Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Where to the Aussie dollar?
(Pictured: Nick Bullman)
The RBA could drop the official interest rate by another 25bps as soon as next quarter, according to the latest assessment by CheckRisk, the UK-based investment risk analysis firm.
In its latest bulletin, CheckRisk says Australian investors have had a good year and the outlook remains positive. This has led to two interesting behavioral expectations that these returns will continue into next year and a reduction in investor perception of risk as measured by volatility and implied volatility measures, according to the research firm’s chair, Nick Bullman.
“On a standalone basis Australia continues to look like a relatively lower risk environment. The RBA has dropped rates by 2.25 per cent since 2011. Rates now stand at 2.5 per cent and while expectations had been that the next move in interest rates would be a move higher, CheckRisk has long felt that the RBA would seek to reduce rates further as the main mechanism with which to ensure that Australian dollar remains competitive in global currency markets,” the bulletin says.
“The RBA has indicated that they want further easing to come through a weaker currency and that should put a cap on any rate rises in the near future. In addition, recent economic data is not supportive of rate rises. Unemployment data release last week showed the largest reduction in full time workers in more than a year with a loss in October of 27,000 full time jobs.
“CheckRisk believes that if the Aussie dollar were to start to rise toward parity with the USD again then the RBA will drop rates by further 0.25 per cent. This could happen as soon as next quarter and the RBA remains in an enviable position of still having room to manoeuvre when compared with the ECB and the Fed.”
Bullman says CheckRisk continues to monitor both external and internal factors with regard to Australia. At present the economy looks more stable and sustainable than almost any other the researchers look at.
“The equity and bond markets have reacted accordingly, however we estimate that barring outside factors, Australia is just past 3 o’clock on our Debt Clock (9 o’clock is when the bubble bursts). That should be good for bonds and equity markets alike, particularly given that CheckRisk believes the RBA will take interest rates lower in order to protect the AUD.”
