Higher for longer: Three experts on where to invest and what to watch

In a case of "fork found in kitchen", the RBA has hiked the cash rate to 4.60% as expected, the highest cash rate in near-on 15 years.

To understand what this higher rate environment means for investors, we reached out to three portfolio managers across different asset classes to find out how they’re positioning and what investors need to watch out for. 

Our three experts are:

• Reece Birtles, Head of Australian Equities, ClearBridge Investments
• Sebastian Mullins, Head of Multi-Asset and Fixed Income, Schroders Australia
• Justin Tyler, Director and Portfolio Manager, Interest Rates and Currency, Daintree Capital

1. Reece Birtles, Head of Australian Equities, ClearBridge Investments

The cash rate outlook

Inflation remains above the RBA's target, but Birtles says the effects of higher rates are starting to become apparent. 

"Our reporting-season analysis found softer demand in parts of the economy, rising funding costs and weaker forward earnings expectations, with some companies relying on price increases and cost savings simply to defend earnings."

For equity investors, the exact peak matters less than rates staying higher for longer, reinforcing the importance of resilient earnings, recurring cash flow and valuation discipline.

Positioning

In a higher rate environment, Birtles expects greater resilience from businesses with recurring cash flow, real productivity gains, disciplined capital allocation and assets that are hard to replicate.

Recent reporting season data was evidence of that. Essential consumer spending held up better than larger-ticket and housing-sensitive categories, and infrastructure, mining services and data centres continued to see firm demand. 

However, "we would not turn those observations into blanket sector calls," he says. "Dispersion within sectors remains high, so our positioning is selective and valuation-led, with a premium on earnings quality and cash-flow resilience."

A stock to back

One stock he would back is Orica (ASX: ORI).

"It gives us picks-and-shovels exposure to a positive mining outlook, backed by a healthy balance sheet and hard-to-replicate manufacturing and supply assets."

A tighter explosives market gives it room to reprice contracts, and it expects higher sourcing costs to have no material impact on margins. 

Risks that investors may be underestimating

Reporting season showed that share prices often moved much further than earnings revisions justified, driven by passive flows and crowded positioning. 

Birtles says investors need to tell a temporary overreaction apart from real damage to cash flow and competitive position.

"The biggest risk investors may be underestimating is taking headline earnings beats and share-price strength at face value."

2. Sebastian Mullins, Head of Multi-asset and Fixed Income, Schroders Australia

The cash rate outlook

The Schroders cash rate model peaked at 4.75%, which points to one more hike before year-end. But that signal is fading as housing slows and sentiment softens. 

"With markets pricing a terminal rate of 5%, we think pricing has run ahead of the fundamentals and now looks too high," Mullins says. 

He expects the RBA to start cutting in 2027 and is adding to Australian bonds, particularly short-dated ones.

Positioning

Mullins says they are underweight Australian equities and prefer the US. Australia is further along in its hiking cycle, and has a more sensitive consumer who feels rate rises more because of expensive housing and floating-rate mortgages. On top of this, "our economic growth is stalling and the recent tax changes could slow consumption," Mullins adds. 

On the other hand, the US is benefiting from resilient consumer spending and a trillion dollars of corporate capex, which is translating into stronger earnings. 

In government bonds, it's the reverse - Mullins says they are overweight Australia, expecting the RBA to be one of the first central banks to stop hiking.

What to back

Corporate bonds and hybrids from Australian infrastructure and utility companies offer yields close to 7%. That compares with an ASX dividend yield of 3.5%, or 4.2% grossed to include franking. 

The issuers are listed, mostly investment-grade companies in monopoly-like industries, with earnings linked to inflation. 

"This is not private debt. We access this part of the market on a duration hedged basis, so we do not need to worry about the short-term moves in interest rates," says Mullins. 

This can be accessed through its Schroder Australian High Yielding Credit Fund - Active ETF (TSX: HIGH).

Risks that investors may be underestimating

Mullins flags two risks. One is an oil spike from the Iran war, which would squeeze consumers and push central banks to hike harder. 

The other is hyperscalers cutting back AI spending. "Neither of these are our base case, but both could happen at the same time, turning two strong tailwinds into headwinds."

3. Justin Tyler, Director at Daintree Capital

The cash rate outlook

Markets may see a November hike as a 50/50 call, but despite this uncertainty, Tyler expects the RBA will hike again because he doesn't think inflation will ease enough in the coming months. 

Beyond the short-term policy moves, Tyler adds that the market is almost pricing in yet another hike around the middle of 2027. 

"If inflation remains sticky, as we expect, then I think that hike will be delivered, so a peak cash rate of 5.1% next year is the most likely outcome at this stage."

Positioning

Daintree holds no fixed-rate bonds and won't buy too much even as their value improves.

As Tyler explains, these bonds now do less to protect portfolios when shares and other risky assets sell off, so they add more volatility than they're worth. 

"Fortunately, we can earn similar yields to long duration government bonds in quite short-dated credit, with much less volatility. That remains our preferred stance."

What to back

Tyler favours floating-rate debt generally, and residential mortgage-backed securities in particular. 

Despite property prices having softened recently, this weakness has occurred after years of strong growth, which he explains has left underlying mortgages of the vintages they hold in significant positive equity. The job market also remains historically strong. The result is a well-diversified pool of mortgages, with no borrowers struggling to make repayments.

"This type of very creditworthy, short-dated floating rate exposure continues to provide us with a significant yield pickup over cash."

Risks that investors may be underestimating

Further rises in oil prices could keep rates higher for longer than anyone expects, and he warns that could last long enough to hurt companies with weaker balance sheets and cause issues in parts of global credit and equity markets.

"This sort of risk is underestimated because there is no clear catalyst for markets to correct ahead of time," he says.

"Instead, it is akin to a boiling frog scenario which gives rise to negative headlines that arise with little warning."