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Q2 2024 Global Equity Outlook

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Developed Markets

Firmer Economic Footing in 2024 for Some but Not Others

A few months into 2024, we find ourselves operating with a better economic backdrop than a year ago. Though we’ve seen a few pockets of weakness, low unemployment, rising wages and strong household balance sheets continue to bolster consumers. At the same time, key inflation measures are trending lower, though they remain above the Federal Reserve’s (Fed’s) target.

We believe the combination of these factors and stimulative fiscal policy makes a soft economic landing in the U.S. more likely.

Some economies outside the U.S. aren’t faring as well. The U.K. and Japan have experienced two consecutive quarters of economic contraction, which puts them in recession territory. In addition, Germany, Europe’s largest economy, contracted in the fourth quarter of 2023.

Meanwhile, earnings growth was positive in the U.S., Japan and emerging markets (EM). Profit growth remained negative in Europe.

Narrow Performance of Market Could Put Portfolios at Risk

In the U.S., earnings growth — and stock market performance — has been concentrated in the so-called Magnificent Seven stocks. In the fourth quarter, these mega-cap stocks contributed nearly 9 percentage points of the S&P 500® Index’s earnings growth, while the combined profit growth for the remainder of the index contributed -4.84 percentage points. For the year, the group’s stock prices climbed more than 76% compared to just 14% for the rest of the index.1

Meanwhile, the Magnificent Seven’s capitalization has grown to account for nearly a third of the S&P 500 and 17% of the MSCI ACWI Index.2 In a recent article, my colleagues Brent Puff and Bernard Chua highlighted the potential for unintended shifts in portfolio risk/return profiles if they become overly concentrated in this relative handful of large companies.

Their study found that more diversified, equal-weighted versions of the S&P 500 and MSCI ACWI indexes outperformed the traditional capitalization-weighted indexes over time. We believe this demonstrates the value of a more diversified strategy and the potential for active managers to provide similar diversified exposure with a more risk-aware approach.

Opportunities Outside of the Magnificent Seven

While many of our portfolios have exposure to mega-cap stocks, our investment teams are also finding compelling growth prospects elsewhere.

For example, the introduction of new diabetes and obesity treatments is creating buying opportunities as the market sorts out potential winners and losers in the weight-loss drugs space. In addition, the artificial intelligence (AI) rollout that helped fuel the Magnificent Seven’s rise has also driven lesser-known companies' profit growth.

At the opposite end of the capitalization spectrum from last year’s mega-cap headliners, we believe small-cap stocks offer compelling potential. Smaller companies in the U.S. and emerging markets are notable beneficiaries of the onshoring and nearshoring trend. What’s more, we find that valuations for this under-owned asset class are attractive.

We’re also finding opportunities in the aerospace industry where manufacturers such as Boeing and Airbus have seen their deliveries rebound from pandemic-era supply chain problems. Manufacturers are ramping production to catch up on their backlogs, which we believe creates investment opportunities throughout the vast aircraft production supply chain.

Looking further out, we could be nearing a positive inflection point in the housing market. Projected declines in mortgage interest rates could help address the sector’s supply shortages and affordability challenges. Beyond homebuilders and their suppliers, a housing rebound could benefit mortgage lenders, home improvement retailers and makers of furniture and appliances.

Emerging Markets

We Expect Resilient Economic Growth in Emerging Markets

We have a favorable outlook for EM stocks. We expect economic growth to remain resilient, with the growth differential compared to developed markets widening throughout the year.

Declining headline inflation and a likely Fed pivot may pave the way for EM central banks to ease monetary policy aggressively. Having risen more sharply than developed markets during the global inflation shock, EM interest rates have further to fall.

Several central banks have already started to cut interest rates, and we expect this trend to continue. From a growth perspective, this could indicate we are past the worst of the drag from tighter financial conditions. Historically, EM stocks have performed well when gross domestic product (GDP) estimates are revised higher and policy rates are revised lower — helping ease financial conditions and support economic activity.

Economic Fortunes Are Turning Positive

Export-oriented economies experienced soft growth in the last two years, reflecting weak global trade and manufacturing activity. However, tech goods exports have improved recently, and we think South Korea and Taiwan should continue to benefit from this trend.

Take South Korea, for example, where the upswing in the memory chip industry is bringing positive outcomes. SK Hynix, a significant player, is seeing substantial profit improvements thanks to a meaningful rebound in memory chip prices.

Meanwhile, we believe Taiwan’s tech-heavy market should be well-positioned amid the AI boom. Strong earnings results from AI-related businesses have fueled optimism and support for companies like Taiwan Semiconductor Manufacturing Co.

The Middle East, particularly Saudi Arabia, offers another story of positive structural growth. Infrastructure investment continues to run at a fast clip, spurred on by the government’s Vision 2030 program. In addition, we believe the tech sector’s consistent and proven ability to attract foreign direct investment (FDI) will support the kingdom’s ambitions to become a data center and AI hub.

We also expect economic growth to accelerate in Latin America. Pandemic shocks and geopolitical tensions are reordering trade relationships and fueling the nearshoring trend. Mexico has played a crucial role and experienced an increase in FDI as businesses opt for shorter supply chains. Record remittances from migrant workers (money earned abroad and sent back to support their families) and the resilience of the U.S. economy have also provided favorable conditions for Mexico.

Brazil benefits from robust domestic demand, which should get additional support from lower interest rates. We believe these conditions create a favorable environment for businesses such as Localiza Rent a Car, Brazil’s largest rental car company.

No Quick Fix in China

Despite a robust rebound in Chinese New Year holiday travel and consumption, China faces continuing challenges to economic growth from the property market downturn, subdued household spending and lingering deflationary pressures.

In 2023, the post-pandemic release of pent-up demand for services was the main driver of consumption. However, as the year wore on, the government’s piecemeal stimulus efforts failed to spur a pickup in spending. Growth this year will depend on improving consumer confidence, income growth and policy support.

During the recently completed National People’s Congress (NPC), China’s government indicated monetary and credit policies will be generally supportive but will not include aggressive easing. More property policy support may be needed to stabilize the struggling property market, which has experienced further declines in sales volume and home prices in recent months.

Nonetheless, we believe the government’s strategic focus on nurturing productivity, developing the digital economy and promoting domestic consumption could create opportunities and potentially reward fundamental stock selection in China.

Patricia Ribeiro
Patricia Ribeiro

Co-Chief Investment Officer

Global Growth Equity

¹ FactSet, American Century Investments.
² FactSet, American Century Investments.

Explore Our Emerging Markets Capabilities

References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.