11th ISS on Risk Measurement and Control
The 11th edition of the International Summer School on Risk Measurement and Control will have as main challenge to face the major macro themes for 2016
Global GDP growth is expected to rise a little from the dip seen in mid 2015, but investors have now recognised the large decline in underlying productivity growth since the financial crash, and no longer expect any significant acceleration in the recovery.
Another widely anticipated theme is that growth in the emerging economies will continue to struggle, despite the fact that almost no one now expects a hard landing in China. Many point to the likelihood of credit deleveraging in the emerging world, but very few expect this to be powerful enough to cause a severe global downturn.
These themes sketch an economic backdrop that would affect asset returns, a little like 2015 has been. But there are downside risks that could produce a much worse year. Three risks seem to be particularly worrying:
- Federal Reserve interventions : Investors seem supremely unconcerned about this risk, believing that secular stagnation (still a widely held theme) will stop the Fed in its tracks. But is the balance of risk correctly priced in this respect? The basic issue here is that the FOMC is far more sceptical than the markets about the secular stagnation hypothesis. The committee is more confident that economic headwinds will slacken in the next year or two, allowing them to shift interest rates upwards towards the rising equilibrium interest rate. If, as they expect, core inflation rises in coming months, they will be emboldened in this view. That would mean a bumpier ride for both bonds and equities.
- Chinese devaluation The People’s Bank of China has now persuaded markets that it has no intention of devaluing the effective rate very far from the stable range that operated last year. But deflation remains rampant in the Chinese manufacturing sector, and over capacity is far from eradicated. A large renminbi devaluation would only be be used as an option of the last resort. But it represents a huge tail risk that would be the final nail in the coffin of the equity bull market.
- A credit meltdown in the emerging economies Credit growth is now slowing throughout the emerging world, and the cold turkey phase of the credit cycle could be very prolonged. JPMorgan economists have estimated that credit deleveraging could reduce GDP growth in the emerging world by 2 to 3 percentage points over the next three years, or even more if there are severe crises of financial confidence. This would be enough to slow global GDP growth by 1 to 1.5 percentage points. At the lowest end of that range, a global recession would become likely.
Well known international experts and scholars will provide us with their view and methodologies to be able to measure and manage the new sources of risk that markets may face.
For 2016 the three streams will be:
- New Frontiers in Risk Management
- Energy Risk Management
- The EURO project: shadows and lights
The first two streams run for two consecutive days and are organized in four different sessions of four hours each. The third session runs for one day and half.