Valuations are likely to matter more going forward, according to John Linehan, Portfolio Manager, US Large-Cap Equity Income Strategy and Chief Investment Officer, T. Rowe Price.
“Having a balance to the portfolio and having both growth and value represented in the portfolio is probably the best path forward,” he said at the T. Rowe Price’s 40th annual global market outlook press briefing.
Rising inflation and monetary tightening globally, coupled with higher bond yields, have been the key factors driving down equity markets, with most major indices near or at bear market levels.
Lineman said that after entering the year with valuations near 20-year highs, most major equity benchmarks are trading below their 20-year averages.
Longer-term, interest rates and inflation are likely to remain higher than levels we have seen over the past decade as de-globalization, onshoring, and increasing geopolitical risks create structural changes in the global economy.
The next decade of equity market leadership, following the last ten years of dominance by growth companies, is likely to be broader and may favor companies with shorter-duration cash flows, including value stocks, according to Linehan.
He argued that almost all the all the downside that we’ve seen over the last year has been a function of multiple compression, rather than earnings.
“As a result of the multiple compression we’ve now entered the fourth bear market of this century. We’ve seen the longest bear bull market in the history of the markets,” Linehan said.
He compared bear markets to “Tolstoy’s unhappy families”, saying that “no two are alike”.
“We have to throw conventional wisdom out the window when we think about what the markets going to do over the course of the next year,” he said.
According to Linehan, the expectations are far more sober today than they were a year ago: “The expectations for growth are still significantly higher than average.”
Linehan expects more volatility next year as interest rates and inflation remain high and the severity of any recession emerges as a key driver of market performance.
Lineman said that balance of risks suggests that caution is warranted.
“We believe that the market will continue to be volatile until the question is answered around the virulence of inflation,” he stressed.
The severity of any recession will be a key driver of market performance next year, he added.
Sebastien Page, Chief Investment Officer and Head of Global MultiAsset, the division that manages about 30 percent of T. Rowe Price’s $1.23 trillion in assets under management, added that the team is defensively positioned given sticky inflation, a potential economic growth shock, and liquidity withdrawals by some market participants
During the press briefing, Page said that valuations for stocks still appear expensive and earnings expectations look too optimistic.
“There is an opportunity to be selectively contrarian. We’re at a critical time in capital markets history. We’re going from a very long period of low inflation, declining rates to something that is going to look and feel different.”
“This transition needs to be managed carefully, both from a tactical perspective but also in terms of portfolio construction,” he stressed.