April 2015

Major benchmarks reach record highs; Nasdaq finally surmounts 15-year hurdle
The major U.S. equity benchmarks reached record highs in April before falling back at the end of the month, ending with modest gains. Notably, the technology-heavy Nasdaq Composite Index finally managed to surmount the levels it achieved at the height of the dot-com bubble in March 2000, although it remained well below that peak on an inflation-adjusted basis. A rebound in oil prices led to strong performance for energy shares, and materials and telecommunication services stocks were also strong. A sharp pullback in biotechnology stocks and some other highly valued segments left half of the sectors in the S&P 500 Index in the red for the month, with health care performing worst. Smaller-cap stocks, which typically have a greater focus on domestic growth, underperformed as the U.S. dollar weakened a bit. The dollar's fall reversed a trend that has prevailed for some time and made investors more optimistic about the profitability of U.S. multinationals.

U.S. Stocks
  Total Returns
MSCI Indexes April 2015 Year-to-Date
Dow Jones Industrial Average      0.45%      0.78%
S&P 500 Index  0.96   1.92
Nasdaq Composite Index  0.83   4.34
S&P MidCap 400 Index -1.49   3.74
Russell 2000 Index -2.55   1.65
Note: Returns are for the periods ended April 30, 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.

Earnings are down, but not as much as feared...
Investors braced themselves at the start of the month for the arrival of first-quarter earnings reports, which appeared likely to reflect the negative effects of both falling energy prices and the strong U.S. dollar. While these headwinds had an impact, markets rose over the first few weeks of the month as many companies reported that profits had not declined as much as analysts expected. By the end of the month, data and analysis firm FactSet reported that overall profits had fallen only slightly in the first quarter—and would have recorded a decent gain if not for the plunge in energy sector earnings. Investors bid up energy stocks as oil prices rose and as evidence finally appeared that producers were reducing supply, which is setting the stage for improved profitability.

...While economic data disappoint
The market's macroeconomic backdrop darkened a bit during April. News that employment growth had slowed dramatically in March caused an initial pullback in stocks, but investors quickly appeared to conclude that it was an aberration and might even lead the Fed to delay raising short-term interest rates. The strong dollar and other factors clearly had a negative overall impact on growth, however. Stocks declined late in the month following the release of data showing the economy had only grown at annual rate of 0.2% in the first quarter, well below even reduced expectations.

Wage gains should boost spending
T. Rowe Price Chief U.S. Economist Alan Levenson notes that unseasonably bad weather played a role in the economic slowdown, just as it did last year. Much of the weakness in March hiring was concentrated in weather-related industries, such as construction, and he expects growth to pick up again later in the year, as job and wage gains feed through to increased consumer spending. Indeed, news arrived at the end of the month that weekly jobless claims had reached their lowest level in 15 years, and measures of consumer sentiment remained elevated.

Significant innovation drives biotech gains
Stocks retreated a bit at the end of the month, and biotechnology shares performed particularly poorly. Stock prices in the sector have soared in recent months, and investors may have become more concerned about valuations. T. Rowe Price health care portfolio managers and analysts acknowledge that valuations among small-cap biotech firms have become somewhat stretched, but they also note that large-cap valuations are more reasonable—and not vastly out of line with those of health care services firms. Along with merger activity, a string of significant advances has supported gains in the segment. The Food and Drug Administration (FDA) has given approval to a number of novel new drugs this year, they observe, with more likely on the horizon.

Some caution on valuations is warranted, but strong balance sheets may support market
Perspectives on current stock valuations vary among T. Rowe Price managers, with some reporting finding greater difficulty in locating stocks that meet their investment criteria. The exceptional length of the current bull market is also a concern, as is weakness in many non-U.S. economies. Nevertheless, they note that healthy corporate balance sheets and cash flows offer companies the flexibility not only to return capital to shareholders through dividends and share buybacks, but also to increase hiring, pursue mergers and acquisitions, and increase capital expenditures. All of these factors are likely to provide support to both the market and the overall economy in the coming months.

April 2015

Late-month selling pressure reverses rally in high-quality government bonds
Taxable domestic investment-grade bonds produced modest losses in April. Fixed income asset classes with more risk broadly outperformed, although high-quality government debt—including U.S. Treasuries and German bunds—enjoyed vigorous demand for much of April before selling off toward the end of the month. The yield on the benchmark 10-year U.S. Treasury note decreased below 1.85% in early April before increasing to finish the month at 2.05%, while the 10-year German government note's yield climbed from an all-time low of 0.05% to almost 0.40% by April 30. The European Central Bank's (ECB) quantitative easing (QE) program helped support the prices of high-quality eurozone sovereign debt, as did worries about Greece's ability to meet its debt obligations. After the ECB's April policy meeting, President Mario Draghi stressed that the central bank's QE is helping the eurozone economy and that the bank expects to continue buying bonds through at least September 2016.

Weak U.S. economic data add to uncertainty about timing of Fed liftoff
The minutes from the U.S. Federal Reserve's March policy meeting showed considerable debate about the timing of the central bank's first rate increase, which contributed to the uncertainty about when the Fed will start to tighten monetary policy. Much of the U.S. economic data released in April were weaker than expected, including a March employment report that showed a disappointing number of jobs added. U.S. gross domestic product (GDP) increased at an annualized rate of only 0.2% in the first quarter as lower oil prices, the strong dollar, and a shutdown of West Coast ports weighed on growth. T. Rowe Price Chief U.S. Economist Alan Levenson believes that the Fed will likely begin to raise rates at one of its summer meetings, with the exact timing depending on the strength of upcoming economic data.

U.S. dollar weakens against many other currencies
In a reversal of the strong U.S. dollar trend that dominated much of late 2014 and early 2015, the dollar weakened against many other currencies in April. This boosted the returns of bonds denominated in local currencies in U.S. dollar terms. Switzerland became the first country to issue 10-year government debt with a negative yield. Fitch Ratings downgraded Japan's credit rating to A from A+, citing the country's problems with stimulating economic growth while simultaneously servicing its huge debt burden.

Total Returns
Index April 2015 Year-to-Date
Barclays U.S. Aggregate Bond Index     -0.36%     1.24%
Credit Suisse High Yield Index    1.31  3.94
Barclays Municipal Bond Index  -0.52  0.48
Barclays Global Aggregate Ex-U.S. Dollar Bond Index   2.17 -2.56
J.P. Morgan Emerging Markets Bond Index Global Diversified   1.63  3.68
Barclays U.S. Mortgage Backed Securities Index  0.04  1.10
Figures as of April 30, 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.

Petrobras avoids technical default, boosting Brazilian bonds
Emerging markets debt generated strong returns as oil prices climbed from their recent lows. In addition, Petrobras, Brazil's state-owned oil company, filed audited financial statements that showed almost $17 billion of charges and write-offs related to a corruption scandal, allowing it to avoid a potential technical default. This removed significant uncertainty that had weighed on Brazil's sovereign and corporate debt in general. These positive developments more than offset China's report that its GDP expanded at a 7.0% annual rate in the first quarter, the slowest pace of growth since the beginning of 2009. Turkey's bonds and its lira currency experienced selling pressure as political uncertainty increased in advance of Turkish general elections in June.

Recovery in oil prices supports high yield bonds
High yield bonds extended their 2015 rally, supported by rising oil prices and moderate levels of new issuance. Bonds from oil-related issuers account for a large proportion of most high yield indexes. Investor sentiment toward high yield bonds has generally been positive since the beginning of the year, possibly as a result of more attractive valuations after plummeting energy prices dragged down prices throughout the asset class in late 2014.

Prices of investment-grade corporate debt decline
In contrast with high yield, investment-grade corporate bonds posted losses largely as a result of trading in parallel with U.S. Treasuries. Heavy new issuance to fund mergers and acquisitions dominated the investment-grade corporate debt market, although ongoing demand for yield helped the market digest the new supply. AT&T sold $17.5 billion in new bonds—the third-largest corporate bond sale on record—to help fund its acquisition of DirecTV. Comcast announced that it would withdraw its proposed acquisition of Time Warner Cable in a move that affected prices of both companies' bonds.

Treasury Yields
Maturity March 31, 2014 April 30, 2015
3-Month    0.03%   0.01%
6-Month   0.14   0.06 
2-Year   0.56   0.58 
5-Year   1.37   1.43 
10-Year   1.94   2.05 
30-Year   2.54   2.75 
Source: Federal Reserve Board

Strong demand for MBS
Mortgage-backed securities (MBS) and asset-backed securities (ABS) were broadly flat for the month as light new issuance helped them outperform Treasuries. Demand for agency MBS, which tend to be relatively stable, liquid bonds, continued to be strong. Housing market data released during the month were generally positive—the National Association of Realtors reported that sales of existing homes jumped 6.1% in March from February to the highest level in 18 months.

New supply weighs on municipal bonds
Heavy new issuance and the sell-off in Treasuries weighed on municipal bond prices in April. Shorter-maturity municipal debt performed better than long-term securities. Near the end of the month, Puerto Rico's municipal debt experienced selling pressure after the territory's legislature rejected a tax reform measure, a move that could weigh even more on the island's already troubled fiscal situation.

Finding some opportunities in MBS and ABS segments
The ongoing low interest rate environment has made it challenging to find attractive relative value in broad fixed income asset classes. However, the combination of the housing market recovery, improving consumer credit, and limited new supply has created some opportunities to add incremental yield above cash in conservative MBS and ABS segments. In some of our multi-sector portfolios, we have added debt issued by Fannie Mae and Freddie Mac as part of the relatively new credit risk transfer deals that these government-sponsored enterprises (GSEs) have brought to market. These deals allow the GSEs to remove some of the credit risk that they assume when guaranteeing mortgage payments.

April 2015

Emerging markets pace April's global stock market rally
Stocks in developed non-U.S. markets posted solid gains in U.S. dollar terms in April as measured by the MSCI Europe, Australasia, and Far East (EAFE) Index. The euro and the British pound advanced approximately 4% and 3%, respectively, versus the greenback, while the yen was relatively unchanged against the dollar. Overall, the U.S. dollar was weaker versus most currencies in April, marking a reversal from the past 12 months. U.S. dollar depreciation is additive to returns for dollar-based investors holding securities in non-U.S. currencies.

Within emerging markets, Latin American and emerging European equities posted double-digit gains, and Asia's emerging markets advanced nearly 7%. Among the largest emerging markets, often referred to as the BRICs, stocks in Brazil, Russia, and China each advanced more than 16%, but the Indian market declined. The standout performer for the past 12 months has been China's A shares market, which is up more than 126%—A shares are generally only available to mainland citizens and are only quoted in Chinese renminbi.

International Indexes
  Total Returns
MSCI Indexes April 2015 Year-to-Date
EAFE (Europe, Australasia, Far East)     4.16%      9.37%
All Country World ex-U.S.  5.12   8.90
Europe  4.46   8.20
Japan  3.55 14.26
All Country Asia ex-Japan  7.24  12.50
EM (Emerging Markets)  7.72  10.17
All data are in U.S. dollars as of April 30, 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.

In the EAFE index, large- and small-cap stocks performed similarly for the month and year-to-date. Growth stocks modestly underperformed value stocks in April but maintained a modest edge for the year to date. Sector performance was mixed. Due to rising oil prices, energy stocks rallied more than 12% in April, although the sector is still down about 20% for the past 12 months. Other strong sectors included telecommunication services, utilities, and financials. Although every sector advanced, information technology and health care were weakest.

The IMF's take on global economic growth: uneven
In April, the International Monetary Fund (IMF) forecast 3.5% global growth in 2015, which is little changed from 2014's 3.4% growth rate. The IMF's global economic growth forecast for 2016 is 3.8%, although the IMF anticipates "uneven prospects across the main countries and regions." The IMF's outlook for advanced economies is improving, while growth in emerging markets is projected to be lower, particularly for the largest emerging markets and oil-exporting countries. Of note: The IMF lowered its forecast for U.S. economic growth in 2015 to 3.1%, increased the eurozone's forecast to 1.5%, and bumped up Japan's growth forecast to 1.0%. Within the BRIC universe, the IMF's 2015 economic growth forecast for Russia now stands at -3.8%; for Brazil, -1.0%; and for China, 6.8%. India is expected to be the fastest-growing economy at 7.5%.

China's manufacturing index continued to fall
China's HSBC purchasing manager's index (PMI) contracted to 48.9 in April, which was lower than already reduced forecasts. (The April data were released in early May—readings below 50 indicate contraction.) New orders for Chinese manufactured goods are now at their lowest level in a year. Exports and imports declined and were also sharply below consensus expectations. China's economy expanded at a 7.0% pace in the first quarter, but the government said that it expects growth to slow to 6.8% in the second quarter. Because of the weaker economic forecast, many investors believe that the Chinese central bank will enact more stimulative measures in the near term. The country's top leadership has vowed to ramp up policies to ensure that economic growth remains in its 7.0% target range. Despite slowing growth in China, stocks have rallied impressively.

Japanese household spending plunged 10.6% in March, as real income and wage gains have been slow to materialize. Household spending, inflation-adjusted wages, and disposable income have declined since the consumption tax increase in April 2014. However, government policies and stimulus initiatives have bolstered investor confidence, and the Japanese stock market has produced strong gains thus far in 2015. Among other developed nations in the region, Hong Kong and Singapore were standout performers in April.

Consumer prices in the eurozone stabilize
Consumer prices in the eurozone were unchanged year-over-year in April, ending a four-month slide and arresting concerns about a deflationary cycle in the region. The quantitative easing program that kicked off in March appears to be having a positive impact despite the near 50% slide in oil prices since mid-2014. ECB President Mario Draghi said he was pleased with the eurozone's consistent policy response, and he said, "the weak and uneven recovery experienced in 2014 will turn into a more robust, sustainable upturn." Separately, Draghi confirmed that the ECB intends to continue its quantitative easing program until September 2016 or until the eurozone achieves its inflation target.

Non-U.S. stocks offer pockets of opportunity
T. Rowe Price portfolio managers remain optimistic about the investment environment for global equities in the intermediate and longer term. However, they anticipate that growth in developed markets will continue in a stop-and-start fashion. The difficult, long-term adjustments that are needed in many markets in Europe and Japan for them to become more competitive are only in their early stages. Overall, T. Rowe Price portfolio managers are confident that Europe offers long-term growth potential, but the near-term outlook for the region is concerning due to disappointing corporate earnings. Lower European stock valuations reflect these worries. In general, portfolio managers are encouraged by the changes taking place at the corporate level in Japan, including the newfound focus on return on equity, improvements in corporate governance, and generally improving returns for shareholders. In emerging markets, returns have become considerably more reflective of underlying fundamentals at the stock and country levels, which we view as a positive development. Although some individual stocks and sectors appear to be richly priced, there are opportunities for bottom-up stock selection.

April 2015

Emerging markets stocks rally as Fed inaction boosts risk appetite
Emerging markets stocks rallied in April as investors speculated that an interest rate hike by the Federal Reserve would be pushed back into this year's second half. Rising U.S. rates raise the risk of capital outflows from emerging markets, where yields are higher than in developed markets. Though the Fed signaled in its April policy statement that an increase in short-term rates was still possible in the coming months, signs of U.S. economic weakness in the first quarter led most analysts to believe that a June rate hike was increasingly unlikely. The MSCI Emerging Markets Index rose to a seven-month high on April 28, the start of the Fed's two-day policy meeting, but pared some of its gain by month-end. Expectations that China would implement more stimulus to support its economy also boosted investors' risk appetite, after the People's Bank of China lowered the reserve requirement ratio for domestic banks for the second time in two months. All 10 sectors in the MSCI index rose, led by energy stocks—which climbed almost 17%, lifted by a surge in global oil prices.

International Indexes
  Total Returns
Index April 2015 Year-to-Date
MSCI Emerging Markets (EM) Index      7.72%     10.17%
MSCI EM Asia Index   6.97  12.59
MSCI EM Europe, Middle East, and Africa (EMEA) Index   8.51  10.70
MSCI EM Latin America Index 10.32  -0.15
All data shown are in U.S. dollars as of April 30, 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 surge on retail investor buying; Indian stocks decline on profit taking

  • Chinese stocks listed on both mainland and A share markets climbed about 17% due to stimulus expectations and inflows from retail investors. Surges in new trading accounts, trading volumes, and margin lending by novice investors in recent months led China's securities regulator to ban a source of financing for margin trades, its latest effort to reduce risk in the stock market.
  • Indian stocks fell as some investors opted to lock in profits ahead of first-quarter earnings after the domestic Sensex benchmark rose to a record in late January. However, India's economic outlook remained positive: the World Bank forecast India's economy would expand at a 7.5% rate this fiscal year and accelerate in subsequent years, while Fitch Ratings said the country's vulnerability to capital outflows has declined thanks to a better policy environment.
  • Southeast Asian stocks were mixed. Stocks in Thailand edged higher but declined in the Philippines and sank nearly 10% in Indonesia. Thailand's central bank unexpectedly cut its interest rate for the second straight month on the same day that the finance ministry lowered the country's 2015 gross domestic product forecast. Indonesia's domestic benchmark sank from a record high in mid-April as disappointing earnings from a few big companies raised fears that the country's economic growth may trail forecasts.

Brazilian stocks rally as commodities gain; Andean markets advance

  • Brazilian stocks surged nearly 17% aided by a recovery in commodity prices and relief after scandal-hit state oil producer Petrobras filed its long-awaited audited financial statements. The country's central bank raised its benchmark rate to 13.25% to contain inflation but isn't expected to tighten much further given that the economy is already contracting. Despite the rally, Brazil's economic data stayed grim: unemployment rose to a three-year high in March, while the latest annual inflation reading rose to an 11-year high.
  • Mexican stocks edged higher. The country's central bank kept its benchmark rate at a record-low 3.0% for the seventh straight meeting, in line with expectations, amid tame inflation and muted economic growth.
  • Stocks in Colombia, Chile, and Peru advanced. Central bank officials in Chile and Peru separately stated that their easing cycles are nearing an end following interest rate cuts in each country over the past year. Meanwhile, Colombia's central bank stayed pat on rates for the eighth straight meeting as inflation rose faster than expected and weaker demand weighed on commodity exports.

Turkish stocks rise despite lira selloff; Russian stocks rebound

  • Turkish stocks strengthened despite a drop in the lira, which repeatedly fell to record lows in April and has lost about 13% against the dollar this year. In addition to a poor economic outlook, investors are nervous about Turkey's general elections in June, which could usher in changes at the central bank and potentially lead to an overhaul of the country's political system.
  • Russian stocks climbed roughly 17%. Russia's central bank cut its key rate by a larger-than-expected 1.5% in its third rate cut this year, as bank officials deemed that the worst of the economic crisis resulting from Western sanctions and slumping oil prices is over. Inflation in Russia hovers near 17%, however, and its economy is still expected to contract this year.
  • South African stocks advanced, and the domestic equity benchmark rose to a record as large-cap mining companies rallied. However, South Africa still suffers from deep economic problems compounded lately by widespread power shortages and a wave of anti-foreigner violence in Johannesburg and other cities.

Solid fundamentals 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 a 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.