It appears we have reached an inflection point in the global equity markets. After a challenging year, many global investors expect a return to the higher levels of volatility and more muted returns that were previously considered “normal.”
For the past several years, global stock returns have been driven by the unprecedented levels of quantitative easing (QE) undertaken in the United States, United Kingdom (U.K.), Japan, and other nations.
Most notably, by pumping hundreds of billions of dollars into U.S. markets, the Federal Reserve’s (Fed’s) bond-buying program kept interest rates and inflation at historic lows and weakened the dollar in an effort to create jobs, lift consumer confidence, and encourage investors to return to the markets and take on risk. U.S. stocks responded accordingly and became the engine driving the global recovery; the S&P 500® Index1 reached multiple new highs since 2009 and recovered all losses from the financial downturn by the first quarter of 2013.
But the environment has changed. While the Fed ended its bond-buying program in October—essentially closing off the taps that had buoyed the global recovery— other central banks, such as in Japan and Europe, continue their aggressive accommodative policies. This divergence of monetary policy signals an increase in both risk and opportunities for investors as we see a reversion to levels of volatility and returns closer to historical norms along with a dispersion of opportunities in the world’s equity markets.
Dispersion of Global Opportunities
The divergence of monetary policy underscores the larger issue of a decoupling of global markets. Though the U.S. recovery led a global resurgence after the financial crisis, other markets are no longer being elevated by the rising tide of U.S. economic activity. Slowing growth in China is pressuring oil and commodity prices and wreaking havoc with the economies of emerging markets and its regional trading partners. Recovery continues apace in the U.K. while it eludes most of the economies in Continental Europe. Japan’s recovery, driven by the government’s massive accommodative program and a weak yen, is selectively strengthening.
Implications for Global Investors
What does this mean for global investors? Along with increased volatility, we expect to see even more dispersion among the world’s markets. This is good news for investors relying on disciplined active management driven by sound fundamental analysis to uncover investment opportunities. Our investment process is to look for individual companies at inflection points that could lead to accelerating earnings growth, regardless of the industry, sector, country, or region they belong to. This bottom-up philosophy is designed to help us identify investment opportunities in any macroeconomic environment. Thus we believe we can employ it to help uncover companies positioned to succeed despite the two-way risk/reward scenario as volatility increases and returns normalize around the globe.
Opinions expressed are those of the portfolio investment team and are no guarantee of the future performance of any American Century Investments 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.
International investing involves special risks, such as political instability and currency fluctuations.
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