- Over this time, companies that have been trading below their intrinsic value, known as value companies, have underperformed
- In part, this reflects the impact of disruption which, in its many forms, has tended to favour the technology sector and the growth style
- As long-established companies begin to compete more aggressively against younger upstarts, there is potential for a change of market dynamics and the value style may re-emerge.
Shaking up the market
Shifting consumer preferences and new technologies have put established business models under pressure in recent years, as everything from taxi rides to travel agents is being revolutionised. This has produced a stark disparity between the fortunes of growth and value equity investing styles, as demonstrated by the chart below.
Disruption tilts the fundamentals towards growth
Cumulative changes, June 30, 2007 – May 31, 2019
Past performance is not a reliable indicator of future performance
Source: Russell (see Important Information). T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.
In the decade following the 2008 financial crisis, the growth style of equity investing has tended to outperform the value style as business and economic disruption have favoured fast-growing companies. We’ve seen little evidence in the first half of 2019 to suggest disruption is slowing down.
That said, we believe the story has begun to shift. One characteristic of fast-growing companies, such as technology start-ups, is that they prioritise rapid expansion and capital investment over near-term profitability. While this approach has proved successful during the most recent technology cycle, investors now appear more aware of the risks associated with financing business plans that push profitability into the distant future. Evidence of this could be seen during the initial public offerings of ride-share giants Lyft and Uber, which fell short of expectations owing to weak demand from potential investors.
On the flipside, established firms that have lagged their more innovative rivals in recent years are beginning to fight back. Leveraging their financial strength and strong brand positions, they are investing in areas where upstarts have taken early market share. Case in point: The Walt Disney Company, which has grown into a major force with its ownership of film studios and television networks, has announced major investments into its own content streaming services to compete with Netflix.
Legislation versus technology
The high-growth technology sector is also facing its share of challenges, particularly from legislators. Political attitudes towards the major technology platform companies are changing due to rising concerns about market power, data privacy, and false or misleading content. So far none of these complaints have generated any serious legislative efforts to restrict technology platforms, but we believe this issue is worth monitoring. We believe investors should be aware that the regulatory regime could change in the future.
Overall, we believe these developments equity investors should prepare themselves for a potential shift in a decade-long market dynamic.