Global Equity Outlook
Can Consumers Continue to Buoy the Economy?
Though a recession has yet to materialize, we enter 2024 with expectations that economic growth will continue to slow, if not contract.
A lot will depend on consumers. Along with the depletion of excess savings, they’re facing slowing wage growth and dealing with the resumption of student loan payments in the U.S. We’re already seeing the effects as consumption trends decelerate and consumers trade down to less expensive products and brands.
In Europe, economic activity is softening, particularly in the manufacturing sector. European economies tend to be tied to China, where uncertainty around real estate is high, and the expected rebound from pandemic lockdowns was not as robust or long-lasting as expected. The ongoing war in Ukraine continues to weigh on the continent as well.
Even with these challenges, the MSCI World Index remains in positive territory for the year. However, we believe sustaining this trend in the new year will depend on the market shifting its attention from macroeconomic worries to earnings improvement.
Profits Confirm the Sustainability of Key Trends
Despite the uncertain outlook, we continue to see global opportunities to own companies with the potential to sustain their earnings growth. Indeed, U.S. profit growth turned positive in the third quarter and confirmed the staying power of such secular trends as digitization, cloud computing, 5G infrastructure spending, data center expansion and decarbonization.
Artificial intelligence (AI) also remains a market focus. Spending on the technology is driving results and heightened expectations for a range of companies, including those providing physical infrastructure such as servers, semiconductors and data centers, as well as software and application developers. AI is also a topic of debate in the C suite, and we’re seeing companies bringing AI innovations to the market to drive productivity improvement for their customers.
We could see the impact of breakthrough weight-loss drugs continue to ripple through the market in the new year. The effects have extended well beyond the makers of so-called GLP-1s to include companies that could experience waning demand for their products or services if there’s widespread uptake of the new drugs. The earnings impact has been negligible so far. However, companies as disparate as medical device makers and snack food manufacturers find themselves on the defensive as analysts try to assess future demand for their products.
Japan Emerging from Deflationary Spiral
While most developed global markets battle high inflation, rising interest rates and slowing growth, Japan has been an outlier. The surge in global inflation has hindered most economies, but it’s helped ease long-standing deflationary pressures in Japan.
Meanwhile, corporate governance reforms aimed at making businesses more accountable to their shareholders have the potential to make select Japan-based companies more attractive to investors. The Tokyo Stock Exchange finalized market restructuring rules, including a directive encouraging companies to use capital more efficiently and emphasize profitability. There’s plenty of incentive to comply, as businesses failing to adopt the new guidelines could face delisting as early as 2026.
While the corporate reforms are positive, and Japan's monetary and economic backdrop is constructive, lower-quality companies were notable drivers of the country’s 2023 stock market performance. Therefore, our teams are focusing on quality as they seek to identify companies they believe have the fundamental and competitive strength to sustain growth.
EM Central Bank Policy Is a Potential Tailwind
After a challenging year, we enter 2024 with a more positive outlook for emerging markets.
Continued EM central bank easing and its potential to propel economic growth is a key consideration, especially in Latin America. Many countries in the region have made considerable progress in tempering inflation because their central banks aggressively hiked interest rates well before their counterparts in developed markets.
With inflation pressure pulling back, easing cycles are underway and could accelerate if financial conditions soften. We expect the deepest cuts among the early and aggressive hikers in Latin America. EM Asian central banks are also likely to cut but much less, consistent with the region’s shallower hiking cycle.
The Market Resets Growth Expectations for China
Meanwhile, the market has recalibrated its growth expectations for China. 2023 opened with strong economic activity as the country emerged from pandemic lockdowns, but the recovery proved to be weaker than expected due to property market turmoil and weak private sector confidence.
Downward pressure from the housing market has persisted, but recent policy signals indicate Beijing’s desire to support economic growth. Looking into 2024, a slew of targeted policy supports should stabilize growth in China. They include fiscal and monetary stimulus, an easing of housing policy and measures to stabilize foreign trade and investment. So far, these policies have not been sufficient to improve investor sentiment.
On a more positive note, internet companies continue to deliver robust results while health care and automakers have seen earnings upgrades. In addition, international outbound travel from China is in the early stages of recovery, which could benefit select hotel and consumer-oriented companies in the region.
Latin America May Be Poised to Capitalize on Its Advantages
We believe Latin America is positioned to take advantage of concerns about the resilience of global supply chains and continued trade tension between the U.S. and China. The region also offers significant potential in agriculture, green energy and minerals for the transition to a net-zero carbon economy.
Mexico, in particular, has advantages that cannot be matched by most countries, including shared borders with the U.S., ports on the Atlantic and Pacific oceans and trade agreements with many of the world’s key markets. In July, Mexico surpassed China to become the U.S.’s largest trading partner, and the government hopes to build on its lead through incentives to entice companies to move operations closer to their North American customers.
Looking ahead, the ongoing easing cycle, along with attractive valuations and a favorable commodity price environment, provide a positive backdrop for Latin America. In addition, domestic consumption has been robust thanks to solid job creation and wage growth.
Explore Our Outlook
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 risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
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.