Markets & Economy

Monthly Market Review

September 2017
T. Rowe Price

SMALL-CAPS AND VALUE STOCKS REGAIN LEADERSHIP AS MARKET’S ADVANCE CONTINUES

Stocks recorded another round of gains in September, marking the eleventh consecutive month of positive returns for the large-cap S&P 500 Index. The advances brought all of the indexes to record highs, although trading volumes remained somewhat subdued for much of the month. In a notable departure from recent trends, the small-cap indexes easily outperformed their large-cap counterparts, and value shares (except among mid-caps) reclaimed market leadership from growth stocks. On a sector basis, energy stocks performed best within the S&P 500 Index as domestic oil prices reached their highest levels since April and international oil prices climbed to levels not seen since mid-2015. Financials also performed well, helped by rising interest rates, which support bank lending margins. Rising rates pressured utilities and real estate stocks, however, which registered declines for the month.

U.S. Indexes
Total Returns

 

September

Year-to-Date

Dow Jones Industrial Average

2.16%

15.45%

S&P 500 Index

2.06

14.24

Nasdaq Composite Index

1.05

20.67

S&P MidCap 400 Index

3.92

9.40

Russell 2000 Index

6.24

10.94

Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended September 30, 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.

POLITICS AND NATURAL DISASTERS DOMINATE SENTIMENT

With few companies reporting earnings and the U.S. economy generally on stable ground, political and international developments—punctuated by several natural disasters—often appeared to drive sentiment in September. Stocks wavered early in the month as investors reacted to both the arrival of Hurricane Irma in the Caribbean and Florida and reports that North Korea was preparing another missile launch. Stocks then jumped on September 11, in what T. Rowe Price traders characterized as a relief rally after the worst-case scenarios in both situations failed to materialize. A further rise in tensions with North Korea later in the month led to sporadic bouts of volatility in the market, however, even as investors assessed the damage wrought by another hurricane, Maria. T. Rowe Price industry analysts expect that the damage from the string of hurricanes in August and September, along with the earthquakes in Mexico, may result in 2017 being the worst year ever for catastrophic insurance losses.

TAX REFORM PLAN JUMP-STARTS “REFLATION TRADE”—AT LEAST TEMPORARILY

Investors also kept a close eye on Washington, where President Trump and congressional Republicans made continued efforts to deliver on a package of regulatory and stimulus measures that had excited hopes for a “Trump reflation” late in 2016. Markets seemed to have a muted reaction to a renewed push in the Senate by the GOP to repeal and replace the Affordable Care Act, although the stocks of health care service providers reliant on Medicaid reimbursement wavered briefly when the effort seemed to be making progress. The abandonment of the legislation late in the month seemed to favor the market, if only because it cleared the way for Republican leaders to focus on tax reform. Stocks rose on September 27, after President Trump revealed plans to lower the top tax rate, eliminate the alternative minimum tax, and treat corporate profits accumulated overseas as already repatriated. In an echo of the “reflation trade” that favored small-caps and value stocks after the election, the small-cap Russell 2000 Index jumped nearly 2% for the day and more than quadrupled the rise of the S&P 500 Index.

The Federal Reserve’s plans to further tighten monetary policy appeared to be another factor periodically driving sentiment. Early in the month, financial stocks reacted poorly to a speech by Minneapolis Federal Reserve Bank President Neel Kashkari, who stated that recent Fed rate hikes have been detrimental to the U.S. economy. Conversely, Fed Chair Janet Yellen captured attention on Wall Street when she remarked in a speech late in the month that the central bank “should be wary of raising rates too gradually.” The Fed’s scheduled policy meeting on September 19–20 brought few surprises, with policymakers keeping rates steady and announcing, as anticipated, plans to begin reducing the size of its balance sheet by not reinvesting some of the payments on its holdings of Treasury bonds and mortgage-backed securities. T. Rowe Price Chief U.S. Economist Alan Levenson currently expects that the Fed will raise rates again in December.

OUTLOOK: SEVERAL FACTORS FAVOR FINANCIALS

Along with the surge in energy shares, the strong performance of the heavily weighted financials segment was an important factor in the market’s overall advance in September, as well as in the outperformance of value stocks. As noted, the prospect of higher interest rates has been a tailwind for financial shares, but T. Rowe Price analysts and managers who focus on the sector believe that longer-term, structural factors may also help financial shares outperform in the coming months. The sector is likely to benefit from further regulatory reform, valuations are generally undemanding, and banks, in particular, are more heavily capitalized and have greater liquidity than ever before. While financials remains a highly cyclical group, T. Rowe Price’s industry experts believe that banks and regulators are positioned to weather the next downturn much better than they did a decade ago.

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 October 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 are subject to market risk, including the possible loss of principal. Investing in financial services may involve additional risk and volatility. All charts and tables are shown for illustrative purposes only.

INTERNATIONAL EQUITIES RISE

Developed international stock markets rose in September, though emerging markets equities lost ground. Geopolitical concerns about rising tensions between North Korea and the U.S. and a morning rush hour explosion—labeled a terrorist incident—at a southwest London Underground station temporarily suppressed markets. The eurozone grew at its fastest pace in two years, according to Eurostat statistics agency, and business sentiment and manufacturing exports were solid. Very strong retail sales growth and buoyant consumer sentiment in the UK outweighed concerns about rising inflation. The euro and the yen weakened against the U.S. dollar, while the pound strengthened. Oil prices reached a three-month high.

Within the MSCI EAFE Index, the majority of sectors gained. Energy stocks rose nearly 8%, and the consumer discretionary, industrials and business services, information technology, and financials sectors surpassed the benchmark. The utilities, consumer staples, real estate, and telecommunication services segments declined. Value stocks outperformed growth stocks, and developed markets outperformed emerging markets.

International Indexes
Total Returns

MSCI Indexes

September

Year-to-Date

EAFE (Europe, Australasia, Far East)

2.53%

20.47%

All Country World ex-U.S.A.

1.89

21.61

Europe

3.32

23.45

Japan

2.08

14.63

All Country Asia ex-Japan

-0.11

31.22

EM (Emerging Markets)

-0.37

28.14

All data are in U.S. dollars as of September 30, 2017. This chart is shown for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

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.

EUROZONE ECONOMIC GROWTH STRENGTHENS

European policymakers increased gross domestic product (GDP) forecasts, as economic expansion rates in Germany and France were the highest in six years. Economic confidence in the region swelled to a decade high. The European Central Bank (ECB) made no policy changes at its September meeting, though it lowered inflation projections as ECB President Mario Draghi noted concern about the recent volatility in the euro exchange rate. Draghi informed markets that any changes to the ECB’s quantitative easing program would likely be announced in October.

UK DOWNGRADES GROWTH FORECAST

The Bank of England voted 7–2 to keep interest rates at 0.25%, but the meeting minutes noted that “some withdrawal of stimulus was likely to be appropriate over the coming months.” Brexit-related economic challenges and weaker-than-expected wage growth weighed on markets, T. Rowe Price traders noted. The UK also reported a softer final second-quarter GDP figure, 1.5%, and a wider current account deficit, though consumer credit continued to grow. Headline inflation in the UK jumped to 2.9% in August from 2.6% in the previous month.

EUROPEAN GEOPOLITICAL VOLATILITY

Spanish stocks gained slightly, but they lagged their European counterparts as an independence referendum in Catalonia gained momentum, despite the Spanish government’s assertion that the vote would be illegal. T. Rowe Price traders noted that the while the independence referendum was grabbing attention, the wider risk on Spanish equity markets seemed to be limited. German stocks rose in the last week of the month following the election of Angela Merkel’s fourth-term win as the German chancellor. French markets were largely unfazed by swelling protests against President Emmanuel Macron’s labor law reforms.

JAPANESE EQUITIES ON THE RISE

Japanese equities strengthened in U.S. dollar terms during the month, as exports spiked 18.1%, the largest year-over-year increase since November 2013. Robust shipments of automobiles to the U.S. and electronic parts to other parts of Asia drove the increase in exports. Imports were strong, swelling 15.2%, far above consensus expectations. Second-quarter GDP marked the fastest pace of growth since the first quarter of 2015. The Bank of Japan voted 8–1 to keep its key interest rates at -0.1%, as policymakers noted that the inflation expectations have stabilized in the country. Prime Minister Shinzo Abe announced plans for an $18 billion stimulus package intended to foster a “productivity revolution.”

EMERGING MARKETS FALL

Weakening global demand resulted in a slight monthly loss for emerging markets stocks, ending nine consecutive months of advances. Most equity indexes in the Europe, Middle East, Africa, and Arabian regions registered losses. Notably, energy price increases helped boost stocks in Russia. Chinese stocks outperformed the MSCI Emerging Markets Index thanks in part to solid growth in industrial production and a pickup in retail sales, but data released in September showed that China is in the midst of an economic slowdown. Latin American stocks outperformed the index, with Argentina rallying just over 10% for the month as the country made progress on economic reforms. India underperformed the emerging markets index as manufacturing activity decelerated and companies liquidated inventories ahead of a scheduled goods and services tax implementation next year.

OUTLOOK: CONTINUED MODEST GLOBAL GROWTH

Global growth momentum that started at the end of last year continued across most developed regions. 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. Global monetary policies have begun shifting away from extreme accommodative policies as the U.S. Federal Reserve advances its interest rate normalization process. The ECB is waiting for sustainable signs of improvement to begin reducing its quantitative easing measures. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising consumption.

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 October 2017 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

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.

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 are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

TREASURY YIELDS REBOUND FROM 10-MONTH LOW

An acceleration in inflation, the Trump administration’s announcement of its tax reform proposal, and increasingly hawkish rhetoric from the Federal Reserve helped drive Treasury yields higher in September. The yield on the benchmark 10-year Treasury note reached a 10-month low of 2.04% on September 7 but rose to 2.33% by the end of the month—its highest level since late July. The two-year note’s yield finished September at 1.47%, its highest level since November 2008. Bond prices and yields move in opposite directions.

FED INITIATES PLAN TO REDUCE ITS BALANCE SHEET

The Fed held short-term interest rates steady, keeping the federal funds target rate in the 1.00% to 1.25% range. At its September policy meeting, the Fed announced that in October it would begin slowly unwinding its $4.5 trillion balance sheet, a legacy of its massive purchases of Treasury bonds and mortgage-backed securities (MBS) in the aftermath of the 2008 financial crisis. The Fed will initially allow $6 billion of Treasuries and $4 billion of MBS to roll off its balance sheet each month as securities mature, and that total will gradually increase. Fed Chair Janet Yellen struck a hawkish tone in public comments, causing the odds of a December rate hike as measured by fed funds futures prices to rise above 75% at the end of September.

Driven by higher gasoline and shelter costs, the consumer price index (CPI) rose 0.4% in August, ending a recent string of lower-than-expected monthly inflation readings. The annual CPI figure of 1.9% was close to the Fed’s 2% inflation target. However, in its post-meeting statement, the central bank said that, although the recent hurricanes might boost energy prices, it expects inflation to remain below its objective in the near term. Inflation weighs on bond returns over the long term.

Total Returns

Index

September

Year-to-Date

 

Bloomberg Barclays U.S. Aggregate Bond Index

-0.48%

3.14%

 

J.P. Morgan Global High Yield Index

0.91

7.35

 

Bloomberg Barclays Municipal Bond Index

-0.51

4.66

 

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

-1.26

8.74

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

0.01

8.99

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

-0.22

2.32

 

Figures as of September 30, 2017. Past performance cannot guarantee future results. This chart is shown for illustrative purposes only and does not represent the performance of any specific security.

Source for Bloomberg Barclays index data: Bloomberg Index Services ltd. Copyright© 2017, Bloomberg Index Services Ltd. Used with permission.

MAJOR NON-U.S. CENTRAL BANKS KEEP ACCOMMODATIVE POLICIES

The U.S. dollar strengthened in September for the first time since February, reducing the returns in dollar terms of bonds issued in other currencies. Yields of non-U.S. high-grade sovereign debt generally moved higher, although the European Central Bank (ECB) and Bank of Japan (BoJ) kept their stimulative monetary policies in place. ECB President Mario Draghi cited persistently low inflation rates as a key reason for why accommodative monetary policy remains necessary until at least the end of 2017. The BoJ made no changes to its current monetary policy, voting to hold short-term rates on excess reserves for financial institutions at -0.1%, while continuing to buy Japanese government bonds in an effort to keep the yield of the 10-year bond near 0%.

Treasury Yields

Maturity

August 31

September 30

3-Month

1.01%

1.06%

6-Month

1.08

1.20

2-Year

1.33

1.47

5-Year

1.70

1.92

10-Year

2.12

2.33

30-Year 2.73 2.86

Source: Federal Reserve Board.

HIGH YIELD BONDS OUTPERFORM OTHER FIXED INCOME SECTORS

High yield bonds outperformed most other fixed income sectors by a large margin for the month. Below investment-grade securities were supported by investor demand for higher yields, a rally in equity markets, and higher oil prices. Energy-related issuers, which make up a significant portion of the high yield market, benefited as the price of West Texas Intermediate oil—the U.S. benchmark—reached its highest level since April. Credit spreads—the additional yield over comparable-maturity Treasuries that investors receive for investing in riskier securities—narrowed for both below investment-grade and investment-grade corporate bonds. Investment-grade corporates were supported by demand from investors in Asia and the U.S., minimal dealer inventories, and inflows.

MBS, MUNIS HOLD UP BETTER THAN TREASURIES

Mortgage-backed securities held up better than Treasuries and the broader U.S. investment-grade bond market for the month. The Fed’s decision to begin tapering its MBS holdings appeared to already have been largely priced in, while rising rates reduced the risk that homeowners would prepay their mortgages by refinancing and supported the sector.

Municipal bonds had negative returns but outperformed Treasuries, as cash flows into the sector remained solidly positive while new issuance fell off more than 30% from the same period last year. In credit-specific news, Puerto Rico’s benchmark general obligation debt traded under 50 cents on the dollar for the first time, as widespread hurricane damage dimmed the hope of meaningful recovery for bondholders. The commonwealth is seeking to restructure its debt in federal court.

EMERGING MARKETS: BRAZIL’S ECONOMY IMPROVES, CHINA DOWNGRADED

Emerging markets bonds produced flat results, as solid demand for the sector was offset by the weakness of many emerging countries’ currencies. In Brazil, the central bank cut interest rates by one percentage point to 8.25%, the eighth cut in 2017, as the country’s economy is showing signs of growth. In negative news, S&P Global Ratings downgraded its sovereign credit rating for China due to concerns about the country’s rising debt levels. The decision marks S&P’s first ratings cut for China since 1999 and the second sovereign downgrade for the country this year after a similar move in May by Moody’s.

FLOATING RATE BANK LOANS CAN HELP MINIMIZE RISK FROM RISING INTEREST RATES

T. Rowe multi-sector bond managers are constructive; however, they’re mindful that valuations in the sector have become less attractive. Like high yield bonds, floating rate loans also stand to benefit from an environment of steady economic growth, favorable employment trends, and healthy corporate fundamentals.

GLOBAL CAPITAL MARKETS ENVIRONMENT

Major U.S. stock indexes were positive in September, with various indexes reaching all-time highs at different points throughout the month. U.S. equities were aided in the early part of the month when President Donald Trump surprised congressional Republicans by agreeing to a short-term fiscal deal with congressional Democratic leaders. The deal, which was approved by both chambers of Congress by comfortable margins, funds the federal government and pushes back the debt ceiling for three months while providing emergency assistance for Hurricane Harvey victims. Stocks continued to rise as damage reports from Hurricane Irma were not as severe as previously expected. Tensions between North Korea and the U.S. remained in the spotlight during September, but volatility in equity markets remained somewhat muted as rhetoric between President Trump and North Korea’s Kim Jong-un appeared to have less of an impact on markets as the month progressed. At the end of the month, President Trump and congressional Republicans proposed a $5 trillion tax reform plan that would reduce tax rates for corporations and individuals alike.

Small-cap shares outperformed mid- and large-caps. The Russell 2000 Index returned 6.24% versus 3.92% and 2.06% for the S&P MidCap 400 Index and the S&P 500 Index, respectively. As measured by various Russell indexes, value stocks outperformed growth stocks across large- and small-caps, whereas growth slightly outperformed value among mid-caps.

In the large-cap universe, as measured by the S&P 500, sector performance was mixed. Energy shares did best as oil prices climbed while demand increased and Gulf of Mexico oil refineries resumed operations after being shut down for several weeks due to Hurricane Harvey. T. Rowe Price energy analysts do not believe that Harvey will have a long-term impact on oil prices. Financials and industrials and business services stocks also outperformed with strong returns. Several sectors produced nearly flat returns, but utilities, real estate, and consumer staples shares declined.

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

September

2.06%

3.92%

6.24%

Year-to-Date

14.24

9.40 10.94

Past performance is not a reliable indicator of future performance.
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.

Investment-grade U.S. bond prices declined. Despite a steep one-day yield decrease at the beginning of September, 10-year U.S. Treasury yields increased for the month (bond prices and yields move in opposite directions). Longer-term Treasury yields hit their September highs at the end of the month after the Federal Reserve decided on September 20 to keep short-term interest rates steady and announced, as expected, that it would begin slowing reinvestment in its bond holdings in October. The Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of domestic investment-grade taxable bonds, returned -0.48%. In the taxable investment-grade debt universe, long-term Treasuries performed worst. Corporate, mortgage-backed, and asset-backed securities held up better but still posted slight negative returns for the month. Municipal issues performed approximately in line with the taxable bond market. High yield issues outperformed high-quality bonds, helped by strength in the energy sector, which represents a substantial portion of the below investment-grade market.

  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

JPMorgan Global
High Yield Index

September

-0.48%

-0.51%

0.91%

Year-to-Date

3.14

4.66

7.35

Past performance is not a reliable indicator of future performance.
Source for Bloomberg Barclays index data: Bloomberg Index Services ltd. Copyright© 2017, Bloomberg Index Services Ltd. Used with permission.

Developed non-U.S. equity markets had positive returns, even though a stronger U.S. dollar versus the Japanese yen and the euro reduced local returns in U.S. dollar terms. The MSCI EAFE Index, which measures the performance of large-cap stocks in Europe, Australasia, and the Far East, returned 2.53%. Most developed Asian markets edged lower, but Japanese shares returned more than 2%. Despite heightened geopolitical tensions with North Korea, the Japanese economy is continuing to slowly gain strength, thanks, in part, to a rebound in global trade. Data released in mid-September showed that Japanese machinery orders in July more than doubled analysts’ expectations. European equity markets in aggregate posted solid returns for the month, with Ireland, Germany, and France leading the way. UK shares rose about 3% in dollar terms, lifted by a 4% strengthening of the pound versus the greenback, stemming from expectations for rising interest rates. The economic picture remained unfavorable, however, as the British Chambers of Commerce indicated that there was “no sign on the horizon of a return to healthier levels of growth.” Rising costs of doing business in the UK and uncertainties surrounding Brexit are weighing on the economy.

Equities in developing markets posted slightly negative returns, underperforming developed equity markets. The MSCI Emerging Markets Index returned -0.37%. Latin American markets were mixed for the month. Mexican shares fell more than 3%, but Brazilian stocks returned more than 4%, even though President Michel Temer was indicted on his second corruption-related charge in three months. Temer is expected to survive this most recent charge―similar to his previous indictment―because of his strong support in Congress. In Asia, Chinese shares were little changed for the month, as data released in September showed that China is in the midst of an economic slowdown. Key indicators, such as industrial output, retail sales, and fixed-asset investment, recently all rose less than economists’ forecasts for the second consecutive month, indicating that China’s economic activity most likely peaked in the first half of 2017. Most emerging European markets declined in dollar terms, but Russian shares bucked the trend and advanced more than 4%. The market was lifted by modest ruble appreciation versus the dollar, higher oil prices, and news that the Russian economic recovery continued to gain momentum. In Turkey, which has a large current account deficit, shares tumbled more than 9% as oil prices climbed and inflation remained elevated.

  MSCI EAFE Index MSCI Emerging Markets Index

September

2.53%

-0.37%

Year-to-Date

20.47

28.14

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 declined in U.S. dollar terms as the dollar strengthened versus the yen and the euro. Government bond yields in core European markets increased from their early month lows, with the 10-year German bund yield rising around 10 basis points during the month. (One basis point equals 0.01 percentage points.) The European Central Bank (ECB) voted to keep its benchmark rate unchanged, and ECB President Mario Draghi stated that he is ready to increase the bank’s asset purchase program if needed. The Bank of England (BoE) voted 7–2 to keep its policy rate unchanged at the historic low of 0.25% at its September 14 policy meeting. With inflation on the rise, however, the BoE warned that “some withdrawal of monetary stimulus” is likely in the months ahead. This announcement prompted a quick rise in 10-year gilt yields and caused the pound to strengthen. In Japan, the Bank of Japan (BoJ) made no changes to its monetary policy at its September 21 meeting, marking one year since the BoJ started its yield curve control program, which currently aims to keep the 10-year government bond yield around 0%. The central bank also indicated it would continue buying Japanese government bonds at a pace of roughly ¥80 trillion per year.

Emerging markets debt produced flat to slightly negative returns but held up better than bonds in developed countries. Local currency issues modestly underperformed dollar-denominated debt as many emerging markets currencies declined versus the dollar. In South Africa, local currency bonds struggled as the rand tumbled versus most major currencies, hitting four-month lows versus the dollar and 10-month lows against the pound. In Latin America, Brazilian bonds performed well as the central bank reduced interest rates―making its eighth rate cut of 2017―by 100 basis points to 8.25% as the country continues to emerge from recession.

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

JPMorgan Emerging
Markets Bond
Index Global
Diversified

JPMorgan GBI-EM
Global Diversified
Index

September

-1.26%

0.01%

-0.34%

Year-to-Date

8.74

8.99

14.28

Past performance is not a reliable indicator of future performance.
Source for Bloomberg Barclays index data: Bloomberg Index Services ltd. Copyright© 2017, Bloomberg Index Services Ltd. Used with permission.

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 October 2017 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

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.

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 are subject to market risk, including the possible loss of principal. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds and bank loans involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. All charts and tables are shown for illustrative purposes only.

EMERGING MARKETS STOCKS DECLINE IN SEPTEMBER AS INVESTORS DIGEST GAINS

Emerging markets stocks declined in September in their first monthly drop since November 2016 as investors took a respite from buying after nine months of gains. The MSCI Emerging Markets Index rose for most of September but retreated near month-end as news of President Donald Trump’s tax cut plan spurred fears that investors would repatriate dollars and trigger large capital outflows from developing countries. Seven of 11 sectors in the index fell and four advanced, led by real estate. Materials stocks fell the most, followed by telecommunication services stocks.

Total Returns

MSCI Index

September

 Year-to-Date

Emerging Markets (EM)

-0.37%

28.14%

EM Asia

-0.01

32.15

EM Europe, Middle East, and Africa (EMEA)

-3.82

11.98

EM Latin America

1.58

27.00

All data are in U.S. dollars as of September 30, 2017. Past performance cannot guarantee future results.
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 DESPITE S&P DOWNGRADE; INDIAN STOCKS DECLINE AS RUPEE FALLS

  • Chinese stocks advanced, though recent data signaled the start of a widely anticipated second-half economic slowdown. Standard & Poor’s cut its credit rating for China citing the country’s rising debt risk, marking the agency’s first ratings cut for China since 1999 and the country’s second major downgrade this year.
  • Indian stocks retreated amid currency weakness and growing concerns about the outlook for the country’s economy, which expanded at its slowest pace in three years in the June quarter. Speculation that India’s government would boost growth through stimulus measures that could widen its fiscal deficit pressured the rupee to a six-month low against the U.S. dollar near month-end.
  • Most Southeast Asian stock markets rose, led by a roughly 3% advance in the Philippines, whose domestic benchmark repeatedly hit record levels. The Philippines’ central bank left its benchmark interest rate unchanged and projected that inflation would remain within its target until 2019. Malaysia’s central bank also held steady on interest rates and forecast stronger-than-expected growth and contained inflation as it noted sustained economic activity across Asia. Indonesian stocks declined. Indonesia’s central bank lowered its benchmark rate for the second straight month and signaled that it would pause at current levels.

BRAZILIAN STOCKS SURGE ON PRIVATIZATION NEWS; MEXICAN STOCKS GAIN ON BENIGN ECONOMIC, INFLATION OUTLOOK

  • Brazilian stocks added more than 4%. Brazil reported that its economy grew a better-than-expected 0.2% in the second quarter from the first, marking the second straight quarter of growth and raising recovery hopes following the country’s worst recession on record. Brazil’s central bank subsequently cut its benchmark lending rate by a full percentage point to its lowest level since July 2013 and signaled a gradual end to the current easing cycle.
  • Mexican stocks fell. Mexico’s central bank kept its benchmark rate unchanged for the second straight meeting as inflation fell in September. Banxico also said that two deadly earthquakes that hit Mexico would have a limited impact on the economy, though the disasters led some economists to cut their 2017 growth forecasts and raised expectations for policy easing starting next year.
  • Andean stock markets were mixed: Stock markets in Chile and Colombia advanced, while Peruvian stocks declined. Central banks in Chile and Colombia held their respective key interest rates steady, in line with market expectations, while Peru’s central bank cut its benchmark rate for the third time this year to counter sluggish economic growth.

SOUTH AFRICAN STOCKS FALL AS ECONOMY REMAINS LACKLUSTER; RUSSIAN STOCKS ADVANCE AS OIL RALLIES

  • South African stocks shed more than 6%. South Africa’s economy expanded a better-than-expected 2.5% in the second quarter from the first quarter, exiting its second recession in 10 years, though full-year growth is expected to hover near last year’s 0.3% expansion. The country’s central bank stayed pat on interest rates, defying expectations of a rate cut, due to inflation risks.
  • Russian stocks gained as surging global oil prices boosted the outlook for the country’s oil-driven economy. Brent crude oil futures touched a two-year high in September and entered a bull market in the third quarter amid signs of tightening demand worldwide. Russia’s central bank cut its key rate by a half-percentage point as inflation slowed more than expected and signaled more rate cuts on the horizon. It also forecast that the economy would expand up to 2.2% this year, up slightly from its earlier target.
  • Turkish stocks dropped nearly 10% amid profit taking following several months of gains and caution about rising inflation. Turkey’s economy expanded a surprisingly strong 2.1% in the second quarter from the prior quarter and 5.1% from a year ago, making it one of the world’s fastest-growing major economies. Days later, Turkey’s central bank left its key policy rates unchanged for the third straight meeting after inflation surpassed 10% last month.

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. Emerging markets stocks remain attractively valued relative to developed markets stocks.

Near-term risks include a rise in U.S. protectionism and a faster-than-expected pace of rate hikes by the Federal Reserve. However, we believe that emerging markets will be able to withstand a gradual tightening of monetary policy given that their financial positions have broadly improved in recent 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 be 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 October 2017 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

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.

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 are subject to market risk, including the possible loss of principal. International investments can be riskier than U.S. investments due to the adverse effects of currency exchange rates, differences in market structure and liquidity, as well as specific country, regional, and economic developments. These risks are generally greater for investments in emerging markets. All charts and tables are shown for illustrative purposes only.

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