Global Equity Outlook

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Inflation and Logistics Pressure Global Recovery

Vaccination Progress Supports Stronger Economic Recovery…

The path out of the pandemic has been bumpier and more winding than we expected. Though cases in Europe were rising again at the time of this writing, many markets worldwide appear to be turning the corner toward recovery. Rising vaccination rates are helping improve mobility and boost economic activity.

While questions about additional variants and the threat of new spikes and lockdowns remain, the results of vaccination rollouts are encouraging. The evidence strongly suggests vaccines reduce the severity of symptoms and lead to lower hospitalization and mortality rates. In this light, we expect reopening to accelerate and economic recovery to continue to strengthen into 2022.

…That Should Drive Earnings Growth

Third-quarter 2021 earnings announcements showed two-thirds of S&P 500 companies reported higher profit margins than they did before the pandemic. A look at earnings reports shows a “v”- shaped recovery and then some. We expect this improvement to continue into 2022.

Pent-up demand, especially in hard-hit consumer-facing industries, such as travel and leisure, should continue to fuel economic expansion next year. Capital expenditure spending also continues to rise, which suggests businesses are anticipating normalization as well.

Higher Prices and Disrupted Supply Chains Remain Wild Cards

Whether inflationary pressures will be longer-lasting remains an open question. Nonetheless, we think current higher inflation and yield expectations could potentially pressure the recovery in corporate earnings. Higher raw materials and labor costs, partly caused by well-documented supply chain disruptions, could also dampen earnings growth. We do, however, believe there are opportunities in companies with the pricing power to pass on higher operating costs and thus sustain earnings growth.

Improving COVID Response Brightens EM Outlook

Emerging Markets Have Room to Grow

Variants continue to present uncertainty, but we believe they should not be as economically disruptive to EM economies as initially feared. As shown in Figure 1, improving vaccine procurement and distribution is helping reinvigorate the reflation and reopening trade as the economic recovery strengthens across emerging markets.

New cases data is improving in former hotspots. We expect this recovery will continue to strengthen as restrictions ease and mobility increases. Reopening represents an opportunity for emerging markets to make up for some recent underperformance relative to developed markets.

Figure 1 | Percent of Population Fully Vaccinated Against COVID-19

Data from 1/2/2021 - 11/8/2021. Source: FactSet, World Health Organization, Our World in Data.

China’s Fast-Changing Regulatory Environment

We think concerns that recent industry-specific Chinese government regulations are an attack on the private sector are overblown. However, we believe the regulations may already be priced into the market. Stated goals of the reforms include reducing financial risks and ensuring new businesses contribute positively to economic development.

Of course, China’s significant position in major benchmarks means any uncertainty would have an outsized impact on overall EM performance. The critical takeaway is that these issues are now well flagged. The regulatory framework is becoming more apparent, and major pieces of legislation appear to be set.

With improved visibility, we may be entering the beginning of the end of this regulatory cycle. Additional volatility is possible as the government implements new policies, so we are monitoring the situation closely. We remain cautious on exposure to China as a result.

EM Inflation Is Likely to Be Transitory

We expect higher inflation will likely continue to worry emerging markets as we head into the new year. We remain in the “transitory” camp regarding EM inflation and expect a return to the previous narrative of slowing inflation toward mid-2022.

Rising vaccination rates, elevated savings levels and low inventory pressures are all positive signals for inflation. But they are all short-term, so we think supply-side pressures should begin to ease. Consequently, we expect inflation across emerging markets to normalize in 2022.

Q1 2022 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.

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.

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.

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.

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