Macro
There has been a material slowdown in China’s growth rate in recent years which in part is due to regulatory upheaval in the shadow banking sector. Here we offer an update on the fine balance achieved to date by Chinese authorities between boosting the resilience of the financial sector by... Show More
The death last week of the founder of Vanguard, Mr John Bogle, offers a timely reminder of the upheaval in the asset management industry brought about by the advent of index investing around four decades ago. Show More
Following its 5% to 10% miss on consensus earnings for 1H, Domino’s fell by around 15% from peak to trough last week. The market has little tolerance for earnings misses from growth stocks. Even after the price decline, the stock is still trading on well above 20 times 12 month... Show More
In a recent research paper, former Chair of the Federal Reserve, Mr Ben Bernanke, proposes price level targeting as an alternative framework for monetary policy. Since 2012, the Federal Reserve has had an explicit inflation target of 2% pa, with inflation commonly measured in terms of the chain price... Show More
The RBA's biannual Financial Stability Review (FSR) has become essential reading since the financial crisis, even for stock-pickers. The central bank has used the October issue as an opportunity to vent about its concerns surrounding investor complacency in global financial markets. It has cited some of these concerns previously, but... Show More
Summary: Market volatility conditions remain subdued in Australia, with volatility in the Australian dollar, government bond yields and the stock market close to historical lows. Lower stock market volatility appears to reflect a global volatility shock, with realised and implied volatility in the S&P500 also benign. Subdued market volatility belies... Show More
A number of popular scapegoats emerged in the aftermath of the financial crisis: conflicted credit rating agencies, a corporate culture and regulatory environment that encouraged risk taking over risk management, lax lending standards, rapid growth in credit, and what some considered to be excessively loose monetary policy from the U.S.... Show More
There is plenty of bad news buffeting the banks, but I remain positive on the sector because pricing suggests that investors have become too gloomy on the sector’s prospects. The sector is trading on a book multiple of 1.9x which represents a 50% discount to the non-bank industrials. Show More
It has been a good week for APRA and the Reserve Bank. Their announcements surrounding the expansion of macro-prudential policy tools and warnings around the outlook for property prices have had the initial desired effect of maximum media coverage. They would hope that lenders and potential property investors are getting... Show More
The revolution in Australian housing reflects a shift towards higher density dwellings. Building approvals for high density dwellings now accounts for half of residential approvals, well above the historical norm of around one-third. Show More
Last year, Evidente published a report entitled The Dangers of Safety, which suggested that there had been an extended period of a rising equity risk premium. Since mid-2016, there has been a reversal of this trend, with the risk free rate moving higher and risk premium moving lower. In this... Show More
The outright contraction in the September quarter real GDP belies underlying strength in the economy. Nominal GDP lifted by 0.5% and expanded by 3% in the year to the September quarter. The nominal economy - which is a more important barometer for stock investors - is gradually pulling out of... Show More
The surprise election of Mr Donald Trump as 45th President of the United States – by a convincing majority in the electoral college – raises four questions that forecasters and investors need to confront. Why did Mr Trump win? What inferences – if any – can investors make about an... Show More
A lift in the equity risk premium (ERP) represents a cohesive narrative of a number of key empirical phenomena in financial markets: stock markets have not-rated despite the drop in the risk free rate, animal spirits in the corporate sector remain dormant despite high profit shares globally and stocks offering... Show More
In this open letter, I question the CBA's misconduct around financial advice in a vertically integrated model of financial advice and cite a senior economist's call for an inquiry into the conflicted nature of financial advice among the major banks. Given the growing regulatory risks surrounding the banks retaining their... Show More
Interbank Cash Rate Futures point to a 65% probability that the RBA Board will cut the Overnight Cash Rate (OCR) by 25 basis points at the August meeting. Real rates have effectively lifted in the first half of CY2016, with the 25 basis point cut to the OCR in May... Show More
Evidente's long only model portfolio is a high conviction, concentrated portfolio with no more than 30 stocks and an active share of no less than 30%. The key macro theme that guides portfolio construction is the prospect that interest rates will remain low in Australia and globally for an extended... Show More
The resounding victory of the ‘Leave’ campaign following last week’s UK referendum revealed a high level of antipathy towards European integration and immigration policy. In this post, Evidente briefly traces the antecedents of the EU and tentatively maps out various future scenarios surrounding European integration. On balance, the chance of... Show More
Various measures of underlying inflation have been at the bottom or below the central bank’s target band for some time now. Because there is little evidence to suggest that growth in aggregate supply or productive capacity has lifted significantly, the onset and persistence of disinflationary forces in Australia and globally... Show More
The key development since the GFC that’s contributed to the slow recovery in the Australian (and global) economy has been a substantial reduction in the stock of human capital, reflecting lower expected future incomes growth and sticky personal discount rates. In Australia, nominal average compensation per employee has slowed to... Show More
Hi Patrick, thanks for reaching out with the feedback. With respect to the ROE, if the lift in equity is associated with a reduction in ROE, then it is because the company is less risky. This is consistent with the MM proposition that a lift in equity capital reduces the expected cost of equity. From a Gordon growth perspective, its not clear that this changes the book multiple. Although the expected roe falls, so does the discount rate, k, which should offset one another. p/e = 1/(k-g). p/bvps = roe/(k-g).
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