Developed Non-U.S. Equity Outlook

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Assessing How the New World Will Look

After experiencing one of the worst quarters in history in the first quarter, stocks rebounded strongly in the second quarter. The peak-to-trough decline of the S&P 500® Index (roughly February 19 to March 23) saw the fastest bull to bear market transition ever recorded. Subsequently, stocks recovered swiftly amid declining infection rates and promising vaccine news.

We remain selective, taking advantage of price dislocation in some high-conviction ideas where we believe the long-term investment thesis remains intact. Our focus remains on businesses with sustainable earnings and business models proving to be resilient.

As we emerge from the first phase of the pandemic, we’re considering how coronavirus has changed the world. Mandatory shelter-in-place orders dramatically rearranged lives and many workers transitioned to working from home. That development has raised questions about the future of the work environment. Commercial real estate demand, businesses dependent on central business district traffic, public transportation usage, and already-challenged brick-and-mortar retailers will be different going forward.

The pandemic has also called into question the near-term fortunes of industries reliant on face-to-face contact and human proximity, such as travel, leisure, entertainment and hospitality. Unemployment hovers at Great Depression-era levels, and even those people still working are rethinking new purchases. Retirement savings took a huge hit during the initial market decline. Ten thousand baby boomers, a large component of the global consumer force, turn 65 each day. As they review their financial situations going into retirement, many may increase savings and forgo purchases, further pressuring consumer activity.

Considering the current uncertainty and volatility, we believe the best course is to maintain our investment process to uncover opportunities with strong underlying fundamentals. These include companies with innovative products and processes, those with pricing power, and those aligned with the changing world. We continue to find opportunities in businesses that facilitate remote working and learning, including cloud-based services, food and grocery delivery, and those exposed to 5G network rollout. E-commerce and digitalization continue to accelerate. Health care companies exposed to vaccine exploration, outsourcing, tools and devices, and telehealth are also attractive.

We believe companies that make it easier to work, shop, learn, eat and play at home will have advantages over traditional offerings for some time. Overall, we’re focused on keeping a long-term investment strategy despite short-term disruptions. 

Several Factors Could Affect the Path of U.S. Equities

COVID-19 has profoundly affected the U.S. population and economy. Yet, U.S. stocks rebounded strongly through mid-June, reclaiming much of the value given up during the correction in March. As we begin to emerge from the worst of the crisis, there are some questions we are trying to answer as we attempt to see how U.S. stocks react.

Will we experience a major second wave of the pandemic? It’s unclear whether the virus will fade or to what extent reopening will result in a spike in new cases. A strong second wave could undo the renewed investor confidence seen recently and force some very difficult decisions about choosing between economic strength and public health.

What effects will the government’s stimulus and Fed’s extraordinary accommodation have on the economy over the long-term? The Treasury and the central bank have taken bold steps to support the economy. These have had a positive effect on stocks, but many economists worry about the long-term effects of injecting so much cash into the system. And, with many businesses essentially closed for months and tens of millions of Americans out of work, it remains to be seen if we will see more volatility or if the recent recovery is sustainable.

Will renewed tensions between the U.S. and China boil over? The U.S. administration has overtly blamed the pandemic and resulting economic disaster firmly on China. This has led to saber-rattling about renewing trade disputes and possible new punishments and sanctions. Not surprisingly, China has asserted that it would respond to any such measures with similar actions.

We’re focused on businesses with strong, sustainable earnings streams and those well positioned for reopening and a return to economic growth in their local markets. We think it’s important to take a cautious approach to those companies with exposure to global trade.

Q3 2020 Investment Outlook Resources

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.

Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.

As with all investments, there are risks of fluctuating prices, uncertainty of dividends, rates of return and yields. Current and future holdings are subject to market risk and will fluctuate in value.

Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.

Diversification does not assure a profit nor does it protect against loss of principal.

Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

Past performance is no guarantee of future results. Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds. 

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

This information is for educational purposes only and is not intended as investment or tax advice.

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