1 Description and guidelines This year is the eleven-year anniversary of the 2008 financial crisis. Looking back at those eleven years, we have experienced a very solid market rebound in equities and a healthy economy. Meanwhile the level of debt in the US has increased to almost $21 Trillion and many economist believe that this level of debt is not sustainable. The goal of the essay is to explore the possibility on the next financial crises. It does not have to be necessary linked to the banking or the housing market because generally crisis occur in different ways and in different market. This is not to say that markets are independent, but for example the banking sector is now very different from eleven years ago. We want to bet on or against a particular US fixed-income sector if another financial crisis occurs. Where do you think that the next financial crisis is going to hit? How bad would the next financial crisis be? These are the type of questions that we want to think about in this essay. The focus of the essay is limited to a potential financial crisis in China. Similar to the investment group project, the deliverable for this essay is a two-page write-up that will construct an argument in favor of an investment opinion. For example, this opinion could be as follows, Yes, we believe that the financial sector and the economy in China is healthy and the regulation and stress testing of the large banks in the US will prevent a negative outcome in the fixed-income market even if there is a crisis in China. We recommend that investors increase their allocation to corporate bonds in the US. The questions that we are focusing on are:
1. Where and how do you see a crisis in the Chinese economy over the the next 12 months?
2. What are the factors or indicators that allow you to forecast and monitor a financial crisis in China if any?
3. How do you think this crisis will impact the US fixed-income sector? You are totally free to suggest that there will be no crisis in China over the next year and defend that opinion. However, you will need to address questions 2 and 3 with respect to the factors that allow you to shape your opinion and the impact to the US fixed-income market of that opinion.
The goal is to be able to document that argument with data and to be forward looking. While it is very difficult to predict the market, it is important to notice that you will write this essay as an investment advisor. Therefore, your potential clients expect you to have a view and defend that view. Otherwise they will not pay you an advisory fee. Below are some suggested steps that you could take to construct your argument. You are free to follow these suggestions. As its name indicates, these are only suggestions. Nothing prevents you from constructing your essay in a totally different way. Sector or investment universe: That will allow you to focus on one index or investment pool. As we have discussed in the class, we will focus on the Chinese economy and will attempt to forecast whether we will have a financial crisis in China over the next 12 months starting now. Support your opinion with data: While this essay is more an opinion piece, it will be more convincing to your potential investors if you can demonstrate that you have studied the data and anchored your view on solid data. Construct a forward-looking opinion: As mentioned previously, we are trying to produce an opinion as close as possible to a practical and real life investment advisory business. In this context, you need to clearly express a view and give clear guidance of investment advice with respect to the next financial crisis.
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