2021 Midyear Market Outlook: Pandemic Recovery Generating Opportunities, Especially In Markets Outside Of United States, But Risks Have Risen After Period Of Strong Returns

BALTIMORE, June 22, 2021 /PRNewswire/ --

  • T. Rowe Price has released its midyear market outlook for 2021, with insights from three of the firm's senior investment executives:
    • Rob Sharps, President, Head of Investments, and Group Chief Investment Officer
    • Justin Thomson, Head of International Equity and Chief Investment Officer, Equity
    • Mark Vaselkiv, Chief Investment Officer, Fixed Income
  • Global growth accelerated in early 2021, led by China and the U.S. The economic recovery from the pandemic appears set to broaden in the second half of the year.
  • Despite strong growth, earnings expectations for stocks could be difficult to meet, though there may be potential for earnings outperformance in some non-U.S. markets.
  • Strong institutional demand for U.S Treasuries is holding fixed income yields down. Investors may want to consider credit sectors for potentially attractive opportunities.
  • China's tighter corporate governance standards, better capital allocation, and technical innovation are expanding the opportunity set for global investors.

  • Accelerated vaccine campaigns in developed countries, additional fiscal and central bank stimulus, and a surge in business activity as industries reopen appear to have set the stage for robust global economic growth in the second half of 2021 and well into 2022.
  • Although China and the U.S. have led the recovery so far, the acceleration in growth should extend to other countries as 2021 progresses.
  • Inflationary pressures, such as surging commodity prices and a global semiconductor shortage, rattled markets at times in the first half of 2021, but central banks largely viewed these pressures as temporary.
  • Longer-term trends already in place could lead to a more sustained inflation upturn. These include large U.S. fiscal deficits, exacerbated by pandemic stimulus efforts; demographics, as baby boomers retire and labor shortages push wages up; a "deglobalization" trend toward higher tariffs, immigration barriers, and supply onshoring; and cyberterrorism, as seen in the recent attacks on a primary U.S. gas pipeline and a major meat supplier, which have revealed the fragility of global supply chains.

  • Corporate earnings and earnings growth expectations surged in the first quarter of 2021, especially in the U.S. However, stock prices rose even faster, pushing valuations in many markets toward historic extremes.
  • Although speculative excesses have appeared in certain areas, including cybercurrencies, special purposed acquisition companies (SPACs), and some stocks traded heavily by retail investors, global and U.S. equity markets do not appear to be in bubble territory.
  • By speeding the adoption of more efficient technologies and business models, the pandemic could drive future productivity gains that might raise the long-term potential globally for economic and earnings growth.
  • Still, stock investors are likely to face more subdued returns than in recent years, even if economic growth remains strong. The post-pandemic economic recovery appears to have been largely priced into the U.S. equity market.
  • Earnings in many non-U.S. markets have yet to rebound as quickly or as strongly as they have in the U.S., creating the potential for these markets to outperform as the recovery broadens. This could break a record 12-year long streak of U.S. equity outperformance.
  • While the value style of stock investing has outperformed the growth style since late 2020, that advantage is likely to moderate in the second half of 2021. But the cyclical recovery theme still has room to run, particularly for global small-cap stocks and many emerging markets.
  • In Japan, earnings results for the broad indexes should remain strong in the second half. Cyclical recoveries have historically generated powerful tailwinds for major Japanese companies as relatively high fixed costs mean that revenue gains tend to translate directly into profits.

  • Yields on U.S. Treasuries and investment-grade corporate bonds remain surprisingly low given the strength of the economic recovery. Negligible or negative sovereign yields in some major markets, including Germany and Japan, have fueled demand for U.S. Treasuries from yield-hungry, risk-averse institutional investors.
  • Fixed income investors seeking attractive opportunities in the second half of 2021 may need to get creative and look to riskier credit sectors, such as U.S. and global high yield, bank loans, and corporate bonds issued by companies in emerging markets.
  • Credit spreads – the difference between yields on bonds exposed to default risk and those on U.S. Treasuries of comparable maturity – are extremely tight by historical standards, reflecting a benign credit outlook. Corporate defaults have plummeted, companies have repaired their balance sheets, and credit upgrades rose above credit downgrades in the first half of 2021, all constructive trends for credit investing moving forward.
  • On currencies, investors should allow for the possibility of a moderately weaker U.S. dollar, owing to huge U.S. fiscal and trade deficits and continued Federal Reserve stimulus. But risk assets have performed well historically during periods of gradual U.S. dollar decline. A weaker dollar could also boost returns for U.S. companies that derive a large portion of their earnings from overseas operations and strengthen the creditworthiness of emerging markets firms that borrow in dollars.


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Rob Sharps, President, Head of Investments, and Group Chief Investment Officer

"To make the case that broad equity valuations are attractive, you have to rely on an argument that there's no practical alternative. That would rest on a continuation of low interest rates and low inflation."

"Pent-up demand and continued fiscal and monetary stimulus should help sustain above-average growth well into 2022. If consumer demand continues to accelerate in the second half of 2021, we could experience an economic boom unlike anything we've seen in some time."

"As 2021 progresses, growth should accelerate in countries beyond China and the U.S. This might be better characterized as a sequenced global recovery rather than a synchronized global recovery.  The timing of the sequence is likely to remain uneven as some countries and regions, including India and Latin America, continue to struggle with the pandemic."

"Historically, valuation has not been a good tactical timing tool, but it typically has been a very good forward indicator of return potential relative to the longer-term averages. I don't think the starting point today bodes very well for robust returns going forward."

Justin Thomson, Head of International Equity and Chief Investment Officer, Equity

"Stocks can do well with a modest uptick in inflation, but not a significant one. Historically, periods of rising inflation have been relatively good for equities in aggregate, but only up to a point. Once inflation gets beyond 3 or 4%, it has tended to choke off returns."

"The received wisdom is that that monetary authorities understand inflation and have the tools to deal with it. But I think we could see a structural shift that will lead to higher inflation rates over the longer term."

"The set up for international markets at the moment is good. The reflation theme plays well in cyclical stocks, and markets outside of the U.S. tend to be more cyclical.  And since earnings in many of these markets haven't rebounded as sharply as they have in the U.S., this bodes well for non-U.S. equities."

"The growth of equity opportunities in China has been one of the single biggest developments in global markets in the last decade or so. I think the potential returns from being on the ground doing fundamental research in China are large."

Mark Vaselkiv, Chief Investment Officer, Fixed Income

"Rising yields pose obvious risks to bond investors, but they also create opportunities. Higher yields could make some credit sectors potentially more attractive relative to stocks. I think at some point, many equity investors will want to lock in the gains they've enjoyed from the bull market.  If so, there could be a rotation back to fixed income."

"Wage increases by major U.S. companies, which are clearly gaining traction, are more permanent than transitory. They have, in effect, set a floor for wages to remain at a higher level, and rising consumer income could help sustain the economic recovery as fiscal and monetary stimulus efforts wind down."

"Floating rate bank loans are a particularly attractive sector in fixed income today. The best thing about them is that the coupons on bank loans reset every 90 days based off a short-term benchmark rate. This could provide benefits all the way through the next Fed tightening cycle."

"With short-term rates in many developed countries hovering near zero, China's credit markets offer attractive current income potential. The 10-year Chinese government bond yield sits around 3%, and with an appropriate credit spread above that, there are clearly some great opportunities for credit pickers going forward. But it demands active management. It demands credit resources in the form of analysts on the ground working in that part of the world."


Among the potential risks to growth that T. Rowe Price investment leaders will be monitoring in the months ahead:
  • The coronavirus. While vaccine campaigns have gathered speed in some developed countries, progress remains slower elsewhere. New variants of the virus remain a threat.
  • U.S. fiscal policy. Although the Biden administration is seeking to raise the U.S. corporate tax rate, the increase is likely to be modest. This would be neutral for U.S. equity markets, but proposed increases in capital gains and dividend taxes, if enacted, would be negative for after-tax returns on most asset classes.
  • Valuations. Price/earnings multiples in some sectors and for some stocks imply demanding earnings expectations. Even relatively strong second-half results might fail to meet those expectations, potentially generating increased market volatility.
  • Political instability. Latin America, Eastern Europe, and the Middle East all contain possible flash points that could disrupt the global economic recovery.

The post-pandemic transformation of the global economy is creating winners and losers, giving active managers who use a strategic investing approach greater scope to seek excess returns above broad market indexes. Strong fundamental research by skilled investment professionals, backed by sufficient global resources, will be key components of that search in the second half of 2021 and beyond.

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Founded in 1937, Baltimore-based T. Rowe Price Group, Inc., is a global investment management organization with $1.59 trillion in assets under management as of May 31, 2021. The organization provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans, and financial intermediaries. The organization also offers a variety of sophisticated investment planning and guidance tools. T. Rowe Price's disciplined, risk-aware investment approach focuses on diversification, style consistency, and fundamental research. For more information, visit troweprice.com, Twitter, YouTube, LinkedIn, Instagram, or Facebook.

Follow Rob Sharps on LinkedIn here.


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