Treasury does carry out stress testing/scenario analysis for the investment strategies on an ongoing basis. Core scenarios form the basis for determining the medium-term economic outlook, with additional scenarios representing more extreme events that have a low probability of occuring but a high impact if they do occur. Importantly these scenarios are used to estimate potential nominal and real portfolio returns, as well as estimating peak to trough drawdown, over the next five years.
The portfolio modellling scenarios available to Treasury are developed by the asset consultant and currently cover a broad range of forward looking economic scenarios including recession, mediocre growth, upside surprise, China credit risk, new energy order, eurozone break-up and Australian housing risk. However, at this time Treasury is not able to access any specific climate-related risk scenarios, or ESG factor scenarios, where the estimation timeframe is potentially over a more extended period of time.
It is important to note that potential outcomes for key economic and financial variables affecting portfolios are highly uncertain. Furthermore, the linkages between economic outcomes and financial markets, as well as how different asset classes are expected to interact under different scenarios, are impossible to predict with a high degree of certainty.