee evaluates the relative attractiveness of major asset classes over a 6- to 18-month time horizon. These positions are currently reflected across our suite of asset allocation portfolios accounting for approximately $255 billion in assets under management as of March 31, 2017.*

Q2 2017 Positions

  • All Asset Classes
  • Equities
  • Fixed Income
Current Position (as of April 2017)
Bonds
Neutral
Stocks

A low-yield environment and rising interest rates weigh on bonds, but stock valuations may have outrun underlying economic growth.

While optimism about the Trump administration's pro-growth policies and lofty earnings expectations have supported a rally in equities, valuations appear vulnerable to disappointment on either front. A low-yield environment and rising interest rates pose headwinds for bonds.

Equities

U.S.
Neutral
International

Overseas stocks benefit more from signs of improving economic fundamentals and optimism over corporate earnings.

Many international developed markets are earlier in the economic cycle than the U.S., with monetary stimulus and attractive valuations offering further support. Expectations for the eurozone's economy and earnings have improved, but populism and Brexit pose near-term risks.

Developed
Neutral
Emerging

Relative valuations for emerging markets (EM) stocks are broadly attractive, but increased risks call for a cautious approach.

EM valuations remain broadly attractive versus developed markets (DM). However, EMs face risks from higher DM interest rates, a stronger U.S. dollar, the sustainability of energy prices, and the potential impact of protectionist trade policies on global trade and capital flows.

Global Equity
Neutral
Real Assets

Infrastructure spending may be supportive, but a long-term supply/demand imbalance still weighs on energy and commodities prices.

The potential for increased U.S. infrastructure spending is supportive, but its ultimate form, timing, and scope remain uncertain. Higher energy prices have been challenged by a sharp U.S. production response, reigniting concerns about global oversupply and pricing pressures.

Large-Cap
Neutral
Small-Cap

Moderation of postelection optimism has moved U.S. small-cap valuations closer to historical norms versus large-caps.

Higher U.S. fiscal spending, lower taxes, and protectionist policies could help small-caps more than large-caps, but the optimism has waned. International small-caps may benefit from stimulative monetary policies and longer growth runways due to early-stage recoveries overseas.

U.S. Value
Neutral
U.S. Growth

Growth stocks should benefit from broadly favorable valuations and expectations for a protracted period of modest economic growth.

The postelection rally in lower-quality value sectors has moderated, and growth sectors have outperformed again in 2017. Fiscal spending, tax cuts, and deregulation should support cyclical sectors like financials and energy, but the legislative process raises uncertainty.

Int'l. Value
Neutral
Int'l. Growth

Overseas value stocks enjoy favorable valuations versus more expensive growth sectors, although certain areas face headwinds.

Valuations for overseas value stocks remain relatively attractive as defensive growth sectors, such as consumer staples, appear increasingly expensive. However, value sectors like financials and energy face headwinds from modest global growth and commodities oversupply.

Fixed Income

U.S. Investment Grade
Neutral
U.S. High Yield

Yield-hungry investors drove strong performance in high yield bonds despite recent weakness in energy prices.

High yield bonds offer a yield advantage over investment grade, but further appreciation appears limited, and they are vulnerable to a pullback in commodity prices. The credit cycle looks extended, but low defaults and better corporate earnings expectations support credit spreads.

U.S. Investment Grade
Neutral
Emerging Markets

Emerging markets (EM) debt features attractive yields and improving fundamentals, but valuations are less compelling.

Higher commodity prices and a risk-on environment after the U.S. elections boosted EM bonds, but protectionism, higher developed market interest rates, and a stronger U.S. dollar pose risks. Many EM economies are healthier than in 2013's sell-off, but conditions vary by country.

U.S. Investment Grade
Neutral
Nondollar

Bond yields and extended duration profiles outside the U.S. continue to offer an unattractive risk/return profile.

Yield and duration still favor U.S. investment-grade debt, but U.S. dollar strength has moderated. Better economic growth and monetary tightening in the U.S. favored the dollar since 2014, but improved overseas growth and nascent monetary tightening overseas temper the advantage.

*The combined asset allocation assets under management of the T. Rowe Price group of companies as of March 31, 2017. This figure includes assets that are held outside of T. Rowe Price but where T. Rowe Price influences trade decisions. The T. Rowe Price group of companies includes T. Rowe Price Associates, Inc., T. Rowe Price International Ltd, T. Rowe Price Hong Kong Limited, T. Rowe Price Singapore Private Ltd., and T. Rowe Price (Canada), Inc.

This material represents the views of the T. Rowe Price Asset Allocation Committee only and may not reflect the opinion of all T. Rowe Price portolio managers. 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. The views contained herein are as of January 2017 and may have changed since that time.

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