Innovation and Disruption Creating Opportunity
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.
- 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.
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||
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