‘Worst is behind us’: Why T Rowe Price is upping equity allocation in multi-asset portfolios

Weightings to government bonds and cash reduced

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T Rowe Price has increased its overweight stance to equities within its multi-asset portfolios, while it has reduced exposures to government bonds and cash.

Based on a more positive outlook for risk assets overall in 2024, with economic growth proving resilient in the US and surprising “positively” elsewhere, Michael Walsh, a multi-asset solutions strategist at T Rowe Price, said it added to its overweight positions in the US and Japan.

“The economic outlook is improving, and even for recent laggards, such as Europe, it seems the worst is behind us. Corporate results have been strong overall during the current earnings season,” said Walsh. We believe the stage could be set for a broadening of equity performance beyond the ‘magnificent seven’ and growth darlings which have driven markets over the last year.”

As a result, Walsh said the T Rowe Price multi-asset portfolios have added exposure to US equities in recent months, with a particular focus on value stocks.

“There are signs that equity market performance is broadening beyond the narrow focus on artificial intelligence and technology stocks which has prevailed in recent months,” he said. “The economic outlook seems bright, increasing the likelihood of the Federal Reserve maintaining a ‘higher for longer’ approach.

“In this environment, more value-focused sectors such as financials look more attractive. Improving prospects for energy names are also likely to be supportive for value.”

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Outside of the US, Walsh added that in recent weeks the multi-asset team has also added to its existing overweight in Japan, investing across the capitalisation spectrum.

“The recent improvements in governance and corporate mindsets are increasingly being recognised by investors globally,” he said.  “Despite recent advances in the market, valuations are still attractive relative to other regions.”

He added: “Bank of Japan policy remains accommodative, following the much-heralded move away from negative policy rates. Earnings growth is strong and expectations continue to be positive. We continue to monitor the recent currency volatility, however. While a weaker yen can be a positive for exporters, it also contributes to the high levels of current inflation.”

Within fixed income meanwhile, Walsh said the team continues to be “constructive” on the outlook for the more “economically sensitive” areas of the market, such as global high yield and emerging market bonds.

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“We have just added to our holdings of emerging market bonds in local currencies,” he said. “Many of the key issuers are now coming to the end of their interest rate hiking cycles, with signs that inflation may be less sticky than anticipated. This makes the yields on offer on such bonds even more attractive.”

Conversely, Walsh said the team continue to be more doubtful on the prospects for high quality developed government bonds and cash, which are usually the “ballast” within multi-asset portfolios.

“The recent rises in yield could have further to run as anticipated rate cuts are delayed further, and fiscal spending and hence sovereign borrowing remains high,” he said.

This has driven reduced exposures to government bonds in areas such as the UK and the eurozone, as well as cash. “Within high quality government bonds, we have been biased towards more inflation-linked issuance as we believe the deceleration in price increases may not be entirely smooth, and bonds offering inflation protection should fare better as a result,” Walsh said.

“We see the higher yields and shorter duration available in areas such as global high yield as being attractive,” he added. “It is difficult to see any fears about creditworthiness overwhelming the attractive carry here in the short term as economic activity remains strong.

“We also look to fixed income strategies with a focus on downside risk management and diversification from risky assets to act as an anchor for portfolios in the current environment.”