2020 Global Market Outlook

PRESS BRIEFING

International Equity

Justin ThomsonPortfolio ManagerChief Investment Officer, Equity

November 19, 2019

2

Opening Comments

International equity markets have serially lagged U.S. markets over the last 10 years

This year has seen a continuation of this underperformance as global economies have slowed and international earnings have been disproportionately affected by the U.S.–China trade dispute

With political headwinds potentially becoming tailwinds, there is reason to believe that growth and inflation expectations have now bottomed

The cyclical conditions for international equities to outperform are present

Structural merits for international markets exist, both in developed and emerging markets

3

As of 31 October 2019

Past performance is not a reliable indicator of future performance.US – S&P 500 Total Return Index, EM – MSCI Emerging Markets Net Total Return Index, Global Agg – Bloomberg Barclays Global Aggregate Bond Index, EM FX –JPM Emerging Markets Currency Spot Index, EAFE – MSCI EAFE Total Return Index. Sources: FactSet Global, S&P, Bloomberg, JP Morgan, 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. Information has been obtained from sources believed to be reliable by J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

Year-to-Date Returns

95%

100%

105%

110%

115%

120%

125%

Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19

US EM Global Agg EM FX EAFE

4

Sources: JP Morgan, IHS Markit, Haver Analytics. Copyright © 2019, Markit Economics Limited. All rights reserved and all intellectual property rights retained by Markit Economics Limited.

As of 30 September 2019

GLOBAL PURCHASING MANAGERS’ INDEX (PMI)

Purchasing Managers’ Index

49

50

51

52

53

54

55

56

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

16

Apr-

16

Jul-1

6

Oct

-16

Jan-

17

Apr-

17

Jul-1

7

Oct

-17

Jan-

18

Apr-

18

Jul-1

8

Oct

-18

Jan-

19

Apr-

19

Jul-1

9

Services Manufacturing July 6, 2018 – U.S. implements first China-specific tariffs

PMI (

>50

= Ex

pans

ion)

5

Equity Market Earnings Growth Revisions

Source: Morgan Stanley Research, used with permission. MSCI US – MSCI United States Total Return Index, MSCI Europe – MSCI Europe Total Return Index, MSCI EM – MSCI Emerging Markets Total Return Index, MSCI Japan – Total Return Index. Earnings revision ratio calculated as (# of upgrades - # of downgrades)/(# of estimates)

As of 31 July 2019

NEXT 12 MONTHS’ EARNINGS REVISION RATIOS (3-MONTH MOVING AVERAGE)

Earn

ings

Rev

isio

n Ra

tio

Earn

ings

Rev

isio

n Ra

tioEa

rnin

gs R

evis

ion

Ratio

Earn

ings

Rev

isio

n Ra

tio

U.S. EUROPE

JAPAN EM

6

As of 30 September 2019

Past performance is not a reliable indicator of future performance.Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. Statistical Office of the European Communities, Haver Analytics, 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. Thisreport is not approved, reviewed, or produced by MSCI.

Europe: Sectoral Mix Weighs

EUROPEAN UNION: GROSS DOMESTIC PRODUCT VS. EARNINGSJan 2004 – Sept 2019

MSCI EU INDEX: EARNINGS PER SHARE IN ENERGY, MATERIALS, AND FINANCIALS Jan 2000 – Sept 2019

€2,900

€3,100

€3,300

€3,500

€3,700

€3,900

€4,100

€2

€4

€6

€8

€10

€12

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Real

GDP

in B

illio

ns

Last

12

Mon

ths’

Ear

ning

s per

Sha

re

MSCI EU Index EPS (L)European Union Real GDP (R)

€ 0

€ 5

€ 10

€ 15

€ 20

€ 25

€ 30

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Earn

ings

per

Sha

re

Energy Materials Financials

7

- 50

100 150 200 250 300 350 400

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

EBuyback Dividend R&D CAPEX

As of 31 October 2019

Source: Citi Research. All rights reserved.

Markets Prefer Payouts to CAPEX

- 200 400 600 800

1,000 1,200

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

E

Buyback Dividend R&D CAPEX

U.S. INVESTMENT AND PAYOUT (US$bn)

JAPAN INVESTMENT AND PAYOUT (Yen Trn)

U.S. IT INVESTMENT AND PAYOUT (US$bn)

ASIA IT INVESTMENT AND PAYOUT (US$bn)

- 10 20 30 40 50 60

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

E

Buyback Dividend R&D CAPEX

-

50

100

150

200

250

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

E

Buyback Dividend R&D CAPEX

8

Markets Prefer Payouts to CAPEX

R² = 0.30

6

8

10

12

14

16

18

20

0 1 2 3 4 5 6

2019

E P/

E

CAPEX/Payout Ratio (2018E)

Source: Citi Research using FactSet estimates. All rights reserved

As of 31 October 2019

INVESTMENT/PAYOUT VS. P/E 2019

Cons StaplesSwitz IT

Health CareUSUS ITAust

Japan

TaiwanIndustrials

Cons Disc.

India

S. AfricaFrance

EnergyUtilities

China

Materials

TelecomsGermany

BrazilMining

Asia IT Korea

Russia

UK

9

As of 31 October 2019

Source: Financial data and analytics provider FactSet. Copyright 2019 FactSet. All rights reserved.World – MSCI AC World Index, Europe – MSCI Europe Index, U.S. – S&P 500 Index, Japan – TOPIX Index.Source for MSCI data: 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.

Return on Equity Across World Markets

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

World Europe US Japan

Retu

rnon

Equi

ty

10

200

300

400

500

600

700

800

900

1000

1100

20

30

40

50

60

70

80

90

1950

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

2002

2006

2010

2014

2018

2022

2026

2030

2034

2038

2042

2046

2050

2054

2058

2062

2066

2070

2074

2078

2082

2086

2090

2094

2098

Japan (LHS) China (RHS)

Sources: Nomura, United Nations Department of Economic and Social Affairs, Population Division (2019), Haver Analytics. Used with permission. Note: The Chinese National Statistical Office defines the working age population as people age from 15 to 59.

As of June 2019

WORKING AGE POPULATION (15‒59) IN CHINA AND JAPAN

China May Grow Old Before It Grows Rich

ForecastActual

(Million People) (Million People)

11

As of 31 October 2019

Sources: Nomura Research Institute, based on the data from IMF World Bank; United Nations; Haver Analytics.

China: Can It Escape the Middle-Income Trap?

1200000

1250000

1300000

1350000

1400000

1450000

1500000

0

5000

10000

15000

20000

25000

30000

3500019

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

1920

2020

2120

2220

2320

2420

2520

2620

2720

2820

2920

3020

3120

32

China: Adjusted net national income per capita (LHS) Population (RHS)

Middle-Income Trap

Population Peaks in 2031

(Thousand People)(US$)

Yearly per Capita GDP Growth: 5%Yearly RMB Appreciation: 2%

Yearly per Capita GDP Growth: 6.5%Yearly RMB Appreciation: 3%

12

Sources: China National Bureau of Statistics, OECD, Haver Analytics.

As at 31 December 2018

HOUSEHOLD DISPOSABLE INCOME – URBAN (RMB)

China: The GDP That Really Matters

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Purc

hasi

ng P

ower

Par

ity (A

djus

ted

EUR)

RMB

13

Source: T. Rowe Price calculations using data from Bloomberg Finance LP. All rights reserved.

Stock of Negative-Yielding Debt

24% OF BONDS IN THE WORLD TRADE AT NEGATIVE INTEREST RATESAs of 31 October 2019

Mar

ket V

alue

(US

$tn)

% o

f Bon

ds O

utst

andi

ng

0%

5%

10%

15%

20%

25%

30%

35%

0

2

4

6

8

10

12

14

16

18

Jan-

10M

ay-1

0Se

p-10

Jan-

11M

ay-1

1Se

p-11

Jan-

12M

ay-1

2Se

p-12

Jan-

13M

ay-1

3Se

p-13

Jan-

14M

ay-1

4Se

p-14

Jan-

15M

ay-1

5Se

p-15

Jan-

16M

ay-1

6Se

p-16

Jan-

17M

ay-1

7Se

p-17

Jan-

18M

ay-1

8Se

p-18

Jan-

19M

ay-1

9Se

p-19

Global Negative yielding debt, Market Value (USD tn) (LHS)

Global Negative Yielding Debt as a market share of all bonds outdtanding (%) (RHS)

14

As of 31 October 2019

Copyright © 2019, Markit Economics Limited. All rights reserved and all intellectual property rights retained by Markit Economics Limited.

Reflation Trade: PMIs Versus Financial Conditions

Global M

anufacturing Purchasing Managers’ Index

Fina

ncia

l Con

ditio

ns In

dica

tor

GLOBAL PMI VERSUS FINANCIAL CONDITIONS INDICATOR

15

Copper-Gold Price Relative

0

2

4

6

8

10

12

14

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Copp

er-to

-Gol

d Pr

ice

Ratio

(X)

Ratio Minimum ratio

Source: T. Rowe Price calculations using data from FactSet Research Systems Inc. All rights reserved. Ratio between LME Copper Cash Official Price (US$/mt) and Gold NYMEX Near Term Price (US$/ozt).

As at 31 October 2019

COPPER-TO-GOLD PRICE RATIO

16

U.S. Versus EAFE

-50%

0%

50%

100%

150%

200%

250%

300%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Cum

ulat

ive

Retu

rns

MSCI EAFE Index MSCI EAFE Index in Local Currency S&P 500 Index

As at 31 October 2019

Past performance is not a reliable indicator of future performance.Sources: T. Rowe Price, MSCI, S&P. Cumulative monthly returns rebased as at 30 September 2009. 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.

17

Sources: BofA Merril l Lynch Global Research, Angus Maddison (University of Groningen) (Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD), IMF.

As at December 2017

GLOBAL SHARE OF GDP (PPP)

Crouching Tiger, Hidden Dragon?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 1000 1500 1600 1700 1820 1870 1900 1913 1940 1950 1960 1970 1980 1990 2000 2010 2017

22%

24%

18%

7%

Others

Africa

Latin America

Rest of Europe

China

IndiaJapan

United Kingdom

United StatesFrance

Former USSR

ItalyGermanySpain

18

0%1%2%3%4%5%6%7%8%

UK

US

Aust

ralia

Eur x

UK

Japa

n

EMBuyback Yield Dividend Yield

As of 31 October 2019

Sources: Citi Research, 2019 Citi estimates, MSCI, Worldscope. All Rights Reserved.

Regional Valuations

CURRENT VALUATIONS OF MAJOR STOCK MARKETS

CYCLICALLY ADJUSTED PRICE TO EARNINGS (CAPE) RATIO(ABSOLUTE)

PAYOUT YIELD (DIVIDEND YIELD + BUYBACK YIELD)

FREE CASH FLOW YIELD (2020 EST)

US UK EurxUK JP GEMPE 21.1 13.8 17.3 13.3 13.2PBV 3.4 1.7 1.9 1.3 1.6CAPE 30.1 17.1 21.1 21.3 15.6DY 2.0 4.7 3.3 2.5 2.9fwd PE 17.4 12.2 14.4 13.3 12.0

0%1%2%3%4%5%6%7%8%

UK

Japa

n

Eurx

UK

US

EM

Aust

ralia

0102030405060

95 97 99 01 03 05 07 09 11 13 15 17 19

USA CAPE Rest of World CAPE

US expensive vs Rest of World

19

Conclusion

International Equity Markets have serially lagged U.S. markets over the last 10 years through a combination of structural factors, currency, widening valuation disparities, and cyclical factors

This year has seen a continuation of this underperformance as Global Economies have slowed and international earnings have been disproportionately affected by U.S.–China trade dispute

Eighteen months into a CAPEX recession, eight months into an inventory correction, and with political headwinds potentially becoming tailwinds, there is reason to believe that growth and inflation expectations have now bottomed

Under these circumstances and given undervalued currencies, we believe the cyclical conditions for International Equities to outperform are present

Structural merits for International markets, both in Developed and Emerging Markets, include rising innovation, better corporate governance models, better demographics (EM), and potential for valuation catch-up

20

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action. The views contained herein are those of the authors as of November 19, 2019, and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal.

All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

© 2019 T. Rowe Price. All rights reserved. T. Rowe Price, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

201910-987569