GLOBAL EQUITIES

Innovation and Disruption Creating Opportunity

Robert W. Sharps , Head of Investments, Group Chief Investment Officer
Justin Thomson , Portfolio Manager
Equity valuations above historical averages in most developed markets do not necessarily mean that global equities are overvalued. Equity risk premiums in many markets still appear reasonable.

Key Points

  • Innovation and disruptive change continue to benefit a relatively small group of mega-cap companies.
  • For the first time since the global financial crisis, the world economy is in a synchronized expansion, driving steady earnings growth in most markets.

  • Barring unpredictable political or economic shocks, the global earnings recovery should continue in 2018.

  • Whether recent low market volatility persists in 2018 remains to be seen, but we do not believe low volatility in itself means a market correction is near.

WAVES OF CHANGE BOOSTING SELECTED MEGA-COMPANIES

We expect the waves of disruptive change in global equity markets to accelerate, fed by a powerful combination of technological innovation, changing consumer preferences, and evolving business models. These forces are upsetting the competitive balance in existing industries while at the same time spurring rapid growth for new products and services.
 

These trends continue to benefit a relatively small group of mega-cap companies that have created dominant positions in industries such as e-commerce, social media, mobile devices, and internet search. Competitive advantages have allowed these companies to leverage powerful economies of scale, sustaining rates of growth that – for their current size – are almost unprecedented.

 

Synchronized Global Growth Boosts the Earnings Recovery

Earnings Per Share Growth In Local Currency Terms, Through October 31, 2017

 

 

Sources: FactSet, Standard & Poor’s, MSCI; data analysis by T. Rowe Price.

MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

DISRUPTION EXPANDING, POLITICS MAY BE SHIFTING

We believe opportunities for profitable growth—both organic and through acquisitions—will remain plentiful for the technology giants in 2018. However, looking ahead, we see two key trends to watch:
 

  • The scope of disruption is expanding across industries. For example, advances in genetic mapping are driving the development of new drugs while horizontal drilling technology has pushed global oil prices sharply lower.

  • Changing attitudes could change the political climate. Until recently, the technology giants have been widely admired. However, data privacy, security concerns, and social media’s role in recent elections have raised questions about how these firms wield their economic power. This creates the potential for a regulatory backlash.

 

SYNCHRONISED GLOBAL ECONOMIC EXPANSION

For the first time since the 2008–2009 financial crisis, the global economy has entered a synchronized expansion. Strong growth, ample liquidity, and low inflation have produced an extended period of exceptionally low volatility—not just in equity markets, but in credit and currency markets as well. Whether this period of calm continues in 2018 remains to be seen, but we don’t view it as a sign that a correction is near.
 

Although valuations are above historical averages in most developed markets, in the context of low interest rates and low inflation shares do not appear overvalued. In addition, central bank policies appear constructive for equities. However, we remain mindful of the risk of inflationary surprises.
 

EARNINGS RECOVERY LOOKS SET TO CONTINUE

To a large extent, equity strength in 2017 has reflected broad-based economic growth. Barring unpredictable political or economic shocks, the global earnings recovery should continue in 2018, but perhaps not at the same rate. Key to markets weathering any slowing momentum will be investors retaining a perception that growth will remain positive as the economic cycle continues to mature.
 

Meaningful U.S. corporate tax cuts could spur capital spending and hiring, potentially giving a second wind to earnings growth. More highly taxed U.S. small caps could benefit disproportionately.

REGIONAL PERSPECTIVES

Region Regional Perspectives
United States

Cyclical sectors benefit from growing optimism about fiscal stimulus 

Europe Positive outlook for earnings despite political uncertainties 
UK Signs of financial stress amid the Brexit negotiations
Japan Strong export demand, a weaker yen, and corporate reform should be supportive
China Current focus is on domestic technology titans, but restructuring of state-owned enterprises could create future opportunities 
Other Emerging Markets
  • Stabilizing economies in Brazil and Russia
  • India was negative in 2017, but moves to address the debt situation should help
  • Potential pockets of vulnerability in Turkey and some Central and Eastern European markets should the U.S. dollar strengthen in 2018

201712- 313575

IMPORTANT INFORMATION

This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarante 500 Internal Server Error

Internal Server Error

Cannot serve request to /content/tpd/dk/en/thinking/articles/2017/q4/innovation-and-disruption-creating-opportunity.html on this server


Apache Sling