2022 has been a wild year for the markets. The global economy is contending with widespread high inflation, rate hikes, and a challenging geopolitical landscape with Russia’s invasion of Ukraine and the rise of fascism. That could open an opportunity for a better way to evaluate profitable stocks: free cash flow.
A model run by Ned Davis Research predicts a 98.1% chance of global recession, the highest probability the model has seen since 2020 and during the financial crisis of 2008–2009.
Last Friday, economists at Ned Davis Research wrote, “This indicates that the risk of a severe global recession is rising for some time in 2023.”
Despite some signs of optimism, including a strong U.S. job market and low unemployment rate, sentiment about the economy remains murky. Billionaire investor Stanley Druckenmiller said to CNBC that, “Our central case is a hard landing by the end of ’23. I will be stunned if we don’t have a recession in ’23. I don’t know the timing but certainly by the end of ’23. I will not be surprised if it’s not larger than the so called average garden variety.”
How Free Cash Flow Can Fight Flailing Markets
Despite the likelihood of a global recession, there are opportunities available to investors. Free cash flow is the cash a company generates after its cash outflows, such as maintenance of capital assets. This cash is ready and available to use for anything from repaying creditors to sending out dividends, making it a critical indicator of the overall health of a company, much more important than raw earnings. ETFs such as the FCF International Quality ETF (TTAI), with its focus on foreign large-cap companies with plenty of free cash flow, are uniquely positioned to weather widespread market storms.
VettaFi head of research Todd Rosenbluth said, “With international equities down sharply in 2022 as companies deal with a potential global economic slowdown, TTAI provides a high quality forward-looking approach focused on non-U.S. companies with a strong financial profile.” TTAI’s top holdings include companies with a strong tilt toward the quality factor, such as Novo Nordisk, Roche, and the Royal Bank of Canada.
For more news, information, and strategy, visit the Free Cash Flow Channel.