global market environment 2q20 · 2020-08-09 · 3. t. rowe price. global market environment. as of...

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Global Market EnvironmentSecond Quarter 2020

T. ROWE PRICE1

GLOBAL MARKET ENVIRONMENTAs of 30 June 2020Market Themes and Risks

Market Themes Market Risks

Highly UncertainEarnings Outlook

Economic Recovery Underway

Massive Fiscal Stimulus

Mixed Success in Business Re-openings

Central Bank Liquidity Support

2nd Wave of Outbreaks

Widespread Unemployment

Negative Economic Feedback Loop

Heightened Political Tensions

Widespread Bankruptcies

T. ROWE PRICE2

GLOBAL MARKET ENVIRONMENTAs of 30 June 2020

*Only includes November 30, 2004 to present due to data availability **Does not include P/Cash Flow due to data availabilityIndices used, from left to right above, beginning with U.S. IG Corp.: Bloomberg Barclays U.S. Investment Grade Corporate, Bloomberg Barclays Euro Aggregate Credit, Bloomberg Barclays U.S. Aggregate Credit – Corporate High Yield, Bloomberg Barclays Global High Yield, Bloomberg Barclays Emerging Markets USD Aggregate, MSCI USA, MSCI Europe, MSCI Japan, MSCI Emerging Markets, S&P 500, S&P 600, MSCI EAFE Large Cap, MSCI EAFE Small Cap, S&P 500 Growth, S&P 500 Value, MSCI EAFE Growth, MSCI EAFE ValueSources: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved., Source for Bloomberg Barclays index data: Bloomberg Index Services Limited., MSCI, Standard and Poor’s. See Additional Disclosures on slide 25.

Valuation Comparisons

Valuations are elevated for most asset classes relative to history.

Equity valuations have been supported by low rates, which make fixed income alternatives less attractive.

Credit spreads have rebounded from low levels but remain wide relative to history, as both downgrades and default expectations have risen sharply.

Median

Based on 10-Year Benchmark

Government Bond Yields

Based on Option-Adjusted Spreads

Based on EqualWeighted Average of

NTM P/E, P/B, and P/Cash Flow





99% 97%100%

83%

38% 40%

24% 24%

14%

100%

75%

66%71%

100%

69%72%

51%

100%

70%

84%

61%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Perc

entil

e R

anki

ng v

s. H

isto

ry

VALUATION COMPARISONSPercentile Rankings vs. Past 15 Years, As of 30 June 2020

Level as of 12/31/19

T. ROWE PRICE3


Source: Haver Analytics / Johns Hopkins University.

Global Pandemic

• The initial outbreak appears to have peaked in China, Japan, and Europe.

• Cases in the U.S. remain elevated, with new outbreaks emerging in southern and western states.

• Within Emerging Markets the situation is quite mixed. Most of emerging Asia has seen limited outbreaks, but Latin America, Africa, and the Middle East continue to face rising case counts.

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

Con

firm

ed C

ases

(US

scal

e)

Con

firm

ed C

ases

NEW CONFIRMED COVID-19 CASES, ROLLING 15 DAY TOTAL

China Wuhan

Japan Italy

Spain France

Germany U.K.

U.S. (Right Axis)

T. ROWE PRICE4

GLOBAL MARKET ENVIRONMENT

Source: Haver Analytics / IHS Markit, Caixin, U.S. Bureau of Economic Analysis, data analysis by T. Rowe Price.

Economic Shock

• The hit to GDP from the shock is almost certain to be unprecedented.

Forward projections are extremely difficult at this point, but a decrease in 2Q’20 that is several multiples worse than even the worse decline in the Global Financial Crisis (4Q’08) is likely.

Due to the lack of significant structural imbalances going into the crisis, we may experience a more swift recovery than normal.

However, a return to the prior level of GDP may take several years.

5150

47

32

37

42

47

52

57

62

2017 2018 2019 2020

PMI I

ndex

(>50

= E

xpan

sion

)

MANUFACTURING PMI January 2017 to June 2020 China

U.S.Euro Area

0.90

0.91

0.92

0.93

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

1.02

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Cyc

le p

eak

= 1

Quarters from Cycle Peak

DEEP US RECESSIONS AND RECOVERY TRAJECTORIES

1957-581973-751982-832008-092020

2020 Projections as of 6/30/20Q2: -30.0%Q3: +10.0%

-7.35

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Y/Y

Gro

wth

(%)

U.S. REAL GDP GROWTH VS. WEEKLY ECONOMIC INDICATOR (NY FEDERAL RESERVE)1 January 2007 To 4 July 2020

Real GDP Weekly Economic Index [Lewis, Mertens & Stock]

T. ROWE PRICE5


Sources: Haver Analytics/U.S. Department of Labor. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.

Labor Shock

• The labor market is experiencing an unprecedented shock due to the impacts of social distancing measures.

Continuing unemployment claims peaked in May at just under 25 million. The previous high was 6.6 million, reached during the height of the financial crisis.

Upon the initial waves of re-opening in early May, continuing claims fell by more than 4 million. But subsequent improvements have been much smaller.

0

5,000

10,000

15,000

20,000

25,000

30,000

Thou

sand

s

USA WEEKLY UNEMPLOYMENT CLAIMS1 January 1998 to 27 June 2020

Continuing Claims Initial Claims

0

5,000

10,000

15,000

20,000

25,000

30,000

Mar-20 Apr-20 May-20 Jun-20

Thou

sand

s

Initial ClaimsContinuing Claims

Tech bubble / 9-11 Peak:6.3%

Financial Crisis Peak:10.0%

11.1%

3

5

7

9

11

13

15

17

Une

mpl

oym

ent (

%)

USA UNEMPLOYMENT RATEDecember 1999 to June 2020

1 March 2020 to 27 June 2020

T. ROWE PRICE6


Sources: Haver Analytics/U.S. Department of Labor.

Unemployment: How much is temporary?

The important question is: How much of the unemployment will prove to be temporary and for how long?

Many of the unemployment claims are by workers who have been furloughed rather than fired.

Job losses designated as permanent are much lower than those considered temporary. However, permanent job losses have reached the levels seen at the height of the early 90s and early 00s recessions.

Ultimately, the level of unemployment will be determined by the number of businesses that are unable to survive the crisis.

0

5,000

10,000

15,000

20,000

25,000

Mon

htly

Job

Los

ses

JOB LOSSES, TEMPORARY VS. PERMANENTJan 1990 to June 2020

Permanent Layoffs

74%

53%

12%16%

26%26%

47%

88%84%

74%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Average(Jan-90 toPresent)

March-20 April-20 May-20 June-20

Shar

e of

Job

Los

ses

PermanentLayoffs

3,3992,099 2,563 2,948

3,707

1,172 1,848

18,063

15,343

10,565

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Average(Jan-90 toPresent)

March-20 April-20 May-20 June-20

Num

ber o

f Job

Los

ses

PermanentLayoffs

T. ROWE PRICE7


*Others includes Rest of World, International Monetary Fund, and the World BankSources: Cornerstone Macro. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.

Unprecedented Stimulus

• The level of both fiscal and monetary stimulus that has been announced is unprecedented.

A lot of lessons were learned during the Global Financial Crisis about market liquidity, so the Fed was well-prepared to take action more quickly and decisively this time.

Meanwhile, fiscal stimulus measures have been focused on helping distressed sectors, small businesses, and workers who have been laid off or furloughed due to the business disruptions caused by lockdowns and social distancing measures.

UNPRECEDENTED GLOBAL MONETARY AND FISCAL STIMULUS1 February 2020 to 12 June 2020

Potential Central Bank Liquidity Injections

Potential Government Fiscal Stimulus

Combined Total

Trillions of USD % of GDP Trillions of USD % of GDP Trillions of USD % of GDP

United States $6.21 29.0% $3.30 15.4% $9.51 44.4%

Eurozone $1.78 13.3% $4.02 30.2% $5.80 43.6%

Japan $1.03 20.0% $2.08 40.3% $3.11 60.3%

United Kingdom $0.25 9.0% $0.14 5.1% $0.39 14.1%

China $1.33 9.3% $1.22 8.4% $2.54 17.7%

Others* $0.68 n/a $2.38 n/a $3.05 n/a

GLOBAL TOTAL $11.13 12.8% $11.83 13.7% $22.96 26.5%

$7,082

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

Tota

l Ass

ets

(Mill

ions

of U

SD)

U.S. FEDERAL RESERVE BALANCE SHEET1 January 2008 to 30 June 2020

€ 6,236

€ 0

€ 1,000

€ 2,000

€ 3,000

€ 4,000

€ 5,000

€ 6,000

€ 7,000

Tota

l Ass

ets

(Bill

ions

of E

UR

)

ECB BALANCE SHEET1 January 2008 to 30 June 2020

T. ROWE PRICE8


Past performance is not a reliable indicator of future performance.*7/16/90 included, even though sell-off fell just short of -20% bear market threshold.Sources: Standard & Poor’s. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures on slide 25.

Bear Markets

• The initial pace of the downturn in current bear market was much more rapid than in all other bear markets since 1960.

Thus far the rebound has been just as swift, driven by aggressive stimulus measures and hopes of a swift economic recovery once a vaccine has become widely available.

Most bear markets experience at least one relief period where stocks rally but then re-test previous lows. -26.15%

-22.18%

-36.06%

-48.20%

-33.51%

-19.92%

-26.72%

-49.15%-56.78%

-60%

-50%

-40%

-30%

-20%

-10%

0%

0 30 60 90 120 150 180 210 240 270 300 330 360 390 420 450 480 510 540 570 600 630

Peak

to T

roug

h In

dex

Pric

e D

eclin

e

Number of Trading Days from Peak

S&P 500 BEAR MARKETS, 1960 TO PRESENT

03/19/62 02/09/1966 11/29/1968 01/11/1973 11/28/1980

08/25/1987 07/16/1990* 03/24/2000 10/09/2007 02/19/2020

Current Bear Market (through June 30):

-8.44%

T. ROWE PRICE9


Past performance is not a reliable indicator of future performance.Sources: MSCI, Russell, Standard & Poor’s, T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Returns in USD. See Additional Disclosures on slide 25.

Equity Market Divergence Continues

Thus far the areas of the market that performed best leading into the sell-off, also outperformed during the sell-off.

Growth led value and large caps have led small caps. This is due to high levels of concern about businesses with higher leverage and higher sensitivity to economic growth.

The U.S. outperformed other developed markets, but gave back a portion of that advantage starting in mid-May.

As of: 06/30/2020 MSCI USA MSCI Europe MSCI Japan

MSCI Emerging Markets S&P 500 S&P 600

S&P 500 Growth

S&P 500 Value Oil Copper Gold

Selloff 2/19/20 to 3/23/20 -34.12% -32.79% -23.34% -27.53% -33.79% -41.27% -31.33% -36.78% -54.58% -18.38% -6.30%

Rebound 3/23/20 to 6/30/20 40.80% 27.79% 22.96% 29.70% 39.31% 40.35% 44.49% 32.41% 68.37% 30.76% 14.42%

YTD YTD (6/30/20) -2.16% -12.43% -6.92% -9.67% -3.08% -17.85% 7.93% -15.52% -35.75% -1.92% 18.00%

14.45%

22.60%

6.35%

0%

5%

10%

15%

20%

25%

Jan-

01Ja

n-05

Jan-

09Ja

n-13

Jan-

17Ja

n-21

Jan-

25Ja

n-29

Feb-

02Fe

b-06

Feb-

10Fe

b-14

Feb-

18Fe

b-22

Feb-

26M

ar-0

1M

ar-0

5M

ar-0

9M

ar-1

3M

ar-1

7M

ar-2

1M

ar-2

5M

ar-2

9Ap

r-02

Apr-0

6Ap

r-10

Apr-1

4Ap

r-18

Apr-2

2Ap

r-26

Apr-3

0M

ay-0

4M

ay-0

8M

ay-1

2M

ay-1

6M

ay-2

0M

ay-2

4M

ay-2

8Ju

n-01

Jun-

05Ju

n-09

Jun-

13Ju

n-17

Jun-

21Ju

n-25

Jun-

29

YTD

Cum

ulat

ive

Rel

ativ

e R

etur

n

RELATIVE PERFORMANCE IN EQUITIES

S&P 500 less S&P 600 (Large vs. Small)S&P 500 Growth less S&P 500 ValueRussell 3000 less MSCI EAFE (U.S. vs. International)

T. ROWE PRICE10


Sources: MSCI, Russell, Standard & Poor’s, T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Returns in USD. See Additional Disclosures on slide 25.

Earnings Expectations

• Earnings expectations have been significantly hurt by the economic shock.

• However, investors are more focused on how long it will take earnings to rebound.

• Current estimates are for S&P 500 earnings to rebound by 3Q 2021, 7 quarters after the beginning of the earnings recession.

• These estimates may prove optimistic. While it appears likely we will have a vaccine by then, it is also likely some impacts from the crisis will affect economic activity for several years. Elevated unemployment is likely to impact consumer spending, and businesses may be unwilling to spend on capex until their balance sheets have been repaired.

4Q'19:$42.21

3Q'21:$42.53

$0

$10

$20

$30

$40

$50

$60

2017 2018 2019 2020 2021

Qua

rter

ly E

arni

ngs

per S

hare

S&P 500 QUARTERLY EARNINGS

ActualEstimates as of 7/6/20

-21%

-45%

-25%

-13% -11%-8%

1%

7%

-50%

-40%

-30%

-20%

-10%

0%

10%

Qua

rter

ly E

arni

ngs

vs. P

eak

S&P 500 QUARTERLY EARNINGS ESTIMATES VS. PEAK (4Q'19)

ActualEstimates as of 7/6/20

7 quarters

-1%

-26%

34%

-8%

-29%

30%

-16% -14%

27%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2019 2020 2021

Y/Y

Gro

wth

(%)

EPS GROWTH ESTIMATES AS OF 30 JUNE 2020

Russell 3000MSCI EAFEMSCI Emerging Markets

-25.2%

0.5%

-31.5%

-10.9%

-18.7%

3.7%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2020 vs 2019 2021 vs 2019

Y/Y

Gro

wth

(%)

EPS GROWTH ESTIMATES AS OF 30 JUNE 2020

Russell 3000MSCI EAFEMSCI Emerging Markets

T. ROWE PRICE11


Sources: BofAML. Standard & Poor’s. MSCI. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures on slide 25.

Are stocks too expensive?

• Stocks have rallied sharply, despite the ongoing economic weakness, leading many to become concerned that stocks are too expensive.

• While this has led stocks to become quite expensive relative to their own history, they have not become particularly expensive relative to bonds.

• When we compare the forward the earnings yield to BBB rated corporate bonds, we can see that the earnings yield remains well above the bond yield.

• This means that investors are still being compensated for the additional risk that comes with owning stocks instead of bonds.

• The current earnings yield premium is very similar to the premium level seen the aftermath of the bursting of the tech bubble and 9/11. 4.45%

2.73%2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Yiel

d (%

)

FWD. EARNINGS YIELD VS. BBB CORPORATE BOND YIELD (31 DEC 2016 TO 30 JUNE 2020)

ACWI Forward Earnings YieldBBB Corporate Bond Yield

4.29%

1.72%

-6

-4

-2

0

2

4

6

8

10

12

Equi

ty Y

ield

Pre

miu

m (%

)

IMPLIED EQUITY RISK PREMIUM: MSCI AC WORLD(MONTHLY, JAN 1997 TO JUNE 2020)

Premium to 3 month U.S. TreasuryPremium to BBB Bonds06/30/2020

4.53%

1.61%

-6

-4

-2

0

2

4

6

8

10

12

Equi

ty Y

ield

Pre

miu

m (%

)

IMPLIED EQUITY RISK PREMIUM: S&P 500MONTHLY, JAN 1997 TO JUNE 2020

Premium to 3 month U.S. TreasuryPremium to BBB Bonds06/30/2020

4.64%

2.73%2.5

3.5

4.5

5.5

6.5

7.5

8.5

Yiel

d (%

)

FWD. EARNINGS YIELD VS. BBB CORPORATE BOND YIELD(31 DEC 2016 TO 30 JUNE 2020)

S&P 500 Forward Earnings Yield BBB Corporate Bond Yield

T. ROWE PRICE12


*Begins on 9 March 2009 which was the low point for the S&P 500 during the financial crisis

Past performance is not a reliable indicator of future performance.Sources: Standard & Poor’s. MSCI, T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Returns in USD. See Additional Disclosures on slide 25.

U.S. vs. the Rest of the World

U.S. Equities dramatically outperformed the rest of the world during the post-financial crisis period.

While the U.S. economy rebounded fairly soon after the peak of the financial crisis, other regions have faced additional challenges.

Europe experienced a second recession in the wake of its sovereign debt crisis and extremely low interest rates have hampered financials.

Japan has faced challenges due to unfavorable demographics and poor corporate governance.

Emerging markets have been hampered by the on-going slowdown in China and deterioration of commodities prices.

Sector make-up has also been a significant factor. Emerging markets earnings have been weighed down by falling commodity prices. European and Japanese financials have been hurt by extremely low rates. Meanwhile, U.S. technology giants have been extremely successful in growing earnings.

100

200

300

400

500

600

Inde

x Le

vel (

100

= 3/

9/20

09)

REGIONAL RETURNS9 March 2009* to 30 June 2020, in USD

S&P 500

MSCI Europe

MSCI Emerging Markets

MSCI Japan

-100

-50

0

50

100

150

200

Earn

ings

Per

Sha

re G

row

th (C

umul

ativ

e %

)

TRAILING EPS BY REGIONMarch 2009 to June 2020

S&P 500

MSCI Europe

MSCI Japan

MSCI Emerging Markets

+8%+2%

+22%

+131%

+480%

+190%+180%+155%

T. ROWE PRICE13


Past performance is not a reliable indicator of future performance.Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Russell. See Additional Disclosures on slide 25.

U.S. Growth vs Value

Fundamental metrics support superior performance by growth stocks during the current growth cycle.

The difference in free cash flow growth is particularly notable.

77%

290%

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

350%

CUMULATIVE TOTAL RETURN 1 Jun 07- 30 June 20

Russell 1000 ValueRussell 1000 Growth

16%

142%

-50%

0%

50%

100%

150%

200%

FREE CASH FLOW GROWTH 1 Jun 07- 30 June 20

Russell 1000 ValueRussell 1000 Growth

11% 5%16%

46%

89%

142%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Sales Per Share Earnings Per Share Free Cash Flow

CUMULATIVE CHANGE 1 Jun 07- 30 June 20

Russell 1000 Value Russell 1000 Growth

T. ROWE PRICE14


Past performance is not a reliable indicator of future performance.Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. Standard & Poor’s. All rights reserved. See Additional Disclosures on slide 25.

U.S. Large Cap vs. Small Cap

Returns for small cap and large cap companies diverged in 2018. The economic crisis has accelerated this divergence, as small cap companies are likely to have less of a buffer against economic weakness.

Balance sheet leverage is of particular concern, as small cap companies carry considerably more debt than large caps.

Small caps have also seen a general deterioration in margins relative to large caps, as they have benefitted less from globalization and automation. They also face greater headwinds from rising domestic labor costs.

0.70

0.75

0.80

0.85

0.90

Rat

io o

f S&

P 60

0 / S

&P

500

SMALL CAP VS. LARGE CAP: GROSS MARGINSJanuary 2011 to June 2020

200%

128%

-50%

0%

50%

100%

150%

200%

250%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

CUMULATIVE PERFORMANCE 31 December 2010 To 30 June 2020

S&P 500 S&P 600

103%

125%

50%

60%

70%

80%

90%

100%

110%

120%

130%

Deb

rt a

s %

of E

quity

SMALL CAP VS. LARGE CAP: LEVERAGE10 Years Ending June 2020

S&P 500 S&P 600

T. ROWE PRICE15


Past performance is not a reliable indicator of future performance.*Returns shown with gross dividends reinvestedSources: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. MSCI. See Additional Disclosures on slide 25.MSCI EEMEA = MSCI Emerging Europe, Middle East, and Africa Figures shown in USD.

Widespread Rebound in Equity Markets

Equity markets across the globe rebounded during the quarter on hope that the worst of the COVID-19 crisis is behind us.

U.S. equities outperformed the rest of the world, driven by aggressive stimulus measures and the strength of technology companies whose business models are conducive to stay-at-home spending.

Emerging Asia remains an area of strength, as many of these nations have already experienced the worst of the virus spread. Additionally, Asia has prior experience with influenza strains similar to COVID-19 (e.g. SARS, Swine Flu, MERS) and were better prepared to act quickly and decisively to quell the spread.

PERFORMANCE FOR MSCI REGIONSIn USD, Total Return – Annualized if Greater than 1 Year, Gross*

Quarter 1 Year 3 Year 5 Year 10 Year

MSCI World 18.4 3.4 7.3 7.5 10.6

MSCI USA 19.8 8.4 11.0 10.8 14.1

MSCI Europe 16.8 -6.3 0.6 2.1 6.3

France 16.5 -9.8 1.3 4.4 6.8

Germany 28.2 -2.0 -0.6 2.5 6.8

Italy 16.9 -10.8 -0.7 -0.7 2.0

Spain 11.7 -20.6 -8.8 -4.1 0.9

United Kingdom 9.7 -17.7 -3.9 -2.4 4.0

MSCI Japan 9.3 3.5 3.3 3.8 6.4MSCI Emerging Markets 20.5 -3.0 2.3 3.2 3.6

MSCI Asia ex. Japan 19.3 2.0 3.9 4.7 6.2

China 17.6 13.3 8.7 5.5 6.6

India 25.7 -17.0 -1.6 0.9 1.7MSCI Emerging Europe Mid East & Africa

18.9 -16.3 0.3 0.6 -0.7

Russia 25.1 -12.2 12.7 9.6 3.1

Egypt 7.4 -11.2 -1.4 -6.4 -1.4

South Africa 32.3 -24.5 -6.9 -5.5 1.1

MSCI Latin America 18.9 -32.2 -6.9 -2.9 -3.5

Brazil 19.5 -33.2 -2.2 0.7 -3.8

Mexico 15.5 -25.1 -14.1 -9.0 -1.9MSCI Frontier Markets 15.6 -11.0 -1.5 0.2 3.9

20.5% 19.8% 19.3% 18.9% 18.9% 18.4%16.8%

15.6%

9.3%

0

5

10

15

20

25

Tota

l Ret

urn

(%)

PERFORMANCE DURING THE 2ND QUARTER 2020

T. ROWE PRICE16


Past performance is not a reliable indicator of future performance.*Returns above are for Russell Indices which correspond to each style-box category. Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Standard & Poor’s. Russell. See Additional Disclosures on slide 25.

U.S. Equities: Growth and Large Cap Maintain Leadership

Growth led value and large caps led small caps during the COVID-19 sell-off. This is due to high levels of concern about businesses with higher leverage and higher sensitivity to economic growth.

Technology, Discretionary, Communication Services, and Health Care fared considerably better than the rest of the market.

After falling by more than 50% in the 1st

quarter, the energy sector staged a partially rally during as oil prices stabilized, but remains the worst performing sector.

Value Core Growth

Larg

e-16.3% -2.8% 9.8%

Mid -18.1% -9.1% 4.2%

Small -23.5% -13.0% -3.1%

14.2%

6.6%

-1.0% -1.7%

-7.1%-8.0%-10.0%

-12.6%

-15.5%

-24.6%

-37.0%

-3.1%

-40%

-30%

-20%

-10%

0%

10%

20%

YTD 2020 S&P 500 SECTOR RETURNS

Sectors

S&P 500

YTD 2020 RUSSELL STYLE RETURNS*

T. ROWE PRICE17


Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. MSCI, Russell, Standard & Poor’s. See Additional Disclosures on slide 25.

Global: Valuations Elevated vs. History

Global price-to earnings valuations are well above 20 year averages.

Elevated valuations are driven by 3 factors:

1) Depressed near term earnings

2) Investor optimism regarding an earnings recovery in 2H’21 earnings

3) Low interest rates

15.42

20.88

14.52 14.04

11.10

23.3722.13

24.09

14.97

10.33

13.88

9.44 8.79 7.48

16.75

20.97

15.1013.60

12.29

21.72

19.4217.76

14.53

5

10

15

20

25

30

S&P 500 Russell 2000 MSCI AC World MSCI EAFE MSCI EM

FORWARD P/E RATIOS20 Years Ending 30 June 2020

20 Year AverageYear agoCurrent

S&P 500 Russell 2000 MSCI AC World MSCI EAFE MSCI EM

Current 21.72 58.56 19.42 17.76 14.53Prior Quarter 15.60 20.21 14.10 12.84 11.22Year ago 16.75 20.97 15.10 13.60 12.2920 Year Average 15.42 20.88 14.52 14.04 11.10High 23.37 58.56 22.13 24.09 14.97Low 10.33 13.88 9.44 8.79 7.48

20 Year Range

58.56

T. ROWE PRICE18


Past performance is not a reliable indicator of future performance.Sources: ICE Data Indices, LLC (“ICE DATA”), is used with permission. ICE DATA, ITS AFFILIATES AND THEIR RESPECTIVE THIRD-PARTY SUPPLIERS DISCLAIM ANY AND ALL WARRANTIES AND REPRESENTATIONS, EXPRESS AND/OR IMPLIED, INCLUDING ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, INCLUDING THE INDICES, INDEX DATA AND ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM. NEITHER ICE DATA, ITS AFFILIATES NOR THEIR RESPECTIVE THIRD-PARTY SUPPLIERS SHALL BE SUBJECT TO ANY DAMAGES OR LIABILITY WITH RESPECT TO THE ADEQUACY, ACCURACY, TIMELINESS OR COMPLETENESS OF THE INDICES OR THE INDEX DATA OR ANY COMPONENT THEREOF, AND THE INDICES AND INDEX DATA AND ALL COMPONENTS THEREOF ARE PROVIDED ON AN “AS IS” BASIS AND YOUR USE IS AT YOUR OWN RISK. ICE DATA, ITS AFFILIATES AND THEIR RESPECTIVE THIRD-PARTY SUPPLIERS DO NOT SPONSOR, ENDORSE, OR RECOMMEND T. ROWE PRICE OR ANY OF ITS PRODUCTS OR SERVICES. Source for Bloomberg Barclays index data: Bloomberg Index Services Limited. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved See Additional Disclosures on slide 25.

Fixed Income Market Performance

• Fixed income performance for the year is reflective of the risk off environment. Liquidity and quality were the driving factors for market performance.

High yield and emerging markets rebounded significantly during 2Q20 but returns remain slightly negative for the year.

13.1%

1.7%

-1.8% -0.9%-3.1%

-20.8% -21.1%

-15.3%

0.0%

-0.3% -1.1%

5.0% 6.1%

19.9% 19.7%

14.9%

20.7%

5.7%

-1.4%

6.1%3.0%

-3.8% -4.2%

-0.4%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

ICE BofA USTreasury (10+ Y)

ICE BofA GermanGovernment (10+ Y)

ICE BofA JapanGovernment (10+ Y)

Bloomberg BarclaysU.S. Aggregate

Bloomberg BarclaysGlobal Aggregate

Bloomberg BarclaysU.S

High Yield

BAML Global HighYield

Bloomberg BarclaysEM USD Aggregate

FIXED INCOME PERFORMANCE (IN USD)

Selloff Rebound YTD

As of: 06/30/2020

ICE BofA US Treasury (10+ Y)

ICE BofA German Government

(10+ Y)

ICE BofA Japan Government

(10+ Y)

Bloomberg Barclays U.S.

Aggregate

Bloomberg Barclays Global

Aggregate

Bloomberg Barclays U.S

High YieldBAML Global High

Yield

Bloomberg Barclays EM USD

Aggregate

Selloff 2/19/20 to 3/23/20 13.13% 1.75% -1.77% -0.94% -3.11% -20.76% -21.13% -15.32%

Rebound 3/23/20 to 6/30/20 0.02% -0.28% -1.08% 5.05% 6.05% 19.92% 19.74% 14.87%

YTD YTD (6/30/20) 20.75% 5.68% -1.43% 6.14% 2.98% -3.80% -4.22% -0.43%

T. ROWE PRICE19


Past performance is not a reliable indicator of future performance.Sources: Haver Analytics/ Federal Reserve Board.

Interest Rates: How Low Can They Go?

• The Fed Funds rate is now at the “zero bound” level (i.e. rates cannot go lower without becoming negative), and Fed policy makers appear unwilling to move rates into negative territory.

Given the depth of the economic slowdown, the Fed is unlikely to raise interest rates over the near term.

With the Fed “out of bullets” from a rate-cutting standpoint, the Fed is focused on providing alternative means to support the economy and market liquidity.

The rise in debt issuance by the U.S. government in response to the crisis may eventually put upward pressure on rates—but this factor is likely to be overwhelmed by deflationary forces, economic weakness, and a demand for “safe” assets over the near term. 0%

2%

4%

6%

8%

10%

12%

14%

Yiel

d

FED FUNDS VS. 2 YEAR AND 10 YEAR TREASURY YIELDSJanuary 1983 to June 2020

2 Year U.S. Treasury Yield

10 Year U.S. Treasury Yield

Fed Funds Rate

T. ROWE PRICE20


Past performance is not a reliable indicator of future performance.Sources: Source for Bloomberg Barclays index data: Bloomberg Index Services Limited. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures on slide 25.

Credit Spreads

• Credit spreads reacted sharply to the sharp economic slowdown. A wave of downgrades and bankruptcies is expected over the next 12 to 18 months.

• However, spreads have eased considerably since late March, as liquidity, investor appetite for risk, and economic data have improved.

OAS COMPARISONS ACROSS U.S. CORPORATES (BASED ON BLOOMBERG BARCLAYS INDICES)All figures are in Basis Points

AAA AA A BBB BB B CCC US High YieldUS High Yield

Energy

12/31/2019 52 48 70 120 182 324 869 360 673

06/30/2020 82 86 113 194 456 643 1209 644 1020

Change +30 +38 +43 +74 +274 +319 +340 +284 +347

10/11/02, 1107

12/12/08, 2117

2/12/16, 864

1009

644

11/1/02, 1,032

12/12/08, 1,483

2/12/16, 1,953

2,219

1,020

0

500

1000

1500

2000

2500

Opt

ion

Adju

sted

Spr

ead

to T

reas

urie

s (in

bas

is p

oint

s)

HIGH YIELD SPREAD HISTORY 1 January 1997 to 30 June 2020, Weekly

BAML US High Yield BAML US High Yield Energy

T. ROWE PRICE21


All data shown is based on the Bloomberg Barclays U.S. High Yield Index. Ratings downgrades and upgrades are based on Standard & Poor’s credit ratings with credit watches excluded.Sources: Standard & Poor’s, Source for Bloomberg Barclays index data: Bloomberg Index Services Limited. See Additional Disclosures on slide 25.

Credit Downgrades

The ratio of rating downgrades relative to upgrades was already rising prior to the crisis and has accelerated significantly.

Not surprisingly, the consumer and energy sectors have been particular areas of weakness.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0

100

200

300

400

500

600

700

Dow

ngra

des

/ Upg

rade

s

Num

ber o

f Dow

ngra

des

HIGH YIELD UPGRADES VS. DOWNGRADES, QUARTERLY, 2010 - 2020

Downgrades (L) Upgrades (L) Ratio of Downgrades to Upgrades (R)

0

100

200

300

400

500

600

Num

ber o

f Dow

ngra

des

HIGH YIELD DOWNGRADES BY SECTOR, QUARTERLY, 2010 - 2020All Other Sectors Energy Sector Consumer Sectors

T. ROWE PRICE22


Sources: FactSet Research Systems Inc. All rights reserved. J.P. Morgan Chase & Co.1 Bank Loan Index data from 31 December 2006.Source for Bloomberg Barclays index data: Bloomberg Index Services Limited. See Additional Disclosures on slide 25.

Credit Spreads Significantly Elevated

Credit spreads moved dramatically higher in 1Q 2020, but have eased over the past 3 months.

Investment grade spreads are only slightly above long term averages, while higher yielding sectors generally about 20% above 15 year averages.

Actions by the Fed have significantly improved market liquidity conditions.

Option-Adjusted Spreads as of 30 June 2020

0

50

100

150

200

250

0

50

100

150

200

250

BloombergBarclays

U.S. AggregateIndex

BloombergBarclays GlobalAggregate Index

CORE INDICES

0

500

1000

1500

2000

0

500

1000

1500

2000

BloombergBarclaysU.S. High

Yield Index

JP MorganLeveragedLoan Index

BloombergBarclays

Euro HighYield Index

CREDIT INDICES

0

200

400

600

800

0

200

400

600

800

JP Morgan EMBIGlobal IG

(Sovereign)

JP Morgan CEMBIIG (Corporate)

EM INDICES

HISTORICAL SECTOR SPREADS(PAST 15 YEARS)

CURRENT(6/30/2019) AVERAGE HIGH LOW

CURRENT VALUATION TO

15-YEAR AVERAGECURRENT SPREAD TO

15-YEAR AVERAGE

Bloomberg Barclays U.S. Aggregate Index 68 bps 63 bps 239 bps 34 bps 7% 5 bps

Bloomberg Barclays Global Aggregate Index 58 bps 55 bps 149 bps 22 bps 5% 3 bps

Bloomberg Barclays U.S. High Yield Index 626 bps 532 bps 1833 bps 238 bps 18% 94 bps

J.P. Morgan U.S. Leveraged Loan Index1 635 bps 514 bps 1415 bps 222 bps 23% 121 bps

Bloomberg Barclays Euro High Yield Index 449 bps 471 bps 1574 bps 193 bps -5% -22 bps

JP Morgan EMBI Global IG (Sovereign) 433 bps 342 bps 748 bps 155 bps 27% 91 bps

JP Morgan CEMBI IG (Corporate) 282 bps 248 bps 690 bps 124 bps 14% 34 bps

Past 15 Years

Historical RangeAverageCurrent

T. ROWE PRICE23


Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.

Oil Prices Stabilize at Low Levels

Oil prices fell dramatically because of oversupply in the market in 2014 through 2016.

The supply-demand imbalance receded in 2017 as global oil demand increased while OPEC and Russia took supply off of the market. But this reversal was only temporary, and the imbalance returned in the later part of 2018.

The current sharp economic slowdown has placed further downward pressure on prices, due to the collapse in demand.

Global production is likely to decrease dramatically in response to lower prices, as evidenced by the dramatic reduction in oil rigs. This will help reduce oversupply over the near to medium term.

0

20

40

60

80

100

120

140

160

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

3.5

Oil

Pric

e (in

U.S

. Dol

lars

)

Mill

ions

of B

arre

ls P

er D

ay

OIL PRICE (BRENT CRUDE) VS.GLOBAL DEMAND MINUS SUPPLY

12 Month Average of Demand Minus Supply (L)

Oil Price (R)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Oil

Rig

Cou

nt

U.S

. Oil

Prod

uctio

n (T

hous

ands

Bar

rels

Per

Day

)

U.S. OIL RIG COUNT VS.U.S. OIL PRODUCTION

U.S. Crude Oil Field Production(Thousand Barrels Per Day)(L)

Oil Rig Count (R)

T. ROWE PRICE24

Key Risks -The following risks are materially relevant to the information highlighted in this material:

Even if the asset allocation is exposed to different asset classes in order to diversify the risks, a part of these assets is exposed to specific key risks.

Equity risk - in general, equities involve higher risks than bonds or money market instruments.

Credit risk - a bond or money market security could lose value if the issuer's financial health deteriorates.

Currency risk - changes in currency exchange rates could reduce investment gains or increase investment losses.

Default risk - the issuers of certain bonds could become unable to make payments on their bonds.

Emerging markets risk - emerging markets are less established than developed markets and therefore involve higher risks.

Foreign investing risk - Investing in foreign countries other than the country of domicile can be riskier due to the adverse effects of currency exchangerates, differences in market structure and liquidity, as well as specific country, regional, and economic developments.

Interest rate risk - when interest rates rise, bond values generally fall. This risk is generally greater the longer the maturity of a bond investment and the higher its credit quality.

Real estate investments risk - real estate and related investments can be hurt by any factor that makes an area or individual property less valuable.

Small and mid-cap risk - stocks of small and mid-size companies can be more volatile than stocks of larger companies.

Style risk - different investment styles typically go in and out of favour depending on market conditions and investor sentiment.

RISK DISCLOSURES

T. ROWE PRICE25

Source for Bloomberg Barclays index data: Bloomberg Index Services Limited.

MSCI. MSCI and its affiliates and third party sources and providers (collectively, “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. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2020. FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE®” “Russell®”, “FTSE Russell®” are a trade mark(s) of the relevant LSE Group companies and is/are used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication. The LSE Group is not responsible for the formatting or configuration of this material or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

I.H.S. Markit: Copyright © 2020 IHS Markit. All rights reserved.

Copyright © 2020, S&P Global Market Intelligence (and its affiliates, as applicable). Reproduction of any information, data or material, including ratings (“Content”) in any form is prohibited except with the prior written permission of the relevant party. Such party, its affiliates and suppliers (“Content Providers”) do not guarantee the accuracy, adequacy, completeness, timeliness or availability of any Content and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such Content. In no event shall Content Providers be liable for any damages, costs, expenses, legal fees, or losses (including lost income or lost profit and opportunity costs) in connection with any use of the Content. A reference to a particular investment or security, a rating or any observation concerning an investment that is part of the Content is not a recommendation to buy, sell or hold such investment or security, does not address the suitability of an investment or security and should not be relied on as investment advice. Credit ratings are statements of opinions and are not statements of fact.

T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.

J.P. Morgan Chase & Co.: Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2020, J.P. Morgan Chase & Co. All rights reserved.

ADDITIONAL DISCLOSURES

T. ROWE PRICE26

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.

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IMPORTANT INFORMATION

LRN: 202007-129744

global market environment 2q20 · 2020-08-09 · 3. t. rowe price. global market environment. as of...

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