The sentiment about the next move for interest rates has shifted rapidly in Australia, with Wilsons Advisory saying markets are now fully pricing in a rate hike next year.
This is a stark turnaround from as recently as six weeks ago, when the expectation was for two more interest rate cuts from the Reserve Bank of Australia (RBA), the broker says.
As they said in a note to clients this week:
(This week's) 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.
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Aussie shares still looking good
But despite the next move for rates likely to be higher, Wilsons says the outlook for domestic equities remains "constructive".
As they said:
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. And, somewhat uniquely, the US Fed's ongoing rate cutting cycle provides an external offset to tighter domestic policy – particularly for offshore earners.
Wilsons went on to say that while each cycle is unique, the past five cycles demonstrated that the market "typically grinds higher ahead of the RBA hiking rates".
The Wilsons team has looked at the various sectors and made some picks for which shares they prefer in each.
Resources tied to global growth
In the resources sector, they say that with our RBA looking to potentially raise rates, and the US Federal Reserve still looking to cut, this supports strength in the Australian dollar, "historically a key driver of mining sector outperformance''.
They also note that resources are more sensitive to global growth than domestic Australian demand.
Overall, given the sector's higher sensitivity to the global growth pulse than to domestic demand, we remain positive on resources irrespective of the RBA's policy stance.
Wilsons' preferred large-cap exposures are Sandfire Resources Ltd (ASX: SFR), Alcoa Corporation (ASX: AAI), Evolution Mining Ltd (ASX: EVN), and Northern Star Resources Ltd (ASX: NST).
Banks fully priced
In the banking sector, Wilsons remains cautious, saying that while in the lead up to the last four of five rate hike cycles the sector has done well due to a strong economic backdrop and expectations of expanding net interest margins, this time is somewhat different, with sector valuations "unusually elevated".
With valuations still full, and earnings momentum being mixed across the majors, we remain cautious towards the sector and continue to advocate for an underweight portfolio exposure.
That being said, their preferred picks are ANZ Group Holdings Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC).
Retailers mixed
In consumer staples, their preferred pick is Woolworths Group Ltd (ASX: WOW), saying the sector has outperformed in the lead up to the past three 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. Given the attractive relative valuation of the supermarket sector (20x forward P/E) versus the retail sector (28x forward P/E), despite similar medium-term growth outlooks, we see meaningful scope for a rotation into supermarkets over the next year and remain positive towards the sector more broadly.
Wilsons is recommending investors steer clear of cyclical domestic stocks such as retailers and media stocks, saying that with the consumer outlook uncertain, companies are being punished heavily for earnings misses, and even for in-line results.
With valuations still demanding – and well above historical averages – across the large caps, we remain cautious on the domestic retail sector and domestic cyclicals more broadly.
