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Volatility Equities Blog

Building a Macro-Resistant Equity Portfolio

30 January 2019

4 min read

Christopher W. Marx| Global Head—Equity Business Development

Kent Hargis, PhD| Chief Investment Officer—Strategic Core Equities; Portfolio Manager—Global Low Carbon Strategy

Sammy Suzuki, CFA| Head—Emerging Markets Equities

After a volatile year in global markets, equity investors are on high alert. With so much uncertainty about the macroeconomic growth outlook, we think it’s important to make sure that an equity allocation is positioned to do well no matter what happens to the economy.

Mixed signals are hanging over markets as 2019 begins. Will global economic growth slow? What will happen when central banks withdraw asset-purchase programs and if interest rates rise? How do you navigate political risks, from Brexit to the US-China trade war? We don’t expect a global economic recession, but the breadth of possible outcomes is much wider than usual, which probably means more volatility this year.

It’s tough to design an equity portfolio for these conditions. Traditional defensive portfolios typically deliver better results if economic growth crashes. Higher-risk equity portfolios may rely on faster economic growth to fuel returns. Today, we think the best solution is to build a macro-resistant equity portfolio that is equipped both to withstand macroeconomic shocks and to deliver if things turn out better than expected.

Growth Fears Stoke Volatility

The macroeconomic growth outlook is very uncertain today. The global Purchasing Managers’ Index tracker fell during 2018, signaling a potential economic slowdown is brewing (Display, left). Global GDP growth has started to slow. At the same time, wage growth is rising in developed countries (Display, right), adding to inflationary concerns that seem to conflict with the growth slowdown. No wonder that market volatility increased dramatically last year. The MSCI World Index rose or fell by more than 1% on 45 days during 2018, compared with only three days in an unusually calm 2017.

Mixed Signals Add Uncertainty to Global Macroeconomic Outlook

Historical analysis and current estimates do not guarantee future results.
In left display, real GDP through July 2018; PMI tracker through October 2018. Right display through July 2018. *At market exchange rates
Includes the euro area, Japan, the UK and the US
Source: Haver Analytics and IHS Markit

In this environment, we think there are three key components to creating a macro-proof portfolio. First, take a closer look at traditional defensive stocks. Second, focus on industry themes that don’t depend on economic growth. Third, pay close attention to balance sheets.

Return to Traditional Defensives

In recent years, we’ve been concerned that some traditional defensive sectors might not provide investors with optimal protection from downturns. About two or three years ago, as interest rates were falling to near zero levels, investors were piling into bond proxies to tap into sources of income. Utilities, real estate investment trusts (REITs) and consumer staples became very expensive, because many investors flocked to these traditional safe havens to protect against potential volatility.

These stocks performed relatively well in the recent downturn. What’s changed? At the turning point from the trough in interest rates, these stocks were very risky as their performance is generally correlated with interest rates. Some of these concerns have diminished now that US interest rates are off extreme lows and valuations are much more reasonable.

Since US interest rates began to rise in late 2016, valuations of low-beta stocks, which are less risky than the market, have improved (Display). When building a defensive equity portfolio, it’s always important to pay attention to valuations. Yet valuations are dynamic, so attractively valued opportunities may be found today in stocks and sectors that were expensive yesterday.

Valuations of Low-Beta Stocks Have Become More Attractive

Through December 31, 2018
Historical analysis does not guarantee future results. Historical information provided for illustrative purposes only and is subject to change.
Price-to-book ratios of the highest and lowest quintiles of monthly beta within the AB global universe of stocks vs. the universe average
Source: Bloomberg, Center for Research in Security Prices, FactSet, MSCI and AllianceBernstein (AB)

Find Investing Themes That Are Resistant to a Slowdown

Some industries and companies just aren’t as vulnerable to a macroeconomic slowdown as others are. For example, human resources firms such as ADP and Paychex are benefiting from a growing tendency of companies to outsource HR functions. This growth has nothing to do with the state of an economy; as companies become more complex, it simply makes more sense to outsource HR.

Similarly, in the financial sector, payments processing is enjoying steady growth as more consumers around the world shift away from cash payments to cards and other payment systems. In the US, electronic and card payments accounted for about two-thirds of consumer spending in 2018, up from less than half a decade earlier, according to BMO Capital Markets. And globally, international electronic payment volumes are projected to grow at 12% a year over the next three years, double the rate of domestic markets, according to the Nilson Report.

Retailers are often seen as cyclical companies that are vulnerable to an economic slowdown. Yet there are defensive pockets of the retail industry that actually tend to do well through downturns. Examples include T.J. Maxx, the off-brand retailer, which benefits when more consumers seek to buy lower-cost clothes.

Professional publishing is another niche market that should hold up in a downturn, in our view. Examples include RELX Group and Wolters Kluwer, providers of critical professional information that lawyers, doctors and professors need on hand for time-sensitive decisions—even if the economy is slowing down.

Watch the Balance Sheet

Quality stocks are still the backbone of a defensive equity strategy. That means scrutinizing companies for their earnings potential in tougher times, including whether they have the balance-sheet strength to endure a rising-rate environment.

Corporate debt is rampant today. After a decade of easy-money policies globally, many companies that borrowed could be vulnerable as conditions change. The potential for rising rates and tighter credit markets could put a lot of pressure on companies that levered up over the past decade. So scrutinizing balance sheets is more essential than ever to ensure that quality stocks will hold up regardless of the direction of the economy and rates.

Not every low-beta portfolio is truly indifferent to the economic environment. By searching for high-quality stocks that offer a degree of stability and trade at attractive valuations, we believe a portfolio can be created that is resilient to macroeconomic whims, which can help investors stay invested through turbulent market episodes—and benefit from an eventual recovery.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

About the Authors

Christopher W. Marx

Christopher W. Marx is Senior Vice President and Global Head of Equity Business Development. He is responsible for overseeing the firm's team of equity investment strategists and product managers, setting strategic priorities and goals for the global Equities business, developing new products, and engaging with clients to represent market views and investment strategies of the firm. Previously, Marx was a senior investment strategist and a portfolio manager of Equities, and in 2011 he cofounded the Global, International and US Strategic Core Equity portfolios with Kent Hargis. He joined the firm in 1997 as a research analyst covering a variety of industries both domestically and internationally, including chemicals, metals, retail and consumer staples. Marx became part of the portfolio-management team in 2004. Prior to joining the firm, he spent six years as a consultant for Deloitte & Touche and Boston Consulting Group. Marx holds a BA in economics from Harvard University and an MBA from the Stanford Graduate School of Business. Location: New York

Kent Hargis, PhD

Kent Hargis is the Chief Investment Officer of Strategic Core Equities. He created the Strategic Core platform and has been managing the Global, International and US Strategic Core portfolios since their inception in 2011. Hargis has also been Portfolio Manager for the Global Low Carbon Strategy Portfolio since 2022. Previously, he managed the Emerging Portfolio from 2015 through 2023. Hargis was global head of quantitative research for Equities from 2009 through 2014, with responsibility for directing research and the application of risk and return models across the firm’s equity portfolios. He joined AB in 2003 as a senior quantitative strategist. Prior to that, Hargis was chief portfolio strategist for global emerging markets at Goldman Sachs. From 1995 through 1998, he was assistant professor of international finance in the graduate program at the University of South Carolina, where he published extensively on various international investment topics. Hargis holds a PhD in economics from the University of Illinois, where his research focused on international finance, econometrics and emerging financial markets. Location: New York

Sammy Suzuki, CFA

Sammy Suzuki is Head of Emerging Markets Equities, responsible for overseeing AB’s emerging-markets equity business and instrumental in the formation and shaping of AB’s Emerging Markets Equity platform. He was also a key architect of the Strategic Core platform and has managed the Emerging Markets Portfolio since its inception in 2012, and the Global, International and US portfolios from 2015 to 2023. Suzuki has managed portfolios since 2004. From 2010 to 2012, he also held the role of director of Fundamental Value Research, where he managed 50 fundamental analysts globally. Prior to managing portfolios, Suzuki spent a decade as a research analyst. He joined AB in 1994 as a research associate, first covering the capital equipment industry, followed by the technology and global automotive industries. Before joining the firm, Suzuki was a consultant at Bain & Company. He holds both a BSE (magna cum laude) in materials engineering from the School of Engineering and Applied Science, and a BS (magna cum laude) in finance from the Wharton School at the University of Pennsylvania. Suzuki is a CFA charterholder and was previously a member of the Board of the CFA Society New York. He currently serves on the Board of the Association of Asian American Investment Managers. Location: New York

This is a marketing communication. This information is provided by AllianceBernstein (Luxembourg) S.à r.l. Société à responsabilité limitée, R.C.S. Luxembourg B 34 305, 2-4, rue Eugène Ruppert, L-2453 Luxembourg. Authorised in Luxembourg and regulated by the Commission de Surveillance du Secteur Financier (CSSF). It is provided for informational purposes only and does not constitute investment advice or an invitation to purchase any security or other investment. The views and opinions expressed are based on our internal forecasts and should not be relied upon as an indication of future market performance. The value of investments in any of the Funds can go down as well as up and investors may not get back the full amount invested. Past performance does not guarantee future results.

This information is directed at Professional Clients only and is not intended for public use.

Building a Macro-Resistant Equity Portfolio

Growth Fears Stoke Volatility

Return to Traditional Defensives

Find Investing Themes That Are Resistant to a Slowdown

Watch the Balance Sheet

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