Global Economic Outlook
Sponsored Content – American Century InvestmentsBy Keith Creveling. Senior Vice President and Senior Portfolio Manager
Brent Puff, Vice President and Portfolio Manager
March 27, 2012
As we proceed through the first quarter of 2012, the U.S. economy continues to drift— not in recession, but far from the level of growth and dynamism we would like to have. Meanwhile, global economic growth has slowed as the world anticipates a solution to the European sovereign debt crisis. In short, we are in a period of uncertainty, not only about how key events will unfold, but about the timing associated with their future progress and resolution. 2011 provided active investment managers like us with a number of macroeconomic challenges and surprises.
There was the tragic earthquake, tsunami and nuclear disaster in Japan. For most of the year, oil and energy markets were affected by the growing and spreading political turmoil in the Middle East. The U.S. and Europe contributed to economic uncertainty as Standard and Poor’s downgraded U.S. government debt in response to the country’s growing national debt and unaddressed national deficits. And in Europe, the debt crisis among eurozone countries continued and spread to larger nations such as Italy and Spain.
And as we ended the year on December 31, none of these concerns has been adequately resolved—meaning they will continue to play a role as macro-factors and uncertainties in the New Year. We can also add to this the Presidential and Congressional elections in the U.S. occurring on Tuesday, November 6, which may result in some resolution of the gridlock that has plagued Washington for the past several years—or may not. Anticipation by the markets on how the elections will turn out could itself be a macro-factor affecting investor sentiment for at least the second half of the year.
Given these circumstances, 2012 is also likely to be a challenging year for active investment managers. Market volatility is likely to remain high and new surprises on the macroeconomic front are possible. Given this outlook, we spoke to the managers of American Century Investments’ Global Growth portfolios to learn how they managed the events of last year and are anticipating the coming year in terms of their investment outlook.
What are the challenges for 2012? How will you navigate these challenges?
Looking ahead, we continue to believe global macroeconomic conditions are likely to remain challenging in 2012, particularly in Europe. In the United States, we are encouraged by improving trends in employment and manufacturing, as well as some signs that the housing market is beginning to stabilize. That said, we expect growth will remain sluggish and uneven. Finally, we believe growth in the key emerging markets of China, Brazil and India will remain strong, albeit a little slower than the growth experienced in 2011.
One of the primary challenges for developed economies will be deleveraging in both the private and public sectors, which is expected to be a drag on growth. However, while European markets will likely continue to be plagued with volatility in the coming months, we believe that valuations remain very attractive, and firms should benefit from a weaker euro.
In addition, companies that have maintained competitive pricing power heading into this low growth environment will likely be positioned to outperform, particularly in defensive sectors. Exposure to luxury brands positioned toward emerging market consumers will likely be beneficial, particularly in Asia where demand has proven to be resilient.
In which industries and sectors do you foresee accelerating growth under this environment?
We continue to seek investment opportunities in companies that we believe can sustain growth and create value for owners even if the economic backdrop remains challenging. We continue to be encouraged by the resiliency of corporate earnings, the financial strength of the corporate sector overall, and the relative attractiveness of equities versus other investments such as bonds.
More specifically, we are maintaining a focus on areas that are benefitting from secular tailwinds, as we believe such opportunities will do well despite the challenging macroeconomic environment. Such market segments include:
- The emerging market consumer including transportation, entertainment and consumer durable purchases.
- The commercial aerospace market and its segments such as engines and component systems, parts and supplies.
- The emergence of cloud computing, network efficiency and security in the information technology sector.
- Further growth in the penetration of smartphones globally.
- The migration of consumer spending to online options.
- Growing exploration, development and production of offshore, deepwater oil fields.
Is the slowing growth of the Chinese economy a concern?
In the short-term it is, but keep in mind that the “slowing” of Chinese economic growth means it is forecast to decline from a range of 10-12% down to a range of 7-9%. That is still impressive growth for the second largest economy—in terms of size—in the world. From a longer-term perspective, the slowing of growth in China is probably a good thing since signs have been emerging, especially in areas like real estate, that the economy was overheating and asset bubbles were potentially emerging. A slower rate of growth for China in the longer term may be beneficial for both for the nation and the rest of the world’s economies. In other words, this kind of slowdown may be representative of a soft landing for their economy as opposed to a hard crash that could occur if higher growth continued and some type of bubble in real estate or industrial investment burst.
What do you see as other potential risks for 2012?
In the U.S., corporate earnings growth this year is unlikely to be driven primarily by margin expansion and cost reduction as it has for the past several years. And with global economic growth appearing to be in a slowdown phase, this is going to create substantial challenges for company executives. However, many large corporations and businesses continue to hold substantial cash and other short-term assets on their balance sheets, which could be put to use as part of a strategy to grow earnings via mergers and acquisitions activity.
Macro-factors will likely remain important in determining the direction of U.S. equity markets for 2012. That is not necessarily bad news if one or more is resolved in a way that boosts the optimism and outlook of both investors and consumers. However, ongoing uncertainty about the sovereign debt crisis in Europe, the U.S. budget deficit, debt and future fiscal policies (e.g. taxation and spending) and unrest in the Middle East may contribute to more of the swings in market direction and investor confidence that we saw in 2011.
The slowdown in global growth has been uneven, acting as a mild buffer to the significant decline in eurozone growth. The divergence between emerging and developed economies’ growth rates is expected to widen in 2012. However, we believe that some level of low but positive growth in major advanced economies is still likely. After Japan posted their first quarter of expansion in a year, the prime minister announced a fourth reconstruction budget in the form of two trillion yen after the previous three implementations have been disrupted by a strengthening yen and uncertainty in Europe. The U.S. has had encouraging economic news since November including job growth, reduced unemployment and rising consumer confidence.
How is your investment philosophy and process changing in light of the challenges you foresee for 2012?
Our investment philosophy and process will not change. Our strategy is solidly rooted in identifying companies at the early stages of acceleration in their fundamental characteristics including sales and earnings. The key is to identify companies at the early stages of acceleration where we believe it will be both sustainable (based on secular trends, industry or company restructuring or structural and paradigm shifts in markets and technologies) and long term. In a period of slowing growth, our strategy focuses on those companies that we believe can sustain growth in the face of a difficult macroeconomic environment. We continue to have a bias toward those companies that are benefitting from strong secular tailwinds. Additionally, we believe that those firms that are able to retain pricing power should fare well in a prolonged period of low or no growth.
Surprisingly, these types of companies emerge in all kinds of market environments— those with strong macroeconomic growth, those with weak macroeconomic growth and (as we anticipate for this year) those with uncertain macroeconomic growth. Because of this, our process is not wedded to short-term changes in the fortunes of companies that merely ride the macroeconomic growth cycle up and down. And it means that we can strive to perform well in nearly any type of economic environment relative to our benchmark and investment universe represented by the MSCI World Index.
What is your advice to global investors given the current economic outlook?
Broad asset diversification can be a smart investment strategy since it offers the potential to reduce risk without a substantial loss of return potential. It is even more important in uncertain economic times, which we foresee in 2012. Ultimately, the challenges we face will be addressed, but the solutions will take time to implement and take effect. There are still excellent investment opportunities for active professional investment managers who use fundamental analysis along with strong risk controls— which is our approach to managing money. The keys to success are diversification and patience in this highly uncertain environment. That is certainly something we practice in constructing our Global Growth portfolio. But investors also need to diversify their investment portfolios by asset class and investment style.
MSCI World Index: A free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.
Standard & Poors 500® Index: A market value-weighted index of the stocks of 500 publicly traded U.S. companies chosen for market size, liquidity, and industry group representation that are considered to be leading firms in dominant industries. Each stock’s weight in the index is proportionate to its market value. Created by Standard & Poor’s, it is considered to be a broad measure of U.S. stock market performance.
Diversification does not assure a profit nor does it protect against loss of principal.
Global investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
The opinions expressed are those of Keith Creveling and Brent Puff and are no guarantee of the future performance of any American Century portfolio. Nothing in this document should be construed as offering investment advice. Please note that this is for informational purposes only and does not take into account whether an investment is suitable or appropriate for a specific investor.
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