Once-in-a-career shift: we have been living in unprecedented times since the start of the year, with a once-in-a-career shift in German fiscal policy, US trade policy and transatlantic relations. Each of these individual changes has the potential to significantly impact the financial markets, and when combining all three events together, predicting market performance and writing market outlooks has never been more challenging. We believe the current environment is supportive of using quantitative tools and frameworks based on evidence to drive potential investment outcomes. We have once again seen consensus trades underperform despite strong fundamentals, as in the case of the AI thematic.
Dispersion is the new normal: the dispersion between equity regions, sectors and factors have been significant since the start of the year. This theme has also been observed in our risk-premia space with average pair-wise correlation between risk-premia strategies making a new low. Navigating increasing global divergence was the headline in our 2025 outlooks and this is exactly what we have observed year-to-date.
Looking ahead: we expect the dispersion between regions, assets and risk premia to remain intact. We suggests a well-diversified portfolio in the current environment with significant shifts in the macro environment. The Sharpe ratio will likely remain key to allocation. The Credit trend is our preferred risk premia of the month. That said, we are looking for a better entry point for cross-asset trend strategies. FX carry continues to be worst performer since the global JPY carry unwind. We see the stars aligning for carry strategy again once we have more clarity on US trade policy.