The RBA may have raised interest rates, but Matthew Lemke, fund manager (income funds) with boutique investment house Prime Value Asset Management, says cash investors are still in the wilderness, and now paying an even higher price for safety.
Mr Lemke says growing inflation has left cash investors so far behind they are unlikely to see the benefits from rate rises for some time.
“There is currently a huge gap between the inflation rate and the cash rate. The problem is that investors may need to temper expectations on rate rises and hence the catch up to inflation may not occur.
“There needs to be plenty of rate rises before cash investors enjoy meaningful returns, and it’s unlikely banks will pass rate rises on in full to depositors.
“Then there is the inflation question – inflation is being fuelled from the supply-side rather than the demand-side, which will temper the RBA hikes as the RBA will not want to hurt the economy already feeling the weight of retail and wholesale price rises.
“My expectation is only for a mild tightening cycle, certainly not the aggressive slew of rate hikes envisaged by the market.
“But an inflation rate of over five per cent while the official cash rate is under one per cent means cash investors are seeing their funds go backwards in real terms at increasing speed.”
Mr Lemke said CPI measuring 5.1% for the 12 months to 31 March 2022 was particularly hard on savers and cash investors. “Cash investors are now paying a very high price for safety. Bank savings accounts commonly pay around 0.25%, while inflation was 5.1% for the year to the end of March 2022, a 4.85% difference.”
To put this in perspective, Lemke says going by the most recent annual inflation rate, if an investor deposited $100,000 into a typical savings account in March 2021, that money now buys $95,150 in real terms in March 2022 – this assumes a common bank savings account paying 0.25%, which leaves a real term inflation rate of 4.85%
Hypothetically, if this high inflation scenario were to continue for a period of years, there would be a significant impact on the value of cash invested in savings accounts. If inflation was to stay at 4.85% in real terms for cash investors in bank accounts paying 0.25%, $100,000 would be worth:
- $95,150 after one year in real terms
- $90, 536 after two years in real terms
- $86,146 after three years in real terms
Mr Lemke stresses that this scenario might not happen and is strictly hypothetical, yet demonstrates how unchecked inflation can erode capital.
Lemke says alternatives to cash investments, such as diversified income investments, could help cash investors to match or stay ahead of inflation – if they are prepared to consider more risk. “The question over risk tolerance becomes more challenging for investors as inflation continues to spike.
“Clearly investors now need to take some risk just to match inflation”, Mr Lemke said.
Lemke manages the Prime Value Diversified High Income Fund, an income fund which has paid $0.42 per unit per month since inception, delivering 5.45% per annum to investors after fees since inception in August 2019.
To invest in the Prime Value Diversified High Income Fund please contact our Client Services Team at info@primevalue.com.au and 61 3 9098 8088