Founder Evidente. Top rated quantitative analyst, Evidente

Sam Ferraro

Founder Evidente. Top rated quantitative analyst

Evidente

Evidente is an independent financial education firm that delivers innovative financial advice to wholesale investors, including active long only funds, hedge funds, pension funds, and sovereign wealth funds, in Australia and globally.  Drawing on academic research in asset pricing, behavioural finance and portfolio construction, Evidente provides wholesale investors with commercial solutions to stock selection and asset allocation decisions across equities and other asset classes.

Macroeconomics

The neutral rate of interest is the rate that aligns the amount of saving and investment in the economy at a level that is consistent with full employment and stable inflation.  It can be used as a benchmark for assessing the current stance of monetary policy.  Last week, the RBA suggested that Australia's neutral rate of interest had fallen to around 3.5%, due to slower productivity growth, ageing demographics and heightened risk aversion.The current Overnight Cash Rate of 1.5% therefore suggests that policy is very accommodative.  But this doesn't line up with the risk framework developed by Evidente which points to a subdued appetite for risk in the financial markets and dormant animal spirits in the household sector. The key hurdle to the recovery gaining traction remains weak business investment in the non-mining sector, despite strong profitability.  The corporate sector will only expand capital investment once there is evidence of a lower equity risk premium associated with a revival in animal spirits in the household sector.  To that end, Evidente will be monitoring the evolution of the durable goods share, a measure designed to track variations in the psychology of the consumer.  Proxies for risk aversion in the household, corporate and financial sectors suggest that policy conditions are less accommodative than implied by the RBA's current assessment of the economy's neutral rate.

The neutral rate of interest is the rate that aligns the amount of saving and investment in the economy at a level that is consistent with full employment and stable inflation.  It can be used as a benchmark for assessing the current stance of monetary policy.  Last week, the RBA suggested that Australia's neutral rate of interest had fallen to around 3.5%, due to slower productivity growth, ageing demographics and heightened risk aversion.The current Overnight Cash Rate of 1.5% therefore suggests that policy is very accommodative.  But this doesn't line up with the risk framework developed by Evidente which points to a subdued appetite for risk in the financial markets and dormant animal spirits in the household sector. The key hurdle to the recovery gaining traction remains weak business investment in the non-mining sector, despite strong profitability.  The corporate sector will only expand capital investment once there is evidence of a lower equity risk premium associated with a revival in animal spirits in the household sector.  To that end, Evidente will be monitoring the evolution of the durable goods share, a measure designed to track variations in the psychology of the consumer.  Proxies for risk aversion in the household, corporate and financial sectors suggest that policy conditions are less accommodative than implied by the RBA's current assessment of the economy's neutral rate.

Risk Reckoner - Heightened Risk Aversion Points to Tight Money