Datt Capital warns the market's focus on RBA rate movements is obscuring a more consequential concern
The rate debate gripping financial markets is focused on the wrong variable, according to Melbourne-based fund manager Datt Capital, which says duration — not direction — is what investors should be weighing.
"Whether the RBA hikes again is not the primary investment question," said Emanuel Datt (pictured top), chief investment officer at 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%?"
The cash rate has returned to levels last seen in late 2011, though Datt notes that comparison is often misread. In 2011, the RBA was cutting rates, offering households and businesses a credible expectation of relief ahead. In 2026, market pricing points to 4.7% by year end, with no cuts anticipated until 2028.
"Businesses and households are not pricing in relief," Datt pointed out. "They are stress-testing against the possibility of more restriction."
Datt said this asymmetry alters behaviour in ways that nominal rate comparisons cannot capture. Australian household debt to GDP reached approximately 113.7% in mid-2025, and the mortgage balances being repriced today are materially larger than in 2011 in nominal terms, reflecting the substantial rise in property values over the intervening 15 years. Housing costs rose 6.5% year-on-year to March 2026. Electricity prices are up 25% as government rebates unwind.
Roy Morgan modelling projects mortgage stress affecting 1.6 million Australians — approximately 30% of borrowers — following the May rate increase.
"Household consumption is expected to take a hit from weaker real incomes as higher prices erode spending power," Datt said. "This is not a brief tightening correction but a prolonged period of restrictive policy operating against a structurally constrained economy."
Datt advised investors to prioritise identifying businesses that can withstand a sustained high-rate environment, as distinct from those whose earnings depend 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," he said.
The firm sees energy producers and gold-linked businesses as direct beneficiaries of the inflationary conditions underpinning higher rates, with defensive industrials and essential services carrying contracted revenue streams also offering structural insulation.
Datt flagged caution on highly geared companies rolling over debt at higher rates, consumer discretionary businesses exposed to household spending compression, and companies with thin margins in competitive industries.
On small-cap equities, he noted that while the segment contains businesses with sound earnings quality, the cohort carries higher refinancing risk and greater sensitivity to credit tightening than large-cap peers.
"We are focussing on duration risk across both fixed income and equities," Datt said. "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."
He also urged investors approaching or in retirement to weigh the timing and depth of drawdowns as carefully as average returns, and to prioritise capital preservation and risk-adjusted outcomes.
"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," Datt said.
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