Understand emerging markets opportunities and the American Century advantage.
By Brent Puff - January 10, 2019
As we head into 2019, equity markets are pricing in a decidedly pessimistic outlook with regards to the global economy and the pace of growth in corporate profits.
The market’s pessimism is a by-product of the following factors:
While we acknowledge the pace of growth is likely to slow in 2019, we do not believe recession is lurking around the corner. We also believe that the abrupt and broad-based sell-off in equity markets has created opportunities to invest in great companies at attractive valuations that are likely to continue to be successful, even as the overall pace of growth moderates.
In my latest video, I outline these issues in more detail and discuss why we believe the market’s fears might be overblown.
Market expectations are low. There's an extraordinary amount of pessimism in the market. I think it's going to take very little positive news on the economic front or the trade front to improve the outlook for equities.
Equity market returns around the world continue to be driven really by three principle fears. The first fear is concern that the U.S. Fed is going to make a policy misstep. In other words, tighten too much into what is a slowing global economy. The second fear that dominated equity markets as we exited 2018 was concern that the US and Chinese trade dispute will continue to escalate, and finally the third fear in the marketplace that has contributed to difficult markets is concern that the economic and corporate profit cycle is mature, slowing down, and the risk of recession is growing looking forward.
Our perspective on those three fears is as follows. First, the risk of Fed policy error in our opinion is overplayed. The Fed is a data-dependent organization. They will adjust policy as the information changes.
On the trade front, we believe trade is probably the single biggest risk as it relates to equity markets in 2019. It's our view that the likelihood of a trade deal is higher than the prospects for a protracted escalation in tariffs in 2019.
And in regards to the third fear, i.e. that economic and corporate profit growth is slowing, that is indeed the case. But importantly, we do not believe the global economy or the corporate profit cycle is going into a downturn. We simply believe that the pace of growth is slowing. In that environment, we think equity returns can continue to be favorable.
A company we like right now is Real Page. Real Page is a leading provider of software solutions to the rental apartment business. Their products are used by building owners to prospect for new customers, to maximize rental yields across their properties, and to do things like collect payments and manage service requests for their tenants.
They have a leading position in the marketplace. The market in which they operate is large and under-penetrated, and they have a business model that is durable and resilient. Roughly 90%, a little bit less than 90%, of their revenues are recurring in nature, i.e. subscription driven, and they have very high renewal rates in the mid-90s. We think the future growth prospects for Real Page are highly sustainable and durable for the next several years.
Another company we like is GDS. GDS is the leading operator of carrier neutral data centers in China. So, demand for data center capacity in China is growing very rapidly, driven by greater cloud adoption and internet customers. The data center market in China relative to developed markets is a lot less penetrated, so we believe looking forward there is a lot of opportunity for GDS to grow sustainably and profitably for the next several years, and like Real Page, it has a very durable, sustainable business model.
I think there's no question there's been somewhat of a disconnect between operating fundamentals and equity performance. The most telling example of that is that valuations around the world have compressed very materially. Corporate profits grew at a relatively robust pace in 2018, and yet equity returns around the world were generally under a lot of pressure. So, stock markets and stock valuations are cheaper today than they were a year ago—and in certain markets like the U.S., materially cheaper than they were a year ago. That's actually a healthy starting point for the market in 2019.
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Despite the first quarter market rally, Global & Non-U.S. Equity Portfolio Manager Brent Puff notes slowing global growth. What’s that mean? The pace of corporate profits is under pressure, which means a more difficult backdrop for equities.
Market expectations are low coming out of 2018. Sr. Portfolio Manager Brent Puff explains the potential implications for global growth markets in 2019.
January 10, 2019
The first quarter was a wild ride for equity markets. VP and Sr. Global & Non-U.S. Equity Portfolio Manager Brent Puff looks at what’s causing volatility, what it means for the equity market and how it presents a chance to be opportunists.
April 03, 2018
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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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