‍Rate hikes create winners and losers. The work is knowing which is which

The instinctive response to a tightening cycle is to reduce risk broadly. That is understandable, but it is also imprecise.

This week, the ABS confirmed headline CPI rose 4.6 per cent in the year to March 2026, the highest reading since September 2023. The spike is concentrated in fuel and transport, driven directly by the Middle East conflict. Automotive fuel rose 32.8 per cent in a single month. Trimmed mean inflation held at 3.3 per cent.

A headline rate of 4.6 per cent, even when fuel is the primary driver, does not give the RBA room to pause. All four major banks are forecasting a May hike. Rate hikes do not transmit evenly across the economy. Some sectors are structurally exposed. Others are largely insulated. That distinction is where investment decisions are made.

"A headline inflation rate of 4.6 per cent, even when fuel is the primary driver, does not give the RBA room to pause."

The sectors feeling direct pressure

Consumer discretionary is the most exposed. The mechanism is straightforward: higher mortgage repayments reduce the share of household income available for non-essential spending. Australian households carry elevated debt levels by historical standards. Each successive hike compounds the effect of the last. Retailers and hospitality operators with fixed cost bases and price-sensitive customers feel this earliest.

Consumer staples are frequently treated as defensive in a rate cycle. That framing is incomplete. The real risk is not revenue loss. It is margin compression. Input costs including energy, logistics, and raw materials have risen materially. Passing those through is constrained by competitive pricing and the growing prevalence of private label alternatives. The defensive label does not protect against a structural cost squeeze.

"The defensive label does not protect against a structural cost squeeze."

Industrials face pressure from two directions simultaneously. Higher rates slow construction and infrastructure activity on the demand side. Energy and financing costs rise directly on the cost side. For capital-intensive businesses on fixed-price project contracts, the timing mismatch between rising input costs and locked-in pricing creates earnings risk that is not always visible until results season arrives.

Where the rate cycle creates relative opportunity

The sectors overlooked in a defensive rotation are those where domestic rate movements are a secondary consideration.

For upstream energy producers, the cash rate is largely irrelevant to earnings. Revenue is driven by global commodity prices. The March ABS data makes this visible in real terms. Diesel rose 41 per cent between February and March, from 181 cents per litre to 256 cents. Regular unleaded moved from 171 cents to 228 cents in the same period. For upstream producers with low extraction costs, that price environment flows directly into revenue. For downstream operators and transport-dependent businesses, it is a cost they cannot easily absorb.

The ongoing Middle East conflict continues to exert upward pressure on global oil markets. Supply investment has been structurally insufficient relative to depletion rates across major producing regions for several years. These dynamics support elevated commodity prices independently of what the RBA decides in May. Value does not accrue evenly across the energy value chain. That distinction matters for portfolio construction.

"Value does not accrue evenly across the energy value chain. That distinction matters for portfolio construction."

Resources present a more differentiated picture. Gold warrants attention when monetary policy uncertainty persists and inflation runs above target. Copper remains anchored to the long-run electrification thesis despite near-term softness from Chinese construction. Battery materials have seen material price corrections from 2022 highs. Selective attention is warranted, though recovery timelines are less certain than consensus has suggested.

Profitable technology businesses with recurring revenue, low capital requirements, and minimal debt are structurally insulated. Their cost base does not rise materially when rates increase. Their customers, typically businesses rather than rate-sensitive households, continue spending on software and infrastructure because the operational case does not change with the cash rate. The sector is not uniformly insulated. High-growth, pre-profitability businesses compress mechanically when discount rates rise. The distinction matters.

What this means for portfolio construction

A sustained rate hiking cycle is not a signal to exit equities. It is a signal to be more precise about which equities, and why.

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 is not a peripheral consideration. It is the core question for investors managing capital through this period.

The businesses best positioned share common characteristics. Their earnings are independent of domestic consumer spending. They carry pricing power that does not depend on volume growth. Their balance sheets do not require refinancing at materially higher rates.

Datt Capital is focused on selecting investments that will outperform over time irrespective of short-term noise. Our investments are presently focused on these sectors which we expect to enjoy structural tailwinds over the medium and long term, targeting sustainable real returns for our investors. Asset selection and appropriate portfolio construction are fundamental to this objective.

"Datt Capital is focused on selecting investments that will outperform over time. Our investments are presently focused on sectors we expect to enjoy structural tailwinds over the medium and long term."

The relevant stress test in this environment is not the base case. It is a scenario where rates remain elevated for longer than the market currently prices. At current inflation readings, that is the planning assumption, not a tail risk.