Research On Asset Allocation Based On China’s Business Cycle

With the fast development of China’s capital market and increasing sophistication of investing behavior, investors have plenty of financial products to choose from and wish to appreciate their asset value more than just maintain it. The categories of investment assets include not only savings, but also stock, futures, bond, fund, precious metal and so on, so it is important for individual and institutional investors to make appropriate decisions about which asset to choose. As the performance of the assets could fluctuate with the change of the macroeconomic environment, it is almost impossible for static investment portfolios to have the best performance all the time. So it is necessary for investors to consider the relations between the performances of different assets and the macroeconomic environment in order to obtain excess return by adjusting the asset allocation to the environment. In a word, it is meaningful to have a comprehensive discussion about how to allocate assets based on the business cycle.This paper first introduces classic theories of business circle and methods to recognize its different stages. Then it discusses the importance and models of asset allocation. When it comes to empirical tests, the business cycle is divided into six stages listed as recovery, first-stage overheat, second-stage overheat, stagflations, first-stage recession and second-stage recession. The division method adopted in this paper is an improved version of Merrill Lynch investment clock, using three economic indicators which are industrial value added, CPI and money supply, and the data ranges from January 2000 to December 2014. Based on the division of business cycle, the paper uses quantitative analysis and qualitative analysis to research on the performances of stock, money, commodity and bond on different economic stages. Then it focuses on the stock market, finding out the most attractive sectors and industries of each business stage. In addition, it also compares the returns of various types of bonds to learn about the effects of credit rating and maturity time on bond’s performances. After these tests, the paper summarizes which is the best asset to allocate during different stages of business cycle, and put up with a new investment strategy combining the previous conclusion of asset rotation with the Markowitz Model in order to help the investors to acquire stable excess returns.