Emanuel Datt
As markets absorb the consequences of a federal budget handed down against a backdrop of persistent inflation, Melbourne-based fund manager Datt Capital says investors are asking the wrong question about interest rates.
“Whether the RBA hikes again is not the primary investment question,” says Emanuel Datt, chief investment officer of Datt Capital. “Markets have largely priced in further tightening. The more important question is duration: how long does the cash rate stay at or above 4.35 per cent?”
The cash rate is back at levels last seen in late 2011 – a comparison Datt says is frequently misread. In 2011, the RBA was in an easing cycle, moving rates lower and giving households and businesses a credible forward expectation of relief. In 2026, the direction is reversed, with market pricing pointing toward 4.7 per cent by year end and no cuts anticipated until 2028.
“Businesses and households are not pricing in relief,” Datt says. “They are stress-testing against the possibility of more restriction.”
That asymmetry changes behaviour in ways nominal rate comparisons cannot capture. Australian household debt to GDP reached approximately 113.7 per cent in mid-2025. The nominal mortgage balances being repriced today are far larger than in 2011, even at equivalent rates, because property prices have risen substantially in the intervening 15 years. Housing costs rose 6.5 per cent year-on-year to March 2026. Electricity prices are up 25 per cent as government rebates roll off.
Roy Morgan modelling[1] projects mortgage stress affecting 1.6 million Australians, approximately 30 per cent of borrowers, following the May rate hike.[2]
“Household consumption is expected to take a hit from weaker real incomes as higher prices erode spending power,” Datt says. “This is not a brief tightening correction but a prolonged period of restrictive policy operating against a structurally constrained economy.”
Against this backdrop, Datt says investors should focus on distinguishing businesses that can absorb a sustained high-rate period from those whose earnings are structurally dependent on cheap credit or consumer discretionary spending.
“Businesses best positioned share common traits: low debt relative to earnings, high interest cover ratios, and pricing power that allows them to pass through input costs without losing volume.
“Energy producers and gold-linked businesses benefit directly from the inflationary conditions driving rates higher. Defensive industrials and essential services with contracted revenue streams also carry structural insulation.
“But we remain cautious about highly geared companies rolling over debt at materially higher rates, consumer discretionary businesses exposed to household spending compression and companies with thin margins in competitive industries where pricing power is limited.
Small-cap companies warrant particular scrutiny, Datt says. “While the segment contains businesses with strong earnings quality, the cohort as a whole carries higher refinancing risk and is more sensitive to credit tightening than large-cap peers.”
“We are focussing on duration risk across both fixed income and equities. In fixed income, floating-rate exposure is favoured over long-duration instruments. In equities, quality earnings should take precedence over growth narratives that require continued multiple expansion.
“For investors in or approaching retirement, the depth and timing of drawdowns should matter as much as average returns. A capital preservation approach focused on risk-adjusted returns becomes more important than ever as the cycle extends.
“Diversification across asset classes and geographies is more valuable in a period of domestic stagflation risk than in normal cycles, where correlation assumptions between asset classes hold more reliably,” he says.
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