New prediction as Fed gets ready to start raising rates
Australia’s official cash rate could hit 5% within the next two years, according to Anthony Murphy, CEO of Lucerne Investment Partners.
Lucerne’s prediction comes as sharemarkets around the world plummet on expectations that the US Federal Reserve will kick off its next rate-rise cycle in the coming weeks.
“We’ve already seen rationalisation start to come into the market,” Lucerne told The Australian. “We can see that institutions and investors as a whole are no longer prepared to just pay up for these high-growth, expensive companies, many of which are not actually generating profits. If you look at the irrational behaviour happening over the last 12 months, it’s resulted in 60 out of the ASX top 200 companies not being profitable. That’s alarming.”
Murphy said that while capital market conditions have been favourable over the past two years, these hyper-growth businesses were the outperformers.
“But they are highly reliant on capital markets supporting them; they’ve got to keep going back to the well in order to survive,” he told The Australian.
Murphy predicted that the Reserve Bank would kick off its own rate-rise cycle by the middle of this year, despite the bank insisting just months ago that it wouldn’t hike rates before 2024.
The pressure on the central bank to raise rates got a boost last week, when headline inflation in the year to Dec. 31 was revealed to have risen to 3.5%, while underlying inflation was 2.6%, The Australian reported. Many market watchers now expect the RBA to move on rates sometime this year.
Murphy predicted that the fallout for equities from the rate hike would result in the sharemarket falling 15% this year. The S&P/ASK 200 is already down 8% in the first weeks of the year from the mere suggestion rates could rise, The Australian reported. The index fell below 7,000 points on Tuesday, wiping out most of the gains from 2021.
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“We think there’s a real risk now that rates are going to increase by about 3-5% over the next two years,” Murphy told the publication. “[The RBA] might try and hold fire as long as they can, but then I think they’re going to have to accelerate at a greater rate than what they would have preferred. You could easily see that 3-5% occur over an 18-month period from July 01 this year. And if you think about the amount of debt people and institutions have taken on over the last few years, you lift that cost of debt from 2% to 6% or 7% over the next 24 months, and it can have dire consequences – not only on the property market, but also on equity markets and business balance sheets.”
Murphy said that investors who want to survive the coming rate hikes need to change their mindset.
“Investors who continue with the mindset of traditional investing over the next five years are going to give away a significant amount of the wealth they’ve generated over the last five in particular,” he said. “Now more important than ever, investors need to apply a lot more active management to their portfolio, as opposed to the buy-and-hold index approach that worked very well over the past decade.”
