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 $279 billion in assets under management as of September 30, 2017.*

November 2017 Positions

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

Equity valuations are expensive, notably in the U.S., while bonds may limit downside potential despite low yields.

Global growth momentum, particularly in Europe and Japan, supports equities, but bargains are scarce across regions. Central banks wind down accommodative policies, though inflation remains weak. Yields remain low and credit spreads are tight, leaving little room for upside.

Equities

U.S.
Neutral
International

International equities offer more upside potential as they are earlier in their economic cycles and earnings have room to grow.

Relative to the U.S., valuations in international markets are modestly more attractive as improving economic fundamentals, positive earnings trends, and strengthening global trade boost support. Valuations in the U.S. are extended amid muted growth and policy uncertainty.

Developed
Neutral
Emerging

Emerging markets (EM) valuations are more attractive versus developed markets. Dispersion in EM sectors and countries is large.

Emerging markets stocks are supported by stable growth in China, low inflation, a weaker U.S. dollar, and improving trade. Commodity and energy prices have provided stability to EM exporters, but the earnings boost from the technology sector may be fading.

Global Equity
Neutral
Real Assets

A long-term supply/demand imbalance still weighs on energy and commodities prices.

Despite the recent rise in energy prices, challenges persist due to U.S. production increases and lower input costs. Industrial metals prices remain structurally challenged by oversupply and slower growth in China.

Large-Cap
Neutral
Small-Cap

Pro-growth domestic policies and lower corporate taxes could be catalysts for U.S. small-caps versus large-caps.

Pro-growth domestic policies and lower corporate taxes support U.S. small-caps, which have higher tax rates than large-caps. Global small-caps are likely to benefit from improving domestic growth trends.

U.S. Value
Neutral
U.S. Growth

Valuations for growth stocks are less attractive after strong outperformance. Tax reform could be a catalyst for value stocks.

Growth stocks are likely to continue to benefit in the current low-growth environment, but valuations are less attractive after strong outperformance. A sustained pickup in economic growth as well as higher rates is likely to be more supportive of value stocks.

Int'l. Value
Neutral
Int'l. Growth

International value stocks enjoy attractive valuations versus more expensive growth sectors.

Improving eurozone and Japanese economies help support valuations for value stocks. Following strong performance for growth stocks, valuations for industrials and consumer discretionary sectors are above historical averages.

Fixed Income

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

High yield fundamentals remain broadly positive, but with limited upside potential at current valuations.

Fundamentals remain positive for high yield bonds, with default rates falling and corporate earnings rising. But with spreads at very low levels, upside potential is very limited.

U.S. Investment Grade
Neutral
Emerging Markets

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

Broadly cheap valuations are supportive, but headwinds could grow as central banks become less accommodative or Chinese growth softens. Rates are falling in many EM countries as central banks shift from tightening to easing.

U.S. Investment Grade
Neutral
Nondollar

Low bond yields and extended duration profiles outside the U.S. dampen the outlook and continue to offer an unattractive risk/return.

European bonds are at risk from rising rates as European Central Bank tightens monetary policy. Yield and duration favor U.S. investment-grade debt. The U.S. dollar may find support as the Federal Reserve tightens policy.

*The combined asset allocation assets under management of the T. Rowe Price group of companies as of September 30, 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 portfolio 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 November 2017 and may have changed since that time. Information and opinions, including forward looking statements, are derived from proprietary and non-proprietary sources deemed to be reliable but are not guaranteed as to accuracy.

There are inherent risks associated with investing in the stock market, including possible loss of principal, and investors must be willing to accept them. The stocks of larger companies generally have lower risk and potential return than the stocks of smaller companies. Since small companies often have limited product lines, markets, or financial resources, investing in them involves more risk than investments primarily in large, established companies. The value approach carries the risk that a stock judged to be undervalued is actually appropriately priced. International investing involves unique risks, including currency fluctuation. Bond yields and prices will vary with interest rate changes. Investments in emerging markets are subject to abrupt and severe price declines, and should be regarded as speculative. High yield, lower-rated bonds generally involve greater risk to principal than investments in higher-rated securities.

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