Naomi Fink for Profit and Loss: Mispriced risk in Australia
Before last month’s RBA rate cut to 2.25%, divergent views with regard to economic risk (and by extension Australian asset markets) became apparent. One contingent foresaw declining yields as a predictable outcome of the slump in commodity prices, but more importantly as a symptom of a wider-spread attenuation in long-sustained appetite for Australian risk assets. The other was more optimistic, seeing the dip in Australian yields as more indicative of risk-haven demand to lend to creditworthy borrowers at higher developed country yields. Which view will prevail?
We present two quantitative measures that lead us to question the risk-haven assumption and argue for caution when investing in Australian risk assets going forward: