Despite some noise in recent economic data, we still believe that the cumulative effect of many years of high inflation–combined with stagnant real wage growth from slower job creation–could put pressure on US household spending over the near term. While a US recession may not materialize, we think the deacceleration will be enough to justify further recalibration of interest rates. As such, we believe that US monetary policy easing, accompanied by global uncoordinated fiscal impulse (e.g., China, Europe pending), should be supportive of risk assets into year-end and beyond.
Nevertheless, we do not plan to increase the beta in our portfolios as we remain wary of stretched valuations in US equity markets and rising geopolitical risks. Within Equity Hedged, we still maintain high conviction in core themes including AI, biotech, and energy. We are also pursuing opportunities in global financials given our expectation that interest rate curves should steepen in a soft-landing environment. Despite lackluster performance from discretionary macro over the last 18 months, we continue to hold a core allocation. We believe that the onset of monetary easing cycles and the US elections could catalyze more opportunities for macro investors. The strategy can also provide a source of positive convexity in risk-off scenarios.
Elsewhere in Trading, we plan to allocate more capital to commodities, with a focus on energy and power markets as climate change continues to drive secular transformation in these sectors. We are also exploring opportunities within agricultural commodities as they experience similar phenomena. Within Credit / Income, we plan to maintain current allocations to corporate long / short credit strategies but continue to reduce more directional corporate credit strategies as we believe current spreads do not appropriately compensate investors for the risk. In Relative Value, fixed income relative value (FIRV) strategies will be further reduced given our moderate return expectations. Balance sheet supply could become more constrained with increasing demand from multi-strategy and quant funds seeking to branch out of equities.