BALTIMORE - International stock markets may be a better bet than the U.S. market in 1995, according to top officials of T. Rowe Price Associates Inc.
The Baltimore firm wins either way with that projection: Of T. Rowe Price's $57 billion in assets, $37 billion is in mutual funds. International funds, run by Rowe Price-Fleming International Inc., the firm's international joint venture with Fleming Group represent nearly half of the firm's mutual fund assets. Rowe Price-Fleming runs nearly $20 billion of the firm's total assets.
Putting its outlook on the line, the firm's asset allocation mutual funds are placing their maximum weighting in international stocks.
George Collins, president and chief executive officer, predicted continued growth in international mutual funds, although not without a slight pause. Overall, he said, lower returns and increased volatility will push investors to less risky investments. To be sure, stock volatility has been unusually low in recent years. For the third year in a row, there has been less than a 10% range from the high to the low in the performance of the Standard & Poor's 500 Stock Index and the Morgan Stanley Capital International Europe Australasia Far East Index. "The swan on top of the water is not looking nearly as stressed as the feet underneath," said M. David Testa, chairman of Rowe Price-Fleming and director of the T. Rowe Price equity division.
Investor education about volatile markets is a particular concern because 40% of the firm's fund shareholders have come on board in the past three years. The firm has launched a new video for 401(k) participants and information kits for retail investors on investing strategies.
The firm's rosy view on international markets does not mean it is bearish on the United States. Paul Boltz, vice president and chief economist of T. Rowe Price, said "we are in the full throes of prosperity."
Future interest rate rises will be smaller than they were in 1994. He said the U.S. economy is 31/2 years into an expansion, which is longer than most post-World War II recoveries with the exception of the 1980s. Although the expansion may continue into another protracted 71/2-year stint as in the 1980s, in the near term "the economy must slow to 2% to 2.5% growth. It has run out of slack." Europe's economies, on the other hand, will grow more strongly.
Still, 1995's slowdown will not be abrupt. Growth might move from 3.5% in the first half to 2.5% in the second half.
The unemployment picture is particularly positive. "Unemployment is dropping impressively. Since 1992, it has been dropping like a rock" to less than 6%. "There's a broad consensus that the economy has reached full employment. It's a remarkable moment in our economic and political history," Mr. Boltz said.
To keep the unemployment rate at 6%, job growth must decelerate as maturing baby busters enter the work force, he said.
In 1995, to stabilize the unemployment rate, the economy only needs to create 120,000 jobs per month, half of the comparable number created in 1994. "That's why the Fed is tightening so aggressively, " Mr. Boltz said.
Although interest rates seem high to many, they still are below the level at which the Fed eased after the crash of 1987. He said if the economy and inflation fail to grow as quickly as T. Rowe Price expects, the Fed would readily allow rates to drop in 1995 and 1996, as it did in the late 1980s.
As for the dollar, the lesson of 1994 is that rising interest rates and a robust U.S. economy are not as important factors as the rising current account deficit, Mr. Boltz said.
William Reynolds, director of the firm's fixed-income division, expects continued strong economic growth in the United States, at least in the first half of 1995; accelerating international growth; somewhat higher inflation; and continued Fed tightening. This will lead to moderately higher interest rates, a flattening yield curve and a more volatile bond market than in the past several years. His outlook for tax-free bonds is favorable while his high-yield bond outlook is stable.
Among other topics discussed at a T. Rowe Price press briefing held in New York:
Mutual fund assets of T. Rowe Price increased almost 9% in the first nine months of 1994.
During the past decade, non-IRA retirement assets invested in mutual funds grew at a 33% annual rate, bolstered by rapid growth in the 401(k) market, according to Mr. Collins.
The individual retirement account rollover market also is growing rapidly with more than $100 billion in annual cash flows.
Mr. Collins cited figures from Sanford C. Bernstein & Co. that predicted mutual fund flows would grow at an annual rate of 12% from the end of 1993 through the end of 1998, with half coming from cash flows and half from market appreciation.
Nine out of 11 T. Rowe Price domestic stock funds exceeded their peers, as measured by Lipper Analytical Services, Summit, N.J., in the five years ended Sept. 30, as did both of the firm's diversified international funds. For the three-year period, all of the firm's international and domestic stock funds beat their peers, while for the 12 months, 14 of 15 stock funds and three of five international funds did so.
In fixed income, all the firm's tax-free and half of its taxable funds exceeded their benchmarks in the year ended Oct. 31.