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: efficacy of macro policies, including austerity, stimulus, monetary and fiscal policies; ‘exit strategies’ from unconventional monetary policies; economic imbalances; the sovereign debt crisis; and the potential of higher inflation.

These themes are contrasted from both orthodox (neo-classical and neo-Keynesian) and heterodox (Modern Monetary Theory, post-Keynesian, and other) ideas that are driving current trends in investment decision making. Presented by William Allen

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.

Day I - 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

• Which economic indicators move bond markets?
• Real interest rates, the business cycle, growth and the return on capital
• Flow of funds – demand for and supply of credit
• Nominal interest rates and inflation expectations
• Bond yields as the expected path of short rates plus a risk premium
• Interest rates in an open economy
• Bond market sectors and trading strategies / What should we be watching?
• Modern framework of central bank policy / Money and inflation / Demand-pull vs cost-push inflation
• Interpretations of policy from neo-classical synthesis and Modern Monetary viewpoints
• Inflation and the ‘output gap’ – excess demand
• Measures of inflation expectations / Inflation and asset returns – trading breakeven inflation
• Is deflation or inflation currently the major threat?

Exercises: Spot Rates, Forward Rates and Breakeven Inflation

Monetary Policy, Fiscal Policy and Risk Premiums

• Targets and instruments of monetary policy
• Operation of rules versus discretion - the Taylor Rule
• Asset prices and alternative interpretations of the ‘transmission mechanism’
• Market-based measures of policy expectations
• Zero bound on short rates – Quantitative Easing and other unconventional techniques
• Fiscal policy and the supply of government bonds
• Budget deficits and the sustainability of debt - are public finances unsustainable in Europe? Is the Euro a sustainable arrangement?

Exercise: Shadow Central Bank Meeting

• Which economic indicators move corporate bond spreads?
• Spreads and expected loss given default
• Structural models – Merton
• Empirical drivers of corporate bond spreads
• The ‘Credit Risk Premium Puzzle’
• Macro drivers – corporate bonds and the business cycle

Day II - Equities, Commodities and Foreign Exchange

Fundamental Drivers of Equities and Commodities

• Which economic indicators move equity prices?
• Equity valuation - dividend discount model / P/E ratio – earnings yield versus Treasury yield
• Equity Risk Premium Puzzle – the price of risk
• Equities versus bonds through the cycle
• Value versus growth investing / Small cap versus large cap investing
• International – emerging markets performance
• Which economic indicators move commodity prices?
• Spot and forward commodity prices
• Sources of global demand and global supply
• Commodities as an inflation hedge
• Real commodity returns and the business cycle
• Diversification - correlation with other asset classes

Exercises: Equity Discussion Topics

Fundamental Drivers of Foreign Exchange

• Which economic indicators move foreign exchange markets?
• Savings and investment in an open economy
• Balance of payments accounts / Sustainability of current account imbalances
• Absolute and Relative Purchasing Power Parity (PPP)
• Definition of the real exchange rate
• Covered and Uncovered Interest Parity – ‘carry trades’
• Does the global economy still need to rebalance?

Exercise: FX Discussion Topics

Summary: Global TAA (Tactical Asset Allocation) Strategy

• Top-down approach to Tactical Asset Allocation
• Identifying the stage of business and interest rate cycle
• Asset class performance in business cycle phases
• TAA and alpha generation
• Characteristics of financial crises
• Managing downside risk