(Bloomberg) -- Morgan Stanley strategists expect quant shops to continue their strong run in 2023 after the rules-based cohort notched up a historic year over the past twelve months.

The math whizzes of Wall Street produced a profit of roughly 4% in 2022, Societe Generale SA data show, comfortably outpacing the returns produced by human decision makers. In a year when all major asset classes clocked heavy losses, hedge funds lost nearly 4%, according to Eurekahedge data. 

Quants have benefited from the re-emergence of macroeconomics as the driving factor for markets as central banks raised rates to quell inflation. This proved a boon for trend followers, while the return of interest rate differentials sparked a new life into carry strategies — where investors seek to profit on the difference between rates across assets.

In 2023, many of this year’s trends could reverse, according to the bank’s strategists, which should drive quant returns on the trip back too.

“These performance patterns are likely to continue in the coming year,” Morgan Stanley’s quantitative analyst Stephan Kessler and strategist Vishwanath Tirupattur wrote in a research note.

They also expect new short- to medium-term trends to emerge as the macro backdrop shifts, rising rates hit a peak and an economic slowdown follows — the bank’s base case for next year. This should boost rates value strategies while 2023’s about face will benefit trend traders, although to a lesser degree than in the past 12 months.

“One way to capitalize on the outlook for the continuation of trending markets and peaking rates is through a rates trend-following strategy with a long bias toward rates,” Kessler and Tirupattur said.

Selling rates volatility could become profitable again next year as policy rates peak and inflation slows, they said.

Foreign currency carry strategies are also favored by Kessler and Tirupattur, as differences between key rates persist, leading the duo to conclude that “being long bonds in regions with high rates may benefit investors as their holdings appreciate when rates eventually normalize.” 

Morgan Stanley strategists also highlighted in the bank’s outlook for next year a combination of value and quality strategies as attractive, on top of the ones singled out by Kessler and Tirupattur.

“While the environment continues to be favorable for value investing, with market volatility remaining high, investors should concentrate on undervalued stocks of high quality – crossing value filters with quality filters, in quant speak,” strategists said in Morgan Stanley’s outlook for 2023.

©2022 Bloomberg L.P.