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January 2020 / INVESTMENT INSIGHTS

Quarterly Outlook: Receding Tail Risks Support Equity Markets

Key insights

  • Several developments could support equity markets at the start of 2020: global trade and Brexit-related tail risks have receded, and we have found the bottom in global manufacturing indicators as well as inflation and interest rate expectations.
  • The U.S. Federal Reserve is unlikely to interfere in the upcoming Presidential elections by meaningfully changing its stance, so we should continue to have a supportive interest rate environment and money growth.
  • China, which represents our largest country overweight, is a potentially rich source of highly innovative companies at the forefront of secular change and disruption.

 

We remain in a world where growth and interest rates are low, in part because disruption is so prevalent—creating capacity and abundance. We believe this environment will persist.

Retaining Conviction in our Cyclical Names

We were well positioned to take advantage of the cyclical rally in the latter part of 2019 and do not currently see any reason to become defensive. We have been carefully contrarian by retaining conviction in our cyclical names, but we also continued to have exposure to quality, durable growth names that sold off in early autumn.

Looking ahead, there are several developments that we think could support equity markets at the start of 2020. Global trade and Brexit-related tail risks have receded, and we have found the bottom in global manufacturing indicators as well as inflation and interest rate expectations.

Year-over-year comparisons in the first half of 2020 should be more favourable of the global industrial economy. This is because the data will be measured against a lower base due to the initial disruptions caused by the U.S.-China trade conflict a year ago. We also expect that the U.S. Federal Reserve is unlikely to interfere in the upcoming elections by meaningfully changing its stance, so we should continue to have a supportive interest rate environment and money growth.

We have been carefully contrarian by retaining conviction in our cyclical names, but we also continued to have exposure to quality, durable growth names that sold off in early autumn.

 

Adding Exposure to China’s Big Internet Platform Companies

We view China, which represents our largest country overweight, as a potentially rich source of highly innovative companies that are at the forefront of secular change and disruption. We have used periods of volatility to add to our positions in several of the country’s big internet platform companies. While there was a broad-based slowdown in the Chinese economy in 2019, we are seeing signs of stabilization and expect gradual improvement as the year unfolds, especially as trade tensions ease.

The second half of 2020 will be dominated by the U.S. election, and we are conscious of the unpredictability of a presidential race that remains wide open and has the potential to be very disruptive for many sectors.

Benefits to Being Carefully Contrarian

As always, we are remaining true to our framework: investing in quality companies where we have an insight about improving economic returns in the future and where valuations aren’t excessive. Given our focus on companies on the right side of change, we remain wary of areas that are subject to structural challenges. However, we think there are benefits to being carefully contrarian in select areas where we have differentiated insights.

 

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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February 2020 / VIDEO

Webinar Replay - Disruption 4.0: Tech Innovation Persists In Unlocking Capacity
RELATED FUND
SICAV
Class Q USD
ISIN LU1028172499
A high conviction global equity fund for which we seek to identify companies on the right side of change. The portfolio typically consists of typically 60-80 stocks representing our most compelling bottom-up growth ideas, often derived from technological innovation and secular disruption.
View More...
3YR Return
(Annualised)
22.10%
Fund Size
(USD)
$3.1b

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