Macro Drivers of Asset Performance and Global TAA Strategy

 

"Well worth doing for someone wanting to refresh and deepen their knowledge of asset classes and asset allocation"

Simon Mulholland - Portfolio Manager
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Course Outline

This course provides a framework to formulate global asset allocation and trading strategies through the business cycle. It includes discussion of the main themes forming the background to global markets – ‘exit strategies’ from unconventional monetary policies, the sovereign debt crisis and the threat of higher inflation.

The programme is designed to provide an overview of the macroeconomic drivers of financial asset performance. It sets out the theoretical determinants of pricing in each of the main asset classes – equities, bonds, commodities and foreign exchange – and examines empirical behaviour through the business cycle. This provides an introduction to the main economic themes that move markets – growth, inflation, the balance of payments, monetary and fiscal policy. The course is structured under the overarching theme of formulating Global Tactical Asset Allocation within a portfolio framework.

Who The Course is For

The course is focused on global portfolio strategy but will benefit anyone involved in financial markets keen to gain a better understanding of the macro drivers of asset performance, particularly those who are executing cross-market trading strategies:

  • Chief Investment Officers
  • Global macro hedge fund managers
  • Private wealth managers
  • Risk managers
  • Traders
  • Strategists

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Prior Knowledge

Some prior knowledge and practical experience of using the main financial instruments and their derivatives is necessary in order to maximise the benefit from attending the course. Some prior knowledge of economics would be useful but is not necessary.


This program is eligible for 16 Continuing Education credit hours from the CFA Institute. If you are a CFA Institute member, CE credit for your participation in this program will be automatically recorded in your CE Diary.


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Day One - Bond Yields, Inflation and Economic Policy

Overview

  • Asset returns / Volatility and correlation / Risk-adjusted returns – downside risk
  • Relative returns and the business cycle

Fundamental Drivers of Bond Yields

  • Real interest rates and nominal interest rates
  • The flow of funds and sector balances
  • Yield as the expected path of short rates plus risk premium
  • Interest rates in an open economy
  • Factors driving the bond risk premium
  • Empirical behaviour of the bond market
  • Main drivers of the yield curve
  • Slope of the curve and the interest rate cycle

Workshop: Shadow Central Bank Meeting - Strategy 

Monetary Policy, Fiscal Policy and Risk Premiums

  • Targets and instruments of monetary policy
  • Money creation and the central bank’s balance sheet
  • Taylor Rule and the setting of short rates
  • Inflation targeting and the output gap
  • How to read what the markets are discounting
  • Quantitative Easing and ‘Operation Twist’
  • Fiscal policy and the sustainability of public finances
  • Budget deficits and bond yields
  • European sovereign debt crisis

Workshop : Country Study

Corporate Spreads and the Business Cycle

  • Spreads and compensation for expected default loss
  • Corporate capital structure and default
  • Structural models – the Merton framework
  • Liquidity and funding risk
  • Empirical research on corporate spreads
  • Spreads and the business cycle
  • Credit default swaps and CDS indices
  • Managing index exposure and beta timing

Day Two - Equities, Commodities and Foreign Exchange

Fundamental Drivers of Equity Markets

  • Discounting cash flows and equity valuation
  • The Dividend Discount Model (DDM)
  • Required return – the ex-ante Equity Risk Premium (ERP)
  • Historical performance of equities versus bonds
  • Factors driving the ERP
  • P/E ratio and the earnings yield
  • Equity returns and the business cycle
  • Macro drivers of equity returns

Fundamental Drivers of Commodity Market

  • History of commodity prices
  • Commodity prices and the business cycle
  • Commodities as a hedge for inflation
  • Spot and forward commodity prices
  • Determinants of ‘contango’ and ‘backwardation’
  • Sources of total return
  • Commodity futures and ETFs
  • Commodities versus equities and bonds

Balance of Payments and Foreign Exchange Rates

  • Balance of payments accounting
  • Current and capital account flows
  • Global balance of payments trends
  • Sustainability of current account deficits
  • Demand for, and supply of, foreign exchange
  • Law of One Price and Purchasing Power Parity
  • Real exchange rates and exchange rate models
  • Covered and uncovered interest rate parity
  • Spot and forward exchange rates

Global Portfolio Diversification and TAA Strategies

  • Markowitz world
  • Investor utility and risk aversion
  • Benefits of diversification
  • Opportunity set and Efficient Frontier
  • Separation Theorem and leverage
  • Beta or Market Exposure
  • Factor Risk or Sources of Alternative Beta
  • Tail Risk and Crisis
  • Managing Macro Risk
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