Can Productivity Explain Excess Returns in the Stock Market?

Recent years have seen the global economy experience signifi cant structural changes, fundamentally altering growth and infl ation dynamics. Even as real economic

growth has stagnated or declined in many regions, infl ation has accelerated sharply. This phenomenon, often termed stagfl ation, is driven by four core trends

• De-globalization: Reduced economic interdependence due to geopolitical tensions, protectionism, and disrupted supply chains. The introduction of tariffs by leading economies elevates production costs, diminishing productivity and increasing infl ation, as recently observed in US-China trade tensions.
• Demographic Shifts: Aging populations, especially in developed economies like Japan and Germany, lead to a shrinking workforce and lower labor market participation. This contraction diminishes overall productivity, slows GDP growth, and exerts upward pressure on infl ation.
• De-carbonization: The transition to renewable energy requires substantial investment and regulatory changes. While this shift is crucial for long-term sustainability, it raises short-term energy and production costs, contributing to higher consumer prices.
• Rising Debt Levels: Both public and private debt have hit record highs, limiting economic fl exibility and capacity for productive investment. Elevated debt, such as the US exceeding $30 trillion, strains budgets and can trigger fi nancial instability, further challenging growth and price stability.

These forces interact and amplify stagfl lationary pressures, creating an exceptionally complex macroeconomic environment.

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Addressing Today’s Economic Headwinds through Productivity

Despite these headwinds, increasing productivity stands as the most effective lever to counteract these negative trends. Enhanced productivity not only supports economic growth but also helps moderate infl ation, serving as a stabilizing force in otherwise volatile conditions. However, recent data reveal a troubling slowdown in productivity growth across major economies, including the US, the Euro Area, and the OECD.

Urgent focus on revitalizing productivity is therefore paramount. Without it, economies risk falling into prolonged stagnation, losing competitiveness, and becoming less equipped to adapt to future disruptions. Boosting productivity is essential for safeguarding resilience and ensuring sustainable prosperity by enabling economies to produce greater output with fewer resources.

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The Averdas Productivity Framework

Averdas identifi es three major domains to drive productivity gains:

• Asset Optimization: Enhance capital and technology utilization.
• Process Improvement: Drive effi ciency through automation and process refi nement.
• Resource Enhancement: Optimize human capital and material usage.

These must be supported by a foundation of resilience, enabling organizations to adapt to dynamic macroeconomic pressures. Together, these factors not only foster stable economic growth but also provide a pathway to sustainable superior returns for investors. More productive firms improve margins, reduce costs, and strengthen profi tability, resulting in a dual benefi t of macroeconomic stability and attractive risk-adjusted returns.

How Averdas Differs from Conventional Investment Models

Traditional asset management typically relies on style factors (e.g., momentum, value, quality) and macroeconomic variables (e.g., infl ation, interest rates) in portfolio construction. While these are foundational to risk management and asset allocation, they insuffi ciently address productivity as refl ected in the input-output relationships critical to operational effi ciency.

This limitation risks:

• Overvaluing firms with high sales but poor resource utilization,
• Undervaluing organizations achieving higher outputs with lower inputs.

Averdas’ methodology systematically integrates productivity indicators, enabling recognition and capture of sustainable competitive advantages that conventional models may overlook.

Investing in Productivity with Averdas

Averdas utilizes a rigorous, quantitative, and scientifi cally grounded approach to factor investing, adhering to the fi ve critical principles for effective design:

• Persistence: Consistent performance across time periods.
• Pervasiveness: Applicability in various regions and market segments.
• Robustness: Stability under different measurement approaches and data definitions.
• Investability: Strategies using liquid, practical assets accessible for real-world implementation.
• Intuition: Transparent and economically logical factors.

Based on these, Averdas introduces productivity-based factor investing by incorporating novel data sets and advanced analytics previously unexplored in fi nancial markets. Unique frontiers are built for sectors and universes, identifying the companies with superior productivity as defined by innovative factor constructs.

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The Four Productivity Factors

• Asset Factor: Focuses on maximizing output from labor, capital, and technology, underpinning long-term growth and revenue expansion.
• Process Factor: Drives profi tability through dynamic and effi cient operations, fostering competitive agility in volatile environments.
• Resilience Factor: Measures an organization’s ability to adapt and recover from disruptions, ensuring stable and elevated returns.
• Resource Factor: Prioritizes the sustainable use of materials and human capital, enhancing ESG outcomes, creating stakeholder value, and supporting higher long-term shareholder returns.

Averdas validates these factors through:

• Fundamental data analysis,
• Machine learning to forecast business outcomes from fi nancial data,
• Large language models (LLMs) to extract insights on operational efficiancy in assets, processes, resilience, and resources.

This comprehensive integration of advanced analytics supports cutting-edge strategies that not only pursue alpha for investors but also contribute to broader economic growth.

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