If market volatility last year frayed investor nerves, 2016 might be even more of a nail-biter.
With the start of the year marked by turmoil in financial markets, MSCI has identified 12 stress points globally to be used in quantifying the effect on portfolios of a range of shifts in markets, liquidity and the macroeconomy, including the prospect of additional interest-rate hikes by the Federal Reserve, weakness in the eurozone and a deceleration in Chinese economic growth.
Global Tensions: Stress Points for Investors
We stress tested two scenarios: how the Fed handles rate hikes down the road and an economic slowdown in China. Our findings:
- The Fed Rate Hike: A well-timed series of rate hikes by the Fed could lead to additional gains of 3% in global stocks and modest losses in government bonds. Raising rates too soon, however, could stall a recovery and lead to incremental losses of 2% for stocks and gains of 7% for government bonds. Conversely, raising rates too late could spur losses across the board, including an additional loss of as much as 7% in emerging-market debt. Whether portfolios are currency-hedged would have a significant impact on results.
- Chinese Growth Prospects: A hard landing in China’s economy could cause Chinese stocks to lose an additional 25%. Global stocks could lose between 5% and 14% over baseline, depending on the extent of China’s integration with the global economy.
Other data gleaned from our report, “Scenarios, Stress Tests and Strategies for 2016,” include:
- U.S. momentum stocks were at the greatest risk of crowding at year-end 2015.
- Several MSCI ACWI Factor Indexes diverged from their long-term average valuations, as of Dec. 31. For example, the MSCI High Dividend Yield Factor Index was relatively expensive, while the Risk Weighted, Value Weighted and Equal Weighted Indexes all were cheaper.
Read the report, “Scenarios, Stress Tests and Strategies for 2016.”