The headwinds blowing in the face of the global economy at the start of the year — growth, inflation, and central bank policymaking have now reached gale‑force speeds. Where these forces go and how they interact will determine the market’s trajectory going forward.
In a white paper issued by T. Rowe Price, Nikolaj Schmidt, chief international economist in the firm’s fixed income division, considered each of them and how investors should plan accordingly.
According to Schmidt, the outlook for growth isn’t positive. The global economy has been hit by a series of adverse shocks, the most powerful of which have been those connected to the surge in inflation and central bank monetary tightening. The current rise in inflation has hollowed out household purchasing power, causing demand to flag. Flagging demand has been worsened by central bank tightening. Schmidt expects these shocks to continue weighing on growth over the coming quarters.
Analysts and market observers have some differing views about where inflation will go. While some speculate that inflation will moderate in the near term as supply‑side disruptions fade, the T. Rowe executive asserted that even if inflation moderates in the short term, it will do so at a pace that’s still well above the central bank’s inflation targets.
This will maintain pressure on central banks to continue their aggressive monetary policies. So, investors must keep in mind that it’s unlikely that central banks will throw in the towel in the fight against inflation anytime soon.
“The combination of these three forces will likely lead to growth slowing to recessionary levels while elevated inflation keeps central bankers focused on delivering tight monetary policies,” wrote Schmidt. “As the valuation of most risk assets benefits from low interest rates and high growth, this outlook is clearly very challenging for risk assets.”
Amidst these headwinds, actively managed ETFs offer the potential to navigate changing markets in a way not possible through passive index-only strategies.
Aside from considering actively managed ETFs for riskier assets such as equities, traditionally lower-risk fixed income allocations may benefit from active management as well.
T. Rowe Price has three actively managed fixed income ETFs that could form the core of an investor’s fixed income allocation:
The T. Rowe Price Ultra Short-Term Bond ETF (TBUX ) invests in a diversified portfolio of shorter-term investment-grade corporate and government securities, asset-backed securities, and bank obligations. A broadly diversified, multi-sector short-duration bond strategy that offers higher income potential beyond traditional cash investments.
The T. Rowe Price QM U.S. Bond ETF (TAGG ) seeks to exceed the performance of the Bloomberg U.S. Aggregate Bond Index, a common measure of the domestic investment-grade bond market. The portfolio manager selects a set of U.S. dollar-denominated bonds representing key benchmark traits while attempting to generate modest outperformance over the index.
The T. Rowe Price Total Return ETF (TOTR ) invests in a diversified portfolio of bonds and other debt instruments. The fund has considerable flexibility in pursuit of strong portfolio returns and is constructed to respond to various market conditions.
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