Philippe Ferreira

Philippe Ferreira

Director, Senior Cross-Asset Strategist

Lyxor Asset Management


Cross-Currents Drag L/S Equity Lower

17 Sep 2018

Investment Partners

It’s been a puzzling start to the month. A sector rotation in equity markets has fueled defensive sectors such as Telecommunications Services and Utilities in the U.S. Meanwhile, the détente in Italy in a context where political leaders (including both vice-premiers) have showed commitment with Brussels has bolstered European financials. In both regions, the sector rotation has been at the expense of IT stocks, an outperforming sector year to date. Concurrently, the U.S. administration continues to blow hot and cold on trade wars, which generates market moves away from fundamentals. Such rotations have generally caught L/S Equity managers on the wrong side. The strategy underperformed last week according to publicly available benchmarks and throughout the current quarter.

In the FX space, the recent depreciation of the U.S. dollar reversed the upward trend registered over the past six months. In particular, the rebound of the GBP versus USD, amidst positive developments regarding the Brexit deal with the EU, has been a drag on CTAs, which maintained short positions on the Cable until recently. The strategy was also down last week but is still leading the pack this quarter so far.

On a positive note, Fixed Income Arbitrage continues to prosper, in relative terms. Although performance is flat on a quarter-to-date basis, it remains the best performing strategy since the beginning of 2018. It has consistently outperformed bond benchmarks since the rally in fixed income markets peaked in mid-2016.

In terms of investment recommendations, we maintain an Overweight stance on Fixed Income Arbitrage. We find the strategy particularly attractive to diversify bond portfolios as robust economic activity and monetary normalization in the U.S. should continue to put upward pressure on bond yields globally. With regards to L/S Equity, we remain Neutral with a preference for variable-biases funds. We do not believe the equity sector rotation is sustainable and maintain a preference for growth stocks. Finally, we turned more constructive on CTAs. The positioning of the strategy is reasonably balanced and the risk of a significant trend reversal in equity and bond markets appears limited.


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