Investment Committee – November 2022


Focus on value and fixed income opportunities

Private Equity in KM cube

This month, KM Cube’s Investment Committee had the honor and the privilege to welcome Mr. Takis Solomos of Elikonos Private Equity Fund, to discuss the potential for private equity in Greece, capital raising, maturity of private investments, and the prospects of future unwinding of such holdings. The discussion was both lively and enlightening and offered a refreshing alternative aspect to portfolio asset allocation for our clients. The Committee has prepared a comprehensive presentation of how KM Cube views private equity in our region and the challenges and opportunities in this environment.

Hedging in 2022

The Committee examined how equity hedges have underperformed in 2022. The main scenario is that this year most investors are probably losing money both from their stock portfolio and their hedges.

Interest rate volatility spillovers

Interest rate volatility as measured by the MOVE index

Interest rate volatility remains elevated but has not spilled over significantly into stocks. Equity volatility as measured by moves in the S&P500 index orbit around half the moves before the crisis. VIX trades anyplace between 22-37 instead of 47, and the volatility-of-volatility VVIX index is around 80 instead of over 120. Equity volatility has absorbed negative news and, evidently, a catalyst is required to see risk aversion significantly higher.

What are the factors for the FED to change its course of action?

Fundamentally, the US Federal Reserve will pivot only if the labor market softens fast enough and is convinced of a sharp move back to 2%. Lowering demand sufficiently to bring job vacancies back into line with unemployment is clearly not going to happen anytime in the next several months.

Is political pressure a possibility for the FED to lower rates?

There is very little noise from the Biden administration suggesting that this is even close. The Committee recalled how President Trump was very loud on such prospects but Fed Chairman Powell did not budge. It will take an outright full-blown recession before the current administration attempts to draw a line to the Fed’s actions.

As lending in the US slows into the low single digits it gradually causes a liquidity shortfall and perhaps a self-reinforcing credit event. We believe this is an incremental process, hence we consider it still very unlikely for this year; though members stressed that this may become increasingly likely as we go through 2023.

Our key indicators going forward

KM Cube focuses on two cases: First, a stronger US Dollar, and second, forced selling possibly from risk-parity funds or 60/40 portfolios. A collapse in global excess US dollar liquidity and the potential for forced selling of parity portfolios creates an increasing likelihood that some stress may emerge in the US market, bringing forward the endgame for heightened interest-rate volatility.

Value portfolios

For the remainder of the month, we remain focused on enhancing our value stock selection process as this remains a core strategy for KM Cube. Our value-oriented stock portfolio stands out as the single most important outperforming factor for the year, in a trend that the Committee believes is a structural turn towards value stocks for the forthcoming years.