Every interest rate cycle produces its own consensus, and this one is no different. The cash rate is at its highest since 2011 and some of the major banks expect it to go higher, while households are gloomier than at any time since the early 1990s, including the global financial crisis and pandemic.
The Firmus initial public offering spectacularly crashed and burned despite artificial intelligence powering ahead, and yet even with all the pessimism, the sell side is resolute that it’s too early to buy the “RBA pivot”.
I’m not so sure that the Reserve Bank of Australia will tell us when it is time. It never has, and it won’t now, which means that investors who are waiting for the permission to turn will likely find the opportunity has passed by.
The sharemarket’s playbook around rate cycles is where most get it wrong because there is no consistent playbook for an RBA pivot. There is an average, and averages hide a great deal of variation.
According to Macquarie, across the seven easing cycles since the early 1990s in Australia, the S&P/ASX 300 Index has done everything from falling 13 per cent to gaining 31 per cent in the first year after the first rate cut. It climbed in fewer than half of those 12-month periods.
Consumer stocks have been no more predictable. Cyclical retail stocks have generally outperformed, but by margins ranging from deeply negative to better than 25 per cent.
That is not noise around a rule, it is because every cycle has its own unique characteristics. This one has an energy shock, an AI capex boom, heavily asset-rich households and a global rate hike cycle that comes against robust economic growth.
Anyone who tells you how consumer stocks will behave by pointing to the median of past cycles is describing history, not necessarily this cycle, which
means the playbook is a guide, not something to follow blindly.
The second problem is timing. The RBA will be the last to call the turn, and while that is not by design, it will make sure it doesn’t declare victory until the data proves it can.
The language will soften only once the evidence is overwhelming. By then, the market will have done the work.
In 2024, the RBA held the cash rate at 4.35 per cent, refused to rule out another increase, and it did not cut until February 2025. Yet investors who waited for that signal watched equities and house prices move well before it.
The data shows that early-cycle sectors such as retail tend to bottom near the end of a hiking cycle, not after the first rate cut.
The third issue, and I say this with some sympathy for the forecasters, is that expectations around the RBA have been wrong more often than right over the past 12 to 18 months.
In September 2024, the case for a rate pivot was being made with conviction; the first cut came five months later. By mid-2025 the market had the cash rate falling towards 3.1 per cent, and six months later it was pricing in rate increases.
As recently as August, almost every economist expected the central bank to hold in September and leave the cash rate at 4.35 per cent. A month later, 33 of 34 were calling for a rate rise.
Forecasting is difficult, but that means less reliance should be placed on
making the right call on the RBA and more on whether stocks are pricing in a worst-case outcome on either rates and/or earnings.
So, where does that put us?
There is no expectation that we are on the cusp of a turn in housing or consumer activity but without a macro catalyst, scaling into cyclical and rate-sensitive exposure is how we believe the cycle will play out. Especially when the return differential between consumer cyclicals and consumer staples is more than 30 per cent over the past 12 months or when real estate has underperformed the broader S&P/ASX 200 Index by more than 25 per cent over the same period.