Since the end of quantitative easing and the onset of turbulent times beginning in 2020, alternative strategies have become prominent again. With this in mind, we invited three experts to discuss alternatives in our monthly “Spotlight On” session. In our discussion, our experts explored key events and trends from the last few years and how alternative strategies have evolved when encountering these various market challenges. Debating the winners and losers of 2024 so far and the outlook for the rest of the year and into 2025, before identifying any specific opportunities and risks ahead of us.
We were delighted to be joined by:
● Stefan Gries: Co-Head European Equities & Co-PM Blackrock European Absolute Alpha
● Fred Ingham: Head of International Hedge Fund Investments, Neuberger Berman Uncorrelated Strategies Fund
● Josh Berelowitz: Portfolio Manager in the Macro Strategies team, J.P. Morgan Asset Management
Key takeaways
● The beauty of long-short investing is market dispersion making it possible to capitalise on both the strongest and weakest fundamentals.
● Disinflation is allowing central banks to ease rates, albeit relatively gradually, which is a positive backdrop for risk assets - though future returns are likely to be more modest.
● Being in a post-QE world means there is a high chance of the backdrop changing suddenly as markets deal with the reversal of unprecedented liquidity injections and bloated central bank balance sheets.
Fund positioning throughout 2023 and 2024
2023 and 2024 have been characterised by volatility, with the macro backdrop shifting considerably over that time. As a result, J.P. Morgan took a cautious approach in early 2023 due to concerns about global tightening by central banks and its economic impact, which culminated in the banking crisis in the US. As a result, they positioned themselves with low exposure to risk assets and a positive bias towards US duration.
However, mid-year, a macro shift occurred as the economic impact of tightening diminished, with data surprises to the upside. Confidence in the US economy grew in absolute terms and also relative to Europe and China, leading to a portfolio pivot towards a longer dollar position. Risk assets still faced challenges, and higher US inflation was anticipated, so a cautious stance on risk assets was maintained - though with an emphasis on the US dollar.
Recently, evidence of disinflation has emerged, particularly in the US, though growth has moderated - creating room for positive performance of risk assets and equities, with duration also performing better.
For Neuberger Berman’s team, it was crucial to maintain a stable allocation across its six main strategies throughout 2023 and 2024 - to remove any cognitive biases from their investment process. Looking at how specific strategies performed in that time, short-term futures trading focused on relative value movements amid mean reversion. Trend following benefitted from momentum in the dollar and equities, while fixed income faced volatility. Volatility relative value strategies focused on equity dispersion, while trading index volatility was challenging.
At Blackrock, when it comes to positioning and net and gross exposure of the fund, they base their investment decisions on what they perceive to be the most compelling opportunities within the universe of pan-European equities. In 2023 and 2024, despite prevailing pessimism, they did not subscribe to recession fears in Europe or the US post-COVID. Different sectors experienced varying post-pandemic trajectories; some faced challenges while others, like European banks, thrived with robust earnings growth. They, therefore, benefited from market dispersion when long-short investing, allowing them to capitalise on strong and weak fundamentals.
The long positions focused on enduring themes such as energy transition and semiconductor investments. Conversely, short positions targeted companies and sectors with structural issues and inflated market expectations, such as non-profitable tech concepts like food delivery.
Winners and losers of 2024 so far
For all our experts, there have been a number of key highlights in 2024 so far. For J.P. Morgan, long-term investments in computing, software, and healthcare innovation, particularly biopharma, robotic surgery, and obesity treatments, performed well. Plus, as the team’s strategy favoured the US dollar and remained cautious on China and other currencies, it fared well from the resilience of the US economy despite pessimistic market pricing for Fed cuts.
At Blackrock, their competitive performance from 2023 came from a diversified long book with notable names like Novo Nordisk, ASML, and Schneider Electric. The detractors were largely down to stock-specific issues, with most of them experiencing an element of normalisation after very strong earnings during 2020-2022 thanks to extraordinary demand and the extraordinary profits seen during that period. That includes some retail stocks, dental implant names, and speciality industrial chemicals distributors listed in Europe. The drag on these stocks’ performance is more a reflection of having seen a longer stock cycle, which thankfully is now coming to an end.
Neuberger Berman saw success in specific strategies. Winners included single stock dispersion, macro and trend allocations favouring the dollar, and insurance-linked securities. Positive momentum in Japanese equities and effective stock picking also helped. However, volatility trading, China recovery positions, convertible bond arbitrage, and statistical arbitrage faced challenges.
2024 and 2025’s outlook
The base case for Blackrock over the next 6 to 12 months is for a continued economic recovery with easing financing conditions and inflation moving towards central bank targets. The ECB's recent actions and positive Eurozone GDP and earnings revisions support this outlook, especially with depressed valuations in Europe compared to the US. Selectivity remains crucial as market dispersion is likely to stay high, but opportunities exist on both long and short sides.
For the next 3 to 6 months, at J.P. Morgan, growth appears stable, and disinflation allows for gradual central bank easing, supporting risk assets. Equities will focus on secular opportunities in cloud computing, software, medical technology, and emerging market financials. In fixed income, conviction in US duration is building, and value could be seen in emerging markets like Brazil. In FX, there is opportunity in favouring the yen against vulnerable currencies. There should be caution regarding European banks due to rising political risks, leading to a relatively cautious view on Europe.
For Neuberger Berman, there are a number of current uncertainties that will continue to provide a challenging backdrop. Political surprises in emerging markets like India and Mexico, along with global geopolitical tensions, add to concerns. Furthermore, the concentration of the US market in indices like S&P and NASDAQ, driven by a few dominant stocks, raises volatility risks. Additionally, recent spikes in ‘meme’ stocks and crypto trading highlight liquidity and asset price vulnerabilities while inflation, though fluctuating, remains elevated.
Market resilience may therefore face tests. Given historical patterns, preparing for potential shocks or volatility spikes is crucial. The base case for the Neuberger Berman team is subsequently one of modest rate reductions without significant inflation, but with risks remaining high. They will actively manage tail risks and breakout scenarios to capture potential market moves.
Opportunities and risks
Blackrock currently favours European construction stocks, semiconductor equipment companies, and energy transition businesses for varying reasons. European construction stocks will benefit from infrastructure investments and residential recovery. Semiconductor equipment firms in Europe lead in key technologies, with strong order books expected to boost earnings by 2025. Energy transition companies, particularly those upgrading grid networks, show potential after decades of underinvestment.
On the short side, Blackrock targets European auto manufacturers facing competition from lower-cost Asian rivals and diversified chemical firms in Europe struggling with energy disadvantages. They also short businesses with weak models and high gearing, such as those overspending on in-house AI capabilities.
for Neuberger Berman, some of their core strategies, such as macro and trend following, have risk-seeking exposure where the opportunity will be in trying to capture momentum in indices globally or carry trades in currency. Some of their strategies are designed to capture momentum breakouts at the shorter end of the spectrum, which will perform well if the environment changes suddenly. There is a high chance of this in the post-QE world, where markets are dealing with the reversal of unprecedented liquidity injections and bloated central bank balance sheets. Finally, some relative value opportunities exist due to different central banks being at different points in their cycles, facing different challenges. The dispersion between economies can create interesting opportunities for futures and macro traders.
Meanwhile, J.P. Morgan focuses on maintaining portfolio robustness by considering probabilistic scenarios. Adding to U.S. fixed income currently looks attractive as disinflation progresses, offering modest positive returns with the potential for stronger performance if economic stress increases. They also favour secular opportunities in the tech sector, driven by the shift to cloud computing and AI demand. Lastly, the challenging Chinese economic backdrop suggests low growth and inflation, making shorting the Chinese yuan appealing.