Imagining the Impact of a Hard Landing in China
Thoughtful stress-testing gives you the ability to evaluate the impact of potential market scenarios on your portfolios, or on a specific subset of positions. A scenario can be based on historical market events, (such as the Global Financial Crisis), or hypothetical events – set up to provide insight into portfolio risk under anticipated, best-case or worst-case future market conditions.
As China confronts numerous internal and external challenges from slowing economic growth, disruption in Hong Kong and a volatile trade conflict with the United States, it may be prudent to assess and understand the risk a hard landing for the Chinese economy may pose to your portfolio.
|Moderate Slowdown||Hard Landing|
|Hong Kong Equities||-10%||-25%|
|MSCI Emerging Markets Index||-10%||-25%|
|US Dollar Index||3%||5%|
|US Bond Prices||3%||5%|
The scenarios below attempt to capture the potential impact of either a moderate slowdown or hard landing for the Chinese economy on select asset classes, incorporating both a risk-off sentiment towards Chinese equities and risk assets as well as a flight to safety towards the US dollar, US treasuries and gold.
The highly customizable nature of Imagine’s stress-testing scenarios allows you to create scenarios specifically tailored to your own risk monitoring priorities and market expectations. Imagine’s scenarios evaluate the performance of your positions under each scenario, analyzing the historical relationship between the shocked asset class and each holding in your portfolio.
In addition to viewing position-by-position results and portfolio totals, you can aggregate positions by parameters such as Industry or Currency to display meaningful breakdowns of the stress-test results.
The examples below leverage ‘View-By’ templates that allow for quick toggling between aggregation criteria, making it easier to examine exposures and identify sources of risk within a portfolio. From here, you can drill into specific industries or currencies to see the contribution of each constituent position.
Aggregation by Industry
Aggregation by Currency
Please contact Consulting or your Imagine representative for help with constructing your own scenario analysis.
The stresses described in this blog post illustrate one possible scenario and are intended to be used in general as guidance towards risk management of market events.
Managing the risks inherent in their positions, including holding sufficient margin, is absolutely essential for prime brokers. The key question is whether or not they are measuring risks and managing margin effectively and proactively.
This summary is based on research conducted between February and March 2021 with 20 banks looking at current trends and priorities for Prime Brokers in the Margin, Collateral and Data areas.
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