North Korea’s risk escalation and the impact on markets. Read more...
North Korea has recently carried out two successful intercontinental ballistic missile tests—the second one, in particular, demonstrating the potential capability to strike West Coast U.S. targets.
In response to strong rhetoric from U.S. President Trump, North Korea proceeded to launch a missile over Japan’s northern Hokkaido island, marking a new level of risk escalation.
In recent weeks, the reaction in major markets to the escalating tensions has been reasonably measured. However, the missile launch over Japan has caused global equity markets to pull back in early trading. Safe havens like gold have rallied, and the euro and yen have risen versus the U.S. dollar.
While military options are on the table, any immediate risk of conflict remains low, in our view. Ultimately, we see a resumption of the uneasy stalemate between the two nations as the most likely outcome.
August 31, 2017
Christopher J. Kushlis, CFA, Asia Sovereign Analyst, London
Growing bond market risks may require more caution, focusing on local emerging market debt, floating rate loans, and strong corporates. Read more...
Central bank and government actions will come under increasing scrutiny as investors look for further signs that accommodative monetary policy is ending.
Any signals that the Federal Reserve and People’s Bank of China may tighten further, or that the European Central Bank will begin tightening, will likely cause yields to spike and volatility to increase.
Political risk also remains a concern in the U.S., Europe, and certain emerging markets.
In this environment, investors may find it prudent to focus on areas such as local emerging market debt, floating rate bank loans, and strong developed world corporate debt.
To protect against economic uncertainty associated with Brexit, we are defensive on gilts and sterling while seeking idiosyncratic opportunities. Read more...
We believe the economic impact of Brexit has been delayed rather than avoided and will probably begin to be properly felt later this year.
Our base case is that, barring a major political change of course in the UK during the next year or so, a “hard-ish” Brexit is still the most likely outcome, meaning the country falls upon World Trade Organization terms soon after March 2019, if not immediately.
It is reasonable to assume that a prolonged period of economic uncertainty would follow the UK’s exit from the EU, possibly exacerbated by a wider global economic slowdown.
We therefore remain defensively positioned in both gilts and sterling. Volatile price movements may mean that short-term buying opportunities arise, but the possibility of a hard Brexit means that the environment for UK investment is likely to be uncertain.
Emmanuel Macron’s victory in the French presidential election will be greeted with relief in markets. However, other risks will soon command attention. Read more...
Emmanuel Macron’s victory—and Marine Le Pen’s defeat—in the second round of the French presidential election will be greeted with widespread relief in markets, with bond spreads tightening alongside rallies in stocks and currencies. Although Macron’s En Marche! movement is unlikely to gain a majority of seats in the National Assembly elections in June, his centrist politics should mean he can form a coalition government with the Republican Party.
Macron is a strong supporter of the European Union (EU) and is likely to work well with German Chancellor Angela Merkel, which may make Brexit negotiations tougher for the UK but could also spell relief for peripheral countries seeking greater fiscal flexibility.
The French financials and telecommunications sectors are among those set to benefit from a Macron presidency. In fixed income, peripheral sovereign bonds may come under pressure as the markets focus on other risks, including elections in other countries and the European Central Bank’s next move.
The Bank of England is ill-equipped to deal with a possible UK economic slowdown, so it may pay to remain cautious on gilts and sterling. Read more...
Article 50 has been invoked and the UK must leave the European Union (EU) by the end of March 2019. Negotiations over the terms of the UK’s exit—and its future trading relationship with the EU—are likely to be conducted in a tense atmosphere, making it difficult to agree on a deal before the deadline.
The prospect of no deal being struck and the UK switching immediately to World Trade Organization terms is higher than is currently priced in by the markets—and could have a major negative impact on the country’s economy.
If this happens, the Bank of England has few tools at its disposal to help reignite growth—there is hardly any scope to cut interest rates and little appetite to extend quantitative easing.
Fiscal measures such as helicopter money may be considered, though this would bring its own risks. As such, we believe it will pay to remain cautious on gilts and sterling for the foreseeable future, although price volatility may present some buying opportunities.
T. Rowe Price research suggests that allocations to real assets equities and inflation-indexed bonds can improve overall portfolio performance by dampening the volatility of both nominal and real returns during inflationary periods. Read more...
Even at relatively low levels, inflation can substantially reduce real portfolio returns over time.
Unexpected inflation can do the most damage, suggesting that inflation protection should not just be a tactical position in response to current events.
Different real assets have shown varying return and correlation patterns across different inflation environments.
TIPS have had a high correlation to unexpected inflation and thus provide protection against the damage it can do to longer-term returns.
There have been remarkably low levels of volatility displayed by markets, especially given the uncertainties that remain ahead. Read more...
While investors continue to enjoy positive returns from global equities, one nagging source of discomfort is the remarkably low levels of volatility being displayed by markets, especially given the uncertainties that remain ahead.
Falling volatility is in part a reflection of some positive changes in the global economy. Corporate profits have also been steadily recovering, while interest rates remain low and monetary policy accommodative.
However, there has been an element of hope and sentiment that has played its own role in lifting markets as consensus has shifted quickly from despair to exuberance in the space of a year.
While the market continues to look to politics and macro data as sources of renewed hope, now is the time to get stock specific and to refresh your portfolio should any disappointments happen.
April 19, 2017
R. Scott Berg, Portfolio Manager, Global Growth Equity Strategy
The latest edition of the T. Rowe Price Report is now available. Read more...
Artificial intelligence growth, propelled by technological advances and massive data sets, is reshaping companies.
U.S. consumer inflation has been rising sharply, raising the question of whether this is the beginning of a breakout in inflation to the upside in response to years of unprecedented monetary policy stimulus and to a well-advanced economic recovery.
T. Rowe Price has launched a new series of model portfolios—investing in varying allocations in a select number of the firm’s actively managed mutual funds—as part of an online discretionary investment advisory program now available for individual retirement accounts (IRAs).
Joe Lynagh, the T. Rowe Price Ultra Short-Term Bond Fund’s portfolio manager, discusses higher-yielding cash management solutions. Read more...
Even after several rate hikes, the hunt for higher yield and income continues as investors create new demand for high-quality short-dated investment alternatives.
The 2016 money market fund reforms not only changed the overall composition of the money fund industry, they also permanently transformed the cash management industry from a “one-size-fits-all” money market fund industry into a more dynamic cash investment solution industry.
As a result of investors’ search for high yields and money fund reform, investment strategies like T. Rowe Price’s Ultra Short-Term Bond Fund have grown in popularity as they can offer investors a way of increasing yield and income while sacrificing only a bit of price stability.
T. Rowe Price’s Ultra Short-Term Bond Fund seeks to provide more income than a money market fund by taking on slightly more risk.
We feel that the term “emerging markets” is now more a matter of benchmark classification, and you cannot view them under one singular homogenous banner any more. Read more...
We are often asked for our view on emerging markets and whether now is a good time to be over- or underweight. We actually feel that the term “emerging markets” is now more a matter of benchmark classification as opposed to some common fundamental reality.
Emerging market fundamentals are about as dispersed as they have been for two decades. You only need to look at economic growth rates by individual country to see that they cannot be viewed under one singular homogenous banner any more.
While region and country-level comparisons are important in this new era of emerging market investing, we would also encourage investors to look at sector and industry dispersion when informing a view of change within and across emerging markets.
While we have high conviction in our emerging market holdings today, if we had to provide one clear and succinct guide to investors seeking to understand emerging markets today, the first step is to ask the question “where is there real change and opportunity?”
Currency and bond markets that offer yield pickup should continue to perform for a while longer but should be monitored. Read more...
The G3 and UK central banks all recently held policy meetings against an apparent backdrop of strong growth and rising inflation. However, the bulk of the growth is being driven by “soft” data, and the acceleration in inflation is mostly due to rising commodity prices in the fourth quarter of last year.
Central banks are tiptoeing toward tightening: We still expect the Fed to deliver three hikes this year, we do not expect any hikes from the European Central Bank (though it may taper asset purchases next year), and Japan is unlikely to consider raising rates until autumn.
We believe that currency and bond markets that offer meaningful yield pickup will perform, which implies that emerging markets will continue to deliver.
However, we also believe that growth figures will need to be closely monitored for any changes in momentum—monetary tightening in a slowing growth environment would produce a very different market response.
Taxes can have a big impact on taxable investment portfolios, but a tax-efficient investment approach can help to maximize after-tax returns. Read more...
Approximately 41% of mutual fund assets are held in taxable accounts, yet the overwhelming majority of mutual funds are managed to maximize pretax returns. Research suggests that investors lose approximately 2% each year to taxes in their taxable accounts.
Mutual funds are required to distribute their income and capital gains to their shareholders each year, and investors holding mutual funds in taxable accounts are responsible for paying taxes on these distributions.
Because most portfolio managers are compensated based on their pretax performance, they are incentivized to generate the highest possible pretax return in a given year with little attention paid to after-tax returns for mutual fund shareholders.
Tax-efficient investment management techniques—asset location, long-term focus, security selection, and using losses to offset gains—can help minimize the impact of taxes on taxable assets and maximize after-tax returns for investors.
October 11, 2017
Donald Peters, Portfolio Manager in the U.S. Equity Division
Recent strong, broad-based, synchronized economic growth across
Central and Eastern Europe has opened up a number of attractive relative value opportunities for fixed income investors. Read more...
Central and Eastern Europe (CEE) has recently benefited from strong, broad-based, synchronized economic growth that has exceeded market expectations, driven, in part, by robust levels of private consumption and investments.
In spite of this broadly coordinated growth, the expansion of CEE has been accompanied by a divergence in inflation dynamics and nuances in the reactions of central banks to growth.
This has opened up a number of attractive relative value opportunities for fixed income investors, although investors also need to be aware of certain idiosyncratic political risks facing the region.
The surge in Japanese corporate earnings growth supports our belief that Japan remains a compelling story, regardless of its economic growth and inflation profile. Read more...
Japanese companies recently achieved two significant milestones—generating record-level profits and surpassing the U.S. in delivering the best earnings growth of the past decade.
This reminds us that economic and corporate fundamentals are two very different considerations, especially in Japan.
The surge in earnings growth supports our belief that Japan remains a compelling cyclical and self-help growth story, regardless of its economic growth and inflation profile.
Central to this belief is the transformation occurring within Japan’s corporate sector, as reform is being prioritized. These efforts are positively impacting company profitability and capital allocation.
Investors waiting for stronger domestic growth and inflation in Japan are missing what is most important, namely accelerating company profits.
The looming prospect of the withdrawal of quantitative easing (QE) has raised concerns that uncertainty and volatility may reemerge. However, aggressive rate hikes may pose more of a risk. Read more...
Quantitative easing (QE) measures from central banks have suppressed a number of natural market forces in recent years, reducing uncertainty and dampening volatility.
Now, the looming prospect of central bank balance sheet retrenchment is raising fears that some of these forces may suddenly reemerge, leaving chaos in their wake.
But the withdrawal of QE is very likely to occur much more gradually than many investors expect, and its effects may not begin to be felt for some time to come. This will be supportive for wages, growth, and risk taking, which could prompt central banks to hike rates more aggressively than is currently priced in by the markets—a hidden risk that many investors are not prepared for.
As such, adopting an actively managed approach to bond investing, with exposure to a wide variety of sectors, may be the most prudent approach.
Within an environment of somewhat stretched valuations, there remain select pockets of value in both sovereign and corporate emerging markets bonds. Read more...
As a corollary of the recent run of positive performance in emerging markets debt, valuations have become somewhat stretched and dispersion has fallen—particularly in the larger emerging markets—leaving attractively valued opportunities fewer and farther between.
Within this environment there remain select pockets of value in both sovereign and corporate bonds, especially in some of the lesser-known emerging markets, where in-depth fundamental research is key.
We are managing these risks by positioning our portfolios more defensively while seeking idiosyncratic ideas and identifying active positions that still offer attractive value.
Central bank tightening will create the biggest risks and opportunities in 2018. Read more...
The main risks and opportunities in 2018 will arise from central bank tightening: The risks will arise from the impact of a number of central banks tightening at the same time, and the opportunities will come from increased volatility and differentiation between markets.
Systematic risk factors do not currently offer good value for money because rates are low, credit is tight, and volatility is muted. One way of responding to this is to allocate more to idiosyncratic risk assets that are sufficiently driven by their own stories to behave differently than the broader market.
Insurance positions have not offered value for money in 2017 because the markets have not been moving sufficiently when negative events have occurred. However, this may change in 2018, and we think there are risks that would require some form of insurance.
The 2008 financial crisis forced regulators to take actions that they would previously never have considered in order to save the global economy. As a result, they will be psychologically better prepared to respond to the next one.
A variety of risk factors lead us to believe that volatility across fixed income sectors will increase in 2018, so we favor meaningful allocations to liquid sectors to facilitate tactical portfolio shifts in response to a risk event. Read more...
Although markets have thus far shrugged off risks, including North Korean nuclear tests as well as expected actions by many developed market central banks to unwind their ultra-accommodative monetary policies, we think that is unlikely to persist through 2018.
The potential risks that could shake up fixed income markets include a surprise in developed market politics, a breakdown in the NAFTA negotiations, escalating geopolitical tensions, and an abrupt slowdown in the Chinese economy.
With some major developed market central banks beginning to scale back their extremely accommodative monetary policies, there is the potential for increased volatility if markets misjudge the speed or timing of the normalization process.
Maintaining meaningful allocations to liquid sectors allows us tactical flexibility should volatility create pricing dislocations and more favorable valuations in credit sectors.
Social Security is not a simple benefit system. It is worth learning about the rules of the program and understanding how benefits are calculated so you can make informed decisions on your claiming strategy.
Because Social Security is a significant, inflation-adjusted source of steady income, it should be an important part of your holistic income strategy in retirement.
Social Security claiming is not one size fits all. There are specific considerations for you to think through if you are single, married, divorced, or widowed.
While taking RMDs from tax-deferred retirement accounts is mandatory at age 70½, you may not need to spend this money. You have options of reinvesting it in a taxable account or donating it to charity. Read more...
At age 70½, you will need to start taking an RMD from your tax-deferred retirement accounts.
The money can be invested in a taxable, nonretirement account.
You could also contribute the RMD to a Roth IRA account if you have earned income and meet the income limits.
You can transfer your RMD to a charity using a qualified charitable distribution (QCD).
RMDs can also be contributed to a 529 College Savings plan.
Once investors turn age 70½, they will need to take required minimum distributions (RMDs) from their retirement accounts, whether they need the money or not. Read more...
For IRAs, you must take your first RMD by April 1 of the year after the year you turn age 70½—regardless of whether or not you are retired. For each following year, you must take an RMD by December 31.
If you have multiple IRAs, you must calculate the appropriate RMD for each one. The total distribution amount can be taken from one or more IRAs to satisfy the withdrawal—as long as the total RMD amount is withdrawn.
If you have multiple prior employer retirement accounts (401(k)s, etc.) you will have to contact your prior employer to calculate the RMD and send you a distribution.
Once the RMD is distributed, you don’t have to spend it, but it cannot remain in the tax-deferred account.
We expect inflation to reach 2% or higher in 2018 as a result of continuing solid growth in the broader economy and a tightening labor market. Read more...
We believe that the sub-2% annualized consumer price index readings we saw during the summer represented a low for the current inflation cycle, and we expect inflation rates will stabilize or run moderately higher in the near term, followed by 2%—or higher—inflation in 2018.
U.S. Treasury inflation protected securities (TIPS) have yet to price in the potential uptick in inflation, providing some upside potential for TIPS investors if inflation does return to trend at 2% or higher over the next year.
Increasing price pressure from the tightening employment market, the weaker U.S. dollar, and relatively stable oil prices are likely to contribute to rising inflation.
The Federal Reserve, which has made it clear recently that its focus on the tightening labor market and easy financial conditions will take precedence over inflation readings that fall short of its 2% annual target, stands as the most prominent obstacle to higher inflation and will likely serve as a cap on TIPS performance in the medium term.
Overall, the U.S. tax reform measure highlights the importance of a planning strategy that can adapt to change. Read more...
The U.S. tax reform measure will have wide-reaching effects on investors. We believe a planning strategy based on fundamental principles is the best response.
While the biggest changes relate to business taxation, the measure also reduces individual tax rates. Those individual changes will revert to 2017 levels after eight years unless Congress takes further action.
Considering the temporarily lower rates and future uncertainty, investors may want to consider contributing to Roth accounts.
Lower taxes may help people to boost their retirement savings to the 15% or more of current salary (including employer matches) that we typically recommend.
Given the complexities and uncertainties associated with the new tax measure, we strongly recommend that investors consult with their professional tax advisors.
Some emerging market currencies are poised to gain in 2018 even after the impressive 2017 returns for many against the U.S. dollar, but investors will need to be increasingly selective in their positioning. Read more...
We believe many of the broad trends that drove gains in emerging market currencies against the U.S. dollar last year are likely to continue in 2018.
We use an assessment of a currency’s relative valuation versus fundamental factors to help find opportunities in emerging market currencies.
The currencies of emerging markets that are poised to tighten monetary policy as a result of strong growth or high inflation are likely to be supported, as are those of countries that are implementing meaningful structural reforms.
Several major emerging markets will hold elections in 2018, and we expect the outcomes of these elections, as well as sentiment leading up to the votes, to be meaningful idiosyncratic drivers of currencies for those countries.
Financial experts discuss less stressful ways to help meet the challenge of rising college costs with these proven savings strategies. Read more...
The Confident WalletTM by T. Rowe Price and The Washington Post BrandStudio is a personal podcast series that inspires long-term success through informed decision on savings.
In this podcast, Lynnette Khalfani-Cox, who’s also known as The Money Coach, is joined by Robert Farrington, founder of The College Investor, and Roger Young, a CERTIFIED FINANCIAL PLANNERTM to provide answers to some tough college savings questions.
The panel discussion will include how to get the most for your college savings dollars, as well as the difference between a 529 savings plan and UGMA/UTMA accounts. They’ll also suggest how you can turn the goal/dream of paying for college into a reality. We invite you to tune in to become better informed.
Experts share their perspectives on which savings and spending choices to consider. Read more...
The Confident WalletTM, by T. Rowe Price and The Washington Post BrandStudio, is a personal finance podcast series that inspires long-term success through informed decisions on savings.
In this podcast, Lynnette Khalfani-Cox, who’s also known as The Money Coach®, is joined by guests Kimberly Palmer, author of “Smart Mom, Rich Mom,” and Judith Ward, a CERTIFIED FINANCIAL PLANNER™ at T. Rowe Price, to answer some tough questions on prioritization.
The panel will address questions, including “What are three things to consider when choosing where to put your next dollar?” and “How does proximity to retirement play a role in where to put your next dollar?”
Questions remain about how the U.S. tax reform legislation passed at the end of 2017 will affect supply and demand in the municipal bond market in 2018. Read more...
While the reduction in the corporate tax rate has made the tax advantages of holding munis for banks and insurance companies less pronounced, we expect most of these corporations to maintain the majority of their holdings in the sector.
A provision in the new law that eliminates the tax exemption on advance refunding bonds, which are issued to retire older, higher-cost debt, is likely to reduce the supply of new bonds in the muni market by 10% to 20%.
If the muni market does experience volatility and yield ratios become more attractive relative to Treasuries, we would generally see this as a potential buying opportunity due to the continued long-term attractiveness of the sector.
You’re technically on the back nine as far as retirement goes, so to ensure that you’re on the right track, our financial experts talk about your unique situation. Read more...
The Confident Wallet by T. Rowe Price and the Washington Post BrandStudio is a personal podcast series that inspires long-term success through informed decision on savings.
The Money Coach, Lynette Khalfani-Cox is joined by Kerry Hannon, AARP’s Jobs Expert and Great Jobs columnist, and Roger Young, A CERTIFIED FINANCIAL PLANNER™ at T. Rowe Price. They’ll answer common questions that concern all of us including whether you’ve saved enough for retirement and if not, how do you play catch up? And when should you consolidate retirement assets?
In the “Keeping You Up at Night” segment, our experts focus on a universal concern of whether you will have enough money to live comfortably throughout retirement.
A panel of financial experts explores the many aspects of estate planning to help ensure that your final wishes are carried out exactly as you wish. Read more...
The Confident WalletTM by T. Rowe Price and The Washington Post BrandStudio is a personal podcast series that inspires long-term success through informed decision on savings.
In this podcast, “The Money Coach” Lynnette Khalfani-Cox , hosts Jeffrey Condon, author of “Beyond the Grave: The Right Way and the Wrong Way of Leaving Money to Your Children (and Others),” and Roger Young, a CERTIFIED FINANCIAL PLANNER™ at T. Rowe Price. They provide a mental checklist of steps to take to get your estate in order. They also suggest how to cut the process down to size with some careful up-front planning.
Among other issues, the panel discusses estate planning costs, what happens if you don’t have an estate plan, and also explores various estate planning elements. In a “This or That” segment, the experts compare the pros and cons of liquidation of assets vs. distribution of items and how it may affect you. Tune in to hear their thoughts.
Our retirement specialists focus on the most efficient and effective ways to construct a retirement strategy that will enable you to confidently enjoy your non-working years. Read more...
The Confident Wallet by T. Rowe Price and the Washington PostBrandStudio is a personal podcast series that inspires long-term success through informed decision on savings.
In this podcast, Lynette Khalfani-Cox, The Money Coach, is joined by financial experts Christine Benz, director of personal finance and senior columnist for Morningstar.com, and Judith Ward, T. Rowe Price CERTIFIED FINANCIAL PLANNER™. They examine all aspects of building a retirement plan that you can then use to tailor your strategy to your specific needs.
You’ll find answers as to when you should start to focus on retirement, how much will you need to save to retire comfortably, and how many different ways you can save. In the “This or That” segment, the panel discusses what should come first: saving for retirement or paying down debt. Their answers may surprise you, so tune in to hear their insights.
Timothy Murray explains why emerging markets are now a different animal from what they were and why this has implications for asset allocators. Read more...
Emerging markets have evolved, and investors now need to look at them through a different lens.
Infrastructure-driven sectors have become much less important drivers of performance, while consumer-oriented sectors have dramatically increased in importance.
For tactical asset allocation purposes, the outlook for commodity prices is still quite important to the relative performance of emerging markets equities, but it is now part of a much broader mosaic of factors.
Partially due to the ongoing trend toward more domestically driven economies, emerging market fundamentals are becoming more impacted by country-specific factors, making broad generalizations about the asset class more and more difficult.
This makes evaluation more complex for tactical asset allocation purposes, but it also means that the alpha potential for active management is higher.
Being defensive did not pay off last year, but we believe that positioning for volatility is the best approach for 2018. Read more...
2017 was notable for the calmness of markets. This was beneficial for equity investors, but it led to underperformance in our Dynamic Global Bond fund1 because of the defensive stance we maintained throughout the year.
This was disappointing, but we strongly believe that our positioning in 2017 was correct given the number of risks present in the market at the time.
Geopolitical risks will continue to challenge the global economy in 2018, inflation could make a comeback and a number of developed market central banks are set to begin hiking rates. Concerns over these developments have already led to increased volatility.
As such, we believe that positioning the fund's portfolio for further volatility and rising yields will help deliver competitive results this year.