Markets & Economy

Quarterly Market Review

Third Quarter 2017
T. Rowe Price

INDEXES REACH NEW HIGHS

Stocks recorded solid gains in the third quarter, bringing returns for most of the major benchmarks into double digits for the year-to-date period. The advance also brought all of the major indexes to record highs by the end of the quarter, although trading volumes remained subdued, particularly in the typically quiet month of August. Information technology stocks performed best within the S&P 500 Index, followed by energy, telecommunication services, and materials shares. Consumer staples was the only sector to record a loss, while consumer discretionary and real estate shares performed only slightly better and managed small gains. Small-caps outperformed large-caps, while mid-caps trailed both and ended September lagging for the year to date. Growth stocks outpaced value shares and added to their significant advantage for the year so far, but value stocks recovered some momentum in the final weeks of the quarter.

U.S. Stocks
 

 3Q 2017

 

Year-to-Date

 

Dow Jones Industrial Average

 5.58%

 

15.45%

 

S&P 500 Index

 4.48

 

14.24

 

Nasdaq Composite Index

 5.79

 

20.67

 

S&P MidCap 400 Index

 3.22

 

 9.40

 

Russell 2000 Index

 5.67

 

10.94

Past performance cannot guarantee future results.

Note: Returns are for the periods ended September 30, 2017. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite, whose return is principal only. Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a registered trademark of Russell Investment Group.

CORPORATE PROFITS RISE BY DOUBLE DIGITS AND BEAT ESTIMATES

Stocks began the quarter on a strong note, helped again by series of positive reports on corporate earnings. According to research firm FactSet, reports released in July and early August revealed that profits for the S&P 500 as a whole had grown over 10% (on a year-over-year basis) in the second quarter, better than analysts expected and building on even stronger gains at the start of the year. A rebound to profitability in the energy sector was partly at work, but strong earnings gains in the heavily weighted technology segment also deserved much of the credit. Accordingly, the technology-heavy Nasdaq Composite led the market’s gains over the early weeks of the quarter.

TURMOIL OVERSEAS AND DOMESTICALLY WEIGHS ON STOCKS IN THE MIDDLE OF THE QUARTER…

Stocks sacrificed much of their gains as the flow of earnings reports wound down in mid-August and left political and international concerns to take center stage. On August 10, the major indexes pulled back sharply as the ongoing tensions between the U.S. and North Korea escalated. The S&P 500 dropped nearly 1.5% and the Nasdaq Composite fell over 2.1% after President Trump vowed that any aggression from North Korea—which had recently threatened a nuclear attack on the U.S. territory of Guam—would be met with “fire and fury.” Wall Street regained its footing as tensions seemed to de-escalate over the following days, but North Korea’s launch of a ballistic missile over Japan on August 28 sparked another brief pullback. T. Rowe Price traders noted that a relatively restrained response from the president to the latest provocation helped stocks recover quickly, however.

Violent clashes between protesters in Charlottesville, Virginia, over the weekend of August 12 did not initially appear to have much impact on the markets, but controversy surrounding the president’s response to the violence soon appeared to weigh on sentiment, especially after the president disbanded two CEO advisory councils following the resignations of several members. These worries seemed to boil over on August 17, when rumors surfaced that Gary Cohn, the president’s chief economic advisor, was also considering stepping down. The White House quickly denied the reports, but the market’s losses accelerated on news that afternoon of a terrorist attack in Barcelona, Spain, leading the major indexes to their biggest declines in over two months.

…BUT HOPES FOR TAX REFORM SEND STOCKS HIGHER AGAIN

Politics remained in the spotlight for much of the rest of the quarter, but in a way that was more favorable for investors. Stocks rallied on August 22, following a report in Politico that Republican lawmakers were making progress behind the scenes on tax reform legislation, according to T. Rowe Price traders. Investors had to wait over a month, but they seemed to welcome the release of the GOP’s plan on September 27, with stocks rallying in particular after President Trump revealed plans to lower the top individual tax rate, eliminate the alternative minimum tax, and treat corporate profits accumulated overseas as already repatriated. In an echo of the “reflation trade” that favored small-caps and value stocks after the election, the small-cap Russell 2000 Index jumped nearly 2% for the day and more than quadrupled the rise of the S&P 500 Index.

Apart from insurance stocks, the market as a whole seemed largely unmoved by the series of hurricanes and other natural disasters that dominated the news in the second half of the quarter, probably because there was little consensus on how they would impact economic growth. Many observers expected rebuilding efforts to help offset the reduction of economic activity in the affected regions, and T. Rowe Price Chief U.S. Economist Alan Levenson observed that the Federal Reserve was unlikely to adjust its policy stance as a result. Indeed, at the end of the quarter, Fed Chair Janet Yellen told a group of economists that the central bank “should be wary of raising rates too gradually.”

POLITICAL TURMOIL IS DAMPENING STIMULUS HOPES, BUT TAX CUTS ARE STILL POSSIBLE

Many T. Rowe Price equity portfolio managers acknowledge that continued acrimony in Washington has diminished the prospects for the significant economic stimulus that many investors had anticipated after Republicans achieved unified control of the government in the 2016 elections. Multi-asset Portfolio Managers David Giroux and Steven Krichbaum believe the market is underestimating the potential for modest tax reform, however. They estimate that a reduction in the U.S. corporate tax rate to 25%, which would be a smaller cut than what President Trump has proposed, could generate an incremental 5% to 10% earnings growth (but not necessarily an increase in stock prices) for the S&P 500 in 2018.

Important Information

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

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

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

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

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

Overview

EQUITY MARKETS POST ROBUST GAINS

International stock markets posted strong returns in the third quarter. Emerging markets outperformed, as Brazilian, Russian, and Chinese markets recorded standout performance. In developed markets, the eurozone, Nordic countries, and Asian stock markets, excluding Japan, performed well. The key equity market drivers included strengthening economic growth, buoyant manufacturing data, solid corporate earnings, and a rise in oil prices. Geopolitical concerns, including terrorist incidents, swelling tension between North Korea and the rest of the world, and natural weather disasters have weighed on some sectors, albeit only temporarily. Many major currencies strengthened against the U.S. dollar during the period, lifting returns in dollar terms.

Within the MSCI EAFE Index, which tracks developed markets in Europe, Australasia, and the Far East, the energy, materials, information technology, consumer discretionary, and industrials and business services sectors outperformed the benchmark. No sector lost ground during the quarter. Value stocks outperformed growth stocks.

International Indexes
     Total Return

MSCI Index

    

3Q 2017               Year-to-Date

EAFE (Europe, Australasia, Far East)

 

5.47%                   20.47%             

All Country World ex-U.S.A.

 

6.25                      21.61               

Europe

 

6.49                      23.45               

Japan

 

4.10                      14.63                 

All Country Asia ex-Japan

 

6.75                      31.22                 

EM (Emerging Markets)

 

8.04                      28.14              

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

Regional Recap

EUROZONE ECONOMIC RECOVERY GAINS STEAM

Throughout the period, European markets reacted to a string of favorable economic news, including a mid-August report that the eurozone’s economic recovery was stronger in the spring than previously estimated, a sustained drop in unemployment rates each month in the quarter, and a continuing trend in the rise of consumer and business sentiment. T. Rowe Price traders noted that the second-quarter earnings season was better than expected, but they pointed out that European companies’ results compared less favorably with strong earnings seasons seen over the last few quarters. In September, European policymakers increased gross domestic product (GDP) forecasts, as economic expansion rates in Germany and France were the highest in six years. The strength in metals and mining stocks was particularly notable, as demand from emerging markets rose and earnings outlooks from key companies helped boost overall equity market results for the period. The Italian, Portuguese, and Norwegian markets posted above-benchmark gains. Italian financial stocks rallied after its government rescued a troubled bank in July, and Norway, a big oil producer, benefited from the rise in oil prices.

On the economic policy front, central bankers attended the annual Jackson Hole, Wyoming, conference hosted in late August by the Kansas City Federal Reserve, where European Central Bank (ECB) President Mario Draghi continued to state that monetary accommodation would be removed at a very slow pace. In the period, both the ECB and the Bank of England made no changes to key interest rates, but Draghi alerted markets that any changes to the ECB quantitative easing program would likely be announced sometime in October. In the UK, inflation continued to rise, and policymakers downgraded growth forecasts amid Brexit-related concerns.

GEOPOLITICAL VOLATILITY

Spanish stocks fell sharply on August 18 following a terrorist attack in a tourist-heavy section of Barcelona that killed at least 13 people and injured more than 100 and another attack in Cambrils, a town southwest of Barcelona. In Spain’s IBEX 35 Index, airlines, hotels, and other tourism-related stocks bore the brunt of losses. But losses in most of the Stoxx 600 Europe sectors reflected investors' equity risk aversion rising, T. Rowe Price traders noted. European equities quickly, albeit briefly, sold off on August 29 following the launch of a North Korean ballistic missile that passed over Japan, and investors moved into safe-haven assets, with gold trading at its highest levels since the election of President Donald Trump. Spain, at the end of September, lagged its European counterparts following uncertainty surrounding the independence referendum movement in Catalonia, despite the Spanish government’s assertion that the vote would be illegal. T. Rowe Price traders noted that while the independence referendum was grabbing attention, the wider risk on Spanish equity markets seemed to be limited. German stocks rose in the last week of September following the election of Angela Merkel’s fourth term win as the German chancellor. Also in September, French markets were largely unfazed by swelling protests against President Emmanuel Macron’s labor law reforms.

JAPAN STRENGTHENS BUT CONCERNS REMAIN

Japanese equities rallied in the quarter. Japan logged its sixth straight quarter of growth (through June) and marked its longest expansion in 11 years—second-quarter GDP marked the fastest pace of growth since the first quarter of 2015. Stocks dropped in August after Bank of Japan Governor Haruhiko Kuroda said Japan’s recent pickup in growth is likely unsustainable, though he pledged to maintain a highly accommodative monetary policy “for some time.” Throughout the period, exports and imports registered solid growth. 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. Abe also announced in September plans for an $18 billion stimulus package intended to foster a “productivity revolution.”

EMERGING MARKETS RALLY

Emerging markets stocks marked nine consecutive months of advances in August before a modest decline in September. In the third quarter, the MSCI Emerging Markets Index outperformed the MSCI EAFE Index. Every emerging markets region logged solid gains during the period. Emerging markets in Latin America and Eastern Europe were the top performers. Brazil, in particular, was a notable standout as markets rose following the corruption sentencing of its former president, a sweeping privatization plan of government assets, and cuts in interest rates. Argentina also rallied on resurgent oil prices, as did Russia. China stocks outperformed the benchmark following strong industrial production and a pickup in domestic consumption. Greece registered one of the biggest declines due to uncertainty about whether the indebted country would be able to stand on its own feet when its bailout program enters its final year.

OUTLOOK: CONTINUED MODEST GLOBAL GROWTH

Global growth momentum that started at the end of last year continued across most developed regions. Markets appear to be anticipating that increased fiscal and corporate spending will be the next leg of support for growth as the effectiveness of monetary policy fades. Global monetary policies have begun shifting away from extreme accommodation as the U.S. Federal Reserve advances its interest rate normalization process. The ECB appears to be waiting for sustainable signs of improvement to begin reducing its quantitative easing measures. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising domestic consumption.

Important Information

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

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

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.

TWO-YEAR TREASURY YIELD REACHES HIGHEST LEVEL IN NINE YEARS

Intermediate- and longer-term Treasury yields finished the third quarter little changed from where they started the period, while yields of shorter maturities rose. Increased demand for safe-haven securities, largely as a result of growing concerns about the potential for conflict on the Korean Peninsula, was offset by a rebound in inflation and the Trump administration’s announcement of its tax reform proposal later in the period. In addition, the Federal Reserve announced that its plan to reduce its balance sheet would commence in October. After starting the period at 2.31%, the yield on the benchmark 10-year Treasury note reached a 10-month low of 2.04% on September 7 but rose to 2.33% by the end of September. The two-year note, which is more sensitive to expectations for Fed rate increases, finished the period at 1.47%, its highest level since November 2008. Bond prices and yields move in opposite directions.

FED INITIATES PLAN TO REDUCE ITS BALANCE SHEET

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

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

Total Returns    

Index

3Q 2017

YTD

Bloomberg Barclays U.S. Aggregate Bond Index

 0.85%

 3.14%

J.P. Morgan Global High Yield Index

 2.24

 7.35

Bloomberg Barclays Municipal Bond Index

 1.06

 4.66

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

 2.48

 8.74

J.P. Morgan Emerging Markets Bond Index Global Diversified

 2.63

 8.99

Bloomberg Barclays U.S. Mortgage Backed Securities Index

 0.96

 2.32

Figures as of September 30, 2017. Past performance cannot guarantee future results. This chart is shown for illustrative purposes only and does not represent the performance of any specific security.
Source for Bloomberg Barclays index data: Bloomberg Index Services ltd. Copyright© 2017, Bloomberg Index Services Ltd. Used with permission.

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

The U.S. dollar weakened for the third quarter in a row, boosting the returns in dollar terms of bonds issued in other currencies, although the greenback recovered some ground in September. Yields on the German and UK 10-year government notes followed a path similar to comparable Treasuries during the period and finished modestly higher, while the 10-year Japanese government bond yield ended slightly lower. The European Central Bank, Bank of Japan, and Bank of England all kept their stimulative monetary policies in place.

Treasury Yields

Maturity

June 30

September 30

3-Month

1.03%

1.06%

6-Month

1.14

1.20

2-Year

1.38

1.47

5-Year

1.89

1.92

10-Year

2.31

2.33

30-Year

2.84

2.86

Source: Federal Reserve Board.

EMERGING MARKETS DEBT OUTPERFORMS

Emerging markets debt outperformed most other fixed income sectors, driven by investor demand for higher yields. Fundamentals were also generally healthy; however, S&P Global Ratings downgraded its sovereign credit rating for China to A+ from AA- due to concerns about the country’s rising debt levels. The decision marks S&P’s first ratings cut for China since 1999 and the second sovereign downgrade for the country this year after a similar move in May by Moody’s.

HIGH YIELD SECTOR BENEFITS FROM RISING OIL PRICES

The high yield bond market benefited from higher oil prices and generally favorable corporate earnings reports and outpaced investment-grade bonds. Energy-related issuers outperformed as U.S. oil prices in September hit their highest levels since April. T. Rowe Price traders noted that with the continued outperformance in the sector, 30% of the U.S. high yield market traded with credit spreads below 2.5 percentage points by the end of September, the first time that has happened since 2007. (Credit spreads are the additional yield over comparable-maturity Treasuries that investors receive for investing in riskier securities.) Spreads also narrowed on investment-grade corporate bonds amid solid demand, reaching the tightest level in three years.

MUNI BONDS SUPPORTED BY SOLID TECHNICAL CONDITIONS

Municipal bonds outperformed Treasuries as cash flows into the sector remained solidly positive, while new issuance has fallen off more than 16% year-to-date compared with last year. Bonds from Illinois outperformed after the state finally passed a budget at the start of July, 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.

MBS FARE WELL DESPITE FED’S PLAN TO REDUCE BALANCE SHEET

Despite the Fed’s decision to begin tapering its MBS holdings, mortgage-backed securities outperformed the broader U.S. taxable investment-grade market. Mortgage rates fell to a year-to-date low in August, but refinancing activity, which can weigh on MBS results, has so far been muted.

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. Like high yield bonds, they also stand to benefit from an environment of steady economic growth, favorable employment trends, and healthy corporate fundamentals.

GLOBAL CAPITAL MARKETS ENVIRONMENT

U.S. stocks continued to rise in the third quarter, with most major indexes reaching new highs through the latter part of September. Equities were buoyed by favorable economic data and solid second-quarter corporate earnings reports. Investors were also encouraged that congressional Republicans were making progress in developing a plan to reform the tax code and reduce corporate and individual tax rates. While market volatility remained generally low, stocks occasionally suffered sharp, but brief, pullbacks in response to rising tensions between the U.S. and North Korea.

Small-cap shares outperformed their larger peers. The small-cap Russell 2000 Index returned 5.67% versus 4.48% for the large-cap S&P 500 Index and 3.22% for the S&P MidCap 400 Index. As measured by various Russell indexes, growth stocks outpaced value shares across all market capitalizations.

In the large-cap universe, as measured by the S&P 500, most sectors produced solid positive returns. Despite periodic concerns about extended valuations, information technology shares performed best, as many leading companies reported gains in revenues and earnings. Energy stocks performed well for the quarter, thanks to a rally in September. Oil prices climbed amid increasing demand for petroleum as hurricane-damaged refineries started coming back online, but T. Rowe Price energy analysts do not expect the recent hurricanes to have a long-term impact on oil prices. Consumer staples stocks fell, while real estate and consumer discretionary shares were modestly positive.

  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index
3Q 2017 4.48% 3.22% 5.67%
Year-to-Date 14.24% 9.40% 10.94%

Past performance is not a reliable indicator of future performance.
Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell indexes. Russell® is a trademark of Russell Investment Group. 

Domestic investment-grade bonds produced modest positive returns in the third quarter. The Bloomberg Barclays U.S. Aggregate Bond Index returned 0.85%. The Federal Reserve did not raise short-term interest rates during the quarter but is expected to raise rates once more this year. Longer-term Treasury yields declined for most of the quarter as rising geopolitical tensions prompted some investors to seek the relative safety of U.S. government debt. However, yields rebounded in September as investors became less risk averse and as President Donald Trump and Congress agreed in early September to fund the federal government and push back the debt ceiling for three months. Also, the Fed announced—as expected—that it would begin to reduce the size of its balance sheet starting in October.

In the investment-grade universe, longer-term Treasury and corporate bonds performed best. Mortgage- and asset-backed securities edged higher. Municipal bonds outperformed taxable securities, helped by steady demand and limited new issuance. High yield issues outpaced higher-quality debt, helped by a sharp rise in oil prices in September. Energy companies represent a substantial portion of the high yield market.

  Bloomberg Barclays U.S. Aggregate Bond Index Bloomberg Barclays Municipal Bond Index JPMorgan Global High Yield Index
3Q 2017  0.85% 1.06% 2.24%
Year-to-Date 3.14% 4.66% 7.35%

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

Developed non-U.S. equity markets outperformed large-cap U.S. shares, helped by a weaker dollar versus the euro and pound sterling, which lifted eurozone and UK returns in dollar terms. The MSCI EAFE Index, which measures the performance of mostly large-cap stocks in Europe, Australasia, and the Far East, returned 5.47%. Major European markets rose, lifted in part by the region’s ongoing economic recovery. Shares in oil producer Norway fared best, but peripheral eurozone markets Italy and Portugal also did very well, posting returns that exceeded 13%. UK shares returned just over 5% in dollar terms, as the pound strengthened amid expectations that the Bank of England would soon raise short-term interest rates in response to rising inflation. Markets in Asia produced more moderate gains. Japanese shares returned slightly more than 4% in dollar terms, as the yen edged lower versus the greenback. With his approval rating improving, Prime Minister Shinzo Abe dissolved the lower chamber of parliament late in the period and called for new elections to be held on October 22.

Emerging markets equities outperformed developed markets in dollar terms, helped by solid global economic growth and strengthening in some non-U.S. currencies. The MSCI Emerging Markets Index returned 8.04%. All broad emerging regions produced gains. Several Latin American markets produced robust returns, led by Brazil, where shares advanced 23% in dollar terms. The Brazilian market benefited from a stronger currency, interest rate cuts, plans to privatize state-owned assets, and the passage of the country’s first labor reform package in 70 years. In emerging Europe, Russian stocks advanced 18%, helped by a stronger ruble, rising oil prices, and a pickup in economic growth. Central European markets produced solid returns, but Turkish shares were nearly flat. Asian markets were mostly positive, led by China and Thailand, but shares in Indonesia fell slightly. Shares in former frontier country Pakistan plunged 16%, in part because of political uncertainty following the supreme court’s ousting of the prime minister. South Korean shares rose a relatively modest 3% for the quarter, but the market is one of the region’s top performers for the year-to-date period.

  MSCI EAFE Index MSCI Emerging Markets Index
3Q 2017 5.47% 8.04%
Year-to-Date 20.47% 28.14%

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

Bonds in developed non-U.S. markets outperformed domestic bonds in the third quarter, as a weaker dollar versus the pound and the euro lifted European bond returns in dollar terms. In the UK, bond yields fell through early September, but yields spiked through the end of the quarter as the Bank of England cautioned that “some withdrawal of monetary stimulus” was likely in the next few months. In the eurozone, German bond yields followed a similar pattern, declining for much of the quarter but rising in the latter part of September. Although Angela Merkel won a fourth term as German chancellor, her efforts to build a coalition government are expected to be difficult, due to her political party’s reduced representation in the legislature. In Asia, the Bank of Japan offered in early July to purchase an unlimited amount of bonds to keep yields from rising. The central bank continues to target a 10-year government bond yield of 0%.

Emerging markets bonds produced strong returns in the third quarter, helped by solid or improving economic growth and falling interest rates in various countries. Local currency bonds fared better than dollar-denominated issues, as some emerging markets currencies strengthened versus the greenback. Brazilian bonds were boosted by central bank interest rate cuts and falling inflation, whereas local currency South African debt struggled amid rand weakness versus the dollar.

  Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index JPMorgan Emerging Markets Bond Index Global Diversified  JPMorgan GBI-EM Global Diversified Index
3Q 2017 2.48% 2.63% 3.55%
Year-to-Date 8.74% 8.99% 14.28%

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

Important Information

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

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

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

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

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

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

EMERGING MARKETS STOCKS ADVANCE AS STEADY GLOBAL GROWTH SUPPORTS RISK SENTIMENT

Emerging markets stocks rose in the third quarter of 2017 as buoyant risk appetite overcame a growing nuclear threat from North Korea and policy uncertainty in the U.S. Steady global growth, strong earnings growth expectations, and relatively cheap valuations versus developed markets stocks sustained demand for emerging markets assets. In July, the International Monetary Fund said that emerging and developing economies would see a “sustained pickup in activity” for the next two years and projected 4.6% growth in the emerging world in 2017, up slightly from its April forecast. The MSCI Emerging Markets Index rose to a three-year high in September but pared gains near month-end as President Donald Trump’s proposed tax cut plan spurred fears that investors would repatriate dollars, leading to large capital outflows from developing countries. All 11 sectors in the index advanced, led by real estate and energy stocks.

International Indexes
    Total Returns

MSCI Index

    

3Q 2017          YTD       

Emerging Markets (EM)

 

 8.04%           28.14%       

EM Asia

 

 7.17              32.15

EM Europe, Middle East, and Africa (EMEA)

 

 6.45              11.98

EM Latin America

 

15.12             27.00

All data are in U.S. dollars as of September 30, 2017. Past performance cannot guarantee future results.
This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

CHINESE STOCKS GAIN DESPITE S&P DOWNGRADE; INDIAN STOCKS PARE GAINS AT QUARTER-END AS THE RUPEE WEAKENS

  • Chinese stocks advanced, though July’s indicators signaled the start of a widely anticipated second-half economic slowdown. Standard & Poor’s cut its credit rating for China citing the country’s rising debt risk, marking the agency’s first ratings cut for China since 1999 and the country’s second major downgrade this year.
  • Indian stocks advanced on optimism about the country’s growth prospects, though concerns about the economic outlook resurfaced at quarter-end after growth slowed to a three-year low in the June quarter. Speculation that India’s government would boost growth through stimulus measures that could widen its fiscal deficit pressured the rupee to a six-month low against the U.S. dollar near the end of September.
  • Southeast Asian stock markets were mixed. Thailand was the best performer, gaining nearly 11%, followed by the Philippines, whose domestic benchmark hit record levels in September. Most Southeast Asian countries reported better-than-expected gross domestic product growth in the second quarter except for Indonesia, whose second-quarter growth lagged expectations and the government’s own target. Indonesia’s central bank lowered its benchmark rate for the second straight month in September.

BRAZILIAN STOCKS SURGE ON RECOVERY HOPES; MEXICAN STOCKS ADVANCE ON BENIGN ECONOMIC DATA

  • Brazilian stocks climbed 23% as President Michel Temer managed to avoid prosecution, allowing him to press on with economic reforms. In September, Brazil reported that its economy grew a better-than-expected 0.2% in the second quarter from the first, marking the second straight quarter of growth and raising recovery hopes after the country’s worst recession on record.
  • Mexican stocks rose slightly as data pointed to a resilient economy, defying fears of a slowdown after the U.S. election. Signs that the Trump administration was softening some of its protectionist rhetoric in renegotiating the North American Free Trade Agreement also lifted the outlook for Mexico’s exporters.
  • Andean stock markets advanced as commodity prices strengthened. Stocks in Chile and Peru posted double-digit gains as global copper prices rallied to a three-year high in September. Colombian stocks lagged with a single-digit rise. Colombia’s central bank cut its benchmark rate twice over the quarter to bolster growth.

SOUTH AFRICAN AND RUSSIAN STOCKS GAIN AS COMMODITIES RALLY

  • South African stocks added nearly 4%, driven by gains in mining companies as commodity prices surged. South Africa’s economy grew a better-than-expected 2.5% in the second quarter from the first quarter, exiting its second recession in 10 years, though full-year growth is expected to hover near last year’s 0.3% expansion. The South African Reserve Bank stayed pat on interest rates in September, defying expectations of a rate cut, due to inflation risks.
  • Russian stocks rallied about 18% as surging global oil prices boosted the outlook for the country’s oil-driven economy. Brent crude oil futures touched a two-year high in September and entered a bull market in the quarter amid signs of tightening demand worldwide. Russia’s central bank cut its key rate by a half-percentage point in September as inflation slowed and forecast that the economy would expand up to 2.2% this year, up slightly from its earlier target.
  • Turkish stocks edged higher after a steep drop in September largely offset the previous two months’ gains. Turkey’s economy expanded a surprisingly strong 2.1% in the second quarter from the first quarter and 5.1% from a year ago, making it one of the world’s fast-growing major economies. However, Turkey’s central bank left its key policy rates unchanged in September for the third straight meeting after inflation stayed near 10%.

SOLID FUNDAMENTALS IN EMERGING MARKETS OFFSET NEAR-TERM RISKS

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

Near-term risks include a rise in U.S. protectionism and a faster-than-expected pace of rate hikes by the Federal Reserve. However, we believe that emerging markets will be able to withstand a gradual tightening of monetary policy given that their financial positions have broadly improved in recent years. Economic growth in emerging markets has stabilized, and corporate earnings are starting to turn higher after years of disappointing performance. Nevertheless, we believe that careful stock selection will be crucial for producing good long-term returns as emerging markets continue to show wide dispersion in the performance of individual countries and companies.

Important Information

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

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

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

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

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

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

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