Morgan Stanley Analysts Foresee Quantitative Strategies Continuing to Succeed in 2023

Strategists from Morgan Stanley anticipate that quant shops will maintain their impressive performance in 2023 following a record-breaking year in the past twelve months.

Data from Societe Generale SA reveals that the math experts of Wall Street achieved a return of approximately 4% in 2022, which was significantly higher than the results of human investors. Unfortunately, all major asset classes experienced significant losses in the same year, with hedge funds losing almost 4% according to Eurekahedge data.

The resurgence of macroeconomics as the primary influence on markets has been advantageous for quants. Central banks raising rates to control inflation has been a boon for trend followers, while the return of interest rate differentials has revitalized carry strategies, which involve investors profiting from the gap between rates of different assets.

By 2023, the strategists at the bank anticipate that many of the trends seen in the current year could be reversed, leading to quant returns on the journey back as well.

Morgan Stanley's quantitative analyst Stephan Kessler and strategist Vishwanath Tirupattur predicted that the current performance trends are likely to persist in the upcoming year in a research note.

Analysts anticipate that as the macroeconomic environment changes, with interest rates reaching their peak and an economic downturn on the horizon, new short- to medium-term trends will emerge. This should be beneficial for rates value strategies, while trend traders may experience a lesser degree of benefit than in the past year when the economic outlook shifts in 2023.

Kessler and Tirupattur suggested that a rates trend-following strategy with a long-term focus on rates could be a beneficial approach to take advantage of the current market trends and increasing rates.

Experts have suggested that selling rates volatility could be a lucrative venture in the coming year, as policy rates reach their highest point and inflation slows down.

Kessler and Tirupattur are proponents of foreign currency carry strategies due to the disparities between key rates. They believe that investing in bonds from countries with high rates could be advantageous, as the value of the bonds will increase when rates return to a more typical level.

Morgan Stanley strategists have identified a combination of value and quality strategies as attractive for the upcoming year, in addition to the ones already mentioned by Kessler and Tirupattur.

Strategists from Morgan Stanley have suggested that investors should focus on undervalued stocks of good quality in the current market climate, which is still favorable for value investing and has high levels of volatility. They have referred to this approach as crossing value filters with quality filters.