June 13, 2012
The managers of T. Rowe Price's international funds recently offered their economic and market outlooks in the funds' semiannual reports to shareholders. The reports cover the six-month period ended April 30, 2012. In developing their outlooks, the managers of T. Rowe Price's international funds draw on the insights of analysts stationed in the firm's offices around the world. The following summarizes some of their observations.
After selling off in the summer of 2011, global markets rallied early in 2012 before turning lower again in April. T. Rowe Price managers generally believe that valuations on global markets are attractive—even in the face of the formidable challenges facing the global economy.
- Jonathan Matthews, manager of the International Growth & Income Fund
The optimism that carried markets higher early in the year has dissipated....As global economic concerns have resurfaced, however, valuations have become more attractive in many parts of the market.
- Bob Smith, manager of the International Stock Fund
The market is focused on the short term and is shunning most investments that have any degree of economic or country-specific risk. It seems that the highest-quality, defensive companies in Europe are now somewhat overpriced, and there are better long-term opportunities in stocks that have a bit more economic risk.
- Justin Thomson, manager of the small- and mid-cap focused International Discovery Fund
Valuations in international small-cap stocks are mostly supportive, and in certain areas investor revulsion means stocks are very cheap. Stocks in Europe remain mostly unloved and inexpensive relative to respective sovereign bond markets and, on a cyclically adjusted price/earnings ratio, at 20-year lows. Stocks in emerging markets are more reasonably valued, but decay in growth rates is more worrying than in the past.
Companies have generally seen their profits grow much faster than the economies in which they operate. Cost-cutting measures, low borrowing rates, and export opportunities have helped many companies bounce back from the 2008–2009 recession—even as a reluctance to hire has hampered overall economic recovery.
- Ray Mills, manager of the Overseas Stock Fund
While the current environment is challenging, we do not think the problems are insurmountable....Corporate balance sheets are healthy and are a source of potential return through growing dividends and share repurchases for companies with excess cash.
- Dean Tenerelli, manager of the European Stock Fund
Many companies have stronger fundamentals than they did in 2008, with robust balance sheets, low inventory levels, and growth opportunities outside of their home markets.
Emerging markets have suffered from a slowdown in exports to the developed world, particularly Europe. However, T. Rowe Price managers cite several reasons why they believe developing economies and markets hold abundant long-term potential.
- Gonzalo Pángaro, manager of the Emerging Markets Stock Fund
Despite our cautious outlook for near-term performance, we remain optimistic about the medium- and long-term prospects for emerging markets. Growing urbanization, increasing consumption, and upward mobility are inexorable trends that will drive strong and sustainable growth over the long run. Disposable incomes are rising among lower- to middle-class households, lending support to companies and industries that rely on domestic demand.
- Bob Smith, manager of the International Stock Fund
Though global growth may be slowing, emerging economies face fewer headwinds due to their stronger fiscal positions compared with mature markets, and they have more flexibility to respond to challenges that may arise.
The debt crisis in Europe is having broad effects, as is a slowdown in China's rapid growth. Nevertheless, many regions maintain attractive internal dynamics.
- José Costa Buck, manager of the Latin America Fund
Given that China has been a huge consumer of iron ore, copper, and other commodities sourced in Latin America, its slowdown will have a meaningful impact on the region's raw materials exporters....We remain optimistic about Latin America's long-term prospects.
- Anh Lu, manager of the New Asia Fund
Looking ahead, we would not be surprised to see the government further relax monetary policy and take other steps to stimulate the economy and avert a hard landing…we do not believe a severe downturn is on the horizon. However, we are taking steps to make sure the fund is defensively positioned as we anticipate that China's slowdown may prove rocky in the near term.
- Campbell Gunn, manager of the Japan Fund
Japan has faced a multitude of headwinds in recent years but has continued to demonstrate remarkable resilience. However, a sustained recovery will require a reversal in the trend of U.S. dollar weakness, which in turn is mostly a factor of relative central bank policy—a dynamic not entirely in Japan's own hands.
- Leigh Innes, manager of the Emerging Europe Fund
While we remain optimistic about the prospects for the region over the long term, we expect markets to remain volatile—particularly countries like the Czech Republic and Hungary, which have strong economic ties to the eurozone—as developed European economies work their way through a period of fiscal austerity.
- Oliver Bell, manager of the Africa & Middle East Fund
Our optimism is based on better governance, attractive demographics, rising urbanization, and infrastructure investment supported by plentiful natural resources.
Foreign stocks are subject to fluctuations based on earnings, interest rates, the volatility of currency exchange rate, and the outlook for inflation. Stocks from emerging markets are vulnerable to political and economic instability as well. Additionally, while accounting practices are becoming more uniform among developed markets, financial information about specific companies in emerging markets can still be harder to obtain.
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