Adjusting a Global Portfolio | cfa level 3 notes
LOS-how to adjust the allocation of investments in various assets
1.Macro-Based Recommendations: The author identifies five potential areas for adjustments in the portfolio: overall allocations to equities and bonds, reallocation between countries, adjustments in the average credit quality of bond portfolios, changes in duration and positioning on yield curves, and adjustments in exposures to currencies.
2.Checklist of Questions: The author provides a checklist of questions to systematically approach the task of making recommendations. These questions include considerations about trend growth, global integration of markets, business cycle phases, monetary and fiscal policies, current account balances, and currencies.
3.Trend Growth: An increase in trend growth generally favors equities due to more rapid long-run earnings growth, while it may have a negative impact on bonds due to higher real interest rates. Changes in trend growth can lead to adjustments in the overall equity/bond allocation and reallocation within equity markets.
4.Global Integration: As a market becomes more globally integrated, its required return should decline, leading to potentially higher returns. Expected increases in integration provide a rationale for adjusting allocations towards such markets.
5.Phases of the Business Cycle: The best time to buy equities is typically when the economy is approaching the trough of the business cycle. Adjustments in allocations and bond portfolio characteristics are recommended based on the stage of the cycle.
6.Monetary and Fiscal Policies: Structural policy changes or unexpected responses to policy measures can provide opportunities for reallocation of the portfolio.
7.Current Account Balances: Changes in current account balances can lead to adjustments in portfolio assets between countries with rising deficits or surpluses.
8.Capital Accounts and Currencies: Currencies are influenced primarily by capital flows, and analysts need to assess whether assets remain attractive after accounting for currency exposure.
9.Valuations: The final consideration is what is already reflected in asset prices, as valuations matter.
10.Quantifying the Views: The author outlines a process for quantifying expected returns using various models and approaches.
21 Jul 2023 - Original by toptradeready.com