Summary
The client, the investment arm of a major US bank, publishes a quarterly outlook that explores potential risk scenarios for the global economy and financial markets. Fathom’s brief was to conduct the detailed modelling of scenarios to the bank’s exact specifications that would underpin the client’s outlook.
The exact risk scenarios were to be decided each quarter after talks between Fathom and the client. Fathom’s challenge was to find ways to construct these detailed and exact scenarios, using both the outlook for key economic and financial market variables in the world’s economic hubs (China, Europe and the US) and, at times, other less conventional data sources. Fathom built a bespoke quarterly modelling service tailored to the bank’s precise needs. The success of Fathom’s work has led to an ongoing relationship, enabling the client to outsource its global macroeconomic model-building function to Fathom.
Key facts
Client
The investment arm of a major US bank
Brief
To provide macroeconomic modelling and scenario analysis each quarter
Timeline
Starting in 2019, Fathom continues to contribute to the bank’s quarterly outlook
Focus area
Macroeconomic strategy
Our approach
Fathom applies the same rigorous, proven process to every piece of work; this process is the DNA that makes up our world-leading research.
Fathom’s priority from the start was to set up a system that ensured that the stakeholders at our client, the investment arm of a major US bank, continue to receive what they need from the economic risk scenarios we provide each quarter. Central to this are the quarterly meetings, to discuss recent economic and financial market developments and to decide the key questions that will inform developments over the forecast horizon.
The answers to these questions serve as the parameters that are fed into Fathom’s proprietary Global Economic Strategic and Asset Allocation Models (GESAM).
The strength of Fathom’s modelling is based on two factors. First, we are one of only a handful of consultancies worldwide to be able to process clients’ questions through a global macroeconomic model, built and continually updated by Fathom, with data covering 150 years and more than 200 countries. Clients can be confident that whatever scenario they would like to explore, Fathom’s answers will be internally consistent and empirically founded, based on data.
Chart shows impact of the different scenarios on the projection for US GDP
Chart shows impact of the different scenarios on the projection for US ten-year government bond yields
Before any question can be put to GESAM, however, Fathom staff must calculate the parameters off-model, across a wide range of areas related to both economic and financial markets. So, the second and most crucial factor is that Fathom’s staff are trained to think critically and with imagination, in order to inform questions that sometimes have no easy answer or established precedent.
One important challenge in answering our client’s brief is to react quickly to emerging risks, and to be able to represent these risks quantitatively — each quarter can bring a novel concern. Sometimes this is relatively straightforward, involving, for example, different assumptions about the path of private consumption. Often, during the pandemic, this was more difficult, when the major variable driving economic scenarios was the disease burden from COVID-19. It was important to be able to understand pandemic dynamics and ensure that they were accurately represented in different scenarios.
Sample scenario: how a rise in the disease burden would affect the quantity and composition of household consumption, taking into account its direct impact on the economy as well as indirect consequences for fiscal and monetary policy.
Delivery
Fathom devised a framework which incorporates the client’s economic views into coherent and sensible economic scenarios. Every three months the scenarios are presented to the client for sign-off, along with the underlying data and a write-up explaining the scenarios to follow. Fathom staff help to explain these scenarios to the client’s wider stakeholders.
Impact
Thanks to Fathom’s work, the client receives regular economic and financial market scenarios that represent its house views and are theoretically founded, empirically driven and internally consistent. This helps to show the client’s stakeholders:
- The most likely path for key economic and financial market variables
- How different assumptions on key unknowns could shape the outlook
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