Preview
The trajectory of interest rates is beginning to level off as inflationary pressures ease. Nonetheless, there’s a growing sentiment that rate cuts may not materialize as swiftly as investors are predicting. In this third quarter outlook , our perspective remains that fluctuating expectations will mark the bulk of 2024. Artificial intelligence (AI), clean energy and cloud computing stand out to us as significant macroeconomic factors that are likely to provide momentum to worldwide economies.
Strategy highlights
- Equity market neutral: The spread between dispersion and volatility is at the widest levels of the past 10 years. Winners and losers are largely canceling themselves out at the index level but provide plenty for stock pickers to choose from.
- Discretionary global macro: Market reactions to incremental data releases and political developments have picked up, with manager conviction on directional themes appearing lower. This environment may favor tactical trading, especially heading into the US election.
- Commodities: Geopolitical tensions in tandem with an active wind season, warmer-than-average climate, and general supply and demand fundamentals allow for a vast array of interesting trades.
|
Strategy |
Outlook |
|---|---|
| Long/Short Equity | Upgrade to neutral given higher sustained levels of dispersion. Idiosyncratic risk is driving price action, and high gross exposures reflect managers’ confidence in their portfolios. AI represents a massive product cycle to create winners and losers. |
| Relative Value | Underweight for fixed income and convertible arbitrage, neutral for volatility trading. Significant excess liquidity has compressed volatility and dispersion across many asset classes, limiting opportunities for relative-value trading but offering attractive entry points for a potential volatility increase. |
| Event Driven | Neutral outlook for traditional event-driven strategies, with a continued 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 favorable sentiment and a busy campaign calendar. |
| Credit | Recent downgrade to an underweight given excess of available capital and tight spreads. There is potential for improved dispersion between issuers to benefit long/short credit managers, but volatility remains low. Structured credit is still marginally more attractive in our view than corporate, though that market also suffers from lower return expectations and higher illiquidity risk. |
| Global Macro | Markets have been highly reactive to new data in anticipation of policy shifts and political elections. This environment may continue to favor tactical strategies over long-term thematic approaches with a greater frequency of trading opportunities as well as event risks. |
| Commodities | Opportunities across commodity markets, encapsulating energy, metals and agricultural, continue to persist due to weather, various macro factors and continued geopolitical tensions across the globe. The current environment allows participants to capitalize on fundamentals and technicals alike. |
| Insurance-Linked Securities (ILS) | After 13 months of spread tightening in the cat bond sector, a reversal occurred, leading to widening ahead of the upcoming wind season. This has led to deals pricing on the wide end, if not outside, of initial guidance, resulting in a couple deals being pulled from the market. We continue to favor the sector given its attractive yield potential in addition to cleaner structures and underlying terms and conditions. |
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.