Here's a 2-part trade that will help investors survive as global economies splinter apart, says Bernstein
- Economies around the world are the most synchronized in years, but Bernstein argues they'll start diverging soon.
- The firm offers a two-part recommendation for best handling this splintering of global economic growth.
As the spectre of a trade war looms, one measure shows that countries around the world are surprisingly unified - at least in one regard.
Global economies are the most synchronized in 50 years, showing a "remarkable degree of consistency" when it comes to growth, according to Bernstein and reflected in the chart below.
Alas, all good things must come to an end, says Bernstein. The firm argues this period of lockstep growth is bound to end, which will increase volatility and lead to more idiosyncratic fluctuations. And while the splintering of global economies may sound daunting, Bernstein stresses there's still ample opportunities available to traders.
"We expect the world to become less synchronized over the next year and at the same time the level of growth to fall," Inigo Fraser-Jenkins, a senior analyst at Bernstein and the firm's head of global quantitative and European equity strategy, said in a client note. "This does not make us bearish, but reduces the upside from here. Investors need to consider what happens next."
The fact that Bernstein remains constructive on the global economy is an important caveat, and one that informs the firm's recommendations for how to invest in the type of environment it's forecasting.
But before we unpack Bernstein's strategy, it's important to set the scene. The firm says the US is in the late stage of its current economic expansion - a commonly-held view across Wall Street - and forecasts a roll-over in profit margins and deal intensity, as well as tighter credit spreads.
With that in mind, here's Bernstein's two-part trade, which employs two so-called "factor" trades. In general, factor investing is a way for investors to get exposure to specific trading strategies, rather than a slice of the market dictated by industry.
1. Go long the so-called growth factor, which is largely explained by its name. It's designed to seek assets that will deliver outsized growth, something many Wall Street firms track using the Sharpe ratio, which measures relative returns.
2. Offset slowing growth with counter-cyclical exposure using the low-leverage factor, while also gaining exposure to free cash flow yield. In simpler terms, the low-leverage factor means companies and assets not saddled by large debt burdens. This fits in with the chart above, which shows highly-levered companies are expensive.