Get ready for a 5pc cash rate, says Lucerne Investment Partners CEO Anthony Murphy

Lucerne Investment Partners’ CEO Anthony Murphy sees Australia’s cash rate getting to 3-5 per cent in the next two years, bringing a world of pain to borrowers and equity markets.

Anthony Murphy, CEO of Lucerne Investment Partners.

The last time Australia’s official cash rate had a five in front of it, the world was going through the biggest financial crisis since the Great Depression. Within the next two years, rates could be back up at that level, bringing a world of pain to borrowers, equity markets and business balance sheets, according to Lucerne Investment Partners CEO Anthony Murphy.

The prediction comes as sharemarkets around the world tumble amid expectations the US Federal Reserve will within weeks kick off the next interest rate-rise cycle.

“We’ve already seen rationalisation start to come into the market. 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,” Mr Murphy said.

“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.”

While capital market conditions were favourable over the past two years, with excess liquidity pumped into the system, these hyper-growth businesses were the outperformers, Mr Murphy said.

“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 said.

That well will run dry quickly if rates jump up to the level Mr Murphy forecasts. He sees the Reserve Bank kicking off its own rate-rise cycle by the middle of the year, well before the 2024 start date the central bank was tipping just months ago.

The pressure on the RBA intensified last Tuesday, when headline inflation in the year to December 31 was revealed to have surged to 3.5 per cent, while underlying inflation was 2.6 per cent. Many now expecting the central bank to move this year.

The fallout for equities from the rate move would result in the sharemarket tanking 15 per cent this year, Mr Murphy predicted. Already, the S&P/ASX 200 is down 8 per cent in the first weeks on the mere suggestion of a new rate-rise cycle. The index fell below 7000 points on Tuesday, giving up most of 2021’s gains.

“We think there’s a real risk now that rates are going to increase by about 3-5 per cent over the next two years,” said Mr Murphy, who runs the Lucerne Alternative Investments Fund (LAIF).

“(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 per cent occur over an 18-month period from July 1 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 per cent to 6 per cent or 7 per cent 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.”

The key for investors looking to emerge unscathed was to ditch the recent investing mindset, Mr Murphy said.

“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.”

The alternative investment manager isn’t suggesting investors completely back away from equities, more that a refined approach is necessary. To this point, the fund has in recent months increased its exposure to oil and gas majors Santos and Woodside, as it sees these stocks “providing good value right now”.

“Our message to investors out there is to get in front of this and start to think differently. Move away from that herd mentality, which only works well until it doesn’t,” Mr Murphy said.

LAIF, which actively manages a portfolio of alternative funds covering asset classes and themes including long-short equities, volatility, precious metals, crypto assets and convertibles, returned 24 per cent last year, bettering the 22 per cent in 2020. For this year, the fund is tipping it can achieve an 8-12 per cent return.