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Trading
Our outlook for developed market (DM) discretionary trading managers has improved, and we plan to increase our allocations as we expect GOP policies to benefit cross-asset volatility and dispersion. We think that equities could be one of the best ways for managers to express views on policy outcomes. While we expect global growth to remain intact, growth in emerging markets (EM) could be negatively impacted by Trump’s policies. In addition, we predict that UK exceptionalism and a stronger GBP would likely overshadow EM country fundamentals, challenging rates and FX trading.
Equity Hedged
Despite rising volatility, we expect economic fundamentals and investor sentiment to generally remain supportive of risk assets. We believe that a moderate amount of beta in portfolios is warranted but intend to be selective on our sources given a wider range of outcomes with current administration. After a strong 2-year rally for risk assets, we plan to right-size some of our top-performing fundamental exposures within Equity Hedged, potentially opting for more opportunistic approaches in the future. We still maintain high conviction in themes in the technology, energy, and financials sectors. While we expect valuations for AI-related stocks to remain under scrutiny in 2025, we are firm believers in the durability of this theme and seek to broaden our exposure. In 2025, we anticipate Trump’s pro-business agenda will benefit capital markets activity and thus, we may increase our exposure to equity event, with a focus on ECM (equity capital markets).
Relative Value
In Relative Value, we plan to maintain our allocations to FIRV as rate volatility could continue to moderate, especially with more certainty around the monetary policy path in the UK and broader DM. However, if there are large dislocations, we may potentially add to the strategy. In merger arbitrage, we are optimistic for the opportunities that deregulation may bring but are less positive than consensus given the uncertainty from a new administration. We plan to reduce our allocations to convertible arbitrage strategies. Our outlook remains positive but is less constructive than last quarter, driven by an influx of capital in the space (particularly from managers in highly levered multi-strategy firms), tight spreads in convertible credit, and modestly richer valuations. We plan to redeploy some capital in quantitative equities (statistical arbitrage) as interesting bottom-up opportunities emerge. We remain encouraged by most quantitative equity managers’ ability to navigate recent market reversals.
Credit / Income
In Credit, all-in yields are still attractive, yet credit spreads have broadly compressed, making it more difficult to deploy capital in areas that we believe have limited impairment risk. As such, we expect our asset-backed and other income strategies to marginally amortize over the year. Within this bucket, UK residential real estate lending and reinsurance remain our highest conviction themes. We recently took some profits in the collateralized reinsurance space, and plan to maintain our exposure from here as risk-adjusted returns are still materially above average historical levels.
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