Betting on Secular Change Is Not Just for Growth Investors

By Heather K. McPherson and John D. Linehan, CFA, T. Rowe Price Portfolio Managers

• Value stocks have come under pressure as economic uncertainty prompts investors to shorten their time horizon, pile into secular winners, and avoid cyclicals.

• We believe our rigorous fundamental research gives us an edge in identifying where the market’s misunderstanding of secular risks could create opportunity.

• We are looking for the most compellingly valued stocks relative to their long‑term prospects.

Widespread innovation and the resulting disruptions to many industries are big reasons why value stocks have lagged over the past decade and a half. But a deep understanding of an investment’s secular risks,¹ along with a disciplined valuation focus, can give skilled investors an edge in seeking to exploit opportunities created by market dislocations.

The challenges facing value stocks intensified during the first half of the year. In certain sectors, the economic damage stemming from the coronavirus pandemic heaped cyclical2 pressures on top of long‑standing secular headwinds, many of which stem from technological innovation. The global health crisis also accelerated the adoption of disruptive technologies—such as e‑commerce, streaming media, and cloud‑based software that supports remote work. Fear and uncertainty have also meant that investors have favored well‑understood growth stories during the recovery rally without regard to valuation.

Near‑term headwinds aside, we believe that leveraging our rigorous fundamental research, valuation discipline, and longer time horizon can help us to find investments that offer more ways to outperform than simply betting on a broad‑based rotation into value stocks.