One of the largest asset managers in the world is playing a cautious game with equities, given what it sees as supportive but slowing global growth and a likely cut in government stimulus programmes.     

T Rowe Price, the US investment house with $1.64 trillion of client assets, said that it remains negative of equities compared with bonds and cash because it dislikes high stock valuations when economic growth is peaking and government stimulus winds down. 

As far as equities go, the firm prefers value-oriented equities globally, US small-cap stocks and emerging market equities, because it expects cyclically exposed firms to benefit from supportive but slowing economic growth. 

Within the bonds area, T Rowe Price is biased to shorter duration and higher yielding sectors by taking overweight positions to high-yield bonds and floating rate notes. During August, the firm said it added positions to mortgage-backed securities because it likes valuations. The markets expect the Federal Reserve to reduce, or “taper” its buying of MBS within its quantitative easing programme.

The Fed has a difficult balancing act to pull off, Thomas Poullaouec, head of multi-asset solutions Asia-Pacific T Rowe Price, and his colleagues, said in a note.

“A scenario of moderating growth, waning employment and lingering inflation could put the Fed between a rock and a hard place – with tapering too quickly potentially jeopardizing the nascent job market and complacency on inflation possibly forcing them to act more decisively down the road,” the firm said. 

“Coming out of the Jackson Hole Economic Symposium, Federal Reserve Chairman Jerome Powell signalled that the Fed could begin to wind down its monthly bond buying by year-end, if the economy and coronavirus cooperate, and acknowledged that the Fed is in no hurry to raise short-term interest rates. The equity market interpreted Powell's comments as very dovish, with the S&P 500 rallying to record high levels on hopes that monetary policy will remain loose for longer.

“Powell also addressed concerns about inflation, calling it hot, but temporary, attributing it to coronavirus-related supply disruptions. Recent softer-than-expected payroll data could also weigh against tightening as the Fed waits for more substantial progress towards employment goals,” it added.