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Special situations – still a place to be, says Lyxor

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The Lyxor Hedge Fund Index headed north this week. Special Situations outperformed, followed by CTAs – thanks to rates and equities – and Global Macro – thanks to commodities and equities.

That’s according to the latest Weekly Brief from Lyxor’s Cross Asset Research Team which says that: “Robust economic prints and cautious monetary normalisations are prolonging the goldilocks for US equities and for dollar assets – including EM markets and cyclical commodities. Gold was up on receding inflation prospects, unlike govies yields still under pressure. The ECB, which suggested tapering announcements at its October meeting, did not put an end to the EUR rise. Oil progressed +6 per cent, factoring for a part refineries disruptions after Harvey.
 
“They seem gone the days when prospects of infrastructure spending, tax cuts, foreign cash repatriation, healthcare reforms would move both equity sectors and stocks in multiple directions. Since then, monetary decisions and the pulse of global growth regained their status of dominant market drivers. Amid rich valuations, investors in the US are more demanding regarding companies’ top-line growth and earnings surprise.
 
“In this context, deep value activist positions continue to be appealing for many. They provide strong tailwinds for Special Situations funds. And they are not short of ideas. Over the last quarter, nearly 20 new positions were instated by the top US activist managers, coming in addition to the numerous new campaigns started since last year.
 
“More than half of these targeted stocks are mid or small caps, predominantly in the Tech, Healthcare, Industrial and Consumer sectors. In aggregate they display more attractive valuations than their peers that are included in mainstream indices. Their credit profile is slightly weaker though. An equally-weighted basket of these positions shows a substantial inflection in revenues and earnings since mid-2016, though progresses have somewhat moderated lately.
 
“The upside for activist stocks might be less stellar going forward. However, when most investors look for extra-growth and yield, we expect them to continue looking for it in the Special Situations’ hunting ground.”

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