Morgan Stanley IM: The Arrival of Long and Variable Lags: How We’re Investing
Jim Caron, Co-Lead Global Portfolio Manager and Co-Chief Investment Officer, Global Balanced Risk Control Team, shares his macro thematic views on key market drivers.
25.01.2023 | 10:36 Uhr
We expect the release of new economic data to be wide, varied and somewhat asynchronous.
Said differently, the arrival of long and variable lags from the
rapid pace of policy tightening will now have an effect on market data
This may lead to higher volatility as the market is apt to change
its mind frequently on which tail risks it wants to latch onto. This
happens when tail risks are fat, as they are in 2023.
Beyond this, a key Fed mouthpiece signaled a 25 basis point Fed hike
at the Feb 1 meeting, and maybe one more in March, pushing everyone
toward the left-tail. No wonder volatility is high!
This combination of fat-tail risks and sizeable amounts of money on
the sidelines will make managing risks particularly difficult in 2023.
Adding to the difficulties is that return correlations between fixed
income and equities are still very high, which makes it mathematically
challenging for traditional portfolio management techniques (e.g. 60
Equity/40 Fixed Income) to reduce risk.
The key to managing this type of volatility, the distribution of
market risks, is to construct a portfolio of offsetting risks and
achieve diversification, or risk reduction, through this balance.
Diversification does not eliminate the
risk of loss. There is no assurance that the Strategy will achieve its
investment objective. Portfolios are subject to market risk, which is
the possibility that the market values of securities owned by the
portfolio will decline and that the value of portfolio shares may
therefore be less than what you paid for them. Market values can change
daily due to economic and other events (e.g. natural disasters, health
crises, terrorism, conflicts and social unrest) that affect markets,
countries, companies or governments. It is difficult to predict the
timing, duration, and potential adverse effects (e.g. portfolio
liquidity) of events. Accordingly, you can lose money investing in this
portfolio. Please be aware that this strategy may be subject to certain
additional risks. There is the risk that the Adviser’s asset allocation methodology and assumptions regarding
the Underlying Portfolios may be incorrect in light of actual market
conditions and the Portfolio may not achieve its investment objective.
Share prices also tend to be volatile and there is a significant
possibility of loss. The portfolio’s investments in commodity-linked notes involve
substantial risks, including risk of loss of a significant portion of
their principal value. In addition to commodity risk, they may be
subject to additional special risks, such as risk of loss of interest
and principal, lack of secondary market and risk of greater volatility,
that do not affect traditional equity and debt securities. Currency fluctuations could erase investment gains or add to investment losses. Fixed-income securities are
subject to the ability of an issuer to make timely principal and
interest payments (credit risk), changes in interest rates
(interest-rate risk), the creditworthiness of the issuer and general
market liquidity (market risk). In a rising interest-rate environment,
bond prices may fall and may result in periods of volatility and
increased portfolio redemptions. In a declining interest-rate
environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Equity and foreign securities are
generally more volatile than fixed income securities and are subject to
currency, political, economic and market risks. Equity values fluctuate
in response to activities specific to a company. Stocks of small-capitalization companies carry
special risks, such as limited product lines, markets and financial
resources, and greater market volatility than securities of larger, more
established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Exchange traded funds (ETFs) shares
have many of the same risks as direct investments in common stocks or
bonds and their market value will fluctuate as the value of the
underlying index does. By investing in exchange traded funds ETFs and
other Investment Funds, the portfolio absorbs both its own
expenses and those of the ETFs and Investment Funds it invests in.
Supply and demand for ETFs and Investment Funds may not be correlated to
that of the underlying securities. Derivative instruments can be
illiquid, may disproportionately increase losses and may have a
potentially large negative impact on the portfolio’s performance. A currency forward is a hedging tool that does not involve any upfront payment. The use of leverage may increase volatility in the Portfolio.
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