The next RBA hike demands sector precision, not defensive instinct

The consensus is clear: Australia’s big four banks are aligned in forecasting a third consecutive RBA cash rate hike in May, which would push the cash rate to 4.35 per cent. The trigger is equally clear: the Australian Bureau of Statistics confirmed headline CPI surged to 4.6 per cent in the year to March, leaving the RBA with no credible room to pause.

What is less clear is how investors should respond. Emanuel Datt, chief investment officer of Datt Capital, argues that the instinctive reaction, reduce risk broadly, rotate into defensives, wait for the cycle to turn, is understandable but dangerously imprecise.

“Rate hikes don’t transmit evenly across the economy,” he says. “The analytical discipline required right now is understanding how rate changes impact each sector and identifying which businesses have the earnings quality to absorb sustained pressure.”

That framing resets the question. The issue is not whether to be defensive. It is where defence actually holds.

Consumer and industrials: where the transmission is most direct

For Datt, consumer discretionary carries the clearest structural headwind. The mechanism is straightforward. Higher mortgage repayments reduce the share of household income available for non-essential spending, and for Australian households still carrying elevated debt levels, each successive hike compounds the effect of the last.

“If the May hike proceeds and consumer confidence data keeps deteriorating, investors should expect earnings revisions across the sector.”

Consumer staples present a more nuanced picture. The defensive label is partially correct but incomplete. Demand for essential goods is relatively inelastic, so revenue holds. The real risk is margin compression.

Energy, logistics, and raw material input costs have risen materially, but competitive pricing and the growing prevalence of private label alternatives constrain passing those increases through. The defensive label, Datt argues, does not protect against a structural cost squeeze.

Industrials are being hit from both directions simultaneously. On the demand side, higher rates slow construction and infrastructure activity. On the cost side, energy and financing costs rise directly.

For capital-intensive businesses on fixed-price project contracts, the timing mismatch between rising input costs and locked-in pricing creates earnings risk that often does not become visible until the results season.

Where domestic rates are simply not the primary driver

Investors overlook sectors in a defensive rotation when domestic rate movements do not primarily drive earnings. Upstream energy producers sit at the top of that list.

“For upstream producers, the domestic cash rate is largely a secondary variable,” Datt says. “Revenue is driven by commodity prices set in global markets.”

The ABS data makes the scale of that dynamic visible. Diesel rose 41 per cent between February and March alone, from 181 cents to 256 cents per litre. For producers with low extraction costs, that price environment flows directly into revenue without a proportional rise in the cost base, which means free cash flow generation at elevated commodity prices can be substantial.

Datt is careful to draw a distinction within the sector. Value does not accrue evenly across the energy value chain. Upstream producers with low production costs and strong reserve bases are best positioned. Downstream operators and refiners face structurally thinner and more volatile margins. That distinction matters for portfolio construction.

On gold, Datt’s view is direct. Historically, the metal performs well during periods of monetary policy uncertainty and sustained above-target inflation. If the RBA hikes in May and inflation data remains sticky through mid-2026, the conditions supporting gold prices remain firmly in place.

On copper, he remains constructive on the structural demand profile linked to electrification, while noting near-term headwinds from slowing Chinese construction activity.

Technology: the distinction that matters

Within technology, the rate sensitivity debate has often been too blunt. High-growth, pre-profitability companies are mechanically sensitive to rising discount rates, and that is well understood and already priced by most investors. But profitable technology businesses with recurring revenue, low capital requirements, and minimal debt occupy a structurally different position.

“Their cost base doesn’t rise materially when rates increase,” Datt says. “Their customers are typically businesses, not rate-sensitive households, and the productivity case for enterprise software doesn’t change with the cash rate.”

Datt sees opportunity in Australian small-cap technology. Under-research compared to large caps creates pricing inefficiencies. Primary research can spot them before the broader market catches up. In a rate environment where consensus positioning is being rapidly repriced, that information advantage becomes more valuable, not less.

The broader principle he returns to is consistent. The businesses best positioned in the current rate cycle share a few common characteristics: earnings driven by factors independent of domestic consumer spending, pricing power that does not depend on volume growth, and balance sheets that do not require refinancing at materially higher rates.

At 4.6 per cent headline CPI, the real return on a term deposit running at 4 to 4.5 per cent is negative before tax. That arithmetic, Datt argues, makes an absolute return strategy targeting positive real returns across the cycle a genuine consideration, not a theoretical one.

For advisers building portfolios in a tightening environment, the lesson is the same one it always is when the cycle turns: precision matters more than posture.