Disruption in all its forms has favoured growth stocks, while the value sector underperformed. However, as investors became cautious of fast-growth companies, value stocks have started to fight back.
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.
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.
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. The specific securities identified and described above do not necessarily represent securities purchased or sold by T. Rowe Price. This information is not intended to be a recommendation to take any particular investment action and is subject to change. No assumptions should be made that the securities identified and discussed above were or will be profitable.
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.