Investment Committee – May 2024


Overcoming Obstacles

The Investment Committee convened to discuss the evolving market landscape, characterized by a complex interplay of disinflationary trends, geopolitical tensions, and technical market indicators. The Committee’s analysis in April proved prescient as volatility, measured by the VIX index, reached the anticipated target of 20% mid-month. This volatility underscores the need for a nuanced approach to the current investment climate.

Interest Rate Outlook and Equity Markets

The Committee’s consensus is that a sell-off in long-end yields is not the primary risk for markets at this moment. Despite interest rate forwards pricing in a higher-for-longer interest rate path, they remain below last year’s peak levels. This moderation in yields is partly due to increased policy divergence, as evidenced by the widening spread between US Treasury and German Bund yields.

With no significant economic data releases, relatively stable interest rates, a lull in geopolitical escalations, and supportive earnings reports, investors have experienced a period of relative calm. While interest rate cut expectations for 2024 may have been overly optimistic, the anticipation of lower rates in 2025 has provided sufficient confidence to maintain equity investments.

Derivative Market Flows and Gamma Exposure

The Committee continues to emphasize the importance of derivative market flows, particularly gamma exposure, as a critical component of our investment strategy. Our analysis indicates that gamma remains positive, with an estimated US$5.5 billion providing a buffer against sharp market movements. This positive gamma exposure suggests that substantial equity price drops are unlikely without triggering supportive flows that stabilize the market.

Liquidity Dynamics and Market Momentum

A significant shift recognized by the Committee is the permanent change in liquidity provision. The cessation of pandemic-era liquidity mechanisms on March 31st, 2024, marks the end of a critical support system for the US stock market. While we do not anticipate a reversion to previous market lows, the absence of new liquidity is expected to dampen market prospects in the coming months. The market’s inability to gain ground this month may be a direct consequence of this liquidity withdrawal, signaling the waning of the momentum trade that has been profitable since 2020.

Investment Strategy Going Forward

Given the current market conditions, the Committee advises clients to remain invested, capitalize on positive carry, and stay vigilant for emerging opportunities later in the year. While the momentum trade may be diminishing, conditions do not yet favor a significant market downturn. The Committee will continue to monitor market dynamics closely, with a particular focus on interest rate movements, geopolitical developments, and derivative market signals, to guide future investment decisions.

In conclusion, the Committee remains committed to a strategic approach that balances the need for vigilance in a volatile market environment with the pursuit of investment opportunities that arise from our in-depth analysis of macroeconomic factors and derivative market flows.

Authors: John Couletsis and Kostas Metaxas