Preview
Interest rates in most parts of the world appear to be stabilizing as we enter 2024, as inflation trends continue to decline from the high levels seen in the summer of 2022. Key macro elements providing a tailwind to global economies and equity markets include technological advancements in artificial intelligence, clean energy, and cloud computing.
Strategy highlights
- Emerging markets: Emerging markets (EM) may see a potential tailwind as macro policies shift in their favor. Recent policy trends may support flows into EM, while regional growth differences can improve the alpha opportunity set for specialist managers.
- Catastrophe bonds: Following a record year of new issuance, the catastrophe bond market spread is elevated relative to historical levels, despite tightening throughout the year. We believe it remains an attractive entry point.
- Long/short credit: Elevated absolute yields combined with higher dispersion due to varying issuer quality provide an attractive tailwind. In addition, an increase in upcoming maturities, refinancing, and increasing defaults may create opportunity.
|
Strategy |
Outlook |
|---|---|
| Long/Short Equity | The changing interest-rate environment has been difficult to navigate but should eventually create sustained dispersion. As such, we see reasons for optimism in the longer term, despite our underweight rating on the strategy. Japan is an area of focus given encouraging macro conditions and corporate reforms. |
| Relative Value | Neutral with an improving outlook. Strategies continue to be hampered by low levels of implied and realized volatility. Looking ahead, increased new issuance, a lower entry point for directional volatility strategies, and potential increased regulatory and central bank activity should benefit, potentially leading to a pickup in dispersion and rates. |
| Event Driven | Neutral but gradually improving outlook with some dispersion at the sub-strategy level. Merger arbitrage and special situations strategies should benefit from pent-up demand for dealmaking, less economic uncertainty, and improved management confidence. Activists continue to benefit from ongoing institutional support, improving governance, and tailwinds related to the upcoming proxy season. |
| Credit | Improved and upgraded outlook, prompted by expectation for more corporate activity in 2024. We anticipate greater dispersion of outcomes favoring active long/short credit managers and continued relative cheapness and inefficiencies in structured credit. |
| Global Macro | Potential risks and opportunities abound around several political elections and central bank policy decisions, as macro managers face a busy calendar. EM specialists, challenged by multi-year outflows, may begin to find an improved opportunity set as inflation-related headwinds begin to subside. |
| Commodities | Macro and geopolitical factors—like the ongoing war in Israel, the Saudi push for OPEC+ production cuts, and potential Chinese stimulus—continue to impact the commodities markets. There should be ample trading opportunities within relative value strategies. |
| Insurance-Linked Securities (ILS) | January renewal pricing is expected to be up slightly year-over-year, after a relatively quiet 2023 in terms of events. 2023 was a record year of catastrophe bond new issuance, and we expect an active and attractively priced new issuance pipeline throughout the first half of 2024. |
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.