Investment Committee – January 2023
Authors: John Couletsis and Kostas Metaxas
The KM cube inaugural investment committee for 2023 recently met to discuss its strategy for the coming year. The committee members acknowledged the wide range of forecasts among market participants and the expected volatility in the market over the next twelve months.
The Role of Micro Factors
One of the main topics of discussion in the committee was the importance of understanding how and why data changes, and how macroeconomic signals can deviate from the micro explanatory factors we are focusing on nowadays. The committee offered the example of the S&P500 and how the index traded around 3835 for days before year-end due to a gargantuan long gamma derivative structure expiring on December 30th at 3835, rather than due to typical end-of-year market activity.
Inflation was also a key topic of discussion, with the committee recognizing that inflation has spiked in recent months but the signal is uncertain and unreliable when it comes to predicting whether inflation will continue trending higher, stay the same, or revert lower. The committee emphasized that it is essential to focus on exploiting alternative risk premiums and seeking to utilize structural risks, instead of trying to predict inflation or any other macroeconomic signal.
Consensus forecasts for 2023
The consensus for 2023 among several major institutions is that it will be a year of mixed economic conditions and uncertainty with low growth, tight monetary conditions, and inflation peaking but remaining above central bank targets. Fixed income assets may become more attractive but volatility in interest rates is a risk. Central banks are expected to remove accommodative policies and bond markets are pricing in tighter policies. The global economy outlook is muted, with China in a growth recession and the Eurozone and UK expected to slip into recession. Alternative investments such as equity neutral and macro strategies may offer attractive returns.
The committee members also agreed on focusing on a very short time horizon and exploiting the definite feature of the markets: the passage of time. They decided to invest heavily into positive-carry positions, reduce the bond portfolio duration, and tilt the core equity portfolio towards value stocks and high dividend equities in particular.
In conclusion, the KM cube inaugural investment committee for 2023 is taking a cautious approach to the market, recognizing the volatility and uncertainty that can arise from macroeconomic signals. Instead of trying to predict these signals, the committee is focusing on exploiting alternative risk premiums and utilizing structural risks to create a well-rounded, representative portfolio.