Scenarios, Stress Tests and Strategies for First Quarter 2016

categories: Risk Management Analytics, Risk Management, Asset Owners, Hedge Funds, SURYANARAYANAN Raghu, KOUZMENKO Roman, ACERBI Carlo, VERBRAKEN Thomas, Asset Managers (Quant or Fundamental), BARLAS Jahiz, BRIAND Remy

The central scenario inferred from markets has evolved this quarter to one where investors expect economies to muddle through global uncertainty but with heightened worries about the effectiveness of monetary and fiscal policies.

Adverse and positive scenarios for the year reflect the following themes:

  • The tension between growth and deleveraging
  • The effectiveness of unconventional monetary and fiscal policies
  • The assessment of the windfalls or dangers of lower oil prices; and
  • The uncertainty created by geopolitics, including the possibility of the U.K. leaving the European Union, a surge of populist
  • sentiment worldwide, and tensions across the Middle East and Southeast Asia

In this report, MSCI has modeled two scenarios — the effects of low oil prices and possible outcomes of a Brexit – and the possible effects on multi-asset class portfolios, based on MSCI’s macroeconomic risk modeling and stress testing capabilities:
 
  • A year of oil prices at $35 a barrel could cause a diversified multi-asset class portfolio invested globally to lose 5.1% or gain 3.5%, depending on the level of systemic risk present. A year of oil prices at $10 a barrel could cause global equities to fall nearly 23%.
  • Brexit could cause a global, diversified multi-asset class portfolio to lose between 1.4% and 6.9%, depending on the extent of spillover to Europe and beyond.


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Scenarios, Stress Tests and Strategies for First Quarter 2016