Portfolio Construction

How to build portfolios with macro-conditional market regimes

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Exploring the value of forecasts of macroeconomic variables for portfolio construction.

This paper uses forecasts of macroeconomic variables to analyse data sourced from LSEG Datastream to challenge traditional investment ideas around forecasting. This research provides a detailed exploration of relationships between data series, to exemplify how forecasts and market data can be used to build more efficient portfolios that incorporate macroeconomic forecasts in a systematic fashion. Finally, this analysis demonstrates that by incorporating both macroeconomic and market dynamics, portfolios can outperform in absolute and relative terms for investors.

Access the full report now to find out:

  • How to construct portfolios that are conditional on LSEG’s polling data of key macroeconomic variables and shed light on the invaluable information embedded in forecasts.
  • The extra rewards that are available to investors who formulate joint forecasts of market and macro conditions rather than treating them as separate.
  • Provide some ideas about how to exploit the spread of opinions among the polled forecasters to build more efficient portfolios.
It is the continuous interaction between macroeconomic trends and market prices that creates better defined regimes by allowing macroeconomic uncertainty to influence the probability of being in a certain market regime.

Fathom Consulting

Key content

The portfolio relationship between risk and return is broadly upward sloping in the low VIX regime and downward sloping in the high VIX regime.

By incorporating both macroeconomic and market dynamics, portfolios outperform in absolute and relative terms by delivering an annualised 6.8% average return with a 1.22 Sharpe ratio.

To investigate the investment value of disagreements among forecasters, we integrate each of the six dispersion metrics and the scorecard combination in seven different multi-asset portfolios.