T Rowe Price’s head of international equities and chief investment officer, Justin Thomson, remains “patiently bearish” on equities and described the current downturn as a once in a 300-year event.
With heightened geopolitical tensions and market uncertainty, the first half of 2022 has witnessed significant capital flows to money markets at the expense of both equities and fixed income.
Thomson described the way in which equities and bonds have fallen in tandem as an anomalous event and he said that there was still further to go before the market bottomed out.
“If you look at how a 60:40 portfolio has performed and…the positive correlations between equities and bonds, we see that as being a very remote event and statistically it’s a one in 300-year event.”
He said that T Rowe Price had been bearish for the past 12 months or so, although there were opportunities to re-engage with equities as multiples continued to fall. Nevertheless, Thomson said there was still further to go before markets bottomed out.
“I’m going to refer broadly to the S&P 500, but let’s say on a forward-earnings basis, we came into the year about 21 times 12 months forward earnings. That’s gone to 16 or 17 times forward earnings so we’re back down in line with historical averages.”
“I’d say that leg of the bear market is largely done. We’ve had the multiple compression effect. In terms of where we are, I think we’ve probably still got further to go because the next leg of this is probably about earnings and you’ve yet to really see the big period of earnings downgrades.”
Asian markets
A number of asset managers have recently moderated their position on China due to short-term headwinds including property sector turmoil, a regulatory clampdown on some of the country’s largest technology companies and the lingering effects of the country’s zero-Covid policy.
Only last month, Thomas Poullaouec, head of multi-asset solutions for Asia Pacific at T Rowe Price, moderated his overweight position on Asian credit due to headwinds in China.
Thomson acknowledged the short-term headwinds in China, although he said that he took a long-term view, which was bullish. He cited the fact that there was potential for stimulus as China has not been ravaged by inflation like most developed markets and the pent-up demand that will be unleashed when the country relaxes its zero-Covid policy.
He also pointed to the fact that the country’s listed securities market, at around 6,000 companies, is larger even than the US market and that unlike other emerging markets, China’s liquidity is very deep.
Overall, he pointed to some of the long-term structural reforms as reasons why he was bullish on Chinese equities.
“If property ceases to become the asset class of choice for savers in China, they’re going to need to find something else and that’s where the equity markets, credit markets, the creation of some kind of defined contribution pension fund market kicks in. These are all the strategic opportunities as I see it in China. I’m very bullish on all those aspects in the longer term,” he said.
On India, Thomson echoed comments from other asset managers that valuations remained stretched, particularly for the popular consumer stocks, although he noted that the long-term demographics were also favourable.
Regarding Asean, which has benefited recently from reopening themes, he was more circumspect.
“The longer-term dynamics of the Asean market – Thailand, Malaysia and particularly, Indonesia, these as investment universes just haven’t evolved in the way that we thought they might 10 years ago,” he said.
China WFOE
In March this year, T Rowe Price opened an office in Shanghai after receiving a licence to set up an unregulated wholly foreign-owned enterprise (WFOE) in December 2020.
This is the firm’s first ever office in mainland China and at the moment is focused on research including medium- and small-cap companies in addition to the familiar mega-cap names.
Thomson, who is chairman of the WFOE, was tight-lipped about whether T Rowe Price would apply for a private fund management licence, which enables foreign firms to raise renminbi from wealthy and institutional investors in China for onshore investment, or the qualified domestic limited partner licence, which allows them to tap the same investors for quota-allocated overseas investment.
He said that this was something that was being discussed internally, although right now the focus is on building out the firm’s research.
“The current focus is on expanding our research coverage to support our global research platform and our investments in Chinese securities,” he said in a written statement to FSA.
“We plan to develop our onshore distribution capabilities in time. We are closely monitoring developments in the market and seek opportunities to work with eligible clients who share our long-term focus.”
