July 2015

Stocks rise as earnings relief outweighs global concerns
The major benchmarks were mostly higher for the month, as global macroeconomic concerns appeared to be offset by some better-than-expected earnings reports. The narrowly focused Dow Jones Industrial Average underperformed the broader Standard & Poor's 500 Index, which in mid-July approached its record high reached in May. The technology-focused Nasdaq Composite reached an all-time high, helped by the strong performance of some major Internet stocks. Smaller-cap shares lagged their larger counterparts, and the small-cap Russell 2000 was the only major index to suffer a loss for the period.

U.S. Stocks
  Total Returns
MSCI Indexes July 2015 Year-to-Date
Dow Jones Industrial Average     0.52%      0.55%
S&P 500 Index  2.10   3.35
Nasdaq Composite Index  2.84   8.28
S&P MidCap 400 Index  0.14   4.34
Russell 2000 Index -1.16   3.54
Note: Returns are for the periods ended July 31, 2015. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

Greece worries diminish...
Stocks began July on a down note, as Wall Street followed global markets lower in reaction to the ongoing debt crisis in Greece. Investors were discouraged by the rejection of austerity measures in a referendum of Greek voters. Within days, however, it became clear that the Greek government would back down from its defiance to its European creditors and make significant concessions in return for more aid. Stocks rallied in response, although most market participants seemed to view the agreement as only a temporary "stay of execution"—with the prospect of a Greek exit from the eurozone likely to reemerge at some point in the future.

...but concerns grow about China
With the Greek situation calming, investors turned their concern to the steep sell-off in Chinese stocks that started in mid-June and accelerated in July. For many, more worrisome than the downturn in stock prices-which had ballooned in recent months-were the ineffective measures on the part of the Chinese government to turn the market around. T. Rowe Price traders noted that, by July 8, the decline in China's market valuation amounted to roughly 15 times the gross domestic product of Greece.

Earnings fall modestly, but mainly due to energy
A flood of second-quarter earnings reports later in July helped investors return their focus to corporate profits and the domestic economy. By the end of the month, data and analytics firm FactSet was reporting that earnings were on track to decline 1.3% on a year-over-year basis, due mainly to a 57% decline in energy profits. With the exception of energy and utilities, most sectors continued to see expanding profits in the second quarter, led by health care.

Oil production costs are in a structural decline
While the outlook for oil and gas producers brightened a bit in the early summer, energy stocks endured another leg lower at the end of July as oil prices retreated to their spring lows. T. Rowe Price energy portfolio managers and company analysts note that most of the factors that contributed to the steep fall in oil prices since the latter half of 2014 remain in place: tepid global economic growth, a strong U.S. dollar, growing North American shale oil production, and OPEC's desire to maintain market share in the face of rising non-OPEC production. Moreover, they believe that these factors will ultimately prove to be structural rather than cyclical, resulting in a long-term drop in the marginal cost of producing oil and in global prices.

Rising wages may challenge profit margins
The strong U.S. dollar has been a broader threat to the profits of U.S. multinationals, both by reducing the value of profits earned overseas and by making U.S. goods less competitive in world markets. But some T. Rowe Price managers believe that labor costs, should they rise considerably in response to further employment gains, may prove a more durable challenge for corporate profit margins. They also caution that U.S. stock valuations, while not inordinately high, are at the upper end of their historical price/earnings ranges and may preclude a significant pickup in stock market performance in the second half of the year.

July 2015

Treasury yields volatile amid Greece and China woes
U.S. Treasury yields were volatile throughout July amid myriad challenges—including the Greek debt crisis and Chinese stock market rout—that weighed on investors' minds. Late in the month, the Federal Reserve, as expected, left rates unchanged and reiterated that future rate hikes will depend on forthcoming economic data. Short-term Treasury yields edged higher, but longer-term yields ended July slightly lower, pressured by falling commodities prices, stock market weakness, and easing inflation expectations. (Bond prices and yields move in opposite directions.) Investment-grade corporate bonds produced positive returns in line with the decline in long-term rates. However, continued heavy merger activity funding needs sparked a spate of new issuance and a widening of spreads—a measure of the additional yield above that of a comparable-maturity, high-quality government security that investors demand for holding a bond with credit risk. Declining commodity prices hurt the performance of the high yield market.

U.S. economic rebound slower than expected
The first estimate of U.S. gross domestic product (GDP) showed a 2.3% annual growth rate in the second quarter, marking a somewhat slower-than-expected rebound from the weak first quarter. T. Rowe Price Chief U.S. Economist Alan Levenson noted that the timing of the Fed's initial rate increase is uncertain as the Fed continues to deliberate on a meeting-by-meeting basis. The GDP numbers showed that productivity growth is still largely absent from this recovery.

Volatility eases after Greece negotiates debt deal
Early in the month, a "no" vote in a Greek referendum raised fears that the country could exit the eurozone. However, peripheral eurozone sovereign bond markets reacted only slightly and Italian and Spanish credit spreads later narrowed. Global volatility fell significantly by month-end as markets reacted positively to Greece's proposed new reform plan that would free up additional funds to keep the country afloat. T. Rowe Price's sovereign analysts expect that the question of a Greek exit from the eurozone remains a real possibility in the medium term.

Total Returns
Index July 2015 Year-to-Date
Barclays U.S. Aggregate Bond Index     0.70%     0.59%
Credit Suisse High Yield Index -0.70  2.18
Barclays Municipal Bond Index  0.72  0.84
Barclays Global Aggregate Ex-U.S. Dollar Bond Index -0.14 -5.56
J.P. Morgan Emerging Markets Bond Index Global Diversified -2.56 -7.32
Barclays U.S. Mortgage Backed Securities Index  0.63  0.94
Figures as of July 31, 2015. Past performance cannot guarantee future results. This chart is shown for illustrative purposes only and does not represent the performance of any specific security.

Municipal bonds posted positive results despite looming Puerto Rico default
Overall, the municipal market was bolstered by the ability of many municipalities to issue new bonds with lower yields as well as by strong demand. This technical support helped the market surmount fundamental concerns. Municipal bonds snapped a three-month losing streak and posted positive results in July even as investors braced for Puerto Rico to miss another debt payment. Puerto Rico's municipal bonds fell about 4.0% during the period. About half of municipal bond funds in the U.S. have exposure to Puerto Rico. T. Rowe Price municipal funds, however, have had minimal exposure to Puerto Rico bonds for some time.

Treasury Yields
Maturity June 30, 2015 July 31, 2015
3-Month    0.01%   0.08%
6-Month   0.11   0.14 
2-Year   0.64   0.67 
5-Year   1.63   1.54 
10-Year   2.35   2.20 
30-Year   3.11   2.92 
Source: Federal Reserve Board

Chicago adds pressure to muni market
In mid-July, a judge ruled that Chicago could not make changes to two of its pension plans that would have reduced the city's obligations to fund retirement benefits. The credit rating agencies could further downgrade the city's municipal debt as a result of the ruling. The financially troubled city issued more than $1 billion in new general obligation bonds to restructure shorter-term debt but had to pay a significant yield premium to attract enough demand to complete the deal.

Emerging markets debt helped by Mexico's peso intervention
Dollar-denominated emerging markets sovereign debt posted modestly positive returns. The strengthening U.S. dollar hurt the performance of emerging markets local currency bonds. Mexico's bonds got a boost month-end after the country's central bank announced that it would hold interest rates steady but increase its actions in the currency market to support the weak peso. Brazil's central bank raised its benchmark lending rate by 0.50 percentage points but signaled that the hike will likely be the last in its two-year monetary tightening cycle. In response, Brazil's bonds declined and the government lowered its fiscal targets, a move that increased the risk that the country's bonds would be downgraded to junk bond status. The continued fallout from the corruption scandal at its partially state-owned oil company, Petrobras, also pressured the country's debt.

July 2015

Europe leads developed markets higher, while emerging markets tumble
Developed European markets generated solid gains in July, despite early-month volatility in Chinese stocks and uncertainty about Greece's future in the eurozone. In the Asia-Pacific region, developed markets generated flat to modestly lower performance—although Japanese stocks continued to trend higher. Emerging markets stocks in Latin America, Asia, and Eastern Europe were pummeled in July as the largest emerging markets dragged the broad emerging markets index lower. Although India generated a solid gain, stocks in China posted steep losses, as did shares in Russia and Brazil due in large part to currency weakness versus the U.S. dollar.

In the MSCI EAFE Index, large-cap stocks outperformed small-caps. Growth stocks performed better than value shares and extended their significant year-to-date advantage. The health care, consumer staples, utilities, and telecommunication services sectors posted the best gains. The poorest-performing sectors, including materials, energy, and information technology, recorded losses. The euro, British pound, and yen were modestly weaker against the greenback. U.S. dollar appreciation detracts from returns for dollar-based investors holding securities in non-U.S. currencies. The EAFE Index returned 3.52% and 13.03% for the month and year-to-date, respectively, in local currency terms.

International Indexes
  Total Returns
MSCI Indexes July 2015 Year-to-Date
EAFE (Europe, Australasia, Far East)    2.08%      8.08%
All Country World ex-U.S. -0.26   4.08
Europe  3.13   7.55
Japan  0.47 14.33
All Country Asia ex-Japan -6.29  -1.06
EM (Emerging Markets) -6.87  -3.97
All data are in U.S. dollars as of July 31, 2015. Past performance cannot guarantee future results. This table is shown for illustrative purposes only and does not represent the performance of any specific security.

Source: MSCI. 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.

T. Rowe Price managers hike their allocations to non-U.S. equities in 2015
This year, T. Rowe Price managers have made several changes to their globally diversified asset allocation portfolios, including an increase to non-U.S. equities relative to U.S. equities. Charles Shriver, portfolio manager of the Global Allocation Fund, believes the shift reflects relative valuations and the belief in the potential for stronger earnings growth outside the United States amid improving economic environments in Europe and Japan. The U.S. and UK have deleveraged enough that they are preparing to raise ultralow interest rates. European economic data have improved versus six months ago as fiscal tightening dissipates, while Japan's outlook is better as a result of delaying a tax hike. In addition to liquidity from quantitative easing programs, Shriver notes, several factors support corporate earnings growth in Europe and Japan, including currency depreciation, which characteristically benefits export-oriented firms, continued low interest rates, and the beneficial impact of low energy prices.

European stocks appear to be gathering momentum
Developed European markets gained about 3% in U.S. dollar terms in July. T. Rowe Price portfolio managers believe that Europe's economic recovery is gaining strength. Chris Alderson, the head of T. Rowe Price's International Equity Division, believes that Europe offers perhaps the best opportunity for earnings acceleration in the second half of 2015. He sees eurozone growth forecasts improving in core countries, such as Germany and France, and in most peripheral countries, except Greece. "The profits recovery appears to have further room to run in Europe than in most other regions," says Alderson. Operating leverage is relatively high for many European large-caps, so even modest revenue growth can translate into higher earnings gains. European equities are also attractive from an income standpoint in the low-rate environment, given average dividend yields of more than 3%. Most encouragingly, valuations do not yet reflect normalized earnings, so we believe that there is potential for stocks to continue rising.

Reform efforts bearing fruit for investors in Japan
Japanese equities edged modestly higher in July and remain the standout market for the year to date. The strong gains reflect the Bank of Japan's stimulus initiatives, an improving corporate earnings outlook, and a weaker yen. Additional support for Japanese stocks has been provided by the massive Japanese postal savings and insurance systems and the Government Pension Investment Fund, which have shifted assets from government bonds into Japanese equities.

"What is not yet reflected in the market is the improved competitiveness of Japanese companies," says Archibald Ciganer, portfolio manager of the T. Rowe Price Japan Fund. Much of the Japanese government's "third arrow" of structural reform has yet to be realized. Japan's Diet passed important labor laws, with some of the changes rewarding employee performance. We think Japanese corporate governance is changing for the better. Ciganer believes that Japan's corporate valuations are attractive compared with other regions, and improving profitability creates a positive backdrop for further gains. However, at current stock levels, it is becoming harder to find good companies at cheap valuations.

Investors dump emerging markets in July
Stock market volatility stemming from the double-digit Chinese market sell-off and an impasse in the negotiations between Greece and its creditors led to a steep decline in emerging markets equities. Greece missed two debt payments to the International Monetary Fund but by mid-month had agreed to austerity measures in return for more bailout funds totaling about €84 billion ($93 billion) over three years. The deal needs to be finalized by August 20, when Greece is due to make a 3.2 billion euro payment to the European Central Bank. The Chinese stock market endured rollercoaster-like swings, and the domestic benchmark index suffered its largest one-day decline (8.5%) in eight years, contributing to the worst monthly performance since late 2009, despite government intervention to prop up the market.

Non-U.S. stocks should continue to benefit from quantitative easing initiatives
Central bank monetary policies are diverging as the U.S. and UK look toward interest rate policy normalization, while Europe, Japan, and China advance their stimulus efforts. Developed European market valuations are no longer particularly cheap, though they remain generally appealing on a relative basis. Having enjoyed a sharp rally to date in 2015, Japanese equities now also seem to be optimistically priced. Emerging markets valuations vary widely by country, which is an appropriate reflection of the considerable disparity in fundamentals and currency concerns. Gonzalo Pángaro, portfolio manager of the T. Rowe Price Emerging Markets Stock Fund, notes that although valuations are not as compelling as they were a year ago, emerging markets still trade at an overall discount relative to their history and developed markets. He expects the dispersion and volatility in emerging markets to continue, and he believes that stock selection will remain the key in generating long-term outperformance. 

July 2015

Emerging markets stocks fall in July as China's sell-off weighs on commodities, currencies
Emerging markets stocks fell in July as China's stock market slump reverberated into the commodities and currencies markets. Oil slid into another bear market, and commodities prices plunged to multiyear lows on the prospect of weaker demand from China, one of the world's biggest consumers of food, oil, and metals. The commodities weakness, in turn, weighed on the currencies for major raw materials exporters such as Brazil, Russia, and Colombia. The JPMorgan Emerging Market Currency Index—which measures the performance of a basket of developing country currencies against the dollar—sank to its lowest level since its 1999 inception. Despite the magnitude of China's stock market correction, T. Rowe Price investment professionals believe it will have a limited impact on China's real economy because stocks represent a relatively small share of Chinese household wealth. More significant is the damage to foreign investor confidence in China's markets following the government's drastic stabilization measures.

The MSCI Emerging Markets Index slid to its lowest level this year. All 10 sectors in the index fell. Energy and materials stocks sank the most, with each sector giving up about 9%. On the flip side, health care and consumer staples stocks declined the least, with each sector shedding about 2%.

International Indexes
  Total Returns
Index July 2015 Year-to-Date
MSCI Emerging Markets (EM) Index     -6.87%      -3.97%
MSCI EM Asia Index  -7.12   -2.27
MSCI EM Europe, Middle East, and Africa (EMEA) Index  -4.65   -0.74
MSCI EM Latin America Index  -8.35  -14.05
All data shown are in U.S. dollars as of July 31, 2015. This table is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Source: MSCI. 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.

Chinese stocks sink despite government intervention; Indian stocks advance

  • Chinese stocks shed nearly 11% while the A shares market for domestic investors slid more than 14%, though both markets remain positive this year. China's stock market slump, which began after mainland markets hit a peak on June 12, continued even after the government took unprecedented steps to stem the decline, such as banning insider selling, allowing nearly half of all listed companies to halt trading, and supplying billions of dollars to a state-run fund to buy shares.
  • Indian stocks advanced as tumbling oil prices eased inflation pressures for the country, which imports most of its energy, and raised expectations that the central bank would lower interest rates at its August policy meeting.
  • Southeast Asian stocks fell as the plunge in commodities and China's slowdown dealt a setback to the region's export-driven economies. Indonesia's currency sank to a 17-year low, while Thailand's currency weakened to its lowest level since 2009.

Brazilian stocks drop as outlook remains grim; Andean markets sink on commodity weakness

  • Brazilian stocks shed more than 12% as the country endured more bad economic news. Standard & Poor's lowered the outlook for its BBB- rating on Brazil from stable to negative, moving it a step closer to cutting its rating to junk. Brazil's central bank raised its key rate to 14.25%, its highest level since August 2006, but signaled that it would be the last rate hike in a two-year tightening cycle.
  • Mexican shares declined. Mexico's central bank kept its overnight interest rate at a record low in an effort to shore up the slowing economy, which has been hit by the drop in global oil prices and lower domestic production. Separately, Mexico's foreign exchange commission said it would increase the amount of dollars it sells each day to support the peso.
  • The Andean markets of Chile, Colombia, and Peru fell between 5% and 10% as tumbling commodity prices weakened their respective currencies and stoked inflation. Central banks in Colombia and Peru left their interest rates unchanged, while the former cut its 2015 economic growth forecast. Chile's government also lowered its full-year growth forecast as prices for copper, the country's chief export, hit a six-year low.

Russian stocks drop with oil's decline; Turkish assets fall as instability rises

  • Russian stocks fell as the price of oil's plunge weighed on the country's economic outlook. Russia's central bank reduced its key interest rate for the fifth time this year on July 31, adding that oil prices staying below $60 per barrel for a long time "is more probable" than it was just last month. July's rate cut renewed selling of the ruble, which lost almost 9% and was one of the month's worst-performing currencies.
  • Turkish stocks retreated as the country's military offensives against Islamic State militants raised the risks of investing in the country, where political instability was already high after the ruling AKP failed to win a majority in June elections. Turkey's currency, stocks, and bonds fell after a week that included a suicide bombing and a shooting incident near the Syrian border, reflecting unease about the country's growing involvement in regional conflicts.
  • South African stocks fell. The country's central bank raised its benchmark rate by 25 basis points to 6.0%, its first rate hike in a year, to tamp down persistent inflation. South Africa continues to struggle with high unemployment, twin deficits, and a depreciating currency, and the central bank governor noted that the growth outlook remains weak.

Solid fundamentals in emerging markets offset near-term risks
We are optimistic about the long-term outlook for emerging markets. Rising consumption, an expanding middle class, and real wage growth are the drivers of huge economic potential in the developing world. Emerging markets are trading at a significant discount on an absolute and relative basis, making current valuations compelling for long-term investors. Most emerging markets have stronger financial positions, larger currency reserves, and more flexible foreign exchange policies than they did a decade ago. Finally, most emerging markets are still expanding faster than developed ones and offer solid growth opportunities for long-term investors. In recent years, we have noted significant dispersion in the returns of emerging markets stocks, even within the same country and industry. We anticipate more divergence in the performance of countries and companies than we have seen in the past 15 years, and we believe that careful stock selection will be crucial for producing good returns over time.