• Angus Crennan

Risk management has never been more important for Australian investors than right now

Compensation for risk is the key perspective for rational investors. Why take risks for free?

We all know that valuations are high and that has been supported by both government handouts and central banks setting interest rates close to zero. This has the twin impact of recognizing nearly all the increased future cash generation in the present, which is why valuations have responded so aggressively even with the global pandemic still infecting another 30,000 Americans per day and significantly worse impacts in various other countries.

Investors rightly fret about changed circumstances. Inflation in the US recently looked substantially higher than expected for example and that made many in the market concerned that the US Federal Reserve might have to start increasing interest rates, which is certain to make valuations less attractive because we apply a greater cost of capital to those future cashflows.

A more dangerous situation however is under our noses. Even with interest rates benefiting from maximum stimulus valuations are stretched.

Consider the premium we earn over 10 year Australian bonds in various equity markets around the world:

Make no mistake these are skinny premiums which means your compensation as an Australian investor for index investments is minimal yet you are taking all the risks of expensive equity markets and emotional investors.

If you want to understand how bad this can get you need to model up how fast and far equity markets can fall from previous highs. Can you afford to risk those sorts of movement in your capital?

Risk management is Balmoral’s forte. We made gains when equity markets fell over 30% during the first quarter of 2020. If you want to continue participating in growth assets but need that participation oversighted with rigorous risk management get in touch with us.



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