Jeanne Asseraf Bitton

Jeanne Asseraf Bitton

Head of Market Research

Lyxor Asset Management

Clouding Up

09 Apr 2018

Active Strategies

Macro & Market Views

World growth prospects will likely remain supportive with fiscal support kicking-in in the U.S., investment recovering in EMU, Japan still on the path to exit deflation, and little risk of a hard landing in China. The inflation picture should stay low but shift gradually amid closed output gaps in the U.S. and Japan. We would overweight U.S. breakeven and retain our cautious stance on U.S. bonds. While the goldilocks macro backdrop may be sustainable, richly valued risk assets are confronted with mounting headwinds. Financial conditions should deteriorate as central bank policy normalization advances. We upgrade our stance on gold as a hedge against protectionism that will likely intensify. We keep favoring Equity over Bonds though to a lesser extent.

U.S. equity risk reward appears unattractive amid looming late-cycle margin compression. Valuations and stage in the reflation process should favor Eurozone and Japanese equities but their relative behavior will, in our view, much depend on currency movements. Further Euro appreciation could undermine the Eurozone’s ongoing recovery and compromise equity market performance. The same holds true for Japan. We think that the balance of diverse country conditions warrants a slight overweight on Emerging equities. Oil prices are not expected to be disruptive this quarter as increased demand should balance out rekindled shale production. 

Alternative Strategies 

Markets are transitioning from goldilocks to late cycle. We still favor equities over bonds but risks are building up. At a time when the macro momentum is peaking, monetary normalization is accelerating and concerns about protectionism are intensifying. Meanwhile the pulse in European (and Japanese) reforms is yet to materialize and could be slowed by politics. 

The coming quarter is likely to offer bumpier and modest beta contribution. Meanwhile, constraints on alpha accentuated. While the coming quarter might be more difficult to navigate for hedge funds, they actually appear attractive relative to most other multi-strategy approaches. 

We positioned around five key axes: i) favor bottom-up over top-down strategies, ii) look for diversifying styles, iii) look for deep-value fundamental pickers, iv) make room for tactical funds, v) manage the overall beta exposure.

We would keep L/S Equity at benchmark. We upgrade L/S Neutral funds, in response to their improving environment. We still see better alpha in the U.S., but mainly for deep-value or tactical funds. The potential for L/S European funds seems compelling but might be slow to materialize, downgraded to neutral.

Merger Arbitrage brings the greatest diversification. We are OW. The shifting fiscal regime and the powerful sector dynamics bode well, even though the upside might be more modest after the spread compression. Special Situations remain attractive as they focus on deep value, hard-catalyst events, but their long bias requires hedging. We remain neutral L/S Credit.

The environment still seems soft for top-down funds. We have long argued that monetary normalization and late cycle features would result in greater economic volatility, more fundamental pricing, and asset returns dispersion. For now, synchronized central banks and politics constrain relative value opportunities. We downgrade CTAs to UW until trend-following conditions mend up. We are neutral on Global Macro.

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