SOURCE: Investor Analytics

Investor Analytics

November 27, 2012 11:36 ET

Investor Analytics Stress Tests Expose Fiscal Cliff Risk

Balanced US Equity & Fixed Income Funds Facing Potential 21% Loss

NEW YORK, NY and LONDON--(Marketwire - Nov 27, 2012) - Investor Analytics LLC (IA), a global leader in risk management solutions, has developed crucial stress tests for asset managers and owners to navigate through any "fiscal cliff" outcome. IA estimates that balanced funds comprising US equities and bonds may suffer losses in the range of 10% to 21% from the fallout of fiscal cliff negotiations. IA's stress tests are designed to help managers prevent catastrophic loss by stressing portfolios against the gamut of potential market reactions. 

"Managing the risk of the fiscal cliff is not about predicting what Congress will do, nor is it about knowing precisely how each market will react. It is about being prepared for a range of market possibilities and understanding how each would affect your portfolio," said Damian Handzy, CEO of Investor Analytics. He continued, "Our research department has developed predictive models that allow clients to simulate the impact of various fiscal cliff scenarios on their investments."

Investor Analytics has created four widely-anticipated fiscal cliff scenarios to provide clients with the risk intelligence that pro-active managers demand. 

1. The Grand Bargain: In this scenario, lawmakers reach a grand fiscal bargain to embrace long-term reform and allow for short-term stimulus to reinvigorate the economy. Potential market effects might be: further decreases in long-term Treasury yields; continuing low short-term yields; continuing low credit spreads or even tightening corporate credit spreads; significant increases in equity and commodity markets; and a strengthening US Dollar.

2. Status Quo: Lawmakers reach a short-term agreement that postpones most of the tax increases and spending cuts. The majority of commentators predict this as a likely outcome, which could cause continued market uncertainty. Under this scenario, while no significant market effects are expected, an adverse impact on the US credit rating cannot be ruled out.

3. Fiscal Cliff - US Retains Safe Haven Status: Lawmakers do not reach agreement on the fiscal issues, with the CBO predicting a GDP contraction of 0.5% next year and an increase in unemployment to 9.1%. This assumes that the US Dollar and US Treasuries will remain safe havens. In this scenario, we can expect further decreases in long-term Treasury yields as investors flock to safe haven assets, continuing low short-term yields, significant widening of credit spreads, significant decreases in equity and commodity markets, and a strengthening US Dollar.

4. Fiscal Cliff - US Safe Haven Status in Jeopardy: Lawmakers fail to resolve the fiscal issues, and the tax increases and spending cuts are implemented without change. This scenario also assumes that the continuing inability to solve persistent fiscal problems threatens the status of the US Dollar and US Treasuries as safe haven assets. The impact could be: significant increases in long-term Treasury yields; continuing low short-term yields; significant widening of credit spreads; significant decreases in equity and commodity markets; and significant weakening of the US Dollar.

For further information about the Investor Analytics Fiscal Cliff Stress Testing Service, or to learn more about the firm, contact us at info@investoranalytics.com.

Note to Editors:

Investor Analytics LLC, headquartered in New York with offices in Boston and London, has been providing portfolio and risk management services to the investment management industry since 1999. IA processes more than USD 340 billion of assets daily for global hedge funds, fund of funds, money market funds, financial institutions, pension funds and endowments. IA employs proprietary methodologies to analyze financial investment portfolios and provides clients with a suite of risk and transparency tools.

The foregoing contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, relationships, opportunities, taxation, technology and market conditions. These statements may be identified by such forward-looking terminology as "expect," "look," "believe," "anticipate," "may," "will," or similar statements or variations of such terms. Actual results may differ materially from such forward-looking statements. IA assumes no obligation for updating any such forward-looking statements at any time. For further information please visit: www.investoranalytics.com

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