Markets & Economy

Monthly Market Review

July 2017
T. Rowe Price

MARKET’S ADVANCE CONTINUES

Stocks rose in July, helping the large-cap S&P 500 Index notch its ninth consecutive monthly gain and bringing all of the major benchmarks to new highs. Small-cap shares continued to lag large-caps, however, and value shares continued to trail growth—both reversals of 2016 market dynamics. All of the sectors within the S&P 500 Index recorded gains, led by the small telecommunication services segment. The large information technology sector also performed well and built on its formidable year-to-date performance (up over 22% through the end of July). Industrials and business services, consumer staples, and health care shares lagged with modestly positive results.

U.S. Indexes
Total Returns

 

July 2017

Year-to-Date

Dow Jones Industrial Average

2.68%

12.28%

S&P 500 Index

2.06

11.59

Nasdaq Composite Index

3.38

17.93

S&P MidCap 400 Index

0.88

  6.92

Russell 2000 Index

0.74

  5.77

Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended July 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 Russell indexes. Russell® is a registered trademark of Russell Investment Group.

FEARS OVER HIGHER INTEREST RATES GET STOCKS OFF TO WEAK START…

Stocks got off to a sluggish start to the month, with the S&P 500 Index recording its worst decline in several weeks on July 6. T. Rowe Price traders pointed to several factors behind the reversal, including rising Treasury yields and fears that the European Central Bank would soon announce changes to its highly accommodative monetary policy. Investors may have also reacted to President Trump’s warning of severe consequences in response to North Korea’s successful intercontinental ballistic missile test.

…BUT FED ASSURANCES HELP EQUITIES REGAIN MOMENTUM

Confidence that monetary policy would remain supportive helped stocks regain momentum. On July 12, stocks scored their best daily gain for the month after Federal Reserve Chair Janet Yellen struck a dovish tone in testimony before Congress. Yellen signaled that the Fed was in no rush to tighten monetary policy and offered reassurances on the current state of the economy. Investors may also have been relieved that she avoided repeating the reference she had made in late June to asset prices as being “somewhat rich.” Two days after her testimony, the Labor Department reported that core (excluding food and energy) inflation had risen only 0.1% in June, the fourth month of increases well below the Fed’s annual inflation target of around 2%. T. Rowe Price Chief U.S. Economist Alan Levenson believes that the data could hinder the Fed’s plans to continuing normalizing interest rates.

Oil prices defied the overall pattern and rose for the month, boosting energy stocks and perhaps benefiting overall sentiment. Late in the month, oil prices hit their highest levels since May as traders reacted to declining U.S. inventories and the announcement of new production cutbacks by Saudi Arabia. Over the longer term, T. Rowe Price energy analysts and managers expect that oil prices will remain under downward pressure, due mainly to a “golden era of productivity” that continues to drive down operating costs, particularly in North American oil and natural gas.

A generally favorable stream of second-quarter earnings reports also fed the market’s gains. As of the end of the month, research firm FactSet was expecting overall earnings for the S&P 500 to have increased by over 9% in the second quarter, and Thomson Reuters I/B/E/S was estimating profit growth in the double digits. Energy firms led the gains as the sector recovered from its swoon over the past two years. Technology earnings were also especially robust. The technology and Internet-oriented media and retail giants that have captured the spotlight in recent months offered mixed results, but their shares generally built on their substantial gains for the year to date.

TECHNOLOGY PROSPECTS REMAIN BRIGHT, BUT VALUATIONS CALL FOR BROADENING SEARCH

T. Rowe Price’s technology managers and analysts remain confident in the sector’s prospects, although they caution that the rapid pace of change is creating losers as well as winners in the segment. They also note that compelling valuation opportunities have become scarcer, leading them to broaden their search to companies in other sectors that are profiting from technological change. In addition, they remain keenly interested in opportunities in China, where the proliferation of Internet-connected mobile phones has opened up massive new media and retail markets.

INTERNATIONAL EQUITIES POST ROBUST GAINS

Developed international stock markets generated strong performance in July, boosted by solid corporate earnings results, robust business sentiment, rising manufacturing exports, and signs that economic expansion is likely to continue. Markets also rose following signals that the major central banks would not move as quickly to tighten monetary policy as previously thought. Toward the end of the month, the euro rose to its highest level against the U.S. dollar in just over two years. Higher oil prices buoyed energy stocks.

Within the MSCI EAFE Index, all but one sector registered gains. The health care sector lost about 1%. The materials, financials, energy, information technology, telecommunication services, and consumer discretionary sectors all beat the benchmark. Value stocks outperformed growth stocks. Emerging markets, boosted in part by strengthened investor confidence in China, strongly outperformed developed market stocks.

International Indexes
Total Returns

MSCI Indexes

July

Year-to-Date

EAFE (Europe, Australasia, Far East)

2.89%

17.53%

All Country World ex-U.S.A.

3.71

18.70

Europe

2.99

19.40

Japan

2.02

12.34

All Country Asia ex-Japan

5.42

29.59

EM (Emerging Markets)

6.04

25.77

All data are in U.S. dollars as of July 31, 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 RECOVERY “ROBUST”

Markets reacted positively to European Central Bank (ECB) President Mario Draghi’s broadly dovish remarks following the July 20 monetary policy meeting that kept interest rates and its monetary stimulus program unchanged. Draghi said that while the economic recovery in the eurozone has been “robust,” “the last thing that the Governing Council may want is an unwanted tightening of the financing conditions that either slows down this process or may even jeopardize it.” Eurozone inflation accelerated to 1.3% in July, as business and consumer confidence surpassed expectations. Unemployment in June fell to 9.1%—the lowest level since early 2009. UK gross domestic product was in line with expectations at 0.3%, a small improvement on 0.2% in the first quarter.

July marked the thrust of second-quarter earnings season. T. Rowe Price traders said European companies, much like those in the U.S., have been reporting better-than-expected results. But, the traders noted, results thus far compare poorly with the strong earnings beats seen over the last few quarters, and investors have been tamping down their expectations for stronger outperformance for the remainder of earnings season. Metals and mining stocks were strongly positive following improved growth and earnings outlooks from several key companies.

ANOTHER ITALIAN BANK RESCUED…

The European Union approved the Italian government pumping in €5.4 billion to take control of Banca Monte dei Paschi di Siena, a struggling, debt-burdened lender. T. Rowe Price traders said the bailout was a positive for the sector and a signal that there is an appetite to clean up insolvent banks. European banks rallied on the news, though the rally faded mid-month.

…WHILE GREECE RETURNS TO THE BOND MARKETS

The financially strapped country returned to the financial markets late in the month (for the first time since 2014) and sold about €3 billion of five-year bonds at an interest rate of 4.625%, a relatively high yield, to account for the inherent riskiness in holding Greek bonds. For the month, Greek equities rose just over 1%, as investors remain relatively confident that the indebted country is on the path to recovery.

JAPAN STRENGTHENS, BUT CONCERNS REMAIN

Japanese equities benefited from increased private consumption and export and import gains. Japanese exports rose 9.7% year over year in June, above expectations and aided by strength in autos, semiconductors and other manufacturing equipment, and integrated circuits. Export growth to the U.S. slowed to 5.2% year to year, while exports to China expanded 14.2%, continuing a 13-month upward trend. Import gains, 15.5% year over year in June, were powered by growth in iron and steel products, nonferrous metals, petroleum products, and coal. The Bank of Japan slightly increased economic forecasts for 2017 and 2018, but it pushed back hitting the 2% inflation target until 2019, the sixth such delay under the current administration. Prime Minister Shinzo Abe began a revamp of his cabinet after his dismal showing in the July 2 Tokyo Metropolitan Assembly election in an effort to rebuild popular and political support.

EMERGING MARKETS ADVANCE FOR THE EIGHTH CONSECUTIVE MONTH

Strong global demand fueled another positive month for emerging markets stocks. Chinese stocks handily outperformed the MSCI Emerging Markets Index thanks in part to strong industrial production and a pickup in domestic consumption, both signs that the country’s economic resilience is on track. But T. Rowe Price sovereign analyst Chris Kushlis cautioned that, despite efforts by China’s government to tighten conditions in the financials sector and housing markets, a slowdown in the country’s growth momentum, which has been fairly modest thus far, could start to pick up in this year’s second half. Brazilian stocks were another strong performer, rising nearly 11% and rallying after Brazil’s former President Luiz Inácio Lula da Silva was sentenced to nearly 10 years in jail for corruption. In Argentina, resurgent oil prices were not enough to offset peso weakness and political uncertainty, resulting in a fall of more than 6% for the month.

OUTLOOK: CONTINUED MODEST GLOBAL GROWTH

Global growth momentum that started at the end of last year continued with improvement occurring across most developed and emerging 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. 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 waits for sustainable signs of improvement before beginning to reduce its quantitative easing measures. We are also optimistic about the continued strength of emerging markets. 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 for long-term investors.

TREASURY YIELDS LITTLE CHANGED AS CENTRAL BANK TIGHTENING FEARS EASE

U.S. Treasury yields were little changed for the month as investor concerns about less accommodative monetary policies eased. Although the sell-off in high-quality sovereign bonds that began at the end of June continued into July, bond market sentiment turned positive by mid-month amid low inflation data and reassuring statements from global central bank officials. The yield on the 10-year Treasury note rose to 2.39% on July 7—the highest level in nearly two months—but finished July at 2.30%, marginally lower than at the end of June. Yields of 30-year Treasuries moved slightly higher. (Bond prices and yields move in opposite directions.) The German 10-year government bond yield reached an 18-month high before declining and finishing July at 0.55%, while the yield on the comparable Japanese government bond (JGB) ended the month around 0.08%. The Bank of Japan, which is attempting to keep the 10-year JGB yield around 0.0%, conducted its first fixed rate bond purchase in five months after the 10-year yield rose above 0.10%.

FED HOLDS RATES STEADY, NOTES INFLATION IS FALLING SHORT OF TARGET

At its late-July meeting, the Federal Reserve, as expected, kept the federal funds target rate in the 1.00% to 1.25% range. In its post-meeting statement, the Fed said that it intended to begin reducing its holdings of mortgage-backed securities and Treasuries “relatively soon,” and T. Rowe Price Chief U.S. Economist Alan Levenson expects the process to begin in October. The Fed also acknowledged that inflation has declined from its pace earlier in the year and is running below the central bank’s 2% target. In Janet Yellen’s semiannual report to Congress, the Fed chair said that low inflation is creating uncertainty in the rate outlook.

ECB KEEPS ITS STIMULUS PROGRAM UNCHANGED

The European Central Bank (ECB) kept interest rates and its monetary stimulus program unchanged at its July monetary policy meeting. ECB President Mario Draghi was broadly dovish in his remarks following the meeting, saying that while the economic recovery in the eurozone has been “robust,” the “last thing that the Governing Council may want is actually an unwanted tightening of the financing conditions that either slows down this process or may even jeopardize it.” The euro rose to a two-year high against the dollar in July.

Total Returns

Index

July

Year-to-Date

 

Bloomberg Barclays U.S. Aggregate Bond Index

0.43%

2.71%

 

J.P. Morgan Global High Yield Index

1.13

6.19

 

Bloomberg Barclays Municipal Bond Index

0.81

4.40

 

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

2.68

8.96

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

0.84

7.08

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

0.45

1.81

 

Figures as of July 31, 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.

BRAZILIAN REAL NOTCHES STRONG GAIN VERSUS DOLLAR

Emerging markets sovereign debt denominated in local currencies outperformed bonds denominated in U.S. dollars as key emerging markets currencies gained against the dollar. The Brazilian real was notably strong, gaining about 6%. Brazil’s central bank cut interest rates by 100 basis points (one percentage point) to 9.25% after annual inflation fell to a decade low of 3% in June. It is the third time this year that the bank has cut rates by 100 basis points, and the rate is now at its lowest point in nearly four years as the central bank moves to pull the country out of a deep recession. The South African rand was one of the few currencies to decline against the dollar. The South African Reserve Bank surprised markets by cutting its benchmark interest rate for the first time in five years as it works to reinvigorate the South African economy.

RISE IN OIL PRICES SUPPORTS HIGH YIELD BONDS; DEMAND REMAINS STRONG FOR INVESTMENT-GRADE DEBT

The high yield bond market benefited from higher oil prices and generally favorable corporate earnings reports and outperformed investment-grade bonds. Energy-related issuers outperformed as oil prices hit their highest levels since May in reaction to declining U.S. inventories and Saudi Arabia’s announcement of new production cutbacks. Light new issuance and solid demand also contributed to positive results for the below investment-grade sector.

Strong demand from Asian and European investors helped the investment-grade corporate bond market digest a heavy supply of new issuance. The generally healthy tone in the equity market also supported high-quality corporate debt, and spreads in the sector continued to compress. (Credit spreads measure the additional yield above that of a comparable-maturity Treasury security that investors demand for holding a bond with credit risk.)

Treasury Yields

Maturity

June 30

July 31

3-Month

1.03%

1.07%

6-Month

1.14

1.13

2-Year

1.38

1.34

5-Year

1.89

1.84

10-Year

2.31

2.30

30-Year 2.84 2.89

Source: Federal Reserve Board.

MUNIS OUTPERFORM AS NEW ISSUE SUPPLY SHRINKS

Municipal bonds recorded solid results, outperforming the broader taxable U.S. investment-grade market. Munis were supported by favorable technical conditions, as new issuance for the month dropped about 20% from the same period last year. Bonds from Illinois outperformed after the state finally passed a budget at the start of the month, ending a legislative stalemate that had lasted more than two years. Illinois remains the lowest-rated state in the U.S. but seems to have avoided a downgrade to below investment-grade, or junk, status. The news that the Food and Drug Administration is considering a policy that would require cigarette manufacturers to reduce nicotine levels weighed on tax-free high yield tobacco bonds, which lost ground for the month.

MORTGAGE-BACKED SECURITIES IN LINE WITH BROADER MARKET

The relatively low volatility in interest rates provided a favorable environment for mortgage-backed securities (MBS), which performed in line with the broader market. Although MBS investors are anticipating headwinds from the Fed’s plan to begin winding down its reinvestment of payments on its MBS holdings, market reaction to the relative lack of news at the central bank’s July meeting was positive. Estimates indicate that the Fed holds approximately 20% of the outstanding supply of agency MBS. Asset-backed securities produced positive returns but trailed MBS. Year-to-date volume in the sector has passed $130 billion compared with $112 billion of new deals at the same point in 2016.

FLOATING RATE BANK LOANS OFFER SOME PROTECTION FROM RISING INTEREST RATES

T. Rowe Price’s multi-sector bond portfolio managers remain constructive on the longer-term prospects for floating rate bank loans because they offer a relatively high coupon and short-duration characteristics, although valuations in the loan sector have become less attractive after their recent stretch of strong performance. Like high yield bonds, they also benefit from an environment of steady economic growth, favorable employment trends, and healthy corporate fundamentals. Although bank loans are generally issued by noninvestment-grade companies, they are traditionally more stable than high yield bonds because of their senior status in a company’s capital structure, their coupon reset feature, and their lower exposure to the energy and commodities segments, where the outlook remains uncertain.

GLOBAL CAPITAL MARKETS ENVIRONMENT

Major U.S. stock indexes pressed higher in July and reached all-time highs at various points throughout the month, helped by a generally favorable stream of second-quarter earnings reports. Early in the month, investors received reassuring economic news, as the Labor Department announced that employers had added 222,000 jobs in June―more than originally anticipated. The Federal Reserve was in the spotlight in the middle of the month, as Fed Chair Janet Yellen delivered her semiannual testimony to Congress on July 12 and July 13. Investors were relieved by Yellen’s comments about the state of the economy and reassurances that the Fed was in no rush to tighten monetary policy. Yellen also acknowledged that the Fed is closely watching inflation, which has been soft in recent months. T. Rowe Price Chief U.S. Economist Alan Levenson notes that subdued core inflation may hinder the Fed’s plans to continue normalizing interest rates.

Large-cap shares outperformed mid- and small-caps. The S&P 500 Index returned 2.06% versus 0.88% and 0.74% for the S&P MidCap 400 Index and the Russell 2000 Index, respectively. As measured by various Russell indexes, growth stocks outperformed value stocks across all market capitalizations.

In the large-cap universe, as measured by the S&P 500, all sectors produced positive returns―though many trailed the broad market. Telecommunication services performed best, rebounding from significant weakness in the first half of the year. Information technology shares continued to perform well, buoyed by some Internet-related companies that posted favorable second-quarter earnings. Energy stocks, which were the worst performers in the first half of 2017, also posted good returns for July, thanks to a rally in crude oil prices. Industrials and business services, consumer staples, and health care stocks underperformed.

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

July

2.06%

0.88%

0.74%

Year-to-Date

11.59

6.92
5.77

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 modestly positive returns, as Treasury yields were little changed for the month. The Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of domestic investment-grade taxable bonds, returned 0.43%. The Fed left short-term interest rates unchanged at its late-month policy meeting, which was widely expected. In the taxable investment-grade universe, corporate bonds performed best, albeit with slim gains. Mortgage- and asset-backed securities edged higher with marginal returns. Municipal issues outperformed taxable bonds, whereas high yield issues benefited from a bounce in oil prices and outperformed investment-grade bonds.

  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

JPMorgan Global
High Yield Index

July

0.43%

0.81%

1.13%

Year-to-Date

2.71

4.40

6.19

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 outperformed U.S. equities in dollar terms, as the dollar weakened further versus most major currencies. The MSCI EAFE Index, which measures the performance of large-cap stocks in Europe, Australasia, and the Far East, returned 2.89%. Developed Asian markets produced good returns, but Japanese shares lagged with a 2% gain in dollar terms. The Bank of Japan now expects to achieve its 2% inflation target in fiscal year 2019, and Prime Minister Shinzo Abe’s approval ratings dipped to all-time lows. All European equity markets produced positive returns, led by oil producer Norway, which returned nearly 12% for the month. Many European markets responded positively to European Central Bank (ECB) President Mario Draghi’s dovish remarks following the ECB’s July 20 policy meeting, which resulted in no monetary policy changes. Bank stocks in the eurozone performed well after the European Union approved the Italian government’s bailout of struggling Italian lender Banca Monte dei Paschi di Siena. In the UK, gains were limited amid data indicating that manufacturing in the UK trailed several other developed European countries, resulting in a wider British trade deficit.

Equities in emerging markets soundly outperformed developed equity markets. The MSCI Emerging Markets Index returned 6.04%. Latin American markets were mostly positive. Brazil was once again in the spotlight as former President Luiz Inacio Lula da Silva was sentenced to nearly 10 years in prison for corruption. Also, the passage of Brazil’s first labor reform package in 70 years contributed to a stronger currency and a stock market gain of almost 11% in U.S. dollar terms. In Asia, Chinese shares rose about 9% as the country released surprisingly strong trade data in mid-July, with imports and exports exceeding expectations. The data showed that global demand for Chinese products is still high and that Chinese citizens are still demanding overseas products. Emerging European markets rose broadly in dollar terms. Russian stocks benefited from an uptick in oil prices but lagged the region amid ruble weakness. Late in July, the U.S. Congress passed legislation that imposes new sanctions against Russia for its interference in the 2016 U.S. presidential election. President Trump signed the bill in early August.

  MSCI EAFE Index MSCI Emerging Markets Index

July

 2.89%

  6.04%

Year-to-Date

17.53

25.77

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 positive returns in U.S. dollar terms, as the dollar weakened versus most major non-U.S. currencies. Government bond yields in core European markets, which spiked in late June, continued climbing into the first few weeks of July, with the 10-year German bund yield rising to 0.6%, its highest level in about 18 months. The euro reached a two-year high versus the greenback during the month. The ECB voted to leave interest rates and its monetary stimulus program unchanged at its July 20 meeting. ECB President Mario Draghi indicated that bank officials would like to avoid “an unwanted tightening of the financing conditions.” Draghi’s dovish comments provided some relief to bond prices, as yields on European government bonds dropped from their mid-month highs. Japanese government bonds (JGBs) were flat in yen terms but rose in dollar terms due to a stronger yen. Early in the month, the Bank of Japan, which intends to keep the 10-year JGB yield around 0.0%, conducted its first fixed rate bond purchase in five months to keep long-term yields from rising.

Emerging markets debt also produced positive returns. In a surprise move, the South African Reserve Bank (SARB) cut its benchmark interest rate for the first time in five years in an attempt to keep its economy from falling further into recession. The SARB, which slashed its 2017 growth forecast for the country, could continue cutting rates in the coming months, but high inflation could be a hindrance. In Latin America, Brazil cut interest rates for the seventh time since October. This most recent cut was the third consecutive 100-basis-point (i.e., one percentage point or 1.00%) reduction. It also marked the first time that interest rates fell below 10% since 2013. The central bank anticipates that lower interest rates may kick-start the Brazilian economy as it comes out of its worst recession in the country’s history.

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

JPMorgan Emerging
Markets Bond
Index Global
Diversified

JPMorgan GBI-EM
Global Diversified
Index

July

2.68%

0.84%

 2.07%

Year-to-Date

8.96

7.08

12.65

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.

EMERGING MARKETS STOCKS GAIN IN JULY ON DOVISH FED, WEAKER DOLLAR

Emerging markets stocks rallied in July as steady global growth and dovish comments from the U.S. Federal Reserve lifted investors’ risk appetite. Developing world stocks rose after the Fed left interest rates unchanged at its latest policy meeting and highlighted recent weakness in inflation—comments that markets interpreted as a sign that the central bank would only raise rates slowly. Currency strength in emerging markets also lifted returns as the U.S. dollar fell versus most global currencies. The International Monetary Fund (IMF) raised its economic growth forecast for emerging and developing economies to 4.6% this year, up slightly from its April projection. However, the IMF warned that global growth risks were skewed to the downside in the medium term. The MSCI Emerging Markets Index rose for the seventh straight month to its highest level in nearly three years. Nine sectors in the index rose, led by materials, while health care was the sole decliner.

Total Returns

MSCI Index

July

 Year-to-Date

Emerging Markets (EM)

6.04%

25.77%

EM Asia

5.67

30.30

EM Europe, Middle East, and Africa (EMEA)

6.01

11.52

EM Latin America

8.30

19.48

All data are in U.S. dollars as of July 31, 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 RALLY AS ECONOMIC DATA BOOSTS CONFIDENCE; INDIAN STOCKS RALLY AS GST LAUNCHES

  • Chinese stocks gained more than 8%, lifted by better-than-expected economic data. China’s gross domestic product rose 6.9% in the second quarter, matching the first quarter’s pace and virtually assuring the country will meet its 6.5% annual growth target. However, recent tightening actions in the financial and housing markets make it likely that China’s economy will start to lose momentum in this year’s second half, believes T. Rowe Price sovereign analyst Chris Kushlis.

  • Indian stocks added nearly 8% and its domestic stock market indexes rose to record levels amid investor optimism about the country’s growth outlook, which has been lifted by reforms such as a new nationwide goods and services tax (GST) that took effect July 1.

  • Southeast Asian markets advanced, lifted by strong demand from China, solid corporate earnings, and a commodities rally that brightened the outlook for the region’s resource-reliant economies. Central banks in Indonesia and Malaysia kept their respective benchmark rates on hold as economic growth picked up and inflation stayed tame in both countries.

BRAZILIAN STOCKS RALLY AFTER ANOTHER RATE CUT; MEXICAN STOCKS RISE ON STRONG GDP DATA

  • Brazilian stocks surged nearly 11%, the most in Latin America. Brazil’s central bank cut its benchmark interest rate by 100 basis points to 9.25%, its third straight rate cut of a full percentage point, in an effort to steer the economy out of its worst recession on record. The central bank signaled that further cuts were on the table but that the pace of easing would depend on economic conditions.

  • Mexican stocks advanced as data pointed to a resilient economy, defying fears of a slowdown after the election of U.S. President Donald Trump. Mexico’s economy grew a better-than-expected 0.6% in the second quarter from the first quarter and expanded 1.8% from a year ago, according to the government’s preliminary estimate. Signs that the Trump administration was softening some of its protectionist rhetoric as it renegotiates the North American Free Trade Agreement also lifted the outlook for Mexico’s export-dependent industries.

  • Andean stock markets rose. Chilean stocks rallied nearly 9% as copper prices surged to two-year highs, boosting the outlook for the world’s biggest copper exporter. Stocks in Peru and Colombia posted milder gains. Central banks in Peru and Colombia cut their respective benchmark rates, and Colombia’s finance minister reduced economic growth forecasts for this year and 2018 due to weak oil prices.

SOUTH AFRICAN STOCKS RISE DESPITE BLEAK ECONOMIC OUTLOOK; RUSSIAN STOCKS ADVANCE

  • South African stocks advanced. The country’s benchmark stock index rose to a record at month-end, driven by gains in mining companies as commodity prices surged. However, South Africa’s economy remained under pressure: Its central bank cut its benchmark rate for the first time since 2012 and halved its 2017 economic growth forecast to just 0.5%. The South African Reserve Bank governor also warned that some of the country’s economic indicators have worsened to levels last seen in 2009 during the global financial crisis.

  • Russian stocks gained. Russia’s central bank left its key interest rate on hold in July after three straight rate cuts, though it added that it saw room for more easing in the second half of this year. The move was seen as an effort to preserve financial stability after the U.S. Congress passed a bill limiting the president’s ability to lift sanctions on Russia, leaving the country at risk for slower economic growth as long as the sanctions remain.

  • Turkish stocks rose. Turkey’s central bank left its various policy rates unchanged for the second straight month as inflation hovered in the double-digit range, adding that it would maintain “a tight stance” in monetary policy until the inflation outlook improved.

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 for long-term investors.

Near-term risks include a rise in U.S. protectionism and a faster-than-expected pace of rate hikes by the Federal Reserve. Given the stronger financial positions of most emerging markets, however, we believe they will be able to withstand a gradual tightening of monetary policy. 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 July 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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