RBA watch: Sectors to target and avoid should interest rates rise – Expert

This week, the Reserve Bank of Australia held the cash rate at 3.6%.

The lead up to this decision saw a swing in the consensus views of many experts. 

Less than two months ago, markets were anticipating further rate cuts this year, however now the sentiment has shifted to expect rate hikes in 2026. 

The team at Wilsons Advisory and Canaccord Genuity have provided an overview of how sectors have historically responded to this kind of economic climate. 

Greg Burke, Equity Strategist said the recent RBA monetary policy meeting reaffirmed that the central bank has well and truly moved from an easing bias to incrementally hawkish on-hold stance, with increasing risks of a 2026 interest rate hike. 

Despite this, the outlook for domestic equities remains constructive. Household spending remains resilient, the RBA’s three rate cuts this year have arguably yet to fully flow through to consumer activity, and loose domestic fiscal policy continues to support economic growth.

Against this backdrop, the report assesses the interest rate sensitivities of key ASX sectors.

Historically performing sectors with RBA hikes

The report said two of the sectors that have historically outperformed during RBA hike periods are: 

• Resources – According to Wilsons Advisory, a more hawkish RBA combined with a dovish Fed supports AUD strength, historically a key driver of mining sector outperformance. Ultimately, resources are more sensitive to global growth than domestic demand. 
• Consumer staples – Staples typically outperform into RBA hiking periods, and valuations look attractive relative to Cyclical Retail, creating scope for a rotation, particularly if the RBA turns more hawkish.

The report also highlighted that it is positive on the healthcare sector. 

Despite historical underperformance pre-RBA hikes, relative valuations are already at 20-year lows, supporting a more constructive sector view.

It’s worth noting that while banks often outperform ahead of RBA hikes, Wilsons Advisory said sector valuations are elevated relative to prior cycles, and earnings momentum is mixed, which tempers its outlook.

Sectors likely to underperform

The report from Wilsons Advisory also said retailers typically underperform prior to RBA hikes and are vulnerable to higher rates, particularly as valuations are demanding. We prefer global earners.

According to the report, domestic cyclicals – including media, retail and other parts of the broader Consumer Discretionary sector – are particularly vulnerable to higher short-term interest rates and typically underperform in the lead up to RBA rate hikes, as investors anticipate a weaker environment for household spending.

Another sector to potentially underperform during RBA rate hike periods is real estate. 

Wilsons Advisory said similar to domestic cyclicals, the RBA’s pivot to a more hawkish on-hold stance removes a key tailwind for A-REITs and other long-duration assets.

However, policy is yet to become an outright headwind with the RBA remaining on-hold.

Stocks to watch 

In the resources sector, the report said given the sector’s higher sensitivity to the global growth pulse than to domestic demand, it remains positive on resources irrespective of the RBA’s policy stance. 

Our preferred large-cap exposures are copper: Sandfire Resources NL (ASX: SFR), aluminium: Alcoa (ASX: AAI) and gold: Evolution Mining Ltd (ASX: EVN), Northern Star Resources Ltd (ASX: NST).

In the consumer staples sector, Wilsons Advisory noted it has outperformed in the lead up to the past three RBA hiking cycles. 

While the sector is exposed to the broader consumer environment, household spending on essentials – particularly food and groceries – is typically highly resilient through the economic cycle. This has historically driven rotations out of Cyclical Retailers and into the more defensive Consumer Staples sector, as the market anticipates tougher times ahead for consumers.

Its preferred stock is Woolworths Group Ltd (ASX: WOW). 

The post RBA watch: Sectors to target and avoid should interest rates rise – Expert appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Bell has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Woolworths Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.