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."
