Macro volatility is back, and it’s testing portfolios that weren’t built with macro in mind. While most portfolios aren’t designed to express macro views, they’re still sensitive to macro shocks.
Scenario analysis is a simple but underused way to surface those exposures. While running scenario analysis will not help predict what happens in the future, it will help understand what could happen. If X moves by Y%, what changes? What gets hit hardest?
Take a basic portfolio made up of five ETFs:
- SPY (US large-cap),
- QQQ (US tech),
- IWM (US small-cap),
- EFA (developed ex-US),
- EEM (emerging markets).
Each is weighted equally. Now introduce one macro factor: the U.S. Dollar Index (DXY). While few investors hold directional DXY positions directly, its moves have broad effects—especially on international equities and global earnings expectations.
What if DXY rises by 10%? What if it falls by 10%?
That’s our test.
Before running any scenario, it's useful to see the empirical relationships.
We started with a correlation matrix of daily returns. DXY showed mild negative correlation with EEM and EFA (around –0.13 to –0.14) and slight positive correlation with SPY and QQQ. That’s consistent with macro intuition: a stronger dollar tends to weigh on international equities and may tighten financial conditions.
Then, using historical daily data, we estimated betas—how sensitive each ETF's returns are to moves in DXY. This gives us a rough map of dollar exposure across the portfolio.
We ran two hypothetical scenarios:
- DXY +10%
- DXY –10%
Using the estimated betas, we calculated the projected return impact for each ETF and for the portfolio as a whole.
- In the +10% dollar shock, U.S. equity exposures (SPY, QQQ) showed gains of 6–7%, while international names like EEM and EFA dropped around –3.5%. The total portfolio returned roughly +6.4%.
- In the –10% dollar shock, the dynamic reversed. EEM and EFA posted gains of 3.6–3.8%, while the U.S. exposures pulled back. The overall portfolio return was around –6.5%.
These are stylized outputs based on recent betas—not forecasts. They ignore second-order effects and assume linear relationships. But even this simple structure makes it easier to understand how macro factors can interfere with equity returns, often in ways that aren’t obvious from surface-level portfolio weights.
This was a basic illustration, using just five ETFs and a single macro factor. But the same approach can be extended in multiple directions:
- Use individual securities instead of ETFs
- Incorporate multiple macro variables (e.g. rates, oil, vol)
- Simulate compound scenarios or policy shocks
- Apply it across long-short portfolios, manager books, or fund-of-funds structures
What matters is not the specific tool, but the thinking: identifying macro sensitivities early, quantifying them with data, and testing what might happen before it does.
At Kiski, we support scenario analysis across full portfolios and manager universes, with factor exposures, correlations, and sensitivities calculated daily across thousands of securities. That makes it possible to design, test, and visualize custom macro scenarios as they emerge, with a fast turn around between idea and output.
This kind of responsiveness is increasingly necessary. Macro has returned as a dominant force in cross-asset performance. Scenario analysis helps teams decide not just what they own, but how those positions behave when the environment changes.
Why It Helps
You don’t need to be a macro trader to think like one. The value of scenario analysis isn’t in being “right” about the next shock—it’s in building a process to understand what’s at stake if something moves.
Whether it’s interest rates, credit spreads, currency shifts, or volatility spikes, these factors impact returns—even in portfolios that seem, on paper, to be purely equity-based or style-driven.
Structured analysis provides clarity when intuition alone isn’t enough, particularly in rapidly evolving market conditions. Scenario tools don't eliminate uncertainty—but they equip investment teams to better understand potential outcomes and act decisively when it counts.
