June 2015

Greece worries weigh on market
Worries over a Greek debt default and its broader implications for the European common currency and financial system took a toll on U.S. and other global markets in June. The large-cap Dow Jones Industrial Average and S&P 500 Index underperformed, while the small-cap Russell 2000 Index defied the broader downdraft and managed a modest gain. The smaller-cap benchmarks reached new highs at mid-month, and the technology-heavy Nasdaq Composite finally surpassed the intraday peak it reached in March 2000. Utilities and information technology stocks were the poorest performers in the S&P 500, while the consumer discretionary sector was the sole segment to record a gain.

U.S. Stocks
  Total Returns
MSCI Indexes June 2015 Year-to-Date
Dow Jones Industrial Average   -2.06%      0.03%
S&P 500 Index -1.94   1.23
Nasdaq Composite Index -1.64   5.30
S&P MidCap 400 Index -1.32   4.20
Russell 2000 Index  0.75   4.75
Note: Returns are for the periods ended June 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.

Greek tipping point provokes largest daily decline since last fall
Investors kept a nervous eye on the Greek debt negotiations throughout June. U.S. markets followed their European counterparts lower at the start of the month, after Greece announced that it would bundle several debt payments to the International Monetary Fund (IMF) into a single payment at the end of the month. Bouts of optimism followed news of concessions on both sides, but it became increasingly clear as the month progressed that the European Central Bank and other creditors would not extend further aid to Greece-and that the country, in turn, would fail to make its scheduled June 30 payment to the IMF. U.S. stocks endured their largest daily decline since last October on June 29, following news that Greece had shut down its stock market and banks and instituted capital controls in preparation for the default.

U.S. economy picks up speed...
Instability in the global financial system might have taken a larger toll on the U.S. market if not for generally encouraging domestic growth signals. At the start of the month, the Labor Department reported that hiring had further accelerated in May, suggesting that the slowdown early in the spring had been temporary. More encouraging, perhaps, was a solid rise in average hourly earnings, which led T. Rowe Price Chief U.S. Economist Alan Levenson to expect a similar ramp-up in consumer spending. Indeed, the Commerce Department reported the following week that retail sales had surged by 1.2% in May, and the University of Michigan announced that its gauge of consumer sentiment had risen strongly. Healthier household budgets were also reflected in the housing sector, where single-family home sales reached their best level in eight years.

...But the Fed stays on the sidelines
The good economic data provoked some fears among investors that the Federal Reserve would soon raise interest rates, but the month brought reassuring news on that front, as well. Sentiment appeared to get a boost at mid-month from the Fed's scheduled policy meeting. Investors were pleased that policymakers left official short-term interest rates near zero, although this was largely expected. But T. Rowe Price traders note that the Fed also sent a clearly dovish signal-the number of members on the rate-setting committee who anticipate one or no rate increase this year went from three at the last meeting to seven. The shift raised the likelihood of a scenario in which the Fed will raise interest rates slightly and then pause to see what the effect will be on financial markets and the economy.

Healthy European firms are likely to withstand Greek financial pressures
Generally, T. Rowe Price equity managers are optimistic that the U.S. economy is on solid enough footing to withstand the fallout from the Greek debt crisis, which is unlikely to bring about a broader European financial contagion. Indeed, the firm's London-based European equity analysts believe that European corporate earnings may even accelerate later in the year. European firms are generally in sound financial shape, which should support growth in capital expenditures, healthy merger and acquisition activity, and revenues and earnings gains.

Mature economic cycle is likely to boost importance of stock selection
The outlook for U.S. equities remains generally positive, but after a six-year bull run that has seen the S&P 500 rise more than 200%, T. Rowe Price managers note that investors may have grown too complacent about the risk of short-term market volatility. Equities still appear quite attractive when measured against very low Treasury yields, but their somewhat high absolute valuations make them vulnerable to the Fed's timetable for returning interest rates to more historically normal levels. A mature economic cycle also implies that companies will have a harder time expanding margins by cutting costs, and that only companies that are executing well will be able to see solid profit growth. We believe that finding the standout performers in each industry will be increasingly important in coming months and that the careful selection of individual stocks is likely to add value relative to a broad-based, index approach.

June 2015

Treasury yields rise as Fed rate increase looms
U.S. Treasury debt prices were volatile as fears of an imminent Federal Reserve rate increase and Greece's move toward default on its debt pulled the market in opposite directions. However, Treasury yields increased for the month as pressure from the impending Fed tightening cycle outweighed the risk-aversion trade. (Bond prices and yields move in opposite directions.) The yield on the 10-year Treasury note increased to nearly 2.50%-the highest level in 2015—during the month before falling somewhat by the end of June.

Strong U.S. economic data, but no Fed action yet
The Fed did not raise interest rates at its June policy meeting, but generally strong U.S. economic data indicated that the central bank will begin to tighten monetary policy before the end of the year. The May nonfarm payrolls report showed 280,000 jobs added, beating consensus expectations, although the unemployment rate ticked up to 5.5% from 5.4% in April as jobseekers reentered the labor force. In addition, consumer spending in May jumped by the largest monthly amount in almost six years. T. Rowe Price Chief U.S. Economist Alan Levenson expects the Fed's first rate increase by the end of 2015 and anticipates that the pace of subsequent rate hikes will be much more moderate than in past tightening cycles.

Greece misses IMF payment
Negotiations between Greece and its creditors dragged on throughout June without an agreement that would free up more aid for the country and allow it to meet its debt obligations. Late in the month, Greek Prime Minister Alexis Tsipras announced a July 5 referendum on whether or not to accept the austerity terms imposed by the lenders as a condition of receiving more funding. The Greek government also imposed capital controls, which included closing banks until after the referendum and limiting ATM withdrawals. On June 30, Greece missed a large payment due to the International Monetary Fund (IMF). German government bonds, which are considered a safe-haven European asset, benefited from the uncertainty, as the yield on the 10-year German "bund" decreased to 0.77% at the end of June from more than 1.00% earlier in the month.

Total Returns
Index June 2015 Year-to-Date
Barclays U.S. Aggregate Bond Index    -1.09%    -0.10%
Credit Suisse High Yield Index -1.38  2.90
Barclays Municipal Bond Index -0.09  0.11
Barclays Global Aggregate Ex-U.S. Dollar Bond Index  0.09 -5.43
J.P. Morgan Emerging Markets Bond Index Global Diversified -1.56  1.67
Barclays U.S. Mortgage Backed Securities Index -0.76  0.31
Figures as of June 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.

Puerto Rico announces inability to repay municipal debt
At the end of the month, the governor of Puerto Rico, which is a major issuer of municipal bonds, announced that the U.S. territory will not be able to repay its debt obligations. The Puerto Rican government had previously maintained that it could pay its debt when due despite the island's many financial troubles. Prices of Puerto Rico's municipal bonds dropped steeply following the announcement. However, it did not seem to disturb the broader municipal market, which finished the month with only moderate losses thanks to its insulation from the international volatility generated by Greece.

Healthier housing market supports MBS
Mortgage-backed securities (MBS) also benefited from their relative insulation from the international turmoil and did not fall as much as other fixed income sectors during the month. The increase in Treasury yields also benefited MBS by making refinancing less attractive for homeowners. Refinancing causes prepayments of existing mortgages, which hurts the value of MBS backed by those mortgages. Asset-backed securities, which many investors use as a high-quality, short-maturity alternative to cash, finished the month nearly unchanged.

Credit spreads on corporate debt widen
Prices of high yield corporate bonds fell, although they did not lose as much ground as investment-grade corporate debt. Credit spreads, which measure the additional yield above that of a comparable-maturity Treasury security that investors demand for holding a bond with credit risk, widened for both high yield and investment-grade corporates. Oil prices were relatively stable over the course of the month, which supported the high yield sector.

Treasury Yields
Maturity May 31, 2015 June 30, 2015
3-Month    0.01%   0.01%
6-Month   0.06   0.11 
2-Year   0.61   0.64 
5-Year   1.49   1.63 
10-Year   2.12   2.35 
30-Year   2.88   3.11 
Source: Federal Reserve Board

M&A deals drive investment-grade corporate bond issuance
New issuance continued to weigh on the investment-grade corporate bond market, with the supply of bonds reaching the market still driven by merger and acquisition (M&A) funding needs, leading to losses for the month. Tobacco company Reynolds American brought $9 billion of debt to market to finance its acquisition of competitor Lorillard. Late in the month, food giant H.J. Heinz issued $10 billion of bonds to help fund its previously announced merger with Kraft Foods.

Brazil raises rates as China lowers them
Emerging markets bonds, which are generally less sensitive to changes in Treasury yields than debt with lower credit risk, declined nevertheless. Despite the broadly weak market for debt from developing countries, Petrobras, Brazil's state-owned oil company, issued new bonds for the first time since its corruption scandal began in late 2014 by selling debt maturing in 100 years. Brazil's central bank raised its benchmark lending rate by 0.50 percentage points to constrain inflation and then lowered its target inflation range. Late in the month, China's central bank cut interest rates by 0.25 percentage points and lowered the amount of reserves that banks need tovmaintain.

Potential for higher volatility to create relative value opportunities
The monetary policies of the world's major central banks will likely continue to dominate the global interest rate environment. While the central banks of the eurozone and Japan aggressively purchase assets in an effort to stimulate economic growth, the Fed's move toward tightening monetary policy should eventually create an upward bias for U.S. interest rates. This divergence in central bank policies, along with the uncertainty inherent in the Greece situation, could lead to increased volatility in global fixed income markets as well as more relative value opportunities.

June 2015

Few places to hide in June's global rout
Every developed market in the MSCI EAFE Index except for Ireland declined in June amid renewed uncertainty about Greece's future in the eurozone. Most developed markets in Europe and Asia declined more than 2%. Performance across emerging markets was mixed, but the overall trend was lower. Markets in emerging Europe and Asia fell sharply, while the Latin America region advanced. The largest emerging markets performed in line with the broad emerging markets index. Brazil generated a solid gain; stocks in India were about flat; and Russia and China each posted losses.

In the EAFE index, small-cap stocks outperformed and have been stronger than large-caps for the first half 2015. Growth stocks held up marginally better than value shares and maintained their year-to-date advantage. Except for telecommunication services, every sector in the index declined for the month. The poorest-performing sectors, including energy, materials, information technology, and utilities, fell more than 4%. The U.S. dollar weakened versus the euro, yen, and British pound. U.S. dollar depreciation contributes to returns for U.S. dollar-based investors holding securities in non-U.S. currencies. The EAFE index returns for the month and year to date in local currency terms were -4.40% and 9.19%, respectively.

International Indexes
  Total Returns
MSCI Indexes June 2015 Year-to-Date
EAFE (Europe, Australasia, Far East)    -2.80%      5.88%
All Country World ex-U.S. -2.75   4.35
Europe -3.04   4.28
Japan -1.70 13.79
All Country Asia ex-Japan -3.64  5.59
EM (Emerging Markets) -2.52  3.12
All data are in U.S. dollars as of June 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, small-cap stocks outperformed for the month and have been stronger than large-caps for the first five months of 2015. Growth stocks held up better than value shares and maintained their year-to-date advantage. Sector performance was mixed for the month but remained uniformly positive for the year to date. Energy stocks fell more than 4% in May, despite relatively steady oil prices. The telecom services, health care, and consumer staples sectors also underperformed. The strongest sectors—information technology, utilities, and consumer discretionary—generated gains.

Greece defaults on IMF loan...
Global stock markets rallied and swooned on speculation as to whether Greek Prime Minister Alexis Tsipras would be able to craft a last-minute deal with Greece's creditors. As the month came to a close, it became apparent that Greece would become the first advanced economy to miss a payment to the International Monetary Fund (IMF). The Greek government temporarily closed its banks and stock market, and it imposed capital controls limiting withdrawals from ATMs. Tsipras criticized the European finance ministers for refusing to extend Greece's loan program, claiming that they had "no other goal apart from blackmailing the Greek people." Europe's geopolitical dysfunction has led to a spike in global stock market volatility, especially in Europe, where the broad market fell about 5% in the last week of June. Greece's future appeared to rest on a snap referendum set for July 5, in which Greek voters issued a resounding "No" vote on the European Union's proposed bailout terms that were required for continued financial assistance. What comes next is a highly uncertain path, possibly culminating in Greece exiting the eurozone.

...While Europe's economic recovery appears to be gathering momentum
Developed European markets declined about 3% in U.S. dollar terms (nearly 5% in local currency terms) in June. The euro gained almost 2% versus the U.S. dollar in June but is about 8% lower versus the greenback for the year to date, which has been a positive factor for export-related sectors. T. Rowe Price portfolio managers believe that Europe's economic recovery is gaining strength, which should benefit investor sentiment. Falling oil prices since mid-2014 have reduced costs for oil-intensive manufacturers and have increased consumers' purchasing power. However, high unemployment and debt levels could weigh on growth. Contagion from a possible Greek default should be minimal as the broad European banking system and corporate sector have limited exposure to Greece.

The white-hot Chinese market doused with cold water
China's restricted A-shares market is up more than 100% in the past 12 months, even after its 8% pummeling in June. This market has been extremely volatile and late in the month fell nearly 20% from its June 12 peak. The mainland A-shares are generally only available to Chinese citizens and qualified institutional investors. Following the largest two-week stock decline in almost a decade, the Chinese central bank cut its benchmark interest rate to a record low, and it reduced reserve-requirement ratios for some lenders. The one-year lending rate was trimmed to 4.85%, and the deposit rate was cut to 2.0%. Although retail sales and industrial production showed signs of stabilizing in May, business investment in infrastructure continued to slow. Premier Li Keqiang has stated that he wants China's economic growth for 2015 to be about 7%.The central bank's rate and reserve cuts (the fourth reduction since November) are designed to prevent a so-called economic "hard landing."

Japan's economic growth revised higher
The Japanese government's efforts to pull the country out of its multi-decade pattern of deflation and stagnating economic growth appear to be working. Japan's first-quarter economic growth was revised sharply higher to an annualized rate of 3.9% to reflect stronger-than-estimated capital expenditures. Japanese consumers increased spending for the first time in more than a year in May. A tightening job market (the jobless rate was 3.3% in May, which policymakers view as near full employment) may be a precursor to wage gains, which could fuel consumption and sustained economic growth. However, consumer prices rose a scant 0.1% for the year through May, well off the Bank of Japan's 2% target.

Non-U.S. stocks should continue to benefit from quantitative easing initiatives
Overall, T. Rowe Price portfolio managers are confident that Europe offers long-term growth potential. "The recent earnings season has been broadly positive, with seven out of 10 sectors beating forecasts. This has led earnings expectations to be revised higher, particularly for more cyclical areas of the market," notes Dean Tenerelli, portfolio manager of the European Stock Fund. In general, portfolio managers are also 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. Central bank monetary policies diverge as the U.S. looks toward interest rate policy normalization, Europe and Japan advance their quantitative easing programs, and many emerging markets lower interest rates to stimulate growth.

In this changing environment, U.S. stocks have slightly higher valuations than the rest of the world, but perhaps deservedly so. Developed European 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 in developing nations.

June 2015

Emerging markets stocks fall in June on Greece debt crisis, Chinese markets plunge
Emerging markets stocks fell in June as Greece inched toward a sovereign default, raising fears of a disorderly exit from the euro and the risk that its troubles would spread to other highly indebted countries. The MSCI Emerging Markets Index posted its biggest drop in two years on June 29 after talks between Greece and its creditors broke down and the country announced a banking and stock market shutdown. Greece's move coincided with a one-day plunge in Chinese stock markets in Shanghai and Shenzhen that pushed that country's benchmark index into a bear market-defined as a drop of more than 20%. The drop in Chinese stocks followed several consecutive days of losses since they hit a peak on June 12 and marked an end to the country's longest-ever bull market, which was driven by speculative trading heavily financed with borrowed money. Nine of 10 sectors in the MSCI Emerging Markets Index fell, led by health care. Consumer staples, the only advancing sector, rose less than 1%.

International Indexes
  Total Returns
Index June 2015 Year-to-Date
MSCI Emerging Markets (EM) Index     -2.52%      3.12%
MSCI EM Asia Index  -3.92   5.22
MSCI EM Europe, Middle East, and Africa (EMEA) Index   0.43   4.10
MSCI EM Latin America Index   1.00  -6.22
All data shown are in U.S. dollars as of June 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 drop from seven-year high; Indian stocks advance

  • Chinese stocks slid 5.5% while the restricted A-shares market slid roughly 8%. This month's plunge followed moves by regulators to clamp down on margin financing, one factor that had driven Chinese stocks to a seven-year high. Additionally, China's central bank reduced its benchmark interest rates and the required level of reserves for certain banks on June 27, an unexpected move that was seen as a sign that the government wants to support the market without fueling more speculative trading.
  • Indian stocks edged higher. India's central bank cut its main lending rate for the third time this year less than a week after the government reported that gross domestic product (GDP) grew at a better-than-expected 7.5% annual pace in the first quarter. However, other weak gauges have raised doubts about whether India's economy is as strong as the GDP data suggest.
  • Southeast Asian markets were mixed: Thai stocks edged up, Philippine stocks slightly declined, and Indonesian stocks sank more than 7%. Central banks in all three countries left their respective benchmark interest rates unchanged in June. Indonesia is struggling with flagging growth, which has increased pressure on the country's newly elected president and raised expectations for a shake-up in his administration.

Brazilian stocks rise despite weak data; Andean markets mixed

  • Brazilian stocks advanced despite government reports this month showing worse-than-expected consumer inflation, economic activity, and job losses. Separately, the scandal-plagued oil producer Petrobras announced it would slash capital spending by 37% over the next five years. The cutback is expected to further weigh on Brazil's economy, which is already seen contracting this year.
  • Mexican stocks declined. Mexico's central bank kept its benchmark interest rate at a record low 3% at its latest meeting this month. Separately, reports showed that manufacturing exports fell and unemployment rose more than forecast, underscoring the fragility of Mexico's economic recovery.
  • Andean markets were mixed. Stocks edged higher in Colombia but retreated in Chile and Peru. Colombia's economy expanded 2.8% from a year ago in this year's first quarter, its slowest pace in two years, and its central bank stayed pat on interest rates for the 10th straight month. Meanwhile, Chile and Peru also kept their rates unchanged at four-year lows as inflation pressures and currency weakness in both countries left their central banks little leeway to cut rates.

Turkish stocks retreat on post-election uncertainty; South African stocks advance

  • Turkish stocks declined amid greater political uncertainty after the ruling AK Party lost its majority in parliamentary elections. The majority loss means that the AKP must form a coalition government and raises the possibility of another election if a new government cannot be formed. The Turkish lira sank to an all-time low and the domestic stock benchmark plunged the day after the elections.
  • Russian stocks retreated nearly 3%. Russia's central bank cut its main rate by a percentage point to 11.5%, its fourth rate cut this year, and warned of substantial risks facing the economy. Separately, the European Union extended economic sanctions against Russia until January as punishment for its role in the Ukraine crisis. The EU sanctions and oil price weakness have pushed Russia into a recession that most analysts believe will last into 2016.
  • South African stocks rose despite a lack of positive market news. Although the country's economic outlook is poor, South Africa's central bank is expected to raise interest rates in July for the first time in a year to stem inflation, which faces upward pressure from currency weakness and rising electricity prices.

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 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.