MEDIA RELEASE: While the risk of inflation rising further has materially abated, high levels of inflation and interest rates, coupled with slowing demand, will continue to present challenging conditions for global equities, according to American Century Investments senior portfolio manager, Brent Puff.
Mr Puff – who runs the investment manager’s $30 billion global growth strategy - said the pace of rate increases by the US Federal Reserve and global central banks will slow, however because aspects of inflation are proving sticky, interest rates will not fall immediately.
“From a corporate earnings perspective, high rates and slowing demand provide a challenging environment for many companies.
“Investors need to therefore be selective and focus on identifying businesses that can sustain fundamental improvement against this economic backdrop,” he said.
Monetary policy is weighing heavily on the US housing market, which accounts for a large portion of US GDP, and the recent US banking crisis has led to a reexamining of exposure to the financials sector amid the continuing uncertainty.
“It’s fair to say we have been stress-testing our assumptions. We're looking at the impact lower rates and higher credit losses could have and considering various macro assumptions.
“We have adjusted our earnings expectations but we also have considered the new outlook in the context of current valuations and trimmed our exposure to US banks, in particular,” he said.
Senior portfolio manager, Trevor Gurwich, agreed that while inflation may remain elevated in key developed economies, the rapid rate increases experienced last year are unlikely to repeat.
“There will be a greater focus on company fundamentals as opposed to macro events which have undoubtedly been driving equity markets over the past year.
“Given the slowing economic growth in the US and parts of Europe, investors will need to ensure their portfolios are comprised of companies with diverse growth drivers.
“It’s also region-dependent, as Europe and the US, for example, are potentially more exposed to slowing economic growth, whereas the dynamics in Japan, both from an inflation and growth perspective, are different. We are seeing opportunities as Japan’s economy continues to benefit from re-opening.
“Diversification is key in this market. We are finding compelling bottom-up opportunities with diverse drivers of earnings growth, including companies that are benefiting as economies in Asia re-open, trends towards near-shoring, and an acceleration in demand for medical procedures post-Covid.
“Small caps have lagged their large cap peers, but that may create opportunity for small cap investors. The headwinds that have weighed on small cap performance, including inflationary pressures, appear to be easing. The combination of attractive small cap valuations and a wide range of small cap companies with accelerating earnings growth bodes well for small cap returns,” he said.
In addition to the changing macro-economic outlook, Mr Gurwich also sees both risk and opportunities for companies related to AI.
“Investors need to understand which companies may benefit from the adoption of AI, and to analyse how material the impact will be on company fundamentals.
“Potential beneficiaries include select semi-conductor and data center companies. It’s also important to consider the risk that adopting AI may present to companies, including lower-end software developers or online education companies.
“The integration of AI has the potential to improve the quality of services and, in turn, translate into commercial success. However, it is important to differentiate between hype and reality by objectively focusing on company fundamentals.
“Within information technology we are also identifying companies whose earnings growth is supported by increased spending tied to logistics software and cybersecurity,” he said.
