Markets & Economy

Monthly Market Review

February 2017
T. Rowe Price

MAJOR INDEXES REACH NEW HIGHS ON STEADY GAINS

Stocks recorded solid gains in February, bringing all of the major benchmarks to new highs. The narrowly focused Dow Jones Industrial Average was the standout performer, managing at the end of the month to achieve a near-record run of 12 consecutive daily closing all-time highs. While not as strong, the broader Standard & Poor’s 500 Index had its own notable streak—the index set a new record for the number of trading sessions (50) without a daily swing of over 1%, a threshold it has not passed since mid-December. Within the S&P 500 Index, health care stocks performed best, and utilities, financials, and information technology shares were also particularly strong. Energy shares endured modest losses, held back by signs of increasing U.S. oil production that threatened to counteract OPEC production cuts. Telecommunication services stocks also recorded modest losses.

U.S. Indexes
Total Returns

 

February 2017

 

Year-to-Date

 

Dow Jones Industrial Average

 5.17%

 

5.82%

 

S&P 500 Index

 3.97

 

5.94

 

Nasdaq Composite Index

 3.75

 

8.22

 

S&P MidCap 400 Index

 2.62

 

4.34

 

Russell 2000 Index

 1.93

 

2.33

 

Past performance cannot guarantee future results.

Note: Returns are for the periods ended February 28, 2017. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to Russell indexes. Russell® is a registered trademark of Russell Investment Group.

ANIMAL SPIRITS BOOST BUSINESS SENTIMENT...

Many observers noted that the market’s gains in February continued to be driven by the “animal spirits”—John Maynard Keynes’s term for the “spontaneous urge to action” that can drive economic behavior—unleashed by the November elections. Evidence was especially clear that President Trump’s election and his promises for deregulation, tax cuts, and infrastructure spending were having a favorable impact on business attitudes. The National Federation of Independent Business’s measure of small-business sentiment moved higher in January and built on its December surge—the largest in the four-decade history of the index. Statements from the administration also seemed to drive market gains on occasion, most notably when Trump told a group of airline executives at mid-month that they should soon expect “something phenomenal in terms of tax.”

Whether those animal spirits had yet to result in a pickup of economic activity was less certain, but optimists could point to several signs that the economy had shifted to a higher gear after a subdued pace of growth in the final quarter of 2016. In one of the most closely watched economic signals, the Department of Labor reported on February 3 that employers had added a robust 227,000 jobs in January. T. Rowe Price Chief U.S. Economist Alan Levenson observed that the gain brought to an end a three-month soft patch and kept the labor market on a path of solid improvement. While hourly wages rose a meager 0.1% in the month, Levenson noted that it marked some consolidation of healthy recent earnings gains, which have outstripped inflation and muted productivity growth. The solid labor market was reflected in gauges of consumer sentiment, which ticked lower in January but remained near multiyear highs.

...AND CONFIDENT CONSUMERS INCREASE SPENDING

Consumers secure in their jobs appeared to be providing a modest boost to the broader economy and corporate earnings. Retail sales showed a solid gain in January, and some prominent “big box” retailers topped earnings expectations for the final quarter of 2016—although the move to online retailing seemed to be taking a continuing toll on department stores. The housing market remained healthy as well, with mortgage applications and existing home sales rising in January. Sales of new homes and pending home sales declined a bit, however. Positive readings also suggested that the manufacturing sector remained on track. A gauge of factory activity marked its fifth consecutive increase, and durable goods orders recorded a solid gain in January, although the increase was due to a rise in volatile aircraft orders.

FED LIKELY TO ACT SOON, BUT EQUITIES MAY PROVE RESILIENT

February also brought news that the consumer price index had jumped 0.6% in the previous month, its largest increase in nearly four years. Much of the gain was due to higher food and energy prices, but the core index, which excludes the two, also rose a solid 0.3%. While higher inflation signals can often dampen markets, investors took the news in stride and even bid up financial stocks in anticipation of higher short-term interest rates and lending margins, according to T. Rowe Price traders. By the end of the month, futures were pricing in a greater than 50% chance of a rate hike at the Federal Reserve’s March 14–15 policy meeting.

Many T. Rowe Price managers believe that stocks can weather a modest increase in interest rates, particularly from extremely low current levels. Indeed, some of the firm’s equity managers welcome a renormalization of monetary policy as long overdue, as it will help tamp down on excessive risk taking and correct other market distortions in recent years. The firm’s managers and analysts, in both the Equity and Fixed Income Divisions, also generally agree that it is too soon to judge the implications of the administration’s plans on interest rates or other aspects of the economy. Any stimulus measures must first pass through Congress, and their impact once they do arrive may be blunted by weakness in the global economy, heightened trade frictions, or other unforeseen events.

INTERNATIONAL EQUITIES RISE

International stocks recorded solid gains for U.S. dollar-based investors in February as equities rose in eight of 10 sectors on the prospect of stronger global economic growth, better corporate earnings results, and currency exchange rates. Markets were also supported by a relatively steady stream of positive eurozone economic data, including accelerations in both manufacturing and service sectors, and news that job creation rose to its highest level in 10 years. The Bank of England (BoE) held its key interest rate steady but upgraded its growth forecast to 2% for 2017. The U.S. dollar weakened against the yen but strengthened against the euro and the pound sterling. Rising oil prices helped boost emerging markets stocks.

Within the MSCI EAFE Index, growth stocks outperformed value stocks. Health care, buoyed by rising biotechnology and pharmaceutical stocks, was the leading sector in the month, increasing over 4.5%. Consumer staples, information technology, utilities, and industrials and business services recorded higher returns than the EAFE index as a whole. The energy and materials sectors recorded negative returns in the month. Overall, emerging markets stocks outperformed developed market stocks.

International Indexes
Total Returns

MSCI Indexes

February

Year-to-Date

EAFE (Europe, Australasia, Far East)

1.45%

4.39%

All Country World ex-U.S.A.

1.61

5.22

Europe

1.21

3.32

Japan

1.12

4.89

All Country Asia ex-Japan

3.39

9.80

EM (Emerging Markets)

3.07

8.71

All data is in U.S. dollars as of February 28, 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 INFLATION, JOB CREATION ARE POSITIVE INDICATIONS OF GROWTH

Economic data in Europe were largely positive during the month. Eurozone inflation in the 19-nation member states rose to 2% in February, up from a rate of 1.8% in January, according to Eurostat. The February inflation rate is the highest since January 2013 and also crests above the European Central Bank (ECB) target of “just below 2%.” In addition, for the first time in about four years, all 19 member states recorded positive inflation. Higher fuel costs were the driving factor undergirding the rise in inflation. Inflationary pressure also caused input costs to rise at the swiftest pace since 2011.

FINANCIALS SOFT AMID GENERALLY STRONG CORPORATE EARNINGS

The Italian parliament approved a plan for a €20 billion rescue fund to inject capital into the country’s struggling banking system—Banca Monte dei Paschi di Siena will likely be the initial beneficiary. The ECB said that the eurozone banks have slashed lending to their peers in the currency bloc over the past year. Cross-border loans fell by 6% year-over-year to €1.26 trillion in January 2017 (latest available data). The ECB said the retrenchment could make eurozone countries more vulnerable to downturns. According to Reuters’ calculations of the ECB data, cash-rich countries, including Germany, France, and Luxembourg, each cut their cross-border lending.

The height of the fourth-quarter European corporate earnings season wound down and markets generally moved higher as investors reacted positively to a larger share of companies beating expectations (about 57% versus the 53% historical average). According to data tracking firm EPFR, each full week of February recorded positive inflows into European stocks, with investors apparently believing that improved economic signs across the Continent are indications of a sustainable recovery. UK and Swiss stocks were some of the better European performers, rising about 2%, while shares in Norway, Ireland, and Italy logged losses.

JAPANESE STOCKS RISE IN DOLLAR TERMS

Japanese stocks rose slightly more than 1% for the month, as measured by the MSCI Japan Index. Economic data were mixed. Retail sales increased 1% from the year-earlier period, marking the third consecutive gain. But Japan’s economy grew slower in the fourth quarter of 2017 compared with the previous quarter (1.0% versus 1.4%). Exports were stronger and imports gained, largely driven by higher oil prices. The Bank of Japan ruled out lowering rates further into negative territory.

EMERGING MARKETS STRENGTHEN

Emerging markets stocks advanced in February as signs of faster economic growth in the U.S. and Europe spurred hopes that a pickup in global growth would benefit developing countries. A commodities rebound fueled demand for emerging markets currencies, causing many to appreciate against the dollar. The Mexican peso and Turkish lira—which both sank to record lows following the U.S. presidential election—each added about 4%, while currencies in Brazil, India, and South Africa posted more modest gains. Chinese foreign- and mainland-traded A shares both rose about 3%. Southeast Asian stock markets rose except the Philippines.

OUTLOOK: MODEST GLOBAL GROWTH AND MUTED INFLATION

Our global economic growth expectations remain modest over the next several quarters. While the implications of the Brexit negotiations and the election of President Trump will play out over many months, we expect a deterioration of UK growth in the near term. Overall, Europe is supported by aggressive quantitative easing and generally lower energy costs relative to a few years ago. However, elevated debt levels, geopolitical uncertainties, and lingering structural issues remain near-term concerns. While China’s economic growth rate will likely slow over time, T. Rowe Price portfolio managers believe that China has many solid growth companies that do not rely on a high level of annual economic growth to generate good returns.

U.S. TREASURY YIELD CURVE FLATTENS

Short-term U.S. Treasury yields increased while yields on longer-term Treasury notes and bonds decreased, causing the yield curve to flatten. Treasuries experienced significant volatility amid uncertainty about the timing of the Federal Reserve’s next interest rate hike and the fiscal policies of the Trump administration. The 10-year Treasury note’s yield fluctuated between 2.35% and 2.55% in February before finishing near the lower end of that range. By the end of February, more investors began to expect the Fed to raise rates at its March meeting, which helped push shorter-term yields higher. (Bond prices and yields move in opposite directions.) Concerns about the ramifications of upcoming elections in Europe boosted demand for longer-term Treasuries.

FED HOLDS RATES STEADY BUT SENDS HAWKISH SIGNALS

The Fed kept its benchmark interest rate unchanged at its policy meeting that ended February 1, but strengthening economic data released later in the month raised the odds that the central bank will hike rates at its next policy meeting in March. In her semiannual testimony to Congress, Fed Chair Janet Yellen suggested that the central bank still expects to raise rates three times in 2017 and that waiting too long to normalize monetary policy would be a mistake. T. Rowe Price Chief U.S. Economist Alan Levenson believes that a rate hike is likely by June and that the potential for a March rate increase is growing.

ANXIETY ABOUT EUROPEAN ELECTIONS DRIVES SOME EUROZONE YIELDS HIGHER

In Europe, yields on sovereign debt from France and peripheral countries increased as populist candidates gained ground in polls for upcoming national elections, raising the risk of a breakup of the eurozone. German government bonds, which are viewed as safe-haven securities, gained amid the political turbulence. The Bank of Japan (BoJ) continued to target the yield on the country’s 10-year sovereign note at 0.0%. BoJ Governor Haruhiko Kuroda told the country’s parliament that the central bank is not considering raising the target even if global rates increase. The euro and the British pound sterling fell against the U.S. dollar, restraining returns on non-U.S. developed market government bonds in dollar terms.

Total Returns

Index

February

 

Year-to-Date

   

Bloomberg Barclays U.S. Aggregate Bond Index

 0.67%

 

 0.87%

 

 

J.P. Morgan Global High Yield Index

 1.46

 

 2.97

 

 

Bloomberg Barclays Municipal Bond Index

 0.69

 

 1.36

 

 

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

 0.29

 

 2.17

 

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

 2.00

    

 3.48

 

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

 0.48

 

 0.44

 

 

Figures as of February 28, 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.

SEARCH FOR YIELD BENEFITS EMERGING MARKETS DEBT

Emerging markets debt was one of the strongest-performing fixed income sectors as investors continued to search globally for higher-yielding securities. The central bank of Brazil cut its benchmark interest rate by 75 basis points and issued a dovish statement following its policy meeting that left the door open for a faster pace of easing, supporting the country’s bonds. (A basis point is 0.01 percentage point.) Mexico’s central bank moved in the opposite direction, raising its key rate by 50 basis points in response to rising inflation fueled partly by weakness in the peso. Later in the month, the central bank announced that it would auction up to $20 billion in currency derivatives that should allow it to better manage the volatility in the country’s currency, helping drive the peso to its highest level against the U.S. dollar since the U.S. presidential election.

ANOTHER STRONG MONTH FOR HIGH YIELD BONDS

Sustained investor demand also drove strong February performance for high yield bonds. Relatively stable oil prices resulting from indications that OPEC members are complying with the production cuts that they agreed upon in late 2016 helped support sentiment toward riskier assets, including noninvestment-grade bonds. Energy- and commodities-related sectors account for a major proportion of the U.S. high yield bond market, although energy issuers underperformed for the month. High yield credit spreads narrowed to their lowest levels in two years. (Credit spreads measure the additional yield above that of a comparable-maturity Treasury security that investors demand for holding a bond with credit risk.)

LIMITED ISSUANCE SUPPORTS INVESTMENT-GRADE CORPORATES

Investment-grade corporate bonds also generated healthy returns, although they lagged their high yield cousins. Credit spreads on investment-grade corporates narrowed, but not to the same extent as in the noninvestment-grade bond market. Limited new issuance supported investment-grade corporate debt, which also benefited from the prospect that potential corporate tax cuts and higher levels of fiscal spending under the Trump administration will extend the credit cycle.

Treasury Yields

Maturity

January 31, 2017

February 28, 2017

3-Month

0.52%

0.53%

6-Month

0.64

0.69

2-Year

1.19

1.22

5-Year

1.90

1.89

10-Year

2.45

2.36

30-Year

3.05

2.97

Source: Federal Reserve Board, as of February 28, 2017.

HIGH YIELD MUNICIPAL DEBT OUTPERFORMS

Municipal bonds performed slightly better than U.S. Treasuries, thanks to limited issuance in the sector. High yield municipals posted the strongest returns, led by debt backed by revenue from tobacco companies’ settlements with the states. Bonds from financially troubled Puerto Rico also performed well after its governor issued a statement saying that the territory would make the February coupon payment on its general obligation debt.

MBS PERFORM IN LINE WITH TREASURIES

Mortgage-backed securities (MBS) produced returns approximately in line with Treasuries. The increasingly hawkish tone from the Fed weighed on MBS, but a statement from Yellen supported the sector. The Fed chair said that the central bank will likely wait until the federal funds rate is higher before ending its reinvestment of payments from its holdings of MBS. Asset-backed securities and commercial mortgage-backed securities (CMBS) lagged MBS, generating only modestly positive returns.

STRONG TECHNICAL BACKDROP IN CMBS CREATES OPPORTUNITIES

Despite the underperformance of CMBS in February, T. Rowe Price’s multi-sector fixed income portfolio managers have a positive outlook for the sector. New regulations that took effect in December 2016 require CMBS issuers to retain some of the credit risk of the commercial mortgages underlying the securities, which is likely to help restrain new CMBS issuance and create a positive technical environment. However, commercial real estate is likely in the final stages of a protracted cycle, so rigorous credit analysis is essential.

GLOBAL CAPITAL MARKETS ENVIRONMENT

U.S. stock prices continued to grind higher in February, helped by favorable economic data, some positive fourth-quarter earnings reports, and expectations that the Trump administration’s forthcoming actions and legislative proposals would lift economic growth and corporate profits. President Trump’s promise to a group of aviation executives that he would soon unveil “something phenomenal” in terms of tax policy contributed to favorable investor sentiment. By the end of the month, several major indexes had reached new highs. Market volatility was remarkably low during the month; in fact, the Standard & Poor’s 500 Index established a new record of 50 consecutive trading days without a daily swing of over 1%. The market’s advance was not derailed by the Federal Reserve’s release of minutes from its latest policy meeting, which illustrated a strong case for additional monetary policy tightening. T. Rowe Price Chief U.S. Economist Alan Levenson believes that a rate hike is likely by June and that the potential for a rate increase on March 15 has risen through month-end.

Large-cap shares outperformed their smaller peers. The S&P 500 Index returned 3.97% versus 2.62% for the S&P MidCap 400 Index and 1.93% for the small-cap Russell 2000 Index. As measured by various Russell indexes, growth stocks surpassed value stocks across all market capitalizations for the second successive month.

In the large-cap universe, as measured by the S&P 500, most sectors produced positive returns. Health care stocks performed best, rallying after President Trump met with executives from various drug companies and promised them expedited drug approvals and lower taxes. Financials climbed amid hopes for higher interest rates that would allow banks to make more profitable loans. Utilities and information technology shares also posted solid returns, whereas energy and telecommunication services shares declined.

  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index
February 3.97% 2.62% 1.93%
Year-to-Date 5.94 4.34 2.33

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.

U.S. bonds posted gains in February. The Treasury yield curve flattened a bit during the month, as shorter-term rates inched higher while longer-term yields edged lower. The Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of domestic investment-grade taxable bonds, returned 0.67%. In the investment-grade universe, long-term Treasuries and corporate bonds posted the best gains, with investor appetite in new corporate issues holding strong. Municipal bonds performed in line with taxable issues, helped by limited new issuance and a pickup in demand. High yield bonds outperformed higher-quality issues, as investor demand for bonds with a yield advantage remained solid 

  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

JPMorgan Global
High Yield Index

February 0.67% 0.69% 1.46%
Year-to-Date 0.87 1.36 2.97

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 underperformed U.S. equities in dollar terms, as the greenback strengthened against several major international currencies. The MSCI EAFE Index, which measures the performance of large-cap stocks in Europe, Australasia, and the Far East, returned 1.45%. Most developed Asian markets rose for the month; Japanese shares gained about 1% in dollar terms, as the yen edged higher versus the dollar. The Japanese economy grew at an annualized pace of only 1% in the fourth quarter of 2016, but it was the fourth consecutive quarter of economic expansion. Several European stock markets produced positive returns, with the pan-European index Euro Stoxx 600 recording its highest close since late 2015. Norway was an exception, as shares slipped about 2.5% in dollar terms as the Norwegian krone depreciated about 1.5% against the dollar.

Equities in emerging markets outperformed developed non-U.S. equity markets. The MSCI Emerging Markets Index returned 3.07%. Latin American markets were among the best performers; the region was led by Brazil and Mexico. The Mexican central bank raised its benchmark interest rate on February 9 by 50 basis points to help stabilize the peso and keep inflation under control. This marks four consecutive policy meetings where the bank has raised rates. Later in the month, Mexico’s central bank announced that it will auction up to $20 billion in currency derivatives in an attempt to exercise greater control of the peso’s exchange rate without relying on its currency reserves. This had an immediate positive response among investors, as the peso quickly rose to its highest mark versus the dollar since the 2016 U.S. presidential election. Asian markets did well, led by Indian and Taiwanese shares. Chinese stocks rose, even though economic data showed that growth is poised to continue slowing. In emerging Europe, shares in Turkey and Poland advanced more than 5% in dollar terms, but Russian shares dropped over 6%―despite a 3% gain in the ruble versus the dollar―amid fleeting hopes that the Trump administration would swiftly remove U.S. economic sanctions.

  MSCI EAFE Index MSCI Emerging Markets Index
February 1.45% 3.07%
Year-to-Date 4.39 8.71

Bonds in developed non-U.S. markets produced marginal gains in U.S. dollar terms, as a stronger dollar versus most major currencies eroded positive returns in local currency terms. In the eurozone, heightened concerns over political stability fueled demand for high-quality German government bonds. In addition, the European Central Bank’s recent decision to remove the yield floor restriction on its government bond purchases drove the two-year German government bond yield down to a record low. Elsewhere, France was in the spotlight as a funding scandal engulfed presidential candidate François Fillon. The developments caused market volatility, with the yield spread (difference) between 10-year French government bonds and 10-year German government bonds widening to a four-year high at one point before retreating as concerns eased. In Japan, yields on short-dated Japanese government bonds (JGBs) fell slightly during the month as the Bank of Japan continued to pursue its policy of yield curve control, specifically keeping the 10-year JGB yield around 0%.

Emerging markets bonds fared better than sovereign debt in developed countries. Local currency issues narrowly underperformed dollar-denominated debt, but several key currencies―including the Mexican peso, the Russian ruble, and the South African rand―appreciated versus the greenback. Brazilian bonds did well as the central bank cut interest rates by 75 basis points. Egypt’s currency, which plunged in 2016 due to two devaluations, climbed nearly 20% versus the dollar in February, as investors showed confidence in the government’s reform efforts. However, Egyptian inflation remains very high.

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

JPMorgan Emerging
Markets Bond
Index Global
Diversified

JPMorgan GBI-EM
Global Diversified
Index

February 0.29% 2.00% 1.80%
Year-to-Date 2.17 3.48 4.09

Past performance is not a reliable indicator of future performance.

EMERGING MARKETS RISE IN FEBRUARY AS GLOBAL GROWTH SIGNS REASSURE INVESTORS

Emerging markets stocks gained in February as buoyant commodities prices and signs of faster economic growth in the U.S. and Europe spurred hopes that a pickup in global growth would benefit developing countries. Oil prices held above the $50 per barrel threshold, lifting the outlook for many resource-dependent emerging markets, after the world’s top oil producers began reducing output this year following an accord struck last November. The commodities rebound fueled demand for emerging markets currencies, causing many to appreciate against the dollar. The Mexican peso and Turkish lira—which both sank to record lows following the U.S. presidential election—each added about 4%, while currencies in Brazil, India, and South Africa posted slimmer gains. Nine of 10 sectors in the MSCI Emerging Markets Index gained. Consumer discretionary stocks rose the most, while the energy sector was the sole decliner.

Total Returns

MSCI Index

    

February               Year-to-Date

Emerging Markets (EM)

 

 3.07%                  8.71%

EM Asia

 

 3.64                     9.72 

EM Europe, Middle East, and Africa (EMEA)

 

 0.11                     2.22

EM Latin America

 

 3.60                     11.50

All data is in U.S. dollars as of February 28, 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.

INDIAN STOCKS RISE ON STRONG GDP DATA; SOUTHEAST ASIAN STOCKS MIXED

  • Chinese foreign and mainland-traded A shares both rose, aided by stable economic data. However, China’s foreign reserves fell in January below the psychologically important $3 trillion threshold as the central bank dipped into its war chest to support the yuan—underscoring the government’s willingness to spend heavily to defend the currency, which has been under pressure from Chinese investors moving money overseas.
  • Indian stocks advanced nearly 6%. India’s annual gross domestic product (GDP) grew a surprisingly high 7.0% in the final quarter of 2016, raising doubts about the accuracy of the country’s economic data. India’s statistics office forecast GDP would expand 7.1% in the fiscal year ending March 2017, a relatively strong pace that suggested the central bank would keep interest rates unchanged.
  • Stocks in the Philippines declined but rose elsewhere in Southeast Asia. Indonesia’s GDP grew at a weaker-than-expected pace in the final quarter of 2016 and expanded 5.02% for the year, in line with forecasts. Malaysia reported that its economy grew at the fastest pace in a year in the December quarter and expanded 4.2% in 2016. Central banks in the Philippines and Indonesia kept their respective benchmark rates unchanged, and the Bank of Indonesia’s governor signaled that it would take a more cautious stance on easing after it cut rates six times last year.

BRAZILIAN STOCKS GAIN DESPITE DISINFLATION; ANDEAN STOCKS MIXED

  • Brazilian stocks rose more than 4%, the most in Latin America. Brazil’s central bank cut its benchmark interest rate by 75 basis points for the second straight meeting, citing widespread disinflation in the economy. The bank’s unanimous decision came after data showed that Brazil’s annual inflation rate sank to a four-year low last month as the country struggles to exit a deep recession.
  • Mexican stocks advanced as the peso rose to its highest level against the dollar since the U.S. presidential election. Mexico’s GDP grew just 0.7% in the final quarter of 2016 and 2.3% for the full year, below the government’s estimate at the start of 2016. Economists forecast Mexico’s economy will grow just 1.6% this year in what would be the slowest growth pace since 2013 as rising inflation and interest rates are seen hurting consumption.
  • Andean stock markets were mixed as stocks in Chile gained while stocks in Colombia and Peru declined. Chilean stocks were helped by resurgent prices for copper, a key export, after workers went on strike at a huge copper mine in Chile in early February. Colombia and Peru reported 2016 economic growth of 2.0% and 3.90%, respectively. However, Colombia’s central bank unexpectedly cut its benchmark rate, while Peru left its key rate unchanged for the 12th straight month.

TURKISH STOCKS GAIN DESPITE WEAK OUTLOOK; RUSSIAN STOCKS DROP AS U.S. SANCTIONS SEEN LIKELY TO STAY

  • Turkish stocks advanced more than 5.0%. Nevertheless, both the World Bank and International Monetary Fund (IMF) gave downbeat assessments of Turkey’s outlook stemming from last July’s failed coup. The World Bank said that Turkey faces headwinds preventing a strong recovery and forecast that the economy would grow just 2.7% this year. The IMF also projected “below potential” growth for Turkey in 2016 and 2017 as political uncertainty dampened domestic demand.
  • Russian stocks shed more than 6.0% as reports of Moscow’s interference with the U.S. presidential election dashed hopes for warmer U.S.-Russia relations and made it less likely that the Trump administration would relax economic sanctions on Russia. The local currency Micex index was the world’s worst-performing stock market in February.
  • South African stocks rose slightly, aided by a stronger rand. South Africa’s economy likely grew 0.5% in 2016 and is forecast to expand 1.3% this year as commodity prices stabilize and confidence levels recover, the country’s finance minister said in his budget address. However, global political uncertainty related to elections in Europe later this year represent risks for South Africa’s economy, he added.

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 February 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.

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