This top-performing macro fund says the economic cycle is bottoming. Here’s why.

Regional banks are getting hammered, and the Federal Reserve is not about to ride the rescue. That’s because the Fed is still fighting rampant inflation, so the banks are stuck with losses in their bond portfolios due to the big spike in interest rates.

With that backdrop, we’ll turn to the managers of macro funds that leave most of the decision making to a computer model that analyzes 27 countries and 28 economic factors. This year, Deuterium Capital Management’s long/short fund has outperformed 97% of its peers, with a return of 5%. Its long-only fund that pits itself against other multi-asset funds has also returned 5% this year.

The market is expecting at least a hint that the Fed will head into neutral after one last rate increase, and Deuterium isn’t disagreeing. “Our models are saying they’ll probably go on a pause because our work on inflation suggested this was really a monetary phenomenon, and the real monetary push on inflation was in the third quarter of 2020,” said John Ricciardi, head of global asset allocation at Deuterium Capital Management.

The impact on prices came two years later, but now the fund manager is expecting disinflation. Already, producer prices turned negative, and he’s expecting the same from the housing component of consumer prices.

He doesn’t expect outright rate cuts as the economy is still growing, albeit softly. “So if you’re counting on the Fed to drive your investment policy, I think you’re in trouble. They’re going to go nowhere,” he said.

But the good news for companies is that the dollar is weakening — the firm is in particular betting on the dollar to fall vs. the Japanese yen and the Swiss franc — and inventories are getting depleted. “it’s one of the best modeling things I know,” he said. “Twelve months after when the inventories are going, you get a rebound in production. We’re going to get that now.”

Ricciardi said the funds are about to shift from an anti-cyclical stance to pro-cyclicals. “Our models are very emphatic that the cycle is bottoming,” he said. “It’s the pro cyclical sectors that have done least well, so there [are sectors] like communications and consumer discretionary, probably in technology as well.” Consumer staples or utilities are the types of stocks they are going to rotate out of.

He said the funds haven’t owned much tech for the last 15 months. Some of the Far East ex-Japan economies are “quite interesting as well,” which they haven’t owned in many quarters.

The biggest risk, says Vijay Modhvadia, managing director at Deuterium, is the Fed taking interest rates up to 6% or beyond. “The market is not prepared for that, and then obviously, we’ll go into a hard recession,” he said. “The biggest risk is central bank policy mistakes.”

The market

U.S. stock futures ES00, 0.13% NQ00, 0.14% held to a tight range ahead of the Fed decision, and after Tuesday’s 1.1% slide in the S&P 500 SPX, -1.16%. Crude-oil futures CL.1, -2.82% were trading around $70 per barrel. The yield on the 10-year Treasury TMUBMUSD10Y, 3.417% was 3.39%, and the dollar DXY, -0.35% was weaker.

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