Due to their distinct characteristics, we are taking a differentiated look at liquid and illiquid alternative investments.
Divergent monetary policies in the United States and Europe should continue to help create exploitable trends in foreign exchange (FX) and rates. This year's U.S. dollar strength has also forced a very diverse set of adjustment paths on emerging markets, which should create a healthy pipeline of opportunities both from a directional and arbitrage standpoint in local currencies and rates. Within the commodity trading advisors (CTAs) space, short-term models are to be favored over long-term trend followers as the latter still hold long developed-market rate positions to a large extent, while also being generally long equities. In the shorter term, mean-reversion models tend to fare better in rangebound markets and at inflexion points, adjusting their trading systems more quickly to new trends. This could be extremely relevant to U.S. and possibly European rates, given current market moves.
Equity market-neutral strategies focussing on arbitraging single stocks’ fundamentals while maintaining sector and regional neutrality should continue to do well. Stocks’ dispersion remains at healthy levels with increasing differentiation between poor fundamentals and earnings releases and good earnings announcements with improving fundamentals. Directional long/short equity strategies operate against a backdrop of equity markets, which range from being fairly to fully priced. U.S. equities could deliver some limited upside this year with the Fed expected to kick-start hiking rates, even if at a gradual pace. Since the start of the year, European equities have already re-rated to a large extent and now need a significant earnings recovery to materialize to justify current multiples. The recent re-appreciation of the euro does not help in this respect.
In the United States, economic conditions remain favorable. The current development cycle continues at a measured pace, helping to maintain income growth in the rental market. The industrial sector appears on the most sustained growth trajectory. In Europe, Tier-2 German cities should increasingly benefit from the strong pricing of the Tier-1 market. Selected opportunities in Southern Europe, primarily in Spain and Portugal, should unfold as the economic recovery gains steam. European logistics remains the segment with possibly the best fundamentals. In Asia, the logistics segment in core markets (Australia, Japan, South Korea) still offers an attractive income component and some defensive qualities. In China, the recapitalization of some troubled developers continues, leading to potential opportunities in the retail and residential sectors.