Investors “not out of the woods” ahead of Q3

Yasmine Raso

Senior Journalist, Financial Newswire

12 July 2023

American Century Investments’ Co-Chief Investment Officer – Global Growth Equity, Patricia Ribeiro, has offered the investment manager’s outlook for investors ahead of 2023’s third quarter.

Forecasting that ongoing market volatility will continue due to persistent inflation, tight monetary policy, continuing geopolitical tensions and pressed labour markets, Ribeiro said investors still remain pessimistic on the potential for a “soft landing”.

“We have reason to believe these headwinds will abate eventually,” she said.

“Even though the Federal Reserve (Fed) paused its aggressive rate-hiking campaign in June, investors worry that excess tightening could choke off earnings and usher in a recession.

“The outlook remains uncertain regarding the “stickiness” of demand. Businesses warn of uncertainty around discretionary spending. Management mentions of labour shortages during earnings calls fell to their lowest level of the pandemic recovery period, boding well for companies squeezed for reliable workforces for three years or longer.

“The services industries, such as health care, retail, hospitality and restaurants, stand to be among the earliest and largest beneficiaries.”

Despite a dreary outlook for the next quarter, Ribeiro maintained some optimism was in store for investors with a decrease in excess semiconductor inventory set to strengthen earnings; restored supply chains and the support of “strategic industries” flagged by the Biden administration supporting a rise in chip sales; and revived customer activity in China and Asia boosting retailers’ sales, reducing inventory and sustaining pricing power.

Ribeiro said this has led the key theme of AI and big data to fight through the furore and dominate investors’ decision-making.

“[AI and big data] will affect physical infrastructure, such as servers and semiconductors, as well as software and applications,” she said.

“Integrating AI could potentially improve the quality of services and translate into commercial success. However, the AI opportunity is still in its early stages, and there are many questions about how it can be monetised.”

American Century’s outlook for emerging market economies also compared China’s slowdown, falling investor sentiment and need for policy easing to prevent further decline of the labour market to the economic improvement noted in India which has boosted its outlook for the quarter.

“The market’s perception that China’s recovery is losing momentum will likely encourage policymakers to take steps to stimulate demand and boost confidence in the economy,” she said.

“[India is] approaching the peak of interest rate tightening cycles, and rates should retreat in the year’s second half. Relative valuations have improved in India. Earnings and growth surprises have turned positive. Domestic demand is strong, driven by a young, well-educated consumer base and workforce.

“India is also benefiting from reshoring. Tesla has proposed establishing a factory in India, and Cisco has announced plans to build manufacturing capabilities in India. Foxconn will also increase its assembly of Apple products in India. Already robust consumption growth should be further boosted by the recovery in rural demand as the drag from higher inflation on income fades.”