Though inflation remains sticky, market conditions appear
favorable for a growing U.S. economy and constructive for stock
selection
BALTIMORE, Nov. 19,
2024 /PRNewswire/ -- T. Rowe
Price held its 42nd annual global market outlook
press briefing today, featuring a panel of the firm's investment
experts sharing their forecasts for the 2025 global financial
markets. Speakers included, Blerina Uruçi, Chief U.S.
Economist, Ken Orchard, Head of
International Fixed Income, Jennifer
Martin, Global Equity Portfolio Specialist, Sébastien Page,
Head of Global Multi-Asset and Chief Investment Officer, and
Donna Anderson, Global Head of
Corporate Governance.
Uruçi highlighted her expectation for another year of strong
U.S. economic growth, bolstered by positive non-residential
investment, continued development of artificial intelligence (AI)
related technologies, and the green energy transition. Orchard
noted that given resilient economic growth, inflation likely
remains stickier than expected, limiting the ability of central
banks to cut rates as much as once priced in by the markets. Martin
believes that the outlook for global equities appears constructive;
the U.S. economy is growing, and consumer and business balance
sheets are strong. Page said that while unemployment, the
manufacturing purchasing managers index (PMI), and the yield curve
may point to a recession, when a broader model is employed, the
outlook is decidedly more optimistic. Anderson discussed how
shareholder activism is shaping the corporate governance landscape
and the drivers behind T. Rowe
Price's response to be more vocal than in the past.
QUOTES AND KEY OBSERVATIONS
Blerina Uruçi, Chief U.S. Economist, Fixed Income Division
Quote
"Improving productivity could signal the end of generally
lackluster growth seen since the global financial crisis. Though
rare, some of the factors that have historically driven positive
productivity shocks appear to be in place today. With rising labor
and non-labor costs, businesses are seeking to maintain output
without sacrificing profits. Moreover, investments in capital and
intellectual property have advanced AI and other technologies,
increasing productivity with high capital and low labor
needs."
Key Observations
- The ingredients are present for another year of robust growth
in the U.S. In recent years, healthy expansion in the U.S. has
spilled over to the rest of the world, helping offset the softness
in Europe and China. We expect this to continue in
2025.
- The positive fiscal impulse in the U.S. is now fading, but
measures like the Inflation Reduction Act and the CHIPS and Science
Act will ensure further disbursement of tax incentives and industry
specific grants during the coming years.
- Despite this positive backdrop, job creation will likely slow
down next year as companies have front-loaded hiring and are likely
to focus on productivity improvements. Without a catalyst for mass
layoffs, the expectation is for unemployment rates to remain
low.
Jennifer Martin, Portfolio
Specialist, Global Equity
Quote
"We expect the coming year will present a constructive
environment for stock selection. Consumer and business
balance sheets are in good shape, and the U.S. economy is growing.
Broadly, we are witnessing fundamental changes taking place
globally that have led to unsynchronized cycles across different
sectors, which are not as correlated as they have been in the past.
We believe adopting an active approach will be required to navigate
global markets responsibly."
Key Observations
- Inflation has fallen to near target ranges, enabling the U.S.
Federal Reserve to lower interest rates.
- The market has been supported by powerful investment trends,
such as artificial intelligence and GLP-1s, alongside recent
economic policy measures and a broadening of market returns.
- The outlook could shift with recent developments in
China, where in late September,
policymakers announced a wide range of measures designed to support
the economy. It will be critical to observe how these new Chinese
stimulus efforts will influence global inflation.
- Looking forward, the two wildcards for markets will likely be
energy, which could be a leading inflationary indicator, and the
consumer, where signs of weakness may rebound post-election.
Ken Orchard, Head of
International Fixed Income
Quote
"Credit assets, while generally fundamentally sound, are
expensive in the face of uncertain geopolitics and likely
volatility. The expectation is for credit to perform well over the
medium term, but the short-term setup is relatively unattractive.
In the current market, we favor securitized credit and bank loans
over investment grade corporate credit."
Key Observations
- Fixed income instruments that typically benefit from inflation
have been attractive, including Treasury inflation-protected
securities (TIPS), global linkers – also known as inflation-indexed
bonds – and breakeven inflation swaps.
- China's coordinated easing may
help boost growth globally and in related emerging markets, but the
extent of the fiscal stimulus remains to be seen.
- Large U.S. fiscal deficits could also increase growth and
Treasury yields. In an environment of "U.S. exceptionalism," we
believe global bonds are attractive and may be less risky than U.S.
Treasuries.
- Real, inflation-adjusted yields have moved higher to reflect
the new macroeconomic regime, and interest rate volatility will
likely remain high.
Sébastien Page, Head of Global Multi-Asset and Chief Investment
Officer
Quote
"T. Rowe Price's Multi-Asset
investment team anticipates a broadening of the market over the
next six to 18 months. The team is long value stocks, emerging
markets, real asset equities, and international small caps, but
neutral on U.S. small caps. Value appears cheap relative to Growth,
and the catalyst could be a passing of the baton on fundamentals.
By the fourth quarter of 2025, year-over-year earnings growth for
value stocks is expected to be comparable to that of growth stocks
due to more favorable comparisons."
- A three-factor model including rising unemployment,
manufacturing PMI, and the inverted yield curve shows a 90%
probability of a U.S. recession in the next 12 months. However,
using services PMI instead of manufacturing, the likelihood of
drops to 22%. When also adding stock returns from the last year and
the level of unemployment, the statistical recession probability
drops to 11%.
- The market isn't pricing in enough inflation risk. Commodities
remain an important factor, goods disinflation may have bottomed,
and real estate and services inflation could remain sticky.
Donna Anderson, Global Head of
Corporate Governance
Quote
"In 2024, shareholder activism has surged globally. This has
prompted T. Rowe Price to voice its
opinions more frequently, especially when public narratives around
contested situations and shareholder proposals have been off the
mark."
Key Observations
- On shareholder proposals, T. Rowe
Price's approach has been consistent over time; the industry
more broadly rode the pendulum too far in both directions.
- In 2025, expect U.S. and European investors' standards
continuing to diverge further, increased investor activism via
social media, and early signs of pullback on "performance-based"
compensation and sustainability metrics in executive pay
programs.
- There are several themes where we are out of consensus,
including the underappreciated costs of activism on long-term
company performance.
A recording of today's event can be found on the Global Market
Outlook Press Briefing registration page; registration can be
completed at any time for access.
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