January 25, 2013

Brian Rogers Bill Stromberg Brian Rogers, T. Rowe Price Chairman, Chief Investment Officer, and longtime manager of the Equity Income Strategy and Bill Stromberg, Global Equity Manager and Global Equity Research Director

Last year, equity markets in the U.S. and around the world rebounded, despite a debt crisis in Europe, slower growth in China, and the impending fiscal cliff at home. T. Rowe Price Chairman, Chief Investment Officer, and longtime manager of the Equity Income Strategy Brian Rogers and Global Equity Manager and Global Equity Research Director Bill Stromberg discuss forces affecting equity markets and what investors should look for in 2013.

Markets Off to a Good Start, but There's Work to be Done

In the U.S., investors were encouraged when Washington averted the fiscal cliff. Rogers predicts that controversy over the debt ceiling and continuing budget battles will cause volatility in the first quarter of 2013 and that any budget solutions will dampen growth in some manner. However, investor confidence seems to be growing as people see a glimmer of hope that Washington may finally be getting to work.

Internationally, increased political stability and aggressive action by central banks have improved sentiment and lifted markets. However, Stromberg notes that, as in the U.S., little long-term structural progress has been made. In both the U.S. and international markets, the situation has moved from acute to chronic, and more sustainable solutions will need to be found.

Key Trends: Shifting Emerging Market Economies, Active Central Banks

Emerging markets have experienced rapid growth over the last decade, but as inflation rose, economies slowed. As economies like China's begin to shift focus away from ramping up infrastructure and growing exports, they are increasingly oriented toward consumer spending and domestic consumption, while still capturing a share of global GDP. Stromberg expects the growth rates of emerging markets to normalize and observes that the growth gap between emerging and developed markets remains very wide.

In the U.S., Europe, and emerging markets like China, India, and Brazil, aggressive monetary easing by central banks has kept interest rates low and pumped liquidity into the system. Rogers warns that in the U.S., investors should not assume the Federal Reserve has absolute ability to fine-tune the economy and that as unemployment ticks down, there may be less consensus in the Fed about keeping interest rates down.

Expectations for 2013: Good, Not Great

As we move through 2013, progress on long-term, structural issues will affect economic growth and equity performance. Investors will be looking for political solutions in the U.S. and Europe, market reforms in China, and improved market governance in India. Rogers notes that the extent to which progress can be made will be key to investor confidence and whether investors are weary enough of low rates of return on cash investments to redeploy assets into equity markets.

Rogers warns that investors should be wary of their ability to predict the future. There are always unknowns, and over time, low portfolio turnover and attention to attractive valuations are constructive investment disciplines.

The views are as of January 9, 2013 and may have changed since that time. This is provided for informational purposes only and is not intended to reflect a current or past recommendation, or investment advice of any kind. Opinions and commentary do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Stocks and sectors may not perform in line with the managers' expectations. All funds are subject to market risk, including possible loss of principal. The value approach carries the risk that the market will not recognize a security's intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. Investing overseas generally carries more risk than investing strictly in U.S. assets, due to factors such as currency, geographic, and emerging markets risk. Because of the concentration in rapidly developing economies, investing in emerging markets involves a high degree of risk. Diversification cannot assure a profit or protect against loss in a declining market.