We explore the implications of a potential equity sell-off, where we hypothesize that less-risky, more-profitable firms with more-conservative investment practices prove more resilient than their competitors. 

When investors assess risk, they construct narratives around the data. Investment managers and asset allocators can look to the long history of market sell-offs for context, to better anticipate future drawdowns and prepare portfolios for what the future may hold. 

Investors might be concerned that escalating unrest in the Middle East could push oil prices higher, as geopolitical risk has once again come into focus for this group. A sustained rise in energy costs may fuel inflation and weigh on economic growth, affecting portfolios. 

Interest-rate uncertainty and restructured trade networks are drawing attention to export-oriented markets. MSCI’s equity models, using foreign-sensitivity exposures, have highlighted wide differences in exporter firms’ performance across regions.  

After the Federal Reserve recently cut rates and indicated that further reductions were likely, the equity market rallied. But sell-offs in August and September signaled investor concerns about an economic slowdown. What are potential outcomes to consider? 

We examine a scenario for how a sudden disruption in credit markets could affect portfolios, especially given indications of the market’s fragility.  

The Federal Reserve is signaling only one rate cut this year, compared to signaling three in March, so rates appear bound to remain higher for longer. Against this backdrop, we updated our macroeconomic scenarios to reflect the latest market data. 

The initiation of the rate-hike cycle by the Federal Reserve has positioned U.S. monetary policy as a major driver of financial markets. What could two downside scenarios for financial markets as investors consider their path forward? 

Global forecasters have recently suggested that the world economy is headed for a soft landing. Our latest market stress test looks at how this and other, less benign scenarios could affect a multi-asset-class portfolio in the coming months. 

Name recognition of highflying stocks, as well as their performance, can be brief. The enduring value of thematic and fundamental analysis is the ability to uncover the macroeconomic and business dynamics that influence long-term stock returns.  

What impact could the troubles in the Red Sea have on Europe’s economy and interest rates? We assess the downside risks related to surging freight costs.

Markets seem to be priced for a soft landing, in which inflation returns closer to target levels and recession is avoided. We also consider two potential downside-risk scenarios: a hard landing and a resurgence of inflation. 

Our quarterly roundtable examines markets, and market-moving events to help institutional investors as they determine the best way forward; across asset classes and parsing out differences between developed and emerging markets.

How could higher global rates for longer than expected affect a global portfolio of equities, bonds and real estate? In our new quarterly series, Macro Scenarios in Focus, we consider four potential paths for the global economy and conduct a portfolio stress test.

Our panel of experts discusses the issues on investors minds and scenarios for what may come next. From inflation “stickiness” to market concentration to central bank actions, how have conditions varied across the globe?

Investor sentiment has improved since the recent banking turmoil, and a soft landing for the U.S. economy seems possible. But there is geographic fragmentation, with China’s post-lockdown recovery potentially stalling. What could it mean for markets? 

The market-implied probability of a U.S.-government default this week shows that investors still view the possibility of such a default as a tail event. But the consequences of a default could be severe and long-lasting. 

2023 has presented many situations that include both risk and potential opportunities for investors, including inflation, continued war in Ukraine and China’s lifting of the zero-COVID policy, which allowed people and goods to travel as freely as they did before the pandemic gripped the globe. We look into how it’s gone so far.

In the wake of the recent banking turmoil, a soft landing for the U.S. economy now seems less likely than at the beginning of the year. We considered four scenarios and performed a stress test on a hypothetical portfolio of global stocks and U.S. bonds.

The broad equity market remained relatively resilient in the wake of recent bank failures, but how might it spill over in the coming months? We present three scenarios for potential risks and opportunities from the recent banking-industry upheaval. 

The collapse of Silicon Valley Bank triggered a sharp sell-off in the stocks and bonds of regional U.S. banks and a rally in Treasurys. All eyes are now on the Federal Reserve. Will it continue raising rates or pivot?

China’s reopening from COVID-19 lockdowns has led to the recent outperformance of the Chinese equity market. We used companies’ economic-exposure data to assess the reopening’s impact on global equities with large revenue exposure to the country.

The macroeconomic landscape for 2023 is shrouded in uncertainty following a tumultuous 2022. We consider four scenarios for growth, rates and inflation and gauge their potential impact on a portfolio of global equities and U.S. bonds.

While a U.S. railroad strike was averted in September, and the U.S. Congress is currently working on legislation to prevent the planned December strike, there is a chance it might not be avoided this time. What’s the potential impact on portfolios?

We explore three scenarios of varying severity for European credit, with outcomes for a multi-asset European portfolio ranging from a 2% return in a “mild recession” scenario to an almost 11% drop in a “sharp global recession,” according to our model. 

After spreads of European banks’ credit-default swaps surged and their equity prices dropped, investors are increasingly focused on the banks’ default probability — and what that could mean for markets. 

We explore the sometimes volatile, push-pull relationship between investors and central banks as each looks to navigate extreme inflation in the U.S., the eurozone and the U.K.

Investors will pay special attention to the August 2022 flash estimate of eurozone inflation, released ahead of the European Central Bank’s policy meeting in early September. What are the market-implied expectations for inflation in the bloc and ECB rate hikes?

The ECB is facing inflation, the risk of diverging sovereign borrowing costs and the threat of gas shortages that could lead to another supply shock. Amidst this uncertainty, we revisit four scenarios about eurozone inflation and ECB monetary policy. 

Carbon footprinting across multi-asset-class portfolios allows investors to measure financed emissions and inform decarbonization decisions. We examine this important step toward managing the net-zero journey.

In a portfolio stress test, we consider the uncertainty around eurozone inflation and the European Central Bank’s policymaking. We outline four scenarios and their potential impact on the bloc’s economy and a hypothetical multi-asset-class portfolio.

As inflation continues to plague the EU and U.S. central bankers announced their latest moves to fight back. MSCI experts join us to discuss policymakers’ options and a range of scenarios investors can consider to help safeguard their portfolios.

As U.S. inflation has surged and the stock and bond markets sold off sharply, investors are scrutinizing the Federal Reserve’s next rate-setting moves. We look at the medium term and how different scenarios could affect multi-asset-class portfolios.

The recent COVID-19 lockdowns in China and their impact on global supply chains add another concern for investors, on top of the Russia-Ukraine war. We model three scenarios for China and their potential spillover effects on global portfolios.

Given climate risk’s multifaceted nature and the long time horizon on which climate change is unfolding, investors face an elevated level of uncertainty when making decisions. What approaches can they take as they seek to manage these risks?

Investors are increasingly focused on inflation and the Fed’s tightening of monetary policy. With the Russia-Ukraine war and resulting sanctions, they may also worry about slowing economic growth. We model three economic scenarios’ potential impact on markets.

Fears of stagflation loom large as investors look to the Fed and other central banks and consider the potential effects of the war in Ukraine.

Investors and policymakers are increasingly focused on the fact that a transition to a low-carbon economy could result in “greenflation,” which could put upward pressure on long-term interest rates and in turn lead to downward repricing of bond portfolios.

Investors are increasingly focused on gauging the risks related to climate change. We investigated how various climate scenarios could impact the credit risk of portfolios. In one scenario, 16% of investment-grade issuers could migrate to high yield.

Although the Federal Reserve may not begin raising rates anytime soon, U.S. and global markets are scrutinizing the Fed’s communications about the likely course of policy actions. We consider three scenarios for the timing of policy responses.

We analyzed two multiperiod inflation scenarios to understand how the funding ratios of defined-benefit pension funds could evolve in each and what they could mean for a pension fund in terms of special contributions over the next 10 years.

Some investors may be concerned about crowding within the fast-growing thematic-investing segment. Using MSCI’s stock-crowding model, we identify crowded themes and run stress tests to understand how they might respond to an equity sell-off.

For long-horizon investors that aim to ride out volatility, short-term risk measures may be insufficient. We used multiperiod stress testing to evaluate one- and five-year returns of hypothetical multi-asset-class portfolios using 50 years of history.

Market participants are hotly debating whether U.S. monetary and fiscal policy may cause inflation. We consider four scenarios — reflation, disinflation, an overheated economy and stagflation — and their potential impact on multi-asset-class portfolios.

Regulations to increase transparency and new methods for quantifying climate change risks and opportunities have pushed the issue to the fore for many investors. We get on the road to COP 26 with Professor Robert Eccles of The University of Oxford, Linda-Eling Lee, Head of ESG Research, and other MSCI experts.

Regulators around the world are upping the ante on climate-related financial disclosures. How can investors stress test potential exposures to these changes in policy? We take a look within Europe.

Will inflation rear its ugly head in the U.S.? Although the outcome of the U.S. elections might have lowered inflation expectations, investors can prepare for scenarios where inflation goes up. In this stress test, we examine three scenarios for inflation over varying time horizons.

Market-implied expectations indicate modest inflation. But some observers are concerned inflation may significantly rise, while others fear deflation. We discuss four inflation scenarios — and their potential implications for stocks and bonds.

In times of heightened volatility, risk limits can protect against equity-market drawdowns. While such measures can dampen portfolio losses, they may also have an impact on long-term returns, particularly in case of a sharp V-shaped market recovery.

Thomas Verbraken, from MSCI’s risk management solutions team, explores potential shapes of the eventual recovery.

Our latest COVID-19 stress test looks at four potential financial-market outcomes ranging from a swift V-shaped recovery to a pessimistic L-shaped scenario, in which outbreaks recur and lockdowns return well into 2021.

While newspaper headlines are focused on volatile stock markets stemming from the COVID-19 pandemic, credit markets are not immune. Our latest stress test asks, “What would it mean for portfolios if losses reached 2008 levels?”

After the coronavirus spread to multiple continents, markets recorded the worst week since the crisis. How much further could markets drop if epidemic turns into pandemic? Our stress test indicates room for further losses.

The toll from the coronavirus has been felt throughout societies, leading to repercussions on the global economy and financial markets. We examine investor impact through markets’ economic exposures to China and factors and by stress testing portfolios.

Amid ongoing U.S.-China trade tension, we have updated our stress test to consider three scenarios for how the situation could unfold — and their impact on currency, bond and equity markets around the world.

Brexit has roiled markets since U.K. voters chose “leave” in the June 2016 referendum. We used our stress-testing model to examine how markets could react to deal and no-deal scenarios.

A consensus has emerged that the Federal Reserve will lower rates in the coming months, but investors remain uncertain over the timing and magnitude of the cuts. What impact could three rate-cut scenarios have on markets?

Emerging-market equities and USD-denominated EM sovereign bonds started 2019 with a bang, but recent market turbulence caused by the U.S.-China trade standoff raises a pressing question: What could trigger the next EM downturn?

The relationship between bonds and equities may be especially important to investors who employ a risk-parity approach. In our analysis, as the bond-equity correlation turned strongly positive, the effect on risk-parity portfolios was much greater than that on traditional 60/40 equity/bond portfolios.

Financial markets are increasingly edgy about prospects for the U.K. Parliament’s expected Dec. 11 vote on a Brexit deal with the European Union.

In October, the 10-year U.S. Treasury yield hit a 7-year high in response to strong economic news, contributing to the second major equity sell-off this year.1 If positive moves in yield continue to drive down equities, this would mean an end to the hedge between stocks and bonds that has been in effect since around 2002. Investors may seek alternative means of diversification, with potentially deep ramifications for strategic asset allocation decisions and multi-asset class strategies.

Argentina and Turkey have experienced sharp corrections in their currency and debt markets over the past couple of months, leading investors to worry about possible contagion to other emerging-market (EM) countries. Are other emerging markets heading in the same direction?

With populist policies on the rise, globally, many believe Italy’s coalition government could add to the EU’s challenges by pursuing populist strategies that could further disrupt both equity and bond markets. We consider two scenarios – a severe and mild one – with very different implications.

Markets appear to have priced in the recent tariffs, but the risk of a broader trade war still looms. Market scenarios based on economic studies suggest an all-out trade war could drive global equity prices down another 10%, with U.S. investors receiving the worst of it.

Measures employed by risk managers and portfolio managers, such as Expected Shortfall and Value at Risk, are designed to calculate the risk level of a portfolio. But some risk models may work better than others for different asset classes and for different market conditions. Besides backtesting Value-at-Risk and Expected Shortfall, we ranked four types of simulations models available in RiskMetrics RiskManager using the MSCI Model Scorecard, an innovative tool that measures how well a model...

The United Kingdom is about to begin negotiations over its exit from the European Union. Though the process could take up to two years, the triggering of talks leaves institutional investors to assess how Brexit, at least at the outset of negotiations, may affect their portfolios.

For the year ending December 31, 2016, we analyzed the 12-month risk forecast accuracy of four categories of simulation models available in RiskMetrics RiskManager: Monte Carlo, historical, filtered historical and weighted historical.

A year marked by Brexit and Trump is ending with widespread uncertainty.

Scenario propagation is the second stage of predictive stress testing practices, following scenario definition. This paper illustrates common pitfalls and suggests best practices for a robust propagation of the shockwave of a prospective scenario onto all relevant risk factors of a financial portfolio. The central observation: Risk managers must guard against “noise” in the predictions. Diagnostic statistics can reduce noise and ensure meaningful predictions. Key best practices include: the...

The aftermath of the 2008 global financial crisis taught the risk industry that expert judgment and economic insight may help investors anticipate and avoid exposure to major financial downturns by using forward-looking models, such as predictive stress tests. But there is no consensus on how to create these scenarios. In this paper, we portray MSCI best practices for stress testing in a flowchart that guides risk managers through a series of steps that lead to a structured way of stress...

For the July 2016 backtesting review, MSCI began by analyzing how each of four types of simulation models available in RiskMetrics RiskManager—Monte Carlo, historical, filtered historical and weighted historical—performed over the year ended June 30, 2016.

The decision by a majority of U.K. voters to leave the European Union shines a light on fissures between perceived winners and losers from globalized markets and highlights for investors the importance of factoring the consequences of inequality and popular discontent into their views. The latest edition of MSCI’s “Scenarios, Stress Tests and Strategies” examines the potential impacts on institutional portfolios of a tide of populist sentiment across Europe and the U.S.

Britain’s leaving the European Union would send the U.K. and Europe into the unknown with possibly major consequences for multi-asset class portfolios.

For this year’s backtesting review, MSCI began by analyzing how each of four types of simulation models available in RiskMetrics RiskManager—Monte Carlo, historical, filtered historical and weighted historical—performed over the year ended December 31, 2015.

Heading into 2016, MSCI examined 12 stress points globally to be used in quantifying the effect on portfolios of a range of shifts in markets, liquidity and the macroeconomy. These stress points include the prospect of additional interest-rate hikes by the Federal Reserve, weakness in the eurozone and a deceleration in Chinese economic growth.

The persistent decline in Chinese equities and commodity prices this summer renewed investor concerns about a possible economic hard landing in the Asian giant.

Risk measures, such as Expected Shortfall and Value at Risk, are designed to calculate the risk of a portfolio. But different risk models may work better than others for different asset classes and in varying time horizons. The MSCI Model Scorecard provides an innovative tool designed to help select the best risk model in terms of Expected Shortfall (ES) and Value at Risk (VaR) predictivity.

Expected shortfall (ES) has attracted controversy as a measure of a portfolio’s risk since it was introduced in 2001. One reason for this was that some critics suggested ES could not be backtested. Last year, however, MSCI proposed a way of backtesting expected shortfall. This development is especially important in the light of the Basel Committee on Banking Supervision’s recent decision to adopt ES in place of VaR. The ability to backtest expected shortfall also has broader...

Stress Testing the Greek Exit Scenario Using MSCI RiskManager This Product Insight uses MSCI RiskManager to examine the potential effects of a Greek exit from the euro, explaining the detailed assumptions behind our stress test design. We make use of RiskManager's predictive stress test tool, which starts with user-defined hypothetical shocks on a few core risk factors (singled out as the drivers of the global crisis) then propagates shocks on all markets. In this current exercise, we employ...

This Market Insight presents the results of an annual backtesting study, using RiskManager, applied to four standard risk models.  The study includes fixed income and equity portfolios during the 2013 calendar year.  While the first half of 2013 was quiet, volatility increased after June 2013. For fixed income portfolios, comparing ex-ante risk forecasts with ex-post returns, the more reactive models showed some underestimation of risk in the turbulent period, while the more stable...