By Zain Nizami, Global Head Of Voice Equity Trading at UBS
In 2023, markets withstood some significant and stressful headwinds, from financials (SVB), macro regime uncertainty (and gyrations), new geopolitical tensions, and pronounced headwinds from slowing economic activity across the globe, especially in Q4. Despite all that, what stands out is VIX and MOVE closed the year at lows. Ultimately, what really drove markets and performance was extreme (mostly bearish) positioning that had built up over the prior 18 months in anticipation of varying degrees of recession/stagflation which didn’t occur. The extremes got ironed out and the subsequent positioning unwind accelerated in December after the last Fed meeting. Having said that, there has already been a pull back from some of the extended views, with a return of the bears’ playbook (wish list) from last year. So far in January, Defensives versus Cyclicals in Europe are up 4.5%, and in the US, up 3.4%. Mega cap tech, up 2.4% despite AAPL weakness, shows investors resuming their hug of defensives there. From bullish buy-side sentiment and conversations in December (albeit forced by rates move), signs of bearishness are returning very quickly.
So, what’s the set-up for 2024? The change in the calendar year has only really effected a reset of P&Ls for many, but not much else. The broader themes are still at play as has been evidenced by the desk’s flow; in some cases not much has changed except extreme positioning has been squared off. The Russell 2000 made a 52 week low-to-high move in just 50 or so days and there were nine consecutive weeks of higher S&P – so there will still be opportunities and advantages again to be pre-emptive rather than reactive to confirmatory data.
