Multi-Asset Strategies Outlook

Explore Our investment Outlook

Reflation Doesn’t Necessarily Equal Inflation

Thanks to the vaccine rollout, an economic recovery and even more government stimulus on the way, it seems we are finally transitioning to a post-pandemic “normal.” So, why are financial markets experiencing such volatility? Well, just as economic conditions are normalizing, so too are bond yields. The 10-year Treasury yield is now at levels last seen before the pandemic in January and February 2020. Of course, the Fed erring on the side of jobs and growth would be a nightmare scenario for bond investors, potentially allowing for much higher inflation.

But reflation—rehabbing a damaged economy—isn’t the same thing as an inflation shock. Think of it like reinflating a bike tire when it’s flat—adding some air is necessary to get back on the road. Inflation is akin to continuing to pump up a tire that’s already under pressure. But the job market and manufacturing activity show serious excess capacity. So, we don’t believe the economic tire is already fully inflated or under significant inflationary pressure.

Assuming we’re correct and investors should be positioning for economic reflation rather than surging inflation, where should investors look? Our shorter-term, six- to 12-month tactical forecasts shown below generally argue for sticking to a balanced diversified approach, with a few exceptions. Our longer-term three- to five-year capital market forecasts show U.S. smallcap and non-U.S. equities offer the highest potential returns, while U.S. high-yield and investment-grade corporate bonds offer attractive risk-adjusted returns.

Asset Class

Low interest rates, combined with the prospect of an economic recovery and rising inflation expectations, have many investors questioning their bond allocations. Fixed income holdings are not justified solely on the level and direction of rates, but as a way to diversify equity risk. And, after the recent jump in yields, we think bonds are more attractive relative to equities than they’ve been in some time. Our long-term strategic allocations are carefully calibrated to pursue risk-adjusted performance over time, and we see no reason to abandon bonds or move off this positioning now.

Equity Region

Successful vaccine rollouts and the constructive resolution of Brexit have significantly improved the relative position of developed market equities relative to the recent past. The broad global economic rebound is likely to present attractive opportunities among more economically sensitive developed market equities, which have lagged the U.S. Nevertheless, strong U.S. economic fundamentals and earnings growth continue to support an overweight position in U.S. equities, if less than in previous months.

We maintain our long-term strategic allocation to EM equities relative to U.S. stocks. A robust global economic recovery would bode well for EM stocks, but we’re not quite there yet—progress on vaccines and the pandemic is uneven across the developing world, meaning the much-needed rebound in consumer spending has yet to take off there. So, while the fundamental view of our EM equity team is positive, we need to see improvement show up in the data before we move off neutral.

U.S. Equity Size & Style

Our long-term neutral strategic allocation provides exposure to small-cap U.S. equities, capturing the attractive risk and return characteristics and diversification benefits they tend to offer over time. So, while we have some exposure here, our quantitative models remain firmly neutral by market cap. This is an allocation we continue to monitor carefully as we hear the qualitative arguments for an overweight to small-cap stocks, relating to improving economic data.

Our tactical allocation model is neutral with respect to stocks by style after having been overweight large-cap growth for over 1.5 years until late 2020. Value stocks have done well relative to growth as the economic rebound gathers pace, erasing some of the relative valuation gap between the two. Despite the neutral short-term view, it’s worth pointing out that our three- to five-year capital market assumptions show a preference for value over growth, with higher risk-adjusted returns across the capitalization spectrum.

Fixed Income

Across the developed world, we are broadly underweight government bonds and neutral to overweight inflation-protected securities and corporate credit. Our fixed income team’s fundamental view is that improving growth will continue to put upward pressure on government bond yields, while benefiting more economically sensitive corporate bonds.

We argued the REIT selloff was overdone for much of 2020. Several months later, our overweight has paid off, so the relative valuation argument for REITs is less compelling. Higher interest rates also reduce the appeal of REITs relative to bonds.

Q2 2021 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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