Recession-Resilient Stocks Around the World

We hope the start of spring has been treating you well. This week, the market digested the implications of an inverted yield curve along with data suggesting the economy has been losing momentum. In light of this, today we'll be using our new Security Search feature to find companies within our worldwide model that are better suited to weather an economic recession and potential deflationary environment.

‍Wolfe Research

‍Before we begin, I wanted to share some very exciting news at Omega Point. We have partnered with premier research boutique Wolfe Research to integrate their proprietary factor library of 350+ factors onto the Omega Point Platform. What this means for our customers is that our coverage of traditional factor and ESG models has expanded to include Wolfe Research's acclaimed industry-specific models, custom macro models, and ‘non-traditional’ models.

In the coming weeks we'll start featuring factors from the Wolfe models in our weekly Factor Spotlight, so stay tuned.

Here's a quick rundown of market and factor trends that we've seen over the past week in the US model.

US Market
3/22/19 - 3/28/19

The S&P 500 ended Q1 2019 with its best quarterly gain since 2009, and the market saw strength on Friday (not captured in image) on the back of yet more optimism over ongoing US-China trade talks. At the same time, we saw that US consumer spending was stagnant in January and that income saw very minimal increases in February, suggesting the economy might be losing momentum. In Germany, weak manufacturing data also sent investors to the bond market, with yields on 10-year German treasuries falling below zero for the first time in three years.

Here's an update on how some key factors have changed in the US model over the past week, using our normalized return indicator:

• Momentum saw a big normalized gain of +0.53 standard deviations in just one week, and has subsequently earned an Overbought designation.
• Profitability in the US has seen a solid rally after hitting a nadir of exactly -2 SD on March 19th, and is now digging its way back towards the mean.
• Volatility and Market Sensitivity both saw a fairly sizable selloff on a normalized basis, highlighting investors' desire to shed riskier stocks given recent headlines.

A Note on Profitability (Worldwide)

‍This is a factor that had seen material weakness over the past month, and has staged a rally over the past few days after hitting a nadir of -1.44 SD below the mean on March 21st. At the hint of recession, it's natural for investors to flock to Quality, so it seems that investors have indeed been reacting to the yield curve news.

The Global Search for Recession-Resilient Stocks

‍There's been plenty of talk this week around the inversion of the yield curve, with pundits arguing over whether this phenomenon is predictive of an imminent recession or not. When the zero line was breached last week (for the first time since March 2007), the market reacted by selling off riskier assets and moving into cash and debt. The market has since rebounded, but as evidenced by this week's factor movements (especially weakness in Volatility and Market Sensitivity), investors are flocking to safety. This, coupled with soft economic data indicating a slowdown in growth in 1Q, has us highly motivated to identify stocks with characteristics that make them well-positioned in the event of a recession. Since it's accepted that in a recessionary environment, investors seek profitable, reasonably valued companies with low debt, the factors that we'll use to qualify our search will be Profitability, Earnings Yield, and Leverage. For this exercise we'll be using our worldwide model, and the ACWI as our universe.

‍Security Search

‍In case you missed it, in last week's Factor Spotlight, we introduced a new platform feature that enables you to quickly filter down names within a factor model by:

• Security descriptors (country, market cap, liquidity)
• Security universe (membership in portfolios, interest lists, and ETFs)
• Factor risk values
• Factor exposure characteristics

For this search, the criteria that we input as search terms are as follows.

• Universe: ACWI
• Profitability Exposure: Greater than 0.25
• Earnings Yield Exposure: Greater than 0.25
• Leverage Exposure: Less than -0.25

These exposures are represented as z-scores, so by choosing 0.25 and -0.25 as our bounds, we're only looking for companies that simultaneously have above-average profitability and earnings yield, and below-average debt levels.

In practice, here's what this security search looks like in the app:

As you can see, out of the 1,375 ACWI constituents, there were exactly 40 global stocks that satisfy our (fairly stringent) criteria. Of the 40 search results, 75% of the names were not in a Tech-related sector and 58% came from outside of the US.

Below are the top 10, ranked by Profitability score - let me know if you'd like a .csv with the entire list and I'll email it to you.

Investors who are steeling themselves for impending economic weakness would be well served to look into these names, as their current factor makeup of low debt, high profitability, and high earnings yield suggests that in a deflationary/recessionary world they'd not only benefit from a flock to safety, but also not be subject to significant P/E decompression.

Regards,
Omer