The State of Monetary Policy and Industrial Asset Allocation: the Ghanaian Perspective

The purpose of this paper is to investigate whether asset allocation across various industries listed on the Ghana Stock Exchange (GSE) varies across different monetary policy states. Design/methodology/approach This paper adopts the Markov Chain technique to split monetary policy into three different states. The authors further adopt the Markowitz portfolio optimization technique to find the minimum variance and optimum portfolio for the industries listed on the GSE. Findings The finding reveals a dynamic asset allocation, which varies the industry's weight mix across the various monetary policy states enhance excess returns compared to the static asset allocation. Specifically, the authors find risk-return trade-off among industries listed on the GSE. Financial and Food and Beverage industries portfolios record high returns relative to the Government of Ghana 91-day Treasury bill. The Food and Beverage portfolio is the only portfolio that records relatively high excess returns across all the monetary policy states. The authors also find that, during expansionary state (high monetary policy rates) of the monetary policy, investors are to allocate about 69 and 30 percent of their investment into food and beverages and financials, respectively. Corner solution is found in the transient state where 100 percent of wealth is allocated to financial to obtain the optimum portfolio. The optimum portfolio in the contraction state assigns 52 percent to financials and 42 percent to manufacturing. In summary, the result supports the dependence of investors' asset allocation decisions on monetary policy. Practical implications Therefore, the authors propose an investment strategy which is dynamic and takes into consideration the monetary policy states rather than static asset allocation which maintains the same industry weight mix over the investment period.