Victor Zhang

In its second 2025 investment outlook, the $263 billion* global asset manager American Century Investments offers guidance on navigating the policy and market uncertainty on tariffs, federal spending cuts, interest rates and more. Advising patience and warning against reactionary moves, the company’s investment officers see opportunities in bottom-up stock selection of high-quality businesses, especially in overlooked asset classes.

“Policy uncertainty is affecting the market’s psyche. After years of Federal Reserve news dominating the market discussion, trade and fiscal manoeuvring play more prominent roles,” said Victor Zhang, chief investment officer of American Century. 

The market doesn’t react to uncertainty uniformly and the source of uncertainty could impact forecasts of market volatility, according to Rich Weiss, chief investment officer of multi-asset strategies for American Century.

“Although market volatility has been present over the past year, it’s important to clarify that economic uncertainty rather than policy changes have driven these movements. There is strong evidence that markets will likely ignore all policy announcements unless there is a clear connection to economic growth or corporate profits,” said Weiss.

Figure 1 shows the sharp disconnect between a widely used metric of policy uncertainty (Global Economic Policy Uncertainty, or Global EPU, Index) and U.S. stock market volatility, as measured by the CBOE Volatility Index (VIX), through January. 

Uncertain tariff policy complicates efforts to balance risks and opportunities

The possibility of additional tariffs continues to suggest multiple outcomes. Charles Tan, co-chief investment officer for global fixed income for American Century, named several possible risks: “U.S. tariff policy also poses a near-term threat to inflation, the domestic economy and global growth. Tariffs likely will affect corporate revenues outlooks and economic growth rates, particularly in the short term.” 

Tan also noted several potential opportunities: “We expect the Trump administration to use tariffs as negotiating tools to secure favourable trade deals, security provisions and other agreements for the U.S. Implementing tariffs will also provide a means for the administration to raise revenues to help pay for tax cuts.”

Ultimately, both Tan and Patricia Ribeiro, co-chief investment officer for global growth equity for American Century, hold moderating perspectives. 

“Though tariffs and trade have captured headlines in the new year, no nation can completely isolate itself and thrive with domestic production alone. We believe this view will eventually prevail,” said Ribeiro. 

Tan added, “Some market observers believe the financial markets remain blindly optimistic and oblivious to mounting risks, particularly from tariffs. Others carefully digest all the commotion, believing the eventual outcome will likely be benign. We are gradually moving toward the more measured latter view.”

Uncertainty over extent of government spending cuts challenges blind optimism

One caution against “blind optimism” is the work of the Department of Government Efficiency (DOGE). As American Century’s global macroeconomic outlook explains, “Government spending has been a key driver of economic growth over the last few years. Furthermore, alongside health care, government employment was a major component of job gains over the same period. So, if DOGE curtails expenditures and government headcount, growth could slow, and the labour market could weaken.”

“Federal government spending has been a significant component of U.S. gross domestic product in recent years. Accordingly, DOGE-related spending cuts could pressure the nation’s GDP,” said Tan. 

Uncertainty spurs Fed’s flexible strategy on rates

The chief investment officers see the Federal Reserve preparing for this uncertainty by giving itself “maximum flexibility.” Although expecting an interest rate cut of half a point this year, Tan forecasts the number could double.

“Fed officials appear committed to a cautious, wait-and-see approach that affords the central bank maximum flexibility. The pace of the economy’s slowdown and the magnitude of DOGE spending cuts will likely influence the Fed’s strategy,” said Tan.

Similarly, the global macroeconomic outlook expects at least two more rate cuts later this year but cautions this could change: “If trade policy and government spending disruptions trigger a sharp slowdown in growth, proving the pause was a mistake, the Fed may ease more aggressively.” 

Active management seeks to avoid reactionary changes while looking for opportunities in uncertainty

While advising patience and staying the course, American Century’s chief investment officers also highlight ways to look for opportunities within this uncertainty. Investors can work with an active manager to utilize bottom-up stock selection of high-quality businesses, especially in overlooked asset classes.

“We take our own advice when investing our clients’ assets: We focus on individual securities rather than betting on the direction of policy,” said Zhang.

Bottom up:

• “In an uncertain environment, when the overall market may become more challenging, bottom-up stock selection assumes even greater importance. Fundamental analysis can help identify growth drivers and the specific companies benefiting from these forces,” said Ribeiro.

High-quality businesses:

• “In this environment, we believe high-quality businesses with agile management teams will likely fare better,” said Keith Lee, global growth equity co-chief investment officer of American Century. “Investing in well-managed, competitively advantaged companies that can sustain growth and profitability may offer the best strategy for dealing with market uncertainties.”

Overlooked asset classes:

• “We haven’t seen a market this concentrated since the dot-com bubble,” said Kevin Toney, global value equity chief investment officer of American Century. “History shows that periods of volatility that tend to follow extreme market concentration can lead to outperformance for overlooked asset classes.” 

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Victor Zhang

With little more than a month to go until the U.S. election, head-of-state elections in other countries this year have shown that even significant or surprise election results don’t lead to long-term market upheaval.

Victor Zhang, chief investment officer of American Century, looks at election results and market impacts in India, the U.K. and France, noting that whether the election results were a landslide or slim victory, a surprise or as expected, the market impact has been temporary.

“While these results have tremendous implications in each country, they haven’t triggered sustained moves in global markets. U.K. investors had already priced in Labor’s victory, whereas the tighter races in India and France produced somewhat surprising outcomes and spurred temporary bouts of volatility. Temporary is the keyword. Market volatility is typical during election season, but the market has historically returned to more typical patterns during the year after votes have been counted,^[1]” said Zhang.

According to American Century data analysis of the presidential elections from 1932 to 2021, it isn’t merely that election-related volatility will end soon after an election. In fact, sitting out of the market before and after an election has historically resulted in underperformance, with investors better off staying invested throughout the election season.

“We studied the results of staying fully invested in stocks versus going to cash for six months before and after a presidential election. Despite elevated volatility during this span, being fully invested outperformed by a wide margin. Similarly, choosing to be in cash before or after the election underperformed the fully invested approach,^[2]” said Zhang.

Fundamentals of asset allocation Trump efforts to profit from election-related volatility

At the same time, American Century’s chief investment officers assert it is difficult for an investor to leverage election-related market volatility to ride the highs and avoid the lows.

“Data shows that trying to get in and out of the market based on the election calendar doesn’t work as well as riding out the uncertainty,” said Zhang. “With all this in mind, the sound investment strategy for election years goes back to the fundamentals of asset allocation. That means accounting for the time horizon, the purpose of the funds you’re managing and your tolerance for risk.”

Agreeing that investing based on political prognosticating is ill-advised, Keith Lee, global growth equity co-chief investment officer, elaborated on the connection between identifying solid businesses and their likelihood to successfully navigate various political outcomes.

“As we near the end of the electoral season, clients ask what we’re doing about the elections and how we’re positioning for this or that political outcome. But that’s not how we manage money, and we don’t believe you should either,” said Lee. “Rather than focus on political headlines, we put our energy into identifying good businesses. We believe companies with solid long-term growth prospects are more likely to generate wealth for our shareholders over time. These firms are also better situated to ride out electoral or economic uncertainty.”

Similarly, Patricia Ribeiro, global equity co-chief investment officer of American Century, advises investors not to lose sight of more significant indicators and drivers of market movements, even if they don’t compete with the overwhelming attention on the election’s impact to markets.

“The U.S. presidential campaign will dominate the news cycle and could be a source of volatility throughout the fourth quarter. In the long term, however, demand for goods and services has a much more significant impact on investment results,” said Ribeiro.

Don’t sleep on real policy-related market impacts

American Century does not use anticipated election outcomes in its investment process because it doesn’t believe it leads to better performance, but that doesn’t mean policies don’t impact the market. For example, Ribeiro points out that tariff and trade policy is unique because of the ease a U.S. president has in unilaterally effecting change.

“Candidates’ views on trade and tariffs are worthy of attention because the president doesn’t need a cooperative Congress to enact policy. So, whoever moves into the Oval Office on January 20, 2025, will have the authority to act unilaterally on an issue with significant economic implications.”

Lee looks at productivity as a solution to our aging society and shows how productivity offers benefits to both workers and businesses, but that relationship is influenced by policy. “Policymakers have a role in how the costs and benefits of productivity gains are distributed throughout the economy. For example, before the 1980s, productivity and wage gains went hand in hand. But policy changes since then have weakened the relationship. The point is that policy choices go a long way toward determining who benefits from rising productivity and to what extent.”

Another area where American Century is tracking a policy that could impact markets is in mergers and acquisitions. Kevin Toney, global value equity chief investment officer of American Century, noting that while the evidence is mixed and unclear, “The outcome of the November election may affect the climate for corporate mergers in 2025 and beyond, although we don’t necessarily think investors should base their investment decisions solely on this issue.”

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Notes:
[1] FactSet, U.S. National Archives, Library of Congress, American Century Investments.
[2] Based on data from 4/30/1932 – 12/31/2021. Source: FactSet, Ibbotson and Associates, Inc., U.S. National Archives, American Century Investments. Four hypothetical investor scenarios were analyzed for each presidential election since 1932. Each hypothetical investor invests $10,000 six months before the presidential election and remains invested in stocks or cash for the six months before and after the election.

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Victor Zhang

Investors can expect political rhetoric to ramp up, both in the U.S., where both party conventions will occur this quarter, and across the globe, which will see head-of-state elections this year in countries representing 60 per cent of the global economy, according to the latest Q3 investment outlook from American Century Investments.

Despite any changes these elections may portend, American Century would not recommend political prognostication portfolio adjustments.

“Historical data indicates that market volatility tends to pick up through Election Day but typically decreases afterward,” said Victor Zhang, chief investment officer of American Century. “The same research also shows that staying invested throughout the election year has delivered better results than attempting to manoeuvre in and out of the market. So, we wouldn’t recommend that investors adjust their portfolios in anticipation of or in response to the turmoil.”

Staying the course despite election twists and turns; political risk small part of overall investment analysis

One reason moving in and out of the market can do more harm than good is because of the difficulty of accurately predicting a series of outcomes: who will win an election, the policies the winner will be able to put in effect and the impact those policies would have on business performance.

“India’s surprise results remind us that investors shouldn’t bet on election outcomes with their portfolios. A lot could change between now and November; even those who correctly guess the outcome would have difficulty handicapping the policy impacts on individual businesses,” said Zhang. “In the end, the performance of individual companies drives investment results.”

Keith Lee, global growth equity co-chief investment officer of American Century, explains that though actively monitoring risk exposure and quantifying political risks such as the impact of tariffs are important, the most significant part of the analysis is the individual security.

“We believe the companies we own have the potential to outperform their competitors because they’re strong companies, not because of political factors. Our North Star is owning good businesses. We believe such companies — those with strong competitive positions and strong balance sheets — possess fundamental business strengths that make them well-positioned to ride out many risks,” writes Lee.

Passive investments may miss AI surprises

The chief investment officers at American Century make the case to look beyond the biggest, most obvious winners in the AI theme to under-the-radar smaller cap companies.

“AI is driving earnings growth for small- and mid-sized companies in developed and emerging markets. Many are businesses that investors using a passive investment approach might miss,” said Zhang.

Additionally, Kevin Toney, global value equity chief investment officer of American Century, points out that AI may boost the “relatively snoozy” utility sector with a growing demand for electricity for the first time in decades. However, utilities may need more transmission capacity and regulated utilities may be more limited than independent power producers.

“For now, we think utilities can be an unexpected beneficiary in the wider frenzy over AI. For the first time in decades, AI may drive significant new demand for electricity,” said Toney. “Other factors are also driving electricity demand. Electric vehicles will significantly increase the need for electricity, especially as demand for them picks up from their current doldrums. The reshoring of manufacturing and supply chains, such as semiconductor plants and electric vehicle plants, is also amplifying electricity needs. But AI leads the surge.”

Read the report.

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Victor Zhang

American Century Investments, a $200 billion^[1] global asset manager, expands its investment lineup with the launch of a new strategy for its clients around the world: American Century Global Sustainable Value Equity strategy.

“We are excited to introduce a new global value capability that offers clients a differentiated value proposition by investing in companies we believe are well positioned to benefit financially from a transition to more sustainable business practices,” said chief investment officer Victor Zhang.

The Global Sustainable Value strategy will apply a best-in-progress approach as it seeks to deliver attractive financial returns while contributing to positive sustainability outcomes across every sector of the economy. The strategy will maintain 45-75 securities and will be managed by global value equity chief investment officer Kevin Toney,  senior portfolio manager Michael Liss and portfolio manager David Byrns.

“The team will leverage our proprietary Improvement Pathway (IP) framework to identify companies that recognise the importance and value of transitioning their business operations to support a more sustainable economy,” said Byrns. “This is an opportunity for our clients to invest in a best-in-progress sustainable strategy that will strive for outperformance while delivering downside risk management and lower volatility.”

The investment team will work in partnership with American Century’s sustainable research team to identify companies for the new strategy.

“Instead of focusing on companies that are already known as sustainability leaders, we are seeking diamonds in the rough – companies that are committed to improving the sustainability of their business,” said head of sustainable investing Sarah Bratton Hughes.

———–

Notes:
[1] Assets under supervision as of 10/27/2023.

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View election results and government policy as inputs rather than drivers of your decision-making.

The tide has gone out on the U.S. presidential election’s blue wave scenario. If Joe Biden’s apparent victory withstands legal challenges, he will assume the presidency with a Democratic majority in the House of Representatives and an undetermined power structure in the Senate. This likely takes a “policy revolution” off the table, but he can still drive change.

The market prefers certainty

So far, global equity markets have taken the extended vote-counting period in stride. But we know markets don’t react well to uncertainty, so we should be prepared for volatility if any of President Donald Trump’s election challenges gain traction.

Control of the Senate also is unknown. Administrators are still tabulating results in a few other races, but Georgia’s two seats will be decided in a Jan. 5, 2021, runoff. These special elections will likely determine the Senate’s balance of power with the potential for a 50/50 split and Vice President Kamala Harris serving as the tie breaker. Democrats maintained their House majority, though it is diminished.

Even with these unknowns, we’re now in a better position to look more closely at what a Biden presidency might mean.

Can Biden revive bipartisanship?

Though working across the aisle sounds daunting in a hyper-partisan environment, Biden has decades of experience in the Senate and has pledged to work with Republicans on Capitol Hill. Failing that, he won’t be powerless to pursue his agenda. Passing significant pieces of legislation will be difficult, but as Trump has demonstrated, executive orders, cabinet department staffing and the authority to pull the levers of government are powerful tools for shaping policy.

COVID-19 relief and stimulus

If negotiators can’t work out a deal before Trump leaves office, one of Biden’s first tasks will be brokering a stimulus package. A deal is likely, but we believe the size and scope will be much smaller than the one that would have been struck with solid Democratic majorities in both houses of Congress. The greater likelihood of scaled-back spending helps explain the post-election underperformance of cyclical stocks that would have benefited from a larger deal.

Taxes

Biden’s proposals to raise taxes on corporations and high-earning individuals aren’t likely to come to fruition. This removes a potentially significant headwind to corporate profits and economic growth.

Health care

While his ability to expand coverage under the Affordable Care Act (ACA) will be limited, Biden will end further federal efforts to weaken it. We believe the ACA is positive for many corners of the health care sector since broader insurance coverage results in more people seeking care and saddles providers with fewer uncollectible bills. Republicans and Democrats share some common ground on drug prices, so price controls remain a risk for pharmaceutical companies.

Technology

Tech companies face a lessened threat of higher taxes, but the risk of tougher antitrust enforcement remains. There’s also the potential for regulatory pressure related to privacy issues and the treatment of gig economy workers. On the positive side, Biden supports electric vehicles, 5G technology and artificial intelligence. He may loosen Trump administration immigration policies that tech companies believe hamper their ability to recruit the best talent from around the globe.

Regulation

The Biden administration’s view of regulating businesses will diverge from that of the Trump White House. The energy and financials sectors provide good examples. Biden is an advocate for the U.S achieving net zero greenhouse gas emissions by 2050, so we expect a tougher stance on fossil fuels and more support for electric vehicles and alternative energy. The financials sector is another area that could face greater scrutiny after seeing an easing of some regulatory burdens under Trump’s watch. This could include restoring certain provisions of the Dodd-Frank Act implemented following the 2008 financial crisis.

Trade

Biden has some protectionist tendencies. But he has pledged to repair relationships with traditional U.S. allies and work jointly to convince China to change its practices.¹ Importantly, a Biden presidency removes some uncertainty from trade discussions because we expect that he’ll bring a more stable and predictable approach to the negotiating table. He also has indicated a desire to use trade policy as leverage with China to gain its cooperation on global climate initiatives.

Success depends on execution, not government policy

As investors, we view election results and government policy as inputs rather than drivers of our decision-making. Some companies manage through legislative and regulatory hurdles better than others even within seemingly politically advantaged or disadvantaged industries.

Beyond any near-term upheaval from this election, every company’s task—and ours—is made even more difficult by the pandemic’s uncertain path and progress in the discovery and delivery of treatments and vaccines. As we build our portfolios, we’ll be evaluating companies and management teams based on their ability to navigate this complex landscape.

By Victor Zhang, chief investment officer

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