Markets & Economy

Monthly Market Review

November 2017
T. Rowe Price

S&P 500 NOTCHES A YEAR OF MONTHLY GAINS

Stocks moved further into record territory in November, extending the market’s formidable streak of steady gains and low volatility. The S&P 500 Index recorded its 12th consecutive month of positive total returns and its best monthly gain since February. The more narrowly focused Dow Jones Industrial Average performed better still, while the technology-heavy Nasdaq Composite lagged a bit, due largely to tech weakness late in the month. The smaller-cap benchmarks performed broadly in line with their large-cap counterparts, and growth and value shares also saw similar gains. Dispersion was more pronounced on a sector basis, although all 11 groups within the S&P 500 Index recorded gains for the month. The small telecommunication services segment fared best, followed by consumer staples and consumer discretionary shares. Materials and information technology stocks saw the smallest gains.

U.S. Indexes
Total Returns

 

November

Year-to-Date

Dow Jones Industrial Average

4.24%

25.69%

S&P 500 Index

3.07

20.49

Nasdaq Composite Index

2.17

27.70

S&P MidCap 400 Index

3.68

15.99

Russell 2000 Index

2.88

15.11

Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended November 30, 2017. The returns include dividends based on data supplied by third-party provider RIMES and 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.

PROFIT GROWTH SLOWS IN 3Q, BUT LESS THAN EXPECTED

Stocks were flat to modestly lower early in the month as the final batch of third-quarter earnings reports confirmed that profit growth had eased in the second half of the year, although not as much as feared. The final tally from data and research firm FactSet showed that earnings for the S&P 500 as a whole had increased 6.4% in the third quarter (versus the same period a year ago)—down from double-digit increases in the first two quarters of 2017, but more than double consensus estimates before the reporting season began. After reporting a large earnings miss in October, General Electric’s (GE) management announced in early November that it was cutting the company’s dividend in half and intended to sell off major portions of its business. GE stock fell sharply in subsequent trading sessions, weighing on the broader indexes and the industrials segment in particular. Investors also appeared to worry about some soft data on Chinese industrial production.

Concerns over the prospects for tax reform also seemed to weigh on sentiment early in November. Wall Street had a muted reaction to the release of the House’s draft bill on November 2, perhaps because the plan, while cutting the top corporate tax rate to 20%, also included revenue offsets such as new limits on the deductibility of interest expenses. Senate Republicans followed with their own draft of tax reform on November 9, but investors appeared to react negatively to the Senate’s plan to delay a corporate rate cut until 2019. Stocks rose after the House passed a bill on November 16, although T. Rowe Price traders noted that substantial doubts still remained as to whether the legislation would become stalled in the Senate, as happened with plans to repeal the Affordable Care Act.

STOCKS REGAIN MOMENTUM AS TAX REFORM CLEARS HURDLES

In defiance of the skeptics, however, Senate Republicans continued making progress on their bill in late November, and stocks shot higher as it became clear that a bill would pass through Congress’s upper chamber. T. Rowe Price traders noted that particular attention focused on Senators McCain, Flake, and Corker—three frequent critics of President Trump and widely viewed as possible holdouts able to stop the bill if they voted together. Stocks jumped after Senator McCain announced his support for the bill on the last day of the month, virtually guaranteeing its passage. (As it turned out, Senator Corker was the sole Republican to vote against the bill when it passed in the early hours of December 2.) Notably, the market’s gains were heavily slanted toward financials and cyclically sensitive stocks, while technology shares lagged considerably. Many leading technology and Internet-oriented firms record much of their profits overseas, making them less likely to benefit from a cut in U.S. corporate tax rates.

The sturdy economic environment may have also fostered the market’s gains late in the month, although it probably played a smaller role than hopes for tax reform in boosting sentiment. Housing data were particularly favorable, with sales of new homes surging in October to their best pace in a decade. The Conference Board’s index of consumer confidence surprised on the upside, and investors were encouraged by early signs of a strong holiday shopping season. The Commerce Department also revised its estimate of third-quarter economic growth upward, to its best pace in three years. Durable goods orders fell unexpectedly in October, however, and a gauge of manufacturing activity fell back a bit.

LOWER CORRELATIONS AND EXTENDED VALUATIONS MAY FAVOR CAREFUL STOCK SELECTION

Ann Holcomb, a manager of diversified equity portfolios at T. Rowe Price, recently told The Wall Street Journal that she sees further upside for U.S. equities in 2018. She noted that the tendency of stocks to move higher or lower in tandem has diminished, however, as sector correlations have declined to their lowest level since the 1990s. Valuations are also somewhat extended, she observed, especially when measured against modest economic growth and continuing policy uncertainty in Washington. Generally, T. Rowe Price managers believe that such conditions may favor careful stock selection.

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 December 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. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. 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.

INTERNATIONAL EQUITIES RISE MODESTLY

Developed and emerging stock markets rose in November. The key drivers included strong economic growth in Europe and Japan and optimism about the possibility of U.S. tax reform. T. Rowe Price Chief International Economist Nikolaj Schmidt noted that eurozone manufacturing Purchasing Managers’ Index (PMI) in November showed strong global growth, and for the first time since 2007, all economies reported that their PMIs were in expansion territory. Political tensions, particularly in Germany, and modest corporate earnings in Europe held back some of the market buoyance during the month. A rise in oil prices helped to modestly improve market sentiment. Several European equity indexes closed at or near all-time highs. Most of the major currencies strengthened versus the U.S. dollar.

Within the MSCI EAFE Index, every sector generated gains during the month. The real estate, telecommunication services, energy, and consumer staples sectors performed best. Growth stocks outperformed value stocks, and developed markets, in aggregate, outperformed emerging markets.

International Indexes
Total Returns

MSCI Indexes

November

Year-to-Date

EAFE (Europe, Australasia, Far East)

1.06%

23.61%

All Country World ex-U.S.A.

0.83

24.94

Europe

0.24

24.34

Japan

2.99

23.50

All Country Asia ex-Japan

0.64

38.29

EM (Emerging Markets)

0.21

32.91

All data are in U.S. dollars as of November 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 EXPANDS

The eurozone recorded its strongest manufacturing output since 2011, while the services sector reached its highest level since May. The European Commission said in its autumn economic forecasts that the 19-country eurozone is slated to grow at its fastest pace in a decade, expanding 2.2% in 2017. The previous forecast was 1.7%, but the growth was revised upward as job creation, lessened political turbulence, and an upswing in business investment strengthened.

UK OUTLOOK DIMINISHES

The European Commission was less bullish about the UK. It sharply cut its forecast for UK growth this year to 1.5% as well as forecasting a further slowdown to 1.3% in 2018 and 1.1% in 2019. T. Rowe Price traders said sentiment surrounding UK consumers is already at a low ebb and hasn’t been helped by British Retail Consortium data falling 1.0% in October—down from 1.9% in September—and nonfood seeing the worst performance since the survey started in January 2011. The Bank of England (BoE) voted 7–2 to raise its benchmark interest rate to 0.50% from 0.25%, the first increase since 2007. However, the BoE signaled that further tightening is likely to be modest.

POLITICAL UNCERTAINTY IN GERMANY

German Chancellor Angela Merkel failed to form a new government after talks among her conservative bloc and the pro-business Free Democratic and center-left Green parties broke down on November 20. Germany’s DAX 30 Index opened lower following the news of the talks breaking down but quickly rallied. T. Rowe Price traders noted that while there are multiple possible outcomes, some of which may end up being positive, they believe that the main options for Merkel are to restart the talks, approach the Social Democratic Party again in hopes of reaching a deal, govern with a minority government, or hold new elections. On the business front, the confidence index reached another record high as strong economic news in the country helped to lift markets.

JAPANESE EQUITIES OUTPERFORM

Japanese equities rallied in November, as exports rose for the 11th consecutive month amid robust demand for automobiles and electronics. Imports were also strong, rising 18.9% in October compared with one year ago. Domestically focused businesses accounted for much of the growth in Japanese stocks, which, on average, are currently priced below the valuations in most other developed markets. More than 60% of TOPIX companies beat their earnings estimates (+16% year over year), largely powered by cyclical companies. Revenue growth was also strong. Bank of Japan (BoJ) Governor Haruhiko Kuroda said in a speech that he thought the BoJ’s current ultra-loose policy was not currently hindering Japan’s banking system. Some economists believe that this is a signal that the central bank could be preparing the market for an earlier-than-expected removal of monetary accommodation.

EMERGING MARKETS LAG

Most emerging markets currencies strengthened versus the U.S. dollar, cushioning declines for U.S. investors. Stocks in Latin America performed poorly. Chilean shares fell nearly 12% in U.S. dollar terms, after market-friendly center-right candidate Sebastian Piñera won the first presidential election round by a much narrower margin than expected. Argentina’s market fell nearly 5%, and Brazilian shares dropped just over 3%. Turkey also lagged, dropping almost 8%. The Chinese A-share market also fell about 3% due, in part, to rising bond yields and concerns that authorities would begin to tighten financial conditions. Also notable, China’s official PMI rose to 51.8 (anything above 50 denotes growth) in November, exceeding October’s reading and analysts’ forecasts. Emerging markets in Europe, Middle East, and Africa (led by a nearly 9% rise in South Africa) outperformed the emerging markets benchmark as a whole.

OUTLOOK: GLOBAL GROWTH CONTINUES TO IMPROVE

Global growth momentum that started at the end of last year is likely to continue to improve and broaden across most developed and emerging markets. Europe and Japan are expected to strengthen due to their exposure to the ongoing improvement in global trade. Markets appear to be anticipating that increased fiscal and corporate spending will be the next legs of support for growth as the role 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 and other major central banks either start raising rates (in the case of the UK and Canada) or begin dialing back on quantitative easing (in the case of the European Central Bank).

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 December 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. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. 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.

SHORT-TERM TREASURY YIELDS INCREASE; CURVE REACHES FLATTEST POINT IN 10 YEARS

The Treasury yield curve continued to flatten in November as short-term yields rose while longer-term yields were little changed. The yield of the two-year Treasury note increased from 1.60% to 1.78%, while the benchmark 10-year note’s yield finished at 2.42%, just four basis points higher (100 basis points equal one percentage point). Demand was stronger for the 30-year bond, and its yield modestly decreased. Prices of shorter-maturity Treasuries are more closely connected to the Federal Reserve’s monetary policy decisions, and progress on tax reform during the month led to expectations that increased fiscal stimulus could lead to a faster pace of economic growth and Fed rate hikes. Bond prices and yields move in opposite directions.

Since the beginning of the year, the additional yield offered by the 10-year Treasury note compared with the two-year note has shrunk from 125 basis points to 64, its lowest level since 2007. At T. Rowe Price’s annual press briefing, Mark Vaselkiv, the firm’s chief investment officer of fixed income, said he expects the Fed’s rate increases to eventually bring short-term yields in line with long-term yields, resulting in a flat yield curve in the second half of 2018.

The Fed took no action at its policy meeting that ended on November 1 but is expected to raise the federal funds rate 25 basis points in December. Jerome Powell’s nomination to replace Janet Yellen as Fed chair sparked little market activity as he is widely expected to continue Yellen’s monetary policies. The economic environment continued to be favorable. Third-quarter economic growth was revised upward, to its best pace in three years, while the core consumer price index (which excludes food and energy prices) rose 0.2% in October.

Total Returns

Index

November

Year-to-Date

 

Bloomberg Barclays U.S. Aggregate Bond Index

-0.13%

  3.07%

 

J.P. Morgan Global High Yield Index

-0.04

  7.86

 

Bloomberg Barclays Municipal Bond Index

-0.54

  4.36

 

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

 2.12

10.22

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

 0.05

  9.45

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

-0.14

  2.14

 

Figures as of November 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.

NON-U.S. BONDS OUTPERFORM AS DOLLAR WEAKENS

Developed market bonds outside the U.S. generally outperformed U.S. debt in dollar terms, driven by a weakening of the greenback versus several key currencies. Early in the month, as expected, the Bank of England (BoE) raised its bank rate to 0.50% from 0.25%, its first rate hike in 10 years. The BoE said it acted to contain UK inflation, which has recently been outpacing the bank’s 2% target, but indicated that further rate increases would come “at a gradual pace and to a limited extent.” Ten-year UK sovereign bonds rallied on the news but finished the month little changed. The yield of the German bund also moved in a narrow range, while the Japanese 10-year note’s yield finished modestly lower. Bank of Japan officials hinted that the central bank could soon back away from its ultra-loose monetary policy.

Treasury Yields

Maturity

October 31

November 30

3-Month

1.15%

1.27%

6-Month

1.28

1.44

2-Year

1.60

1.78

5-Year

2.01

2.14

10-Year

2.38

2.42

30-Year 2.88 2.83

Source: Federal Reserve Board.

WEAK EARNINGS REPORTS OFFSET RISING OIL PRICES FOR HIGH YIELD BONDS

High yield bonds recovered from outflows early in the month and produced nearly flat results. Weak third-quarter earnings reports from some high yield issuers weighed on the sector, and bonds from Sprint and T-Mobile lost ground on the news that the companies were abandoning their merger plans. Rising oil prices and the news that OPEC had agreed to extend its 2017 production cuts through 2018 provided a tailwind for the heavily weighted high yield energy segment. In the investment-grade corporate bond market, heavy supply weighed on results, especially early in the month, but solid demand, equity strength, and positive momentum for tax reform provided support.

Mortgage-backed securities performed in line with Treasuries. Mortgage prepayment concerns continued to ease amid rising expectations for a Fed rate hike.

HEAVY SUPPLY WEIGHS ON MUNI BONDS

Municipal bonds also faced headwinds from heavy supply. Advance refundings, or the ability of issuers to refinance existing debt with new tax-exempt bonds, looked likely to be eliminated in the tax reform package, and these deals surged 60% from November 2016 as issuers tried to get them done before year-end. Longer-maturity munis outperformed, and high yield tax-exempt tobacco bonds, which are up almost 20% for the year, continued to post solid results amid demand for higher-yielding securities.

CHINESE YIELDS REACH HIGHEST LEVELS IN THREE YEARS

An uptick in global growth supported ongoing inflows to emerging markets, though enthusiasm was contained by some idiosyncratic risks. Chinese bond yields climbed to their highest levels in three years as the government cracked down on speculative financial activities following October’s Communist Party Congress. Moody’s Investors Service maintained its investment-grade rating on South Africa’s local and foreign currency debt. The decision was a respite after S&P Global Ratings downgraded the local debt to junk status.

FLOATING RATE BANK LOANS OFFER SOME PROTECTION FROM RISING INTEREST RATES

Although valuations in the loan sector have become less attractive after their recent stretch of strong performance, 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. Bank loans involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities, but like high yield bonds, they benefit from an environment of steady economic growth, favorable employment trends, and healthy corporate fundamentals.

GLOBAL CAPITAL MARKETS ENVIRONMENT

U.S. stocks produced solid gains in November, with major equity indexes finishing the month at or near record highs. The rally was driven by hopes that Congress would pass, and President Trump would sign, tax reform legislation in the near future. The House of Representatives passed its version of a tax reform bill in mid-November, while the Senate was poised at the end of the month to vote on its own version of a tax-reducing bill. (The bill passed the Senate in the early hours of December 2.) Before the legislation can be sent to the president, however, the two versions need to be reconciled via a conference committee consisting of lawmakers from both chambers, and the same revised bill would need to be passed by each house. Favorable economic data also supported the rally, as did Trump’s decision to nominate Federal Reserve Governor Jerome Powell as the next chairman of the central bank. Powell is seen as favoring bank deregulation and willing to continue current Fed Chair Janet Yellen’s gradual approach to raising short-term interest rates.

Mid-cap shares narrowly outperformed their larger and smaller counterparts. The S&P MidCap 400 Index returned 3.68% versus 3.07% for the large-cap S&P 500 Index and 2.88% for the Russell 2000 Index. As measured by various Russell indexes, growth stocks and value stocks were evenly matched across all market capitalization segments. For the year-to-date period, growth stocks maintained a significant performance advantage over value stocks.

In the large-cap universe, as measured by the S&P 500, all sectors produced positive returns. Telecommunication services stocks fared best, rebounding from sharp losses in October. Consumer staples and consumer discretionary shares also produced strong returns. Materials stocks lagged with mild gains. Energy stocks trailed, even though oil prices increased and OPEC and some non-OPEC countries agreed at the end of the month to extend 2017’s production cuts through the end of 2018. Information technology shares also underperformed, as a sharp sell-off near the end of the month pared earlier gains.

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

November

3.07%

3.68%

2.88%

Year-to-Date

20.49

15.99 15.11

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.

Source: Third-party vendor RIMES, as of November 30, 2017.

Domestic bond returns were slightly negative in November. Longer-term Treasury yields were little changed, while shorter-term yields rose in anticipation of a Federal Reserve interest rate increase in December. The Bloomberg Barclays U.S. Aggregate Bond Index returned -0.13%. In the investment-grade universe, Treasury, corporate, asset-backed, and mortgage-backed securities fell slightly. Municipal bonds fell more than taxable bonds, as higher issuance ahead of year-end weighed on their performance. High yield bonds performed mostly in line with higher-quality issues.

  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

JPMorgan Global
High Yield Index

November

-0.13%

-0.54%

-0.04%

Year-to-Date

3.07

4.36

7.86

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.

Source: Third-party vendor RIMES, as of November 30, 2017.

Stocks in developed non-U.S. equity markets underperformed U.S. shares, even though stronger non-U.S. currencies lifted overseas returns in dollar terms. The MSCI EAFE Index, which measures the performance of stocks in Europe, Australasia, and the Far East, returned 1.06%. Developed Asian markets appreciated in dollar terms, led by Singapore and Hong Kong. Japanese stocks advanced about 3%. The Japanese market was supported by Prime Minister Shinzo Abe’s recent reelection, favorable economic data, and news that export growth helped the Japanese economy expand for a seventh consecutive quarter—a streak not seen for more than 15 years. European markets were mixed. Although eurozone economies continued to expand, investor sentiment was hurt somewhat by some disappointing corporate earnings reports as well as the inability of several German political parties to form a governing coalition. UK shares were little changed in U.S. dollar terms. The Bank of England raised short-term interest rates at the beginning of the month, which boosted the pound versus the dollar. Near the end of the month, the UK and the EU were reported to have reached an agreement on a so-called “divorce bill,” which could help Brexit negotiations resume.

Emerging markets stocks lagged shares in developed markets. The MSCI Emerging Markets Index returned 0.21%. Asian markets were mixed, with Pakistan and Thailand performing well, while Taiwanese shares fell more than 3%. South Korean and Indian shares were fairly flat. The Chinese A-share market fell about 3% due, in part, to rising bond yields and concerns that authorities would tighten financial conditions. Emerging European markets were also mixed: Russian shares advanced more than 3%, whereas Turkish shares tumbled about 8% in dollar terms. The lira fell, and bond yields increased during the month, as President Erdogan criticized the central bank’s inclination to raise interest rates in an attempt to control elevated inflation. In Latin America, Brazilian shares fell 3%, while Mexican stocks dropped less than 1%. Chilean shares plunged almost 12%, as presidential candidate Sebastian Pinera, who is perceived as being market friendly, won the first round of the election by a smaller-than-expected margin. The second round will be held in mid-December.

  MSCI EAFE Index MSCI Emerging Markets Index

November

1.06%

0.21%

Year-to-Date

23.61

32.91

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.

Source: Third-party vendor RIMES, as of November 30, 2017.

Bonds in developed non-U.S. markets produced solid returns in dollar terms. With long-term bond prices in Japan and various European markets little changed, returns were driven primarily by stronger currencies versus the greenback. The euro and British pound climbed about 2% versus the dollar, while the Japanese yen rose about 1.5%.

In emerging markets, bonds denominated in local currencies performed much better than dollar-denominated bonds, as some key currencies—such as the South African rand and the Mexican peso—appreciated versus the dollar. The Turkish lira was a major exception, falling almost 3% versus the greenback due to President Erdogan’s criticism of the central bank’s monetary policies.

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

JPMorgan Emerging
Markets Bond
Index Global
Diversified

JPMorgan GBI-EM
Global Diversified
Index

November

2.12%

0.05%

1.68%

Year-to-Date

10.22

9.45

12.93

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.

Source: Third-party vendor RIMES, as of November 30, 2017.

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 December 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. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. 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.

EMERGING MARKETS STOCKS ADVANCE IN NOVEMBER AS RISK APPETITE, CORPORATE EARNINGS LIFT SENTIMENT

Emerging markets stocks rose in November as evidence of synchronized global growth drove demand for higher-risk assets. Data showing slowing yet still solid economic growth in China, rising commodity prices, and a corporate earnings recovery across the developing world continued to draw investor inflows into the asset class. The MSCI Emerging Markets (EM) Index rose for the second straight month, continuing an uninterrupted string of gains in 2017 following a pause in September. Much of this year’s advance in emerging markets has been driven by technology and consumer discretionary companies, leaving stocks in traditionally cyclical sectors such as financials, materials, energy, and industrials and business services relatively undervalued, points out Hong Kong-based Portfolio Manager Ernest Yeung. Five sectors in the MSCI EM Index rose, and six sectors declined. Consumer discretionary stocks performed the best, while real estate stocks fell the most.

Total Returns

MSCI Index

November

 Year-to-Date

Emerging Markets (EM)

 0.21%

32.91%

EM Asia

 0.12

39.31

EM Europe, Middle East, and Africa (EMEA)

 3.44

17.01

EM Latin America

-2.99

18.79

All data are in U.S. dollars as of November 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 A SHARES DROP ON DELEVERAGING SPECULATION; SOUTHEAST ASIAN STOCKS GAIN ON SOLID GDP DATA

  • Chinese stocks rose but domestic A shares retreated as a sell-off in the domestic bond market spilled into the stock market, pushing the benchmark Shanghai Composite to a two-month low. The declines in Chinese debt were sparked by concerns that Beijing would start tightening conditions to reduce risk in the financials sector after China’s 19th Communist Party Congress ended in October.
  • Indian stocks slightly declined. India’s economy expanded 6.3% in the third quarter from a year earlier, ending five quarters of slowing growth. The third-quarter figure lagged expectations but exceeded the previous quarter’s 5.7% pace, which marked a three-year low. Earlier in the month, Moody’s raised its investment-grade sovereign credit rating for India by one notch, marking the agency’s first upgrade for the country since 2004.
  • Most Southeast Asian markets rose except for Indonesia. Indonesia’s economy grew a slower-than-expected 5.06% in the third quarter from a year ago, leaving it on track to miss its official full-year 5.2% target, and the central bank left its benchmark interest rate unchanged. However, Malaysia, Thailand, and the Philippines each reported surprisingly strong third-quarter growth.

BRAZILIAN STOCKS WEAKEN ON PENSION OVERHAUL UNCERTAINTY; CHILEAN STOCKS DROP ON ELECTION RESULTS

  • Brazilian stocks fell amid investor unease about the fate of a pension reform bill seen as key for shoring up the country’s finances. Though President Michel Temer’s administration scaled back some of the bill’s original proposals, the government coalition continued to struggle with securing enough votes to ensure the bill’s passage in Brazil’s lower house of the legislature.
  • Mexican stocks slightly declined. Mexico’s central bank reduced its full-year economic growth forecast to reflect the impact of two deadly earthquakes in September. Banxico projected 2017 growth of 1.8% to 2.3% versus an earlier 2.0% to 2.5% range, but it left its 2018 estimate of 2% to 3% growth unchanged.
  • Andean stocks delivered mixed results. Markets in Colombia and Peru rose, but Chilean stocks sank more than 11% after first-round election results showed fewer-than-expected votes for former President Sebastian Pinera, who was expected to win, while a leftist coalition fared better than expected. Central banks in Peru and Colombia both cut their respective benchmark rates to boost sluggish economic growth.

SOUTH AFRICAN STOCKS GAIN ON RAND RALLY AFTER MOODY’S MAINTAINS CREDIT RATINGS; TURKISH STOCKS SLUMP

  • South African stocks surged nearly 9% as the rand staged a relief rally after Moody’s kept its investment-grade ratings on South African local and foreign currency debt, though it put its assessments on review for a possible downgrade. However, S&P cut its rating on rand-denominated debt to junk and reduced its rating on South Africa’s foreign currency debt deeper into speculative territory. The changes reflect S&P’s view of “further deterioration of South Africa's economic outlook and its public finances,” the agency stated.
  • Russian stocks advanced as Brent crude oil prices traded above $60 per barrel during November, lifted by an unexpected agreement between Russia and the world’s leading oil producers to keep limiting output until the end of 2018. Earlier in November, Russia reported that its economy expanded 1.8% in the third quarter from a year earlier, lagging expectations and the previous quarter’s 2.5% growth pace.
  • Turkish stocks shed almost 8% as the currency fell to a record low amid fears of political interference in monetary policymaking. The lira lost 2.8% in November—making it the worst-performing emerging markets currency—reflecting investor worries about the Turkish central bank’s independence after President Recep Tayyip Erodogan criticized the bank for tightening policy to tame inflation.

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 December 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. Stock prices can fall because of weakness in the broad market, a particular industry, or specific holdings. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. 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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