Market overview

Lyxor Cross Asset Research Q1 2021 : Lights On The Horizon

Investment Strategy By Lyxor Cross Asset Research 
First Quarter 2021

 

Macro & Market Views
The page is about to turn on the pandemic and on four years of unorthodox U.S. foreign policies. Investors are contemplating a landscape in 2021 that may not have been as propitious for years. The normalization of world economies would accelerate, amid lower geopolitical uncertainties, still ample global liquidity, and large accumulated savings being put back to work. Meanwhile threats and distortions from unprecedented monetary and fiscal stimulus would not immediately surface.


Thus, investors’ top four concerns might focus on i) getting the right sequence of regional, sectors and factors uneven recoveries, ii) navigating rich, consensual, and crowded assets, iii) finding alternative means to hedge their risks amid grounded yields, and iv) dealing with the current lingering wildcards: the global economy is not yet out of the virus wood and still faces a challenging winter with the time frame to roll out vaccination programs needing clarification. Also, future U.S. policies remain tied to the two remaining Georgia Senate elections in January.


We expect markets to look through these transitory factors and would add adding risk, combining growth-at-reasonable-price with value assets, both regionally and at sector levels. We are O/W on global equities, in particular on U.S. and Japan, while staying tactical on EMU and UK, where risk appear higher. We are neutral overall on EM, skeptical they can sustainably outperform DM equities yet, favoring selected countries exposures. Capped by dovish central banks, we are neutral on Govies, with a negative long-term bias, but long U.S. inflation breakeven. Within credit, we are O/W on U.S. HY and EU periphery spreads and neutral on fairly valued EM HC debt. EM currencies offer catch-up potential (O/W). We favor Copper over Oil and downgraded Gold to neutral, which may have past its peak.

 

Alternative Strategies
Alternative strategies delivered robust returns so far in Q4 2020 (+2.4%) considering their moderate equity market beta, which we estimate at below 15% at present. Alpha generation has been positive and significant in recent months.


Going forward, we proceed to some adjustments to reflect better economic prospects. We upgrade Special Situations and Directional L/S Equity, at the expense of Merger Arbitrage and Fixed Income Arbitrage. Meanwhile, our stance on Global Macro and L/S Credit remains constructive while we stay defensive on Market Neutral L/S. The strategy remains vulnerable to factor rotations which we expect might continue.


Overall, we maintain our preference for Event-Driven vs. L/S Equity and Global Macro vs. CTA. Rich valuations and policy risks suggest some strategies with limited directionality, such as Merger Arbitrage, continue to bring elevated value added to achieve portfolio diversification.