Investing Amid Disruption

Global financial markets are increasingly being influenced by disruptive forces. The global corporate landscape continues to be reshaped by a combination of technological innovation and changing consumer preferences, which is upending established business models.

Relative valuations between equity styles (Figure 1) are also being impacted by disruption, pushing valuations for the winners and the losers in sharply opposite directions.

Although many investors equate disruption with the major technology platform companies, the effects also are being felt across a host of other sectors and industries. Energy markets, for example, are being disrupted by the rise of shale fracking and the increased competitiveness of solar and wind energy. Our research suggests that almost a third of the S&P 500 by market capitalisation is being affected by some level of secular challenge.

Companies that are challenged by disruptive forces or major secular changes are likely to experience slower revenue and earnings growth over the next 10 years than they have in the past decade. The hit to these firms' share prices could be dramatic.

Figure 1: Equity valuations are diverging

One‑year forward P/E ratio, growth relative to value

As of October 31, 2018

_{Source: FactSet Research Systems Inc., All rights reserved; all data analysis by T. Rowe Price.}

_{*December 1997 through October 2018 **September 1998 through October 2018}

A similar bifurcation is playing out in markets such as Japan. Although the MSCI Japan index has been looking relatively cheap, with a price/earnings ratio of about 12 at the end of October, the Japanese market is sharply divided between firms that are increasing shareholder returns and those that are essentially stagnating.

On the other hand, structural change may have made emerging market (EM) equities more attractive. As of the end of the third quarter 2018, technology accounted for 27% of the MSCI Emerging Markets index, up from virtually nothing 10 years ago. This reflects not only the growth of China's own technology giants, but also the rise of other high‑value EM industries based on intellectual property. We believe this adds depth and breadth to the emerging markets opportunity set, in addition to its strong growth potential.

What influence is disruption having on markets? Read more.