Thomas Pollaouec, T Rowe Price
“The purchasing managers index (PMI) for the major economies has been at the highest level in the past two years, so that means that the upside surprise is weak if you look at the long-term horizon [up to 2019],” said Pollaouec, who joined the firm earlier this year from State Street Global Advisers. He was speaking at a recent media briefing in Hong Kong.
He added that the broad-based recovery that investors saw in 2017 will not continue in the following year, which means that investors should find opportunities where earnings are more solid.
Besides the weaker upside in equities markets, Poullaouec also expects more volatility in the coming year.
“Volatility is so low, and historically, volatility tends to mean revert at some stage.”
The VIX Index is currently around 9%-10%, which could double to the long-term average of 18%-20%, he said.
However, the good news is that the correlations among the major equity indices are at the lowest in ten years. “If you are a stock picker, then you have more opportunities to differentiate among stocks.”
Rich valuations
Poullaouec said valuations of global equities, which he typically uses as a starting point when finding investments, are generally high.
“When we look at valuations, there are not many places where we would have confidence to invest over a medium-term horizon. This is especially true about the US equity market.”
Valuations for US large caps have reached their highest compared to their 15-year history, he said. Earnings expectations for US companies are quite elevated as well, given that their earnings have also peaked this year.
Because of that, he prefers equity markets outside the US.
“On a relative valuation basis, we prefer Japan and Europe equities, where we have seen more modest [average corporate earnings] estimates.”
Japanese companies have also seen a massive improvement in corporate governance since 2012 and more companies are now paying higher dividends to their shareholders, he said.
He also likes emerging markets, especially in Asia, where he is more optimistic about their their earnings potential.
“Earnings growth is more pronounced in Asia, and that’s why we have a preference around the region versus the rest of the world.”
From a sector perspective, he expects that technology, financials and consumer-related companies globally are areas set for higher growth.
T Rowe’s Global Allocation Fund, a multi-asset fund which is registered in Singapore and managed by Charles Shriver, has nearly 60% of its assets in equities. Under the equities portion, the fund is underweight the US and overweight Europe, emerging markets and Japan relative the MSCI AC World Index, according to the fund’s factsheet.
Geographic exposure for equities
| Fund | Benchmark | |
| United States | 45.7% | 51.6% |
| Europe | 24.3% | 22.1% |
| Emerging Markets | 12.2% | 11.0% |
| Japan | 10.9% | 7.9% |
| Rest of World | 6.9% | 7.4% |
The Global Allocation Fund versus the MSCI AC World and Bloomberg Barclays Global Aggregate Bond indices since the fund’s inception
Source: FE Analytics. All NAVs have been converted to US dollars for comparison purposes. Note: The fund’s benchmark is 60% MSCI AC World Index, 28% Bloomberg Barclays Global Aggregate Bond Index and 12% USD Libor.
