Disruption in its various forms--technological, political, economic, and monetary--is likely to determine the direction of global markets in the coming year, T. Rowe Price experts predict.
With the U.S. moving into the later stages of the business cycle, the U.S. Federal Reserve raising interest rates, and monetary and credit conditions diverging widely across the other major global economies, the potential for renewed volatility in both equity and fixed income markets remains high.
Disruption goes well beyond technology. Secular change is forcing us as investors to heavily consider not only the winners, but also the losers of global disruption.
The global corporate landscape continues to be transformed by a revolutionary combination of technological innovation and changing consumer preferences, which is upending established business models. Although disruption creates risk, it also can generate potential opportunities for investors with a disciplined strategic approach. Correctly identifying the winners and losers in this competitive struggle will remain the key to portfolio outperformance, Giroux contends. “I’d argue that the disruptive environment we’re in is why active management will be well positioned over the next decade,” he says. “High‑quality active managers can really benefit from having a longer‑term horizon, which allows them to make the kind of investments that potentially will add value in our clients’ portfolios over the next five to 10 years.”
The upswing in volatility that disrupted global markets—equity markets, in particular—in 2018 appears likely to persist in 2019, driven by slowing economic momentum, tighter liquidity, monetary divergence, and political risk. Meanwhile, technological innovation and competitive challenges will continue to threaten established leaders in a host of global industries.
In this less supportive environment, McCormick notes, markets have begun to punish bad behavior, taking aim at overleveraged companies, antiquated business models, and inflation‑prone sovereign debtors. As a result, security‑specific risks are becoming increasingly critical. But these same risks also can generate potential opportunities for active investors to buy attractive assets at temporarily depressed prices. In‑depth research and solid fundamental analysis are vital.
“There’s no question that markets tend to get trickier late in the cycle" McCormick says. "But it also can be a great time to take a strategic approach to investing.”
VIX INDEX VS 10-YEAR U.S. TREASURY YIELD As of October 12, 2018
Sources: Bloomberg Finance L.P. and T. Rowe Price.