In muddled markets fraught with volatility and changing regimes, it can become difficult to discern areas of opportunity. T. Rowe Price, an active management powerhouse within the industry, recently discussed potential avenues of opportunity it’s watching this year in equity markets.
In the shifting tides of 2025 markets, with aggressive U.S. tariffs and economic policy uncertainty, market predictions become increasingly difficult. Josh Nelson, head of global equity, T. Rowe Price, talked about the arenas where the firm sees potential this year in a recent webcast hosted on the VettaFi platform.
The Value of Looking Abroad This Year
Given U.S. volatility and economic headwinds, Nelson sees opportunity in international and emerging markets. Growing U.S. deficits also leave the U.S. at a disadvantage to many countries that have worked to consolidate their debts in recent years.
“You have economic data improving versus the U.S.,” explained Nelson. “You have fiscal positions better outside of the U.S. than inside the U.S., which can be stimulative to the economies, and you have valuations at extreme levels on a relative basis to the U.S.”
China remains an overlooked outperformer, up 30% in the last year and 6% year-to-date at the time of the webcast, according to Nelson. The country faced a difficult recovery period after severe and prolonged COVID-19 lockdowns, followed by the collapse of its property sector. The government has since enacted a number of reforms as well as supportive policy measures, particularly this year, to boost consumer spending, the stock market, and Chinese industries.
Japan is also a country the firm views positively, though valuations relative to the U.S. have slipped a bit. Europe appears favorably positioned in its inflation fight compared to the U.S., as do China and many other countries.
Looking broader, valuations remain extremely attractive in emerging and international markets compared to the U.S. “EAFE was trading at 14 times earnings, EM trading at 12 times earnings,” Nelson explained. “You’re in a period where the setup is very, very good and economies are improving relative to the U.S.”
See also: The Advantages of a Multiyear Investing Framework in 2025
Investing for Inflation in 2025 Equity Markets
Inflation will likely rise and remain elevated for longer due to tariff impacts, high deficits, rising oil prices in the longer-term, and housing costs. With reshoring efforts in a high-tariff environment, a substantial amount of investment is required to restructure supply chains. The capital expenditure required for this rerouting is inherently inflationary, Nelson noted.
The U.S. deficit continues to grow at an alarming pace, at around 7% deficit spending according to Nelson’s calculations. The U.S. government now finds itself in a situation where it must curtail federal spending — to the detriment of the economy — or let the deficit continue to balloon, also with its own severe economic consequences. “High deficits are inflationary in general and can crowd out private sector spending given the massive borrowing of the U.S. government,” explained Nelson.
Cheaper energy prices generally provide disinflationary pressures, as has been the case for the last decade or so in the U.S. Driven largely by U.S. shale production, flatlining production costs in the industry after years of cost declines create a backdrop for structurally higher oil costs.
At the same time, rising housing costs coupled with decreasing demographics due to new immigration policies create demand challenges. Many of the problems within the housing sector are also structural ones that will require a great deal of investment to resolve. This in turn creates further inflationary pressure. Challenges in the housing sector are particularly notable since rents/housing make up approximately one-third of CPI readings.
Areas of opportunity for investors in a high inflation environment include value sectors. “If you look at the last two inflationary environments — the early 2000s and the ‘70s — energy, materials, industrials, staples have historically worked,” Nelson noted. Commodities also warrant consideration, particularly because decreased investment in the last decade led to shrinking supply. In the next three to five years, Nelson sees the supply shortfall as a boon, driving oil prices and other commodities higher.
Rely on Active ETFs to Navigate Volatile Equity Markets
T. Rowe Price offers an expansive actively managed ETF suite, comprised of 13 equity strategies and 6 bond strategies. This includes T. Rowe Price International Equity ETF (TOUS ) for those investors looking for opportunities abroad, with a focus on developed markets. The fund managers take macro factors into account when constructing the portfolio. However, the main focus centers on the bottom-up research and fundamentals of individual companies. TOUS has a management fee of 0.50%.
Domestically focused, large-cap investors would do well to consider the T. Rowe Price U.S. Equity Research ETF (TSPA ). The fund seeks to outperform the S&P 500 while maintaining similar characteristics. It also offers different weightings and exclusions to the benchmark based on fundamental research. TSPA has a management fee of 0.34%.
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