Year-End Optimism and Market Shifts
As we approach the close of 2024, global markets are signaling optimism, driven by evolving dynamics and substantial policy recalibrations. This year has been marked by critical shifts in economic and political landscapes, which continue to influence investor behavior and portfolio strategies. Against the backdrop of recent US presidential elections and a broader re-calibration of risk management strategies, the investment committee reflects on key developments shaping the financial markets.
Market Dynamics
Investors are setting up for a bullish year-end, as most US presidential election hedges have now been unwound. We believe that the full implications of the election results are still being digested, with small uncertainties around tax, trade, and immigration policies. The whole world didn't just adjust their risk overnight. There will probably be prevailing trends following the elections. November indicated that this argues for a broad set of reflation trades; a pro-cyclical approach to stocks, with high GDP growth and a benign investment environment. The flow of funds should be clearly bullish and implied volatility will plummet further. Bonds, however, are threatened.
Structural Shifts in Market Fundamentals
There’s something structural going on under the hood, which is the hedging flows of market-makers and derivatives dealers warehousing hedges and overwrites. It’s principally a function of what underlying positions live beneath the surface and require dynamic hedging. These flows are the new “fundamentals” of the stock market universe. Option flows have grown dramatically during the past years. Market-makers can’t warehouse all such risk; hence they go out in the market to hedge it. Because of the vast volume, their hedging activity dominates the market.
Evolving Role of Derivatives in Market Strategies
We see that a vast number of people are still not comfortable accepting that we don't need to see a price for the underlying. The price of any stock may be derived from the price of its options. Consequently, client portfolio diversification goes beyond just what we invest in. Today it also includes how. And the derivatives market currently includes clearer signals than the cash equity market. For December, it favors long risk appetite, and we see very few reasons the Christmas party may be threatened.
Conclusion
The investment landscape at year-end remains vibrant with significant opportunities, underscored by a pro-cyclical momentum and advancements in derivatives-driven market analysis. As these trends consolidate, they reaffirm the importance of a dynamic, informed, and diversified approach to portfolio management. Looking ahead, the committee remains cautiously optimistic, prepared to navigate any emerging risks while capitalizing on the positive macroeconomic and market signals. This commitment to adaptability and foresight will continue to define our investment strategies into 2025 and beyond.
Authors: John Couletsis and Kostas Metaxas