Markets & Economy

Monthly Market Review

May 2017
T. Rowe Price

S&P 500 HITS NEW HIGH, BUT RETURNS ARE WIDELY MIXED

The major indexes were mixed for the month. The large-cap S&P 500 Index and the technology-heavy Nasdaq Composite Index managed to establish new highs at month-end before falling back a bit. The Dow Jones Industrial Average lagged, and the smaller-cap benchmarks recorded losses. The disparate performance of the benchmarks reflected the widely varying returns of sectors within the S&P 500 benchmark. Technology stocks returned 4.4% for the month, bringing their year-to-date gain to over 20%. Conversely, falling oil prices pushed energy shares down 3.4%, leaving them down over 12% since the start of the year. The contrasting performance of the two sectors was one reason growth stocks handily outperformed their value counterparts for the month and built on their substantial lead for the year to date.

U.S. Indexes
Total Returns

 

May 2017

Year-to-Date

Dow Jones Industrial Average

 0.71%

  7.47%

S&P 500 Index

 1.41

  8.66

Nasdaq Composite Index

 2.50

15.15

S&P MidCap 400 Index

-0.49

  4.30

Russell 2000 Index

-2.03

  1.48

Past performance is not a reliable indicator of future performance.
Note: All data are in U.S. dollars and as of May 31, 2017. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite, whose return is principal only. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a registered trademark of Russell Investment Group.

VOLATILITY REACHES TWO-DECADE LOW…

The relative calm that has characterized trading in recent months carried into the start of May, with stocks inching higher amid relatively subdued trading volumes. The stability was evidenced in the behavior of the Chicago Board of Exchange’s Volatility Index (VIX), widely known as the “fear index,” which fell to its lowest level in over two decades on May 8.

…BUT SPIKES ON POLITICAL CONCERNS

Rising political tensions soon interrupted the calm, however. On May 10, markets wobbled briefly on news that President Trump had fired FBI Director James Comey, but the greater market reaction came a week later, when reports surfaced that the president had earlier asked Comey to end his investigation into the Trump campaign’s ties to Russia. Stocks plunged on the news, with the Dow Jones Industrial Average and S&P 500 falling the most since September and the Nasdaq having its worst day since the Brexit vote in June. Investors seemed to worry that the controversy would undermine the Trump administration’s efforts on tax reform and other market-friendly policies.

Nevertheless, the declines proved short-lived, with the benchmarks regaining their losses within days. The quick appointment of the widely respected former FBI director, Robert Mueller, as a special counsel in charge of the investigation seemed to calm the markets, as did a rumored roster of generally nonpartisan candidates to take over Comey’s position. Many market observers also agreed that the president’s trip overseas at the end of the month helped take attention away from the fraught domestic political environment.

EARNINGS RISE AT FASTEST PACE SINCE 2011

Favorable first-quarter earnings reports also bolstered sentiment and help compensate for political worries. By the end of the month, analytics firm FactSet was estimating that overall earnings for the S&P 500 had risen by nearly 14% compared with the quarter a year before—the biggest gain since 2011. A swing to profitability in the energy sector was a major reason for the surge, but materials, financials, and information technology companies also posted strong profit increases.

The month’s economic reports were also generally favorable. Payrolls growth rebounded in April following a disappointing showing the previous month, and sentiment gauges indicated that consumers remained upbeat about their job prospects. Retail sales also improved, although not as much as some analysts hoped, but auto sales recorded their fourth consecutive monthly decline. Americans also appeared to be growing more cautious about home purchases, with higher home prices and mortgage rates seeming to take a toll on pending home sales and new construction. T. Rowe Price Chief U.S. Economist Alan Levenson expects growth to pick up later in the year after a slow start, returning to a growth path of roughly 2% a year, the longer-term pattern it has followed since the current expansion began in 2009.

“DEFLATIONARY PROGRESS” SHOULD MUTE GROWTH EXPECTATIONS

Levenson and many T. Rowe Price equity managers also expect that any fiscal stimulus, whether in terms of tax cuts or increased infrastructure spending, is unlikely to arrive before 2018 and may be smaller in scope than many had anticipated. T. Rowe Price global growth equity manager David Eiswert believes that President Trump’s efforts to boost growth may face even longer-term hurdles. In a piece guest-authored for the Financial Times early in the month, Eiswert argued that President Trump’s growth and reflation agenda is unlikely to pull the economy off its slow growth path. “Deflationary progress,” Eiswert contended, is seeing automation and other technological changes drive substantial rewards to some, even as it keeps a lid on overall growth in individual industries—as starkly illustrated by the music industry’s transition to digital streaming. “Investors and voters will have to come to terms with the contradiction of progress and lower growth,” Eiswert cautions.

INTERNATIONAL EQUITIES RISE

International stocks recorded strong gains as sentiment picked up, following better-than-expected corporate earnings, improving economic data, less global uncertainty, and the election of a pro-European Union (EU) president in France. Most emerging markets currencies strengthened against the U.S. dollar, aiding returns. The Bank of England kept interest rates unchanged at its monetary policy meeting, despite an uptick in inflation.

Within the MSCI EAFE Index, all 10 sectors logged gains. Utilities, telecommunication services, information technology, consumer staples, health care, and energy stocks recorded higher returns than the EAFE index as a whole. Materials stocks recorded the smallest gain. Growth stocks solidly outperformed value stocks. Emerging markets, weighed by falling energy prices, underperformed developed market stocks.

International Indexes
Total Returns

MSCI Indexes

May

Year-to-Date

EAFE (Europe, Australasia, Far East)

3.81%

14.40%

All Country World ex-U.S.A.

3.35

14.05

Europe

5.06

17.18

Japan

3.02

  8.93

All Country Asia ex-Japan

4.36

20.93

EM (Emerging Markets)

2.98

17.34

All data computed in U.S. dollars and as of May 31, 2017. This chart is shown for illustrative purposes only and does not represent the performance of any specific security. Past performance is not a reliable indicator of future performance.

Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities of financial products. This report is not approved, reviewed, or produced by MSCI.

LESS POLITICAL UNCERTAINTY IN EUROPE INVIGORATES THE MARKET

European markets reacted positively to the decisive May 7 election of centrist Emmanuel Macron over anti-EU nationalist Marine Le Pen in the French presidential election. Bank stocks rose following the news but quickly settled back, as equity markets in general had already priced in a Macron victory. On May 9, France’s CAC 40 Index rose to its highest level since January 2008, and the pan-European Stoxx Europe 600 Index finished at a 21-month high. The euro gained about 1% during the week of Macron’s victory, continuing a rising trend for the currency in the weeks leading up to the election. T. Rowe Price Equity Portfolio Manager, Dean Tenerelli said a likely relief rally over the summer could provide further stability in European markets now that the threat of a Le Pen victory has been put to rest, and he thinks that banking and telecommunication services stocks will see a boost as Macron’s pro-business stance and support for greater consolidation gain traction.

EUROZONE ECONOMIC GROWTH LARGELY POSITIVE…

On May 10, European Central Bank (ECB) President Mario Draghi pushed back on calls by some European officials to ease its monetary stimulus. Draghi said that despite strong eurozone growth, inflation in the region remained weak, and the 9.5% unemployment rate was still too high. However, economic news coming out of Europe was a strong drumbeat of positivity. Germany’s business climate index rose to its highest level since 1991, eurozone gross domestic product (GDP) continued to grow, and manufacturing in the region rose to a six-year high.

…BUT GREECE FALLS INTO RECESSION

Greece’s GDP declined, marking a return to recession. However, Greek stocks rose a strong 14%, buoyed in large part by a May 2 agreement between the country and international creditors to clear the way for debt-relief talks. But talks between both sides seemed to stall by the end of the month, as a solution had yet to be made public.

JAPAN STRENGTHENS

Increasing consumption and stronger exports and imports fueled a rise in Japan’s economy, as the country logged its fifth consecutive quarter of expansion in the first quarter of 2017. Inflation rose 0.4% in April. Retail sales were better than expected, and industrial output posted its best gain in nearly six years. T. Rowe Price’s Japan-based equity portfolio manager, Archibald Ciganer, believes that Prime Minister Shinzo Abe’s “Abenomics” policies deserve much of the credit for Japan’s improving economic situation. However, Ciganer said that he has grown a bit more cautious about the Bank of Japan’s ability to weaken the yen over time, as the global currency environment has grown more uncertain and volatile. In addition, Ciganer notes that the Japanese market is more exposed than most to the health of the global economy. While he expects modest global growth to continue, an unexpected strengthening or weakening is likely to resonate with Japanese stocks.

EMERGING MARKETS ADVANCE, BUT BRAZILIAN STOCKS SLIDE AMID POLITICAL TURMOIL

Emerging markets stocks marked the sixth consecutive month of positive returns, helped by continued international economic growth. The MSCI Emerging Markets Index hit a two-year high near month-end. Chinese stocks outperformed emerging markets as a whole, but local currency Chinese A shares were flat and underperformed the index. Ratings agency Moody’s cut China’s credit rating for the first time since 1989, citing concerns about rising debt and slowing economic growth. Brazilian stocks, down 5% for the month, tumbled following a report on secret recordings of President Michel Temer approving bribes from a top donor to buy the silence of the former speaker of the house, who is in jail for corruption. Brazil’s central bank reduced its benchmark rate by 1% at month-end, citing increased uncertainty, and signaled a moderate pace of rate cuts in the future, which disappointed investors who expected more aggressive easing. Russian stocks slid more than 6% as data showed lackluster economic growth and oil prices fell on disappointment that OPEC extended, but did not deepen, its production cuts until March 2018.

OUTLOOK: MODEST GLOBAL GROWTH

While the implications of the Brexit referendum and the impact of new policies of the new Republican-majority Congress and Trump administration will take shape over many months, we expect improving economic data. Markets appear to be anticipating increased fiscal and corporate spending to be the next leg of support for growth as the effectiveness of monetary policy fades. While remaining largely supportive, global monetary policies could diverge further in the near term as the U.S. Federal Reserve’s interest rate normalization policy advances and the ECB looks for sustainable signs of stabilization to begin reducing its quantitative easing measures. While emerging markets growth is expected to improve, emerging economies face increased risk from protectionist trade policies and rising developed market interest rates. China’s growth rate is expected to slow as the government seeks to rein in excessive debt. T. Rowe Price investment managers believe that the country still offers plenty of solid growth companies that do not rely on a high level of annual GDP growth to generate good returns.

TREASURIES BENEFIT FROM U.S. POLITICAL TURBULENCE

Longer-maturity U.S. Treasury bonds, which investors view as safe-haven securities, benefited from an increase in U.S. political risk after President Donald Trump removed FBI Director James Comey from office and the Department of Justice appointed a special counsel to investigate possible ties between former Trump campaign officials and the Russian government. The yield on the 10-year Treasury note decreased to 2.21% at the end of the month from 2.29% at the beginning of May. (Bond prices and yields move in opposite directions.) Yields on short-term Treasury debt increased as investors continued to expect the Federal Reserve to gradually raise its benchmark short-term lending rate.

FED KEEPS RATES ON HOLD

As was widely expected, the Fed held rates steady at its May monetary policy meeting. Late in the month, the central bank released the minutes from the meeting, which seemed to change few minds about the likely path of future interest rate increases—prices of federal funds futures contracts continued to show that the market expected rate hikes in June and September. T. Rowe Price Chief U.S. Economist Alan Levenson noted, however, that Fed officials were particularly focused on whether the first-quarter slowdown in growth would be reversed in the second quarter.

EURO AND YEN RALLY AGAINST U.S. DOLLAR

High-quality government bonds from non-U.S. countries also gained support from the political turmoil in the U.S. The yield on the 10-year German sovereign note reached 0.44% mid-month before a rally drove it below 0.30% near the end of May. The euro gained more than 3% versus the U.S. dollar, further boosting the returns of eurozone government debt in dollar terms. The Bank of Japan continued to hold the 10-year Japanese government note’s yield near 0% while the yen strengthened 0.8% against the U.S. dollar. Japan’s economy grew at a 2.2% annualized rate in the first quarter, which marked the country’s fifth consecutive quarter of expansion—something Japan has not experienced in more than a decade.

Total Returns

Index

May

Year-to-Date

 

Bloomberg Barclays U.S. Aggregate Bond Index

0.77%

2.38%

 

J.P. Morgan Global High Yield Index

0.66

4.85

 

Bloomberg Barclays Municipal Bond Index

1.59

3.94

 

Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index

2.19

6.21

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

0.88

6.34

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

0.62

1.76

 

Sources: Bloomberg Barclays and J.P. Morgan. All data are in U.S. dollars and as of May 31, 2017. Past performance is not a reliable indicator of future performance. This chart is shown for illustrative purposes only and does not represent the performance of any specific security. Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission.

MUNIS OUTPERFORM MOST TAXABLE SEGMENTS

Municipal debt outperformed most segments of the taxable bond market. T. Rowe Price municipal bond traders reported that demand for tax-free securities was robust, supporting the asset class. The muni market also proved resilient in the face of a notable development in the market for bonds from Puerto Rico—a large segment of the market given the tax-free nature of interest payments on the bonds in all U.S. states. Early in the month, Puerto Rico’s financial oversight board filed a petition with the U.S. District Court in Puerto Rico to help the U.S. territory restructure approximately $51 billion in debt. This would be the largest restructuring of municipal debt in U.S. history. T. Rowe Price’s municipal bond team has said for some time that Puerto Rico was excessively leveraged and that its debt burden would eventually need to be restructured.

INVESTMENT-GRADE CORPORATES OUTPACE RISKIER BONDS

In a reversal of a trend from recent months, investment-grade corporate debt performed better than segments with more credit risk, including high yield bonds. Investment-grade corporates benefited from their tight trading links to Treasuries as well as from narrower credit spreads, which measure the additional yield above that of a comparable-maturity Treasury security that investors demand for holding a bond with credit risk. Credit spreads decreased the most in the telecom and health care sectors.

GAINS FOR EMERGING MARKETS BONDS DESPITE INCREASING POLITICAL RISK IN BRAZIL

Emerging markets debt produced healthy returns despite a sudden increase in political risk in Brazil. One of Brazil’s leading media outlets reported that it had obtained recordings of President Michel Temer allegedly condoning bribes to win the silence of a potential witness in the ongoing investigation into the country’s huge government corruption scandal. Brazil’s bonds and currency sold off sharply on the news before regaining some of their lost ground. Emerging markets debt denominated in local currencies performed notably better than dollar-denominated bonds in U.S. dollar terms, as many emerging markets currencies strengthened versus the dollar.

Treasury Yields

Maturity

April 30

May 31

3-Month

0.80%

0.98%

6-Month

0.99

1.08

2-Year

1.28

1.28

5-Year

1.81

1.75

10-Year

2.29

2.21

30-Year 2.96 2.87

Source: Federal Reserve Board, as of May 31, 2017.

HIGH YIELD CREDIT SPREADS NARROW

Credit spreads on high yield bonds also narrowed over the course of the month, leading the asset class to positive returns that were less impressive than in recent months. Oil prices were volatile, leading to some volatility in noninvestment-grade bonds as commodities-related issuers make up a sizable portion of high yield benchmark indexes. Crude oil rallied in anticipation of coordinated production cuts at a late-month OPEC meeting but then fell after the announced decrease in production was smaller than the market had anticipated.

MBS LAG MOST OTHER TAXABLE BOND SEGMENTS

Mortgage-backed securities (MBS) were positive but lagged most other fixed income segments, extending their year-to-date underperformance. Continued uncertainty about the Fed’s plans to reduce its large holdings of MBS weighed on the market. The central bank’s holdings account for a major proportion of outstanding agency MBS. The minutes from the Fed’s May policy meeting showed that officials supported a plan to gradually reduce reinvestment of principal from its bond holdings in an effort to minimize the impact on the MBS market, but the details of the unwinding strategy are still unknown.

SELECT LOCALLY DENOMINATED EMERGING MARKETS BONDS ATTRACTIVE

T. Rowe Price’s multi-sector bond portfolio managers are finding opportunities to benefit from positive inflation-adjusted interest rates in select locally denominated emerging markets debt. These attractive real rates contrast with the negative inflation-adjusted yields available in most developed markets. Inflation has broadly moderated from the traditionally high levels in developing economies, boosting real yields while allowing some emerging markets central banks to cut interest rates. In addition, some emerging markets currencies appear to provide compelling relative value after the U.S. dollar’s multiyear rally, but selectivity in exposure to the currencies of developing markets is essential.

GLOBAL CAPITAL MARKETS ENVIRONMENT

Major U.S. stock indexes were narrowly mixed in May. It was a relatively quiet month, except for a one-day plunge on May 17, stemming from the congressional investigations into possible Russian influence in the 2016 U.S. elections and President Donald Trump’s controversial firing of FBI Director James Comey. Early in the month, the Federal Reserve decided to leave short-term interest rates unchanged at its May 2–3 policy meeting, as expected. Also, Congress and the president agreed to fund the federal government until September―thus avoiding, for the time being, a possible government shutdown. In addition, the monthly payrolls report for April showed a rebound after a disappointing March report. None of these developments seemed to have much impact on markets, however. On the other hand, investors waited eagerly for the Fed to release on May 24 the minutes from its earlier policy meeting, in hopes of finding clues about the timing of the Fed’s next rate increase―possibly in mid-June―and about the central bank’s plans to reduce the size of its balance sheet, which could begin later this year. While a June rate increase is not a certainty, T. Rowe Price Chief U.S. Economist Alan Levenson continues to believe the Fed will raise rates two more times in 2017.

Large-cap shares outperformed mid- and small-caps. The S&P 500 Index returned 1.41%, versus -0.49% and -2.03% for the S&P MidCap 400 Index and the Russell 2000 Index, respectively. As measured by various Russell indexes, growth stocks surpassed value stocks across all market capitalizations―continuing this year’s trend.

In the large-cap universe, as measured by the S&P 500, most sectors produced positive returns. Information technology shares performed best, led by several industry bellwethers. Utilities and consumer staples stocks generally fared better than the broad-based S&P 500. Energy shares fell the most on disappointment that oil-producing countries extended, but did not deepen, their production cuts until March 2018. Financial shares declined partly due to the Fed minutes, which hinted at gradual interest rate hikes, rather than aggressive rate increases, through the remainder of the year. Higher interest rates enable banks to make more profitable loans.

  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index

May

1.41%

-0.49%

-2.03%

Year-to-Date

8.66

 4.30

 1.48

Past performance is not a reliable indicator of future performance.
Source for S&P data: S&P. Standard & Poor's®”, “S&P®”, “S&P 500®”, “Standard & Poor's 500”, and “500” are trademarks of Standard & Poor's, and have been licensed for use by T. Rowe Price.
Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group.

U.S. bonds posted positive returns in May. The Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of domestic investment-grade taxable bonds, returned 0.77%. The Fed’s post-meeting statement and the Fed’s meeting minutes published three weeks later reinforced expectations of two more rate hikes this year. In response, short-term interest rates pressed higher, but long-term rates edged lower, resulting in a flattening of the Treasury yield curve. In the taxable investment-grade universe, most fixed income sectors produced positive returns, with long-term Treasury and corporate bonds performing best. Mortgage-backed and asset-backed securities posted milder gains. Municipal bonds outperformed taxable bonds. High yield issues posted modest gains.

  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

JPMorgan Global
High Yield Index

May

0.77%

1.59%

0.66%

Year-to-Date

2.38

3.94

4.85

Past performance is not a reliable indicator of future performance.
Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission.

Developed non-U.S. equity markets outperformed U.S. equities in dollar terms, as the dollar weakened versus most major currencies. The MSCI EAFE Index, which measures the performance of large-cap stocks in Europe, Australasia, and the Far East, returned 3.81%. Most developed Asian markets rose; Japanese shares advanced 3% as the yen edged higher versus the greenback. The Japanese government released positive economic data in May, including a preliminary reading that showed gross domestic product growth at an annualized rate of 2.2% in the first quarter of 2017. This was the fifth consecutive quarter of positive growth and the longest stretch of quarterly growth in over a decade. Most European markets produced positive returns in dollar terms, helped by a 3% advance in the euro. In France, centrist candidate Emmanuel Macron won the highly anticipated second round of the presidential election, defeating far-right candidate Marine Le Pen. The result was widely expected.

Equities in emerging markets underperformed developed non-U.S. equity markets. The MSCI Emerging Markets Index returned 2.98%. In Latin America, Brazilian shares fell 5% for the month. Brazilian assets tumbled when news broke that President Michel Temer allegedly condoned acts of bribery. Most emerging Asian markets rose, but South Korea far outpaced the region with an 8% gain. The market was boosted by optimism that the new president, Moon Jae-in, would take measures to reduce corruption and increase fiscal spending. Most markets in emerging Europe rose in dollar terms, led by Greece and Hungary, where stocks advanced more than 10%. Russian stocks were the outlier, dropping over 6% as oil prices fell following OPEC’s decision to extend, but not deepen, its production cuts.

  MSCI EAFE Index MSCI Emerging Markets Index

May

  3.81%

  2.98%

Year-to-Date

14.40

17.34

Past performance is not a reliable indicator of future performance.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

Bonds in developed non-U.S. markets produced solid returns in U.S. dollar terms. This was driven in part by the U.S. dollar weakening against most major foreign currencies on rising U.S. political concerns and weak economic data fueling speculation that the Fed could slow its pace of monetary tightening. In Europe, government bond yields declined amid dovish rhetoric from European Central Bank officials. In the UK, the Bank of England decided to keep its policy rate unchanged at the historic low of 0.25%. This news, coupled with a weakened 2017 economic growth forecast and diminishing expectations for Prime Minister Theresa May’s Conservative Party to do well in the upcoming general elections on June 8, caused the pound to weaken. In Japan, long-term government bond returns were flat, as the 10-year yield stayed close to the Bank of Japan’s 0% yield target.

Emerging markets debt produced positive returns. Emerging markets currencies were mostly higher versus the dollar, and local currency issues generally outperformed dollar-denominated debt. During the month, Moody’s Investors Service cut its credit rating on China to A1 from Aa3 but changed the outlook to stable from negative. The downgrade reflects concerns over China’s rapidly growing debt load and marks Moody’s first reduction of China’s credit rating since 1989. Elsewhere, Brazilian bonds came under pressure and the currency, the real, weakened due to the corruption allegations against President Temer. However, the central bank reduced interest rates at the end of the month.

  Bloomberg Barclays
Global Aggregate
Ex-U.S. Dollar Bond
Index

JPMorgan Emerging
Markets Bond
Index Global
Diversified

JPMorgan GBI-EM
Global Diversified
Index

May

2.19%

0.88%

1.96%

Year-to-Date

6.21

6.34

9.86

Past performance is not a reliable indicator of future performance.
Bloomberg Index Services Ltd. Copyright 2017, Bloomberg Index Services Ltd. Used with permission.

EMERGING MARKETS STOCKS RISE IN MAY ON REASSURING GLOBAL GROWTH OUTLOOK

Emerging markets stocks rose for the sixth straight month in May as solid economic data worldwide assured investors of a sustained global recovery. Most developing world countries reported first-quarter gross domestic product (GDP) growth that either matched or exceeded forecasts. China lifted sentiment as indicators signaled broadly stable growth and its foreign currency reserves rose for the third straight month. Most emerging markets currencies strengthened against the U.S. dollar in May, which also helped returns. The MSCI Emerging Markets Index hit a two-year high near month-end. Seven of 10 sectors in the index rose, led by consumer discretionary stocks. Energy and utilities stocks declined, while the materials sector ended nearly flat

Total Returns

MSCI Index

 May

 Year-to-Date

Emerging Markets (EM)

 2.98%

17.34%

EM Asia

 4.54

21.10

EM Europe, Middle East, and Africa (EMEA)

 0.20

  7.56

EM Latin America

-2.32

  9.59

All data are in U.S. dollars and as of May 31, 2017. Past performance is not a reliable indicator of future performance.
This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

CHINESE STOCKS GAIN; SOUTHEAST ASIAN STOCKS ADVANCE ON SOLID GDP DATA

  • Chinese stocks rose, while domestically traded A shares were nearly unchanged. Moody’s cut its credit rating on China for the first time since 1989, citing concerns about rising debt and slowing economic growth. The downgrade doesn’t affect the domestic bond market but still deals a setback for China, which is trying to woo more foreign investors into its $9 trillion debt market.

  • Indian stocks advanced. India’s economy grew a weaker-than-expected 6.1% annual pace in the first quarter, its slowest growth in more than two years, weighed by a shock demonetization measure last November. For the fiscal year ended March 31, India’s GDP grew 7.1% compared with 8.0% the previous year. The surprising first-quarter slowdown makes it more likely that India’s central bank will leave interest rates on hold.

  • Southeast Asian stocks posted slight gains. The Philippines reported that its first-quarter GDP grew a lower-than-expected 6.4% from a year ago as government spending weakened, while Indonesia’s roughly 5% first-quarter GDP growth met forecasts. Malaysia reported that its economy grew a surprisingly strong 5.6% in the first quarter, its fastest pace in two years, aided by an export recovery driven by higher oil prices. 

BRAZILIAN STOCKS SLIDE ON RENEWED POLITICAL TURMOIL; ANDEAN STOCKS GAIN ON RATE CUTS

  • Brazilian stocks fell after a newspaper reported on secret recordings of President Michel Temer approving bribes from a top donor to buy the silence of the former speaker of the house, who is in jail for corruption. The allegations against Temer sparked a sell-off in Brazil’s markets and raised the specter of another impeachment after former president Dilma Rousseff was ousted last year. The central bank reduced its benchmark rate by 1% at month-end, citing increased uncertainty, and signaled a moderate pace of rate cuts in the future, disappointing investors who expected more aggressive easing.

  • Mexican stocks edged higher. Mexico’s economy grew at a surprisingly strong 2.7% seasonally adjusted annual pace in the first quarter, leading its finance ministry to lift its 2017 growth estimate. The improved outlook comes just two months after the ministry cut its annual forecast, a move it attributed to U.S. policy uncertainty. Mexico’s central bank raised its benchmark rate to its highest level in eight years after inflation accelerated.

  • Andean stock markets advanced. Central banks in Chile, Colombia, and Peru cut their benchmark interest rates to stimulate growth in their respective economies. Chile’s rate cut was the fourth this year and came after the country reported its weakest quarterly growth since the 2009 financial crisis. Peru’s rate cut was largely expected as the country recovers from damaging rainstorms and a long-running corruption scandal involving Brazilian construction firm Odebrecht—both of which will curb economic growth this year, according to Peru’s finance minister.

RUSSIAN STOCKS FALL AS ECONOMY REMAINS WEAK; SOUTH AFRICAN STOCKS GAIN ON HOPES FOR ZUMA’S OUSTER

  • Russian stocks slid more than 6% as data showed lackluster economic growth despite an upswing in oil prices from year-ago levels. Russia’s first-quarter GDP edged up 0.5% from a year ago, barely above the previous quarter’s 0.3% pickup, spurring doubts about the health of the economy after it emerged from recession at the end of 2016. The International Monetary Fund forecast Russia’s economy would grow 1.4% this year but cautioned that medium-term growth would be “subdued” due to bottlenecks in the economy and sanctions.

  • South African stocks advanced as growing opposition to corruption-tainted President Jacob Zuma raised hopes that he would be forced out of office, though he survived a second attempt to oust him by leaders of the ruling African National Congress. South Africa’s central bank left its key interest rate unchanged and lowered its economic growth forecasts for this year and next, citing weak business and consumer confidence.

  • Turkish stocks rose, extending the previous month’s rally that was spurred by the outcome of a constitutional referendum giving the country’s president greater executive powers. Gains were helped by a stronger lira, which has rebounded this year after hitting a record low against the U.S. dollar in January. The domestic benchmark Borsa Istanbul 100 Index rose to a record near month-end.

SOLID FUNDAMENTALS IN EMERGING MARKETS OFFSET NEAR-TERM RISKS

We are optimistic about the outlook for emerging markets. Most developing countries have smaller current account deficits, larger foreign exchange reserves, and more flexible currencies than they did in previous decades, reducing the risk of a financial crisis. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising consumption as the middle class expands. Emerging markets stocks remain attractively valued relative to developed markets stocks for long-term investors.

Near-term risks include a stronger dollar and a faster-than-expected pace of U.S. interest rate hikes. Given the stronger financial positions of most emerging markets, however, we believe they will be able to manage a gradual move away from the Fed’s accommodative policies of the past several years. Economic growth in emerging markets has stabilized and corporate earnings are starting to turn higher after years of disappointing performance. Nevertheless, we believe that careful stock selection will remain crucial for producing good long-term returns as emerging markets continue to show wide dispersion in the performance of individual countries and companies.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of May 2017 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance cannot guarantee future results. All investments involve risk. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

T. ROWE PRICE, INVEST WITH CONFIDENCE and the Bighorn Sheep design are collectively and/or apart, trademarks of T. Rowe Price Group, Inc. © 2017 T. Rowe Price. All rights reserved.

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