Beware of bubble talk, for now

In a wide ranging speech delivered overnight in New York, Glenn Stevens, provided more colour on his prior communications in which he has bemoaned the low level of entrepreneurial risk taking across Australia's corporate sector and implored businesses to invest for future growth prospects. Mr Stevens has acknowledged that lower returns on safe assets have not pulled down the cost of capital because there has been an offsetting rise in the equity risk premium. The risk free rate is low due to factors that are restraining corporate investment: low expected earnings growth and a high expected risk premium. I show that the lower risk free rate and lift in the risk premium have contributed to the relative rise in multiples of defensive stocks, and expect their elevated valuations to persist as long as animal spirits remain dormant. (VIEW LINK)