A World of Opportunities:Finding Growth Opportunities Outside the U.S. in a Decelerating Growth Environment

July 2019 Notes from the Global Growth Equity Desk

Key Takeaways§ Non-U.S. equities have underperformed U.S. equities over the last 12 months,

and the near-term outlook appears grim.

§ Despite this pessimism, our research suggests opportunities exist across numerous sectors in a variety of markets.

§ American Century Investments’ Non-U.S. Growth team is finding attractive opportunities where growth is driven by strong global secular trends and company-specific, idiosyncratic drivers.

§ The team adheres to a disciplined process that approaches investing from the bottom-up stock selection perspective. We believe our process can help identify opportunities in any market environment.

In this paper, we explain why we believe investing in non-U.S. equities has been challenging over the past year. We discuss how our investment process helps lead to identifying high-quality companies domiciled outside the U.S. that we believe represent attractive opportunities despite the current environment and provide four specific examples of companies that have seen positive earnings revisions: Neste, DSM, Symrise and Recruit Holdings.

Non-U.S. Equities Have Faced Challenging ConditionsThe overall market environment for Non-U.S. equities has been challenging over the last 12 months as shown in Figure 1. Stocks in both developed non-U.S. markets and emerging markets trailed U.S. stocks as deteriorating macroeconomic conditions weighed on companies outside the U.S.

“Despite this pessimism, our research suggests opportunities exist across numerous sectors in a variety of markets.”

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Laura Granger, CFA

Senior Client Portfolio Manager

Data as of 4/30/2019. Performance is in USD. Net of fee. Source Bloomberg.

The year began with the hope of a resolution to the U.S.-China trade dispute that had lowered expectations for growth. This optimism set the stage for a positive outlook for 2019 but was short-lived. Recent events, including rising concerns about trade and tariffs, Brexit uncertainty, and rising political tensions have led to a deceleration in global growth.

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Figure 1 | Non-U.S. Equities Have Significantly Underperformed the U.S.12-Month Total Return as of 4/30/2019

The Global Outlook Is GloomyThe macroeconomic backdrop appears challenging in all regions of the world. For example, in the eurozone, business confidence is weakening, CapEx trends are decelerating, and loan growth has moderated. Two major business sentiment indices, the IFO and the ZEW, illustrate Europe’s deteriorating outlook. See Figure 2.

IFO data from 12/31/2017 to 3/31/2019. ZEW data from 12/31/2017 to 5/31/2019. Source: Bloomberg, IFO Institute, ZEW.

In the U.K., failed Brexit negotiations have led to the prime minister’s resignation, injecting more uncertainty into an alreadyfragile economy. Japan, a market dominated by exports and companies exposed to factory automation investment, has seen orders decline. See Figure 3.

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Figure 2 | Conditions in the Eurozone Have Deteriorated

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Figure 3 | Japan Has Seen a Slowdown in Industrial Orders

Data from 12/31/2011 to 4/30/2019. Source: Bloomberg.

Finally, as shown in Figure 4, many of the “green shoots” in China we observed early in the year (suggesting stabilizing growth) have reversed trend. Auto sales are exhibiting double-digit declines, retail sales are weak and many media companies are experiencing decelerating advertising trends.

Auto data from 5/31/2018 to 4/30/2019. Retail data from 12/31/2017 to 5/31/2019. Source: Bloomberg.

So, Why Invest in Non-U.S. Equities?All these negative data points could lead some investors to question investing in non-U.S. equities. But this grim top-down outlook doesn’t mean there are no opportunities to uncover.

We believe countries outside the U.S. contain many exciting growth opportunities currently overlooked by investors focused onnegative macroeconomic and political headlines. These companies operate in multiple sectors, including technology, consumer, health care, materials and energy. Our approach to growth investing continues to find numerous opportunities that we consider attractive. This includes businesses that are benefiting from strong global secular trends and company-specific, idiosyncratic drivers.

A Solid Investment Process Can Identify Opportunities in Any MarketThe Non-U.S. Growth team approaches investing from a bottom-up stock selection perspective. Our philosophy is based on three core beliefs:

1. Earnings drive stock prices over the long term.

2. The direction of earnings growth is a more powerful predictor of stock price performance, and those companies with accelerating, sustainable growth outperform over time.

3. The market is slow to identify changes in fundamentals that lead to improvement or acceleration in growth and does a poor job of extrapolating those improved trends into earnings estimates, creating opportunity.

We focus on identifying inflection points in fundamentals that we believe will lead to accelerating, sustainable growth, where that improved growth is not yet reflected in consensus estimates. Entering a stock at the point of inflection in fundamentals, when the improvement is not yet fully reflected in consensus estimates may enable participation in positive earnings revisions and stock price re-rating.

Our process is fundamentally driven and focused on identifying four key attributes (ISGV):

§ Inflection in fundamentals that could lead to accelerating growth

§ Sustainability—the focus of our in-depth fundamental research

§ Earnings Gap—Do our models demonstrate upside to consensus estimates?

§ Valuation and risk/reward considerations

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Figure 4 | Trends Have Reversed in China

Our Process Has Helped Identify Many Diverse Investment OpportunitiesWhile our process doesn’t uncover every opportunity, and not every stock selection we make is successful, our process has helped us identify many exciting growth companies domiciled in Europe and Japan. Here are four examples where we believe our process has helped identify companies with compelling company-specific drivers that make them attractive in a challenging environment: Neste, DSM, Symrise and Recruit Holdings.

Neste: Our approach of identifying inflection early in a company’s growth cycle can sometimes lead to opportunities outside the typical growth sectors of the economy. One such name is Neste. Once a sleepy oil refining company, Finland-based Neste has transformed into a fast-growing refiner of renewables. I: We initiated our position in Neste as we noted the company increased capacity in renewables refining, which was leading to a mix shift away from low-margin oil refining to higher margin renewable diesel. S: We believe the growth is sustainable due to company-specific drivers and support from the regulatory environment in Europe and the U.S.

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The company has a proprietary technology that allows for multiple types of biodegradable feedstocks, allowing optimization of inputs to maximize margins. This gives the company a sustained cost advantage. In addition, recent regulatory changes in Europe and the U.S. that mandate the use of renewable fuels supports the long-term story.

The company is the top player globally with approximately 70% market share (Source: American Century Investments. Data as of 4/30/2019). G: We think the Street continues to underestimate the company’s ability to optimize inputs and maintain higher spreads. V: In 2018, the stock was trading at a significant valuation discount typically awarded to pure oil refiners, as the Street wasn’t recognizing the growth of the renewables business. The company has consistently exceeded Street expectations, resulting in upward earnings revisions. See Figure 5.

DSM: Netherlands-based chemical company KoninklijkeDSM is another opportunity our investment team uncovered.

New product cycles are driving the inflection in growth for DSM. After several years of stagnant growth in the company’s nutrition business, recent investments in R&D have yielded several new products that we expect will contribute to meaningful acceleration in earnings growth.

One exciting new product is Clean Cow, a feed additive that could potentially reduce methane emissions by as much as 30%. Beef and dairy cattle produce total greenhouse gas emissions equal to that of the transportation industry globally. (Source: EcoWatch, May 2019.)Another innovation is fermented stevia, which has the potential to expand the market opportunity for no-calorie sugar alternatives. We anticipate the new products will provide additional growth potential. We also anticipate margin expansion as improved revenue growth leads to operating leverage. Figure 6illustrates the most recent earnings revision trends.

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Figure 5 | Neste Earnings Growth Is Outside Typical Growth Sectors of the Economy

Data from 1/18/2018 to 4/30/2019. Data in USD. Source FactSet.

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Figure 6 | DSM: Trend Consensus Earnings Revisions

Data from 2/6/2019 to 4/30/2019. Data in USD. Source: FactSet.

Symrise: The consumer products industry has become more competitive, driven by the many innovative new entrants into the global market. Large, multinational consumer products companies typically need to spend more on R&D for innovation in flavors, fragrances and technology to remain competitive. This is benefitting some consumer-focused chemical companies. This includes Symrise, a German-based chemicals company that develops flavors, fragrances and other materials for cosmetic, perfume and food companies.

The addition of new capacity in high-demand products such as menthol and cosmetic ingredients is driving the inflection in revenue growth.

Symrise has higher exposure to some of the faster-growing regional players and exposure to high-growth markets, including pet food, probiotics and cosmetics.

We believe Street estimates don’t fully reflect Symrise’s growing customer base and the margin improvement derived from price increases, mix shift and vertical integration. As show in Figure 7, analysts have consistently revised earnings higher.

Recruit Holdings: Lastly, our process uncovered Japan-based Recruit Holdings, a standout in the cyclically challenged industrials sector. Recruit Holdings is the leader in digital human resources solutions and operates multiple online information and staffing services websites. Its key website is Indeed.com, the primary driver of future growth and value creation. Indeed.com matches employers with qualified candidates through an online portal with sophisticated search technology.

Indeed.com has seen very strong growth in the U.S. and is expanding its capabilities to Europe and Asia. The company acquired Glassdoor.com about a year ago, expanding its total market opportunity. In addition to its proprietary technology, the company is benefitting from strong employment growth globally. Recruit has grown earnings at an average rate of 20% over the last four years, and we believe this growth rate can be sustained. Earnings have been consistently revised higher over the last year. See Figure 8.

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Figure 7 | Symrise: High Growth Potential Not Fully Reflected in Consensus Estimates

Data from 5/8/2018 to 4/30/2019. Data in USD. Source: FactSet.

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Figure 8 | Recruit Holdings: Earnings Growth Despite Operating in a Cyclically Challenged Sector

8/14/2017 – 4/30/2019Data from 8/14/2017 to 4/30/2019. Data in USD. Source: FactSet.

ConclusionOur investment process seeks to identify companies exhibiting accelerating sustainable growth characteristics despite the challenges of a decelerating growth environment. We believe investors avoiding non-U.S. equities due to top-down macroeconomic concerns may miss some compelling investment opportunities. Despite the current decelerating-growth environment, our Non-U.S. Growth Equity team has uncovered what we view as attractive opportunities that fit our investment process. Over the long term, it’s our view that it isn’t about investing in specific regions, countries or sectors, but aboutidentifying compelling stock-specific ideas regardless of geography or short-term market conditions.

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DisclosuresRelative Contributors and Detractors for American Century Non-U.S. Growth

Top 5 Contributors – Latest Month Contribution (%)

Cellnex Telecom 1.58

Sysmex 1.37

InterXion Holding 1.48

Recruit Holdings 1.68

adidas 1.49

Data from 5/1/2019 to 5/31/2019.

Top 5 Detractors – Latest Month Contribution (%)

Canada Goose Holding -0.63

Alibaba Group Holding -1.40

Melrose Industries -0.72

Lundin Petroleum -0.99

Infineon Technologies -0.51

Data from 5/1/2019 to 5/31/2019.

Holdings are subject to change without notice. Equity holdings are grouped to include common shares, depository receipts, rights and warrants issued by the same company.Source: FactSet.

Top 10 HoldingsPortfolio Weight (%)

AIA Group 3.06

AstraZeneca 2.38

CSL 2.29

Diageo 2.20

Keyence 2.07

Lonza Group 2.05

Danone 1.99

London Stock Exchange Group 1.95

Symrise 1.91

Novartis 1.65

Data as of 5/31/2019.

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