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Peter Hardy, senior client portfolio manager for Global Value Equities, American Century Investment.
Explicit outlooks, macro outlooks don’t really play into how we make decisions in our portfolios. We determine a normal and a downside scenario for each company in our quality universe of stocks, and then pick the best risk returns based on that view of market reality, as opposed to making macro calls and getting whipsawed by changes in the environment or speculative behavior. With that in mind, the returns for stocks beyond the intermediate future is hazy. What we know for at least the intermediate future, the next quarter or so, is that inflationary forces around the world are leading most central banks to rethink the current monetary policies. A world where quantitative easing or easy money is giving way to quantitative tightening or more constrained access to money. And that should lead to more volatility.
In the US, for example, inflation has been running at its highest level since the 1980s, with nearly every price cohort experiencing increases, wages, rents, cost inputs due to supply chain pressures, commodities, et cetera. This has led the Federal Reserve to accelerate the ending of asset purchases and bring forward the prospect of interest rate increases. It has also caused the stock markets to sell off, as we go from an environment where money is looking for a home to an environment where money is being removed from the system. I would anticipate volatility to continue as we go through this process. However, what occurs after will be the real question. Can economic growth remain solid in the midst of this normalization? Do inflationary forces moderate in the second half of the year based on the change in monetary tack? Are there unanticipated consequences worldwide, like we’ve already seen with Evergrande in China, will those appear? And those will be the questions that need to be answered beyond the intermediate future.
To a certain extent, emerging market economies have seen the impacts of inflation first, and some countries have experienced pain earlier. The ECB has not indicated the same desire to end easing as the Fed, due to slower growth in Europe, although inflation is being experienced there also. These markets may hold up better in the interim, as we sit here at the end of January, 2022. And that’s been the case. Nearly all developed markets are down, with the US being down slightly more, as a rule. What happens going forward? So with all that why and why not gibberish, my simple answer is, I anticipate volatility to continue. And typically in periods of volatility, the US becomes a safe haven for investors. So beyond the intermediate future, the next year or so, I would anticipate the US stocks to benefit versus the rest of the world.
In general, the sell-offs in 2022 have been a repositioning by investors from risk assets to less risky assets. And in this environment, we’ve seen both value outperform growth, but more importantly, quality value stocks versus low quality value stocks, which outperformed early in the year in 2021, have been the beneficiary. Many of these stocks have attractive relative valuations and have been disregarded by investors. So as the market redefines the discount rate — where interest rates normalize, where monetary policy ultimately ends — you should continue seeing value stocks and quality value stocks outperform, but market volatility continue.