T. Rowe Price leans into cyclicals, moves underweight US growth stocks

T. Rowe Price Australia has released their asset allocation research paper, noting the team has moved further underweight equities, particularly US growth stocks, relative to bonds.

The global fund manager believes that stocks currently offer a less compelling risk/reward profile against a backdrop of declining growth, and tightening central bank policies.

Within equities, the fundies says it has continued to reduce its exposure to US growth stocks and tilt toward cyclical stocks, while maintaining overweights to value-oriented equities globally.

The funds will also continue to invest into small-caps, and emerging market stocks, where it says valuations are more reasonable and should benefit from a continued path of recovery.

Within its bond portfolio, T. Rowe Price’s credit outlook favours shorter dated and higher yielding bonds through overweights in floating rate loans and high yield bonds.

T. Rowe Price’s market perspective

Despite Omicron variant weighing in the near-term, the fundie believes growth should remain solid with inflation likely to moderate this year amid central banks tightening.

The fundie also expects global supply chains issues will improve this year.

The report says that central bank tightening will be a key theme in developed countries. The Federal Reserve turned decisively more hawkish at its December meeting, announcing an acceleration of the pace of tapering, which will now end asset purchases by March.

From a timing standpoint, these policies will be taking hold just as growth and inflation are expected to be moderating, and amid a spike in the Omicron variant across the globe.

Given these factors, T. Rowe believes the market seems to be calling into question how far the Fed can tighten policy before being forced into retreat.

The fundie says it’s looking for the Fed Funds rate to be 1.6% at the end of 2024, well below the Fed’s target of 2.1%.

According to T. Rowe Price, the Fed seems eager to join the tightening rush, perhaps worried that if they don’t move fast enough while they can, they may be vulnerable to respond to the next economic downturn.

Meanwhile in emerging markets, central banks may be already nearing peak tightening, according to the report.

As a case in point, earlier this week China’s central bank moved to lower interest rates on its medium term notes by 10 basis points to jumpstart the Chinese economy.

T. Rowe Price says that key risks to global markets include Omicron variant, persistent inflation, supply chain disruption, central bank missteps, China growth trajectory, and increasing geopolitical concerns.