Investment Committee – January 2024
The investment landscape of 2023 was characterized by a notably dynamic correlation regime, particularly between equities and bonds. This environment posed significant challenges for maintaining effective hedges to mitigate downside risk. Despite these challenges, certain investment strategies outperformed, notably high-dividend paying stocks and short equity volatility positions. Our firm’s decision to hold high-dividend stocks was vindicated, although the decline in equity volatility levels did not facilitate the monetization of our hedges.
The year was largely marked by a lack of inspiring market movements, with considerable effort required to maintain portfolio positions, a sentiment that can be encapsulated as “running around just to stay still.” Despite this, we are pleased to report satisfactory performance across our three flagship products: Unicorn, Global Navigator UCITS, and our fixed-income actively-managed certificate.
The bond market experienced a rally in the last quarter, bringing down the interest rate curve across all maturities. This move has led to market expectations of a significant shift in monetary policy, with market-implied probabilities suggesting US Dollar rates could be 1.50% lower by the end of the year. The breaking of the bond downtrend, which persisted for over three years, reflects the discounting mechanism of informed investors’ expectations, rather than a random aggregate of uninformed market participants’ beliefs.
The Federal Reserve has signaled the onset of an interest rate cuts cycle within the year, aligning with its role as an agent of stability and a volatility absorber. Barring an unforeseen external catalyst, we anticipate that 2024 will continue along the trajectory set in the previous year.
In the prevailing bull market, we recognize that beta is the prevailing winner, as the rising tide lifts all boats. However, it is crucial for our investors to understand the trade-off involved with hedges, conservatism, and low leverage, which may restrain the returns of client portfolios.
Looking ahead, the main scenario for a bull market involves rapid interest rate cuts. However, the Investment Committee identifies two potential obstacles to this outlook:
- The lower inflation outlook has not yet materialized. While US inflation peaked in June 2022 at 9.1%, November Consumer Prices were still at +3.1%, marginally higher than June’s +3.0%.
- Strong economic growth, as evidenced by the upward revision of US third-quarter GDP growth to +5.2%, may cause central banks to hesitate in reducing interest rates swiftly.
In light of these considerations, our strategies are well-positioned to outperform for the year, even if these potential hindrances materialize. The Committee remains vigilant and will continue to monitor these developments closely, ready to adjust our investment strategies as necessary to optimize client portfolio performance.
Authors: John Couletsis and Kostas Metaxas