- As the dust settles: despite the famous "sell in May and go away" adage, May ended up being the best month in terms of US equity vs. bond performance since Jun-2023 and US equities are back in positive territory after the strong equity market rally. The rally was once again largely driven by the Mag-7 stocks, some of which are now trading near their all-time-highs. With the strong equity performance over the past month, our Equity Strategy team now sees limited upside potential in holding equities.
- Adding QIS to enhance returns: US equities have delivered >20% returns each year for the past two years. This is a very rare occurrence outside the late 1990s and has only happened twice in the past 100 years; and in both instances cumulative returns in the subsequent two years were negative. It is hard to argue in favour of diversification during periods of more than 20% returns in US equities, although we expect 2025 to be an environment of global portfolio rebalancing and limited returns in equity markets. During such times we believe adding QIS indices to your typical 60-40 portfolios could enhance returns, particularly by adding carry strategy to replace some equity risk in your portfolio.
- The trend has not been a friend: trend strategies have been under pressure since the JPY carry trade unwound in mid-2024. The environment of macro regime shift since last summer has driven an underperformance in terms of trend strategies. 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. We are currently going through a correction period for trend strategies after a strong four years of performance after COVID. Our risk-premia framework is once again suggesting an overweight positioning in trend strategy, although financial markets are still being driven by short-termism, which makes historical analysis difficult. As a result, we remain cautious on trend and focus on carry.
- Keep calm and carry on! In our last publication (Risk Premia: After Liberation Day) we highlighted our preference for BBVA FX LatAm carry strategy. Since then, the popularity of EM carry trades has increased with the continued depreciation of the USD. We suggested the normalisation of macro volatility combined with near record high ex-ante carry potential as drivers, and we still see these pushing more investors into carry trades. The question most asked by clients on the topic is: “can carry strategies perform despite flat/negative equity returns”. In this publication we look at the past episodes of carry strategy performance despite limited equity returns. Our short answer is yes, as long as the rate differential, i.e., the carry potential remains high. We also see credit carry as a diversifier in our already constructive view of the FX LatAm carry trade.