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.
In times of stress in the markets, not only does volatility increase for individual assets, cross-asset correlations can increase dramatically as well. This results in a “double whammy” for a typical portfolio because the portfolio’s volatility increases due to both effects.
Those responsible for maintaining a margin system often feel that they are drowning in data management issues. In part two of this series we discuss ways to make margin calculations far more efficient and meet the firm’s need for answers in real-time.