Systematic Core Macro

What were the major recent events and impacts on your asset class?

So the end of Q1 was dominated by a lot of turmoil actually, as the outcome of the Silicon Valley Bank crisis impacted a lot of macro markets. But as we come into Q2, we've seen much more of a risk on tone re-establish itself with gains across most major equity markets. Particularly in the US, we've seen strong growth in tech stocks propelled by enthusiasm and strong earnings, particularly amongst expectations around the prospect for artificial intelligence (AI). And actually, in Japan we've also seen very strong equity performance with the Nikkei reaching highs, really not seen since the all-time highs of the late 1980s.

So to add to what Chris just described, one thing we need to mention looking back at the last quarter is how central banks have addressed the matter of inflation. So in the US, the Federal Reserve (Fed) has paused rate hikes despite inflation proving sticky. However, in the UK and Europe, central banks did continue to increase rates and, in the UK, for example, the two-year yields have reached 5% mark, which hasn't been seen since 2008. Another topic of interest during the quarter certainly being the matter of the debt ceiling in the US. So as the Government was approaching the date by which it wouldn't be able to pay its bills, there was nervousness increasing in the markets. Market stress indicators worsened and this led to an increase in volatility in both equity and bond markets.

Commodities is another diversifier that is worth mentioning. They have experienced a widespread decline over the last quarter, and really year, partly due to the slowdown in the Chinese post-Covid economy. In particular, oil prices fell and that, despite an ongoing conflict in Ukraine, as well as an announced production cut in Saudi Arabia. Meanwhile, there have been a number of major grains markets that have experienced the opposite of that, and that is partially due to the impact of El Nino, but also growing concerns of droughts in key growing areas. Gold is another one worth mentioning because there the climb, the increase, in prices is really due to central banks increasing buying.

What can your asset class offer in the current environment?

Indeed, in an environment with increasing interest rates, systematic macro strategies can offer the ability to capture global opportunities. These strategies are designed to be able to identify opportunities across different countries and regions, taking advantage of diverging interest rate policies. To give an example, the yen continued weakening against the US dollar and that's due to a large rate differential. Another example would be emerging market currencies, where again the outperformance can be mostly attributed to high yield differentials benefiting carry trades. So Q2 has actually been actually really interesting from our perspective because we've seen a lot of diversification and dispersion in positioning between different kinds of systematic styles, even in a quarter where various different styles have all performed quite well. For example, we've seen managers focus more on trend following styles, including ourselves, really benefiting from some of the rallies that we've seen across equity markets. However, for value-based approaches, some of the dividend yields that we've seen in equity markets have become less attractive against the background of a higher risk free rate. And we've seen carry style approaches look for opportunities elsewhere, for example, as Farida already alluded to in terms of more attractive rate differentials, particularly emerging market foreign exchange (EM FX) assets such as some of the LatAm currencies.

What is your outlook in the near and medium term?

So in contrast to some of the turbulence that we saw actually at the end of Q1 or even actually going back to the end of 2022, generally the positioning and views that our models and similar managers like ourselves have had have actually remained remarkably stable over this quarter. Generally, we've seen that trend following styles have generally remained positioned long equities in order to benefit from medium or long term continued rallies in these asset classes. Of course, with risk mitigating measures in place in the event of shorter-term market corrections. We've also seen that carry style models are generally positioned to continue to benefit from the broader interest rate differentials that we've seen, particularly in the EM FX space and regionally, generally the strong economic growth that we've seen in Japan has meant that models have been tilting their risk allocations more heavily towards that market. Elsewhere, particularly in commodities, we've seen more mixed views, for example, in energy, as we've seen, models take a negative view across both oils and natural gas as prices have declined recently in those markets and in industrial commodities such as copper, we've also seen models taking negative views in light of recent sluggish economic data coming out of China.

Is there one chart you’re currently monitoring closely?

So one of the charts that we'll be looking at for sure going forward is that of the Vix. Vix is a volatility index, also known as the fear index, and it's an indicator of the expected volatility of the equity markets and it also gives us a sense of the gauge of the investor sentiment. Now, this is important because we're currently trading at a level which we haven't seen since pre-pandemic or for that matter, it's the lowest level since the start of the Russia-Ukraine conflict, and it's below 20. This is important because systematic macro, commodity trading advisor (CTA) strategies, are somewhat perceived as long volatility strategies. And this is true because research has shown that investment approaches like trend following tend to do disproportionately well in cycles of higher volatility. However, our research also shows that in moments of lower volatility, investment approaches based on value-like methodologies tend to do really well.