T. Rowe Price managers give their views on what’s in store for 2015
The overall outlook
Despite impressive market resilience during the past 12 months, investors should moderate expectations for investment returns in the years ahead.
A key theme for 2015 is that investors should see more divergence than usual among global economies, central bank policy responses, and market performance. Although the world is increasingly interconnected, world trade has been decreasing in the years since the global financial crisis. As countries have become more insular, domestic factors will be more likely to drive financial markets going forward.
We believe conditions are ripe for further US stock gains, although the upside is likely limited owing to moderately high valuations and already high company profit margins. By contrast, emerging stockmarkets, which have underperformed developed markets since 2011, have more compelling valuations, and the structural growth evident in many frontier markets continues to be undervalued.
In the years since the global financial crisis, slower growth has been pervasive among world economies. Looking to 2015 and 2016 we expect average growth of 2.4 per cent and 5.1 per cent for advanced and emerging economies, respectively. This is better than 2014, but still below the norm.
In the US, fiscal headwinds are easing, business capital expenditure is on the rise, and the labour market recovery is driving income and spending. Together, these signals point to the possibility of the economy reclaiming its historic annual growth rate of approximately 3 per cent.
However, the eurozone is lagging badly, with unemployment and bank assets trending unfavourably. This leads to an outlook that is more uncertain and divergent from the US than usual. Despite Europe’s challenges, the region has six of the world’s 10 most competitive economies and boasts companies offering opportunities for debt and equity investors willing to look beyond gloomy headlines.
Meanwhile in global fixed income markets, exceptionally loose monetary policy around the world has led to a feeling of relative certainty for a number of years. But with interest rates on the rise in some markets and higher rates on the horizon in others, including the US, investors can expect more uncertainty and volatility ahead.
The US high yield market has enjoyed an impressive multi-year run. Though valuations are somewhat stretched as a result, a favourable credit environment remains given the prevailing low interest rates around the globe. US high yield is offering less compensation for risk relative to international high yield. In Europe, the high yield market has more than tripled in size over the last five years, which has created more liquidity, depth, and diversity for investors.
The managers’ view
Bill Stromberg, head of equity at T. Rowe Price:
“Coming out of the global financial crisis, economic healing has taken place at different paces in various markets around the world. Stock prices in the US have soared while they have lagged in Europe, Japan, and some emerging markets. US stocks can continue to advance, though likely at a more moderate pace, and the potential exists for positive earnings surprises in Europe and Japan. We expect more volatility in 2015 and investors will need to be selective. Fundamental equity research and individual stock selection will be more important than ever.”
Arif Husain, head of international fixed income:
“The US and Europe seem to be on different paths at the moment, with the US economy gaining steam and Europe trailing. As economic reports between the two regions continue to diverge, investors should expect yield spreads to keep widening and central bank responses to differ. Emerging markets still offer pockets of opportunity and relatively attractive valuations, especially in sovereign and corporate investment-grade debt and in certain areas of the high yield market.”
Oliver Bell, portfolio manager, Middle East & Africa Equity and Frontier Markets Equity:
“The structural drivers for an extended period of strong economic growth across many frontier markets, such as Vietnam, Sri Lanka, Pakistan, and most of Africa, remain in place. As each year passes, these drivers – peace, democracy, better economic management, and booming investment – become more entrenched. Of course, geopolitical risks are still present and moving ahead there may be some headwinds brought on by rising US interest rates and a stronger dollar. However, we are confident frontier markets in the aggregate should perform relatively well.”
Mark Vaselkiv, portfolio manager, T. Rowe Price High Yield Bond:
“High yield bond investors increasingly need to think globally. US credit markets are somewhat overvalued as a result of an influx of new investors and a limited supply of quality bond issuers. By contrast, international opportunities are expanding with the growth of European high yield and emerging markets corporate bonds alongside the leveraged loan asset class. Strong credit research can help investors profit from dislocations and volatility driven by economic and geopolitical uncertainties.”