Consistency through macroeconomic baseline scenarios

Consistency through macroeconomic baseline scenarios

Offering high service quality requires wealth managers to communicate in a consistent way about their investment products, especially with respect to market forecasts and realized performance. Using a macroeconomic baseline scenario (MEBS) approach allows broad consistency among products without scarifying well-defined performance ownership. The MEBS should cope in a quantitative way with a one year forecasting horizon and offer themes and trends on a longer term horizon basis. Investment professionals, research analysts, as well as sales and marketing collaborators can take advantage of a consistent baseline MEBS. In addition to improving quality and transparency, the proposed approach does allow generating added value for the wealth manager through efficiency and effectiveness gains.

One of the major challenges faced by wealth managers is communicating consistent market expectations throughout the product portfolio on one side and assuring clear performance ownership on the other side. This challenge can be addressed by defining a common macroeconomic view on the markets that is valid as the baseline scenario for all investment products manufactured and for all client communication. This macroeconomic baseline scenario (MEBS) can be seen as the main anchoring point around which the wealth manager generates investment performance. Potential deviations found in individual investment products are from this baseline scenario rather than from the current market environment. For example, the MEBS may forecast that interest rates will raise over the next 12 months. In a trading oriented product with a forecasting horizon of less than one month, the responsible portfolio manager may well have a long duration positions explained by his short-term view on interest rates without doubting the long-term oriented MEBS.

The MEBS should be used as the basis for all market forecasting activities, whether top-down or bottom-up. It guarantees forecasting consistency around the different asset classes (fixed income, equity, balanced, real estate, etc.). It should also allow for a fixed income portfolio manager in New York to rely on the same MEBS that a marketing expert in Frankfurt selling a balanced mandate is using.

An operating model

The set-up requried to successfully produce MEBSs can be described using the operating model approach. Four major dimensions need to be considered:

  1. Product description – what is understood by a MEBS.
  2. Clients – who is relying on the MEBS.
  3. Processes – how is the MEBS created and how is its quality assured.
  4. People – who is involved and as such responsible for the definition of the MEBS and its performance.

Product description

A successful MEBS should contain two components:

  • Themes and trends – A long-term, that is 3 to 5 years, scenario defined by a set of themes and trends that are believed to become relevant in the future.
  • One year forecastsOne calendar year, point forecasts relative to the consensus market expectations. Forecasts for growth, inflation, and jobless claim should form the core of these forecasts. In addition to the point forecasts, a confidence in the forecast, the key drivers behind the forecast, and a set of arguments should be stated.


There exist three types of clients for MEBSs:

  • Investment professionals responsible for the investment performance of individual products.
  • Research analysts providing bottom-up input for different investment products.
  • Marketing and sales professionals communicating on investment products with clients and potential clients.


An overview of a sound process is shown in Figure 1. It relies on multiple independent sources of input.

Input sources

To assure that all angles are covered, input from three different types of sources should be used:

  • In-house experts and people responsible for the performance of individual product. They assure on one hand a buy-in from the end-clients and allow using the unique capabilities of the wealth manager.
  • Third party research from independent research institutes (IFO, etc.), agencies and governments (ECB, FED, etc.) as well as brokers (CSFB, Goldman Sachs, etc.). These sources allow gaining different perspectives and assuring that the right questions are asked.
  • Historical market data provided by data providers like Blooomberg, Reuters, etc. Using historical data allows identifying trends and cross-check forecasts for historical consistency.
Figure 1 - Proposed process for developing a high quality sound macroeconomic baseline scenario

Figure 1 – Proposed process for developing a high quality sound macroeconomic baseline scenario

Themes and trends

The goal is to identify major themes and trends that are expected to become relevant for the markets in the future. A possible tree stage process is:

  • identify potential themes through a methodological screening process.
  • cross-check the relevance of these themes within the industry.
  • prioritize the selected themes for their relevance.

This process should encourage out of the box thinking and innovation. External experts should be considered.

One year forecasts

On the one year horizon, the forecasts should include the three most important macro-economic indicators, growth, inflation, and jobless claims. Each forecast should be comprised of

  1. a quantitative point forecast for a one calendar year time horizon as well as for the first half of that calendar year,
  2. a confidence in the forecast,
  3. the key drivers behind the forecast, and
  4. qualitative arguments supporting the forecast.

The four major regions, Europe, United States, Japan, and Asia should be considered. Depending on the resources available and the granularity at which the forecasts are used, more regions or a finer decomposition of the regions may be implemented. But bear in mind that the focus should be on quality rather than on quantity.

Forecasts, as well as themes and trends, should be revised on a quarterly basis and controlled at least on a monthly basis. The quality of the forecasts should be measured relative to the market consensus.


Investment management is a people’s business and so is developing a high quality MEBS. Team members should be selected according to three criteria

  1. macro-economic knowledge and education,
  2. proven macro-economic skills, and
  3. interests in working in a team defining the macroeconomic baseline scenario.

It is important to avoid conflict of interests when building the team. The composition should be a reasonable mix of junior and senior investment professionals. The team should be chaired by a senior, but neutral, officer assuring communication and acceptance of the output produced throughout the organization. Ideally, the team is based in one location. To guarantee that the output produced is integrated seamlessly into the different products and services, the team members should be investment managers working part-time in defining the macroeconomic baseline scenario and not be full-time economists.

Lessons learned

There exists a need for a single MEBS:

  1. Investment products relying partially or completely on a top-down investment process need a coherent view on the markets.
  2. Equity as well as credit analysts require input about the future of the economy as input to their models.
  3. Sales and marketing can improve their communication and selling capabilities by speaking one single voice.

Having a single MEBS in place, addition to the three needs already mentioned, adds value for the wealth manager around three dimensions:

  1. Allows avoiding redundancies by developing only one MEBS within the company and not different MEBS for different locations and/or products.
  2. Brings together the brightest people guaranteeing the highest possible quality.
  3. Allows differentiating from competitors by having an innovative, structured, and consistent setup.

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