Preview
The interest-rate path appears to be stabilizing as inflation trends decline from the high levels seen in the summer of 2022. However, there are concerns that rate cuts will not happen as quickly as the market expects. We continue to think that most of 2024 will be an oscillation of expectations, shifting between cuts to no change in rates. Artificial intelligence (AI), clean energy and cloud computing are a few key macro elements providing a tailwind to global economies and equity market outlooks.
Strategy highlights
- Activism: It was a record-breaking year for activist campaigns in 2023. Higher interest rates and other headwinds have led to slowing growth for certain companies, thereby creating opportunities for activist investors.
- Discretionary global macro: Forward-looking and nimble managers should find ample trading opportunities in the months ahead as markets focus on the upcoming US election and potential monetary policy changes across regions.
- Insurance-linked securities (ILS): Despite continued catastrophe-bond market spread tightening, the forward-looking opportunity set remains attractive. Early indications are that 2024 could be another year of record primary market issuance.
|
Strategy |
Outlook |
|---|---|
| Long/Short Equity | Maintain an underweight outlook as sentiment continues to be driven by AI, and volatility remains extremely low. However, dispersion is improving as the market focuses more on company-specific factors and less on rates. High gross exposures reflect managers’ confidence in their portfolios. |
| Relative Value | Underweight for convertible and fixed income arbitrage, and neutral for volatility arbitrage. Regulatory uncertainty and excess capital negatively impact our outlook for fixed income and convertible arbitrage, respectively. Volatility arbitrage is suffering from low realized and implied volatility levels but presents an attractive entry point to be long protection in case of unexpected market moves. |
| Event Driven | Neutral outlook for traditional event-driven strategies, with a notable overweight for activism. Merger arbitrage and special situations investing are benefiting from a pickup in activity, offset by higher regulatory and political risks. Activism represents a bright spot given fresh portfolios and ample targets for new campaigns. |
| Credit | Modest downgrade to a neutral outlook, given tight absolute credit spreads and excess capital allocated to the space. We continue to favor trading-oriented and relative value strategies such as long/short credit due to expectations that dispersion across issuers will likely stay high. Cautious outlook for structured credit given directionality and liquidity risks. |
| Global Macro | The environment remains constructive for macro managers, especially those that can trade tactically around major political and policy events. Campaigning ahead of the US election may contribute to market volatility and create trading opportunities. Monetary policy adjustments and regional differences are also likely to remain a key factor for both directional and relative value trades. |
| Commodities | Volatility across commodity markets, most notably energy and agriculture, remains high due to a variety of geopolitical and macro factors. This elevated volatility should continue to provide plenty of relative-value trading opportunities. |
| Insurance-Linked Securities (ILS) | Following a more orderly January renewal period relative to January 2023, the ILS market remains attractive. Despite recent tightening, the rate-on-line for private ILS strategies and the catastrophe bond market spread remain elevated and provide appealing total yield potential. |
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. Some subadvisors may have little or no experience managing the assets of a registered investment company. International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Derivative instruments can be illiquid, may disproportionately increase losses, and have a potentially large impact on performance.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Currency management strategies could result in losses to the fund if currencies do not perform as expected.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments. Short selling is a speculative strategy. Unlike the possible loss on a security that is purchased, there is no limit on the amount of loss on an appreciating security that is sold short. Investments in companies engaged in mergers, reorganizations or liquidations also involve special risks as pending deals may not be completed on time or on favorable terms. Liquidity risk exists when securities or other investments become more difficult to sell, or are unable to be sold, at the price at which they have been valued.
Active management does not ensure gains or protect against market declines.