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Global equity market volatility tipped to continue

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American Century has shared its global market outlook for the third quarter, which the US-based asset management firm expects will be characterised by ongoing volatility.

Volatility in global equity markets is forecast to continue throughout the third quarter, according to a new market outlook published by American Century.

The US-based asset management firm has predicted that the ongoing issues of elevated inflation, historically high interest rates, geopolitical challenges, and squeezed labour markets will continue to pose a challenge for global equities over the coming months.

However, Patricia Ribeiro, co-chief investment officer of global growth equity at American Century, asserted that these major headwinds are expected to begin to ease eventually.

“While we see some encouraging signs for stocks worldwide, we’re not out of the woods. Revised data shows that the eurozone contracted during the fourth quarter of 2022 and the first quarter of 2023,” Ms Ribeiro said.

“Accordingly, investors are pessimistic about the likelihood of a soft landing. 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.”

According to Ms Ribeiro, investors have a number of reasons to be optimistic about the second half. In particular, she pointed to a reduction in excess semiconductor inventory, which is expected to support company earnings during the upcoming period.

“Repaired supply chains and the Biden administration’s support of ‘strategic industries’ also support an upturn in chip sales. Renewed consumer activity, especially in China and Asia, is helping retailers reduce inventory, increase sales and maintain pricing power,” she added.

But adding to the unpredictability of the outlook, Ms Ribeiro said, is the “stickiness” of demand, with businesses indicating their uncertainty in regard to discretionary spending.

Key emerging markets poised for growth

Turning to emerging markets, American Century suggested improving economic conditions in countries like India and Brazil have helped to strengthen the outlook for the third quarter.

“Both of these jurisdictions are approaching the peak of interest rate tightening cycles, and rates should retreat in the year’s second half,” said Ms Ribeiro.

“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.”

Ms Ribeiro noted that Brazil’s economic growth data had been revised higher, with corporate earnings in the country higher than anticipated and inflation lower than had been predicted.

Meanwhile, regarding the world’s largest emerging market economy, Ms Ribeiro indicated that China’s recent economic slowdown was expected to drive additional policy support.

“Amid the current tepid pace of recovery, global investor sentiment toward China remains weak. Manufacturing sector weakness and a deteriorating labour market should trigger policy easing, which will be necessary to prevent the labour market from further deterioration,” she said.

“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.”

In a recent analysis piece published by InvestorDaily, Daniel Graña, a portfolio manager from Janus Henderson, explained how emerging markets are embracing innovation, deglobalisation, and decarbonisation to position themselves for future growth.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.