Due to increased capital expenditures in artificial intelligence, energy security, and defense, T. Rowe Price has raised its overweight position in equities, anticipating support for medium- to long-term markets. Concurrently, potential progress in a peace agreement between the US and Iran could also provide a short-term boost to market sentiment.
Regarding regional allocation, the firm continues to favor US and emerging market stocks, primarily based on a constructive view of the AI cycle. Meanwhile, given Europe's higher sensitivity to rising energy costs, it maintains an underweight position in that region.
T. Rowe Price has further reduced its allocation to fixed income, maintaining a short duration stance. In credit, due to concerns that inflationary pressures could trigger a widening of credit spreads, it has downgraded its allocation to high-yield bonds.
Thomas Poullaouec, Head of International Investment Solutions and Portfolio Manager at T. Rowe Price, along with the firm's Asia Investment Committee, noted that even if the impact of the current energy shock eventually subsides, several structural factors suggest interest rates may remain higher than the levels seen over the past decade.
The global economy requires increased investment, with spending needs in areas such as AI infrastructure, defense, energy security, and grid resilience continuing to rise. At the same time, persistent fiscal deficits and high bond issuance volumes are expected to continue putting pressure on government bond markets.
Longer-term bond yields also reflect a rise in term premiums, as investors demand higher compensation for inflation volatility, fiscal uncertainty, and geopolitical risks. Collectively, these factors indicate that interest rates may remain structurally elevated, justifying the maintenance of a short duration strategy.
The MSCI Emerging Markets Index has undergone significant changes, with the technology sector's weight in the benchmark rising from 24% at the end of 2024 to approximately 42% currently. While investors may still view emerging markets as an investment area benefiting from regional economic growth, commodities, Chinese consumer demand, and global trade, this asset class is becoming increasingly linked to AI infrastructure, semiconductors, and digital platforms.
This does not signify a cyclical decline for emerging markets, but rather a shift in the source of the cycle. Emerging markets may now be more influenced by the semiconductor cycle, capital expenditures of hyperscale cloud companies, AI investment sentiment, and overall growth stock risk appetite.
For multi-asset investors, an allocation to emerging markets may carry higher technology and growth stock risks than anticipated, potentially leading to an underestimation of concentration and correlation risks. However, this transformation also enhances emerging markets' participation in structural earnings growth, supporting T. Rowe Price's decision to maintain an overweight allocation to emerging market equities.
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