Home / Opinion / Investment opportunities from the RBA’s surprise hike

Whilst it is clear that leaving interest rates at an 'emergency' level isn't appropriate, it is difficult to believe that the Australian cash rate will be above 3 per cent, as the market predicts, in 2023. A 50-basis point increase in mortgage rates that are in many cases below 2 per cent will hit people and businesses, but most likely property prices, hard. 

I must admit I was as surprised as anyone when the Reserve Bank of Australia announced an unexpectedly large 50 basis point increase in the cash rate. For those not involved in finance, 50 basis points is 0.50 per cent, which has taken the cash rate from 0.35 to 0.85 per cent overnight. Joining the RBA has been Westpac, which immediately announced that mortgage rates would be increased by the same amount.

Whilst it is clear that leaving interest rates at an ’emergency’ level isn’t appropriate, it is difficult to believe that the Australian cash rate will be above 3 per cent, as the market predicts, in 2023. A 50-basis point increase in mortgage rates that are in many cases below 2 per cent, will be significant. It will hit people and businesses, but most likely property prices hard. 

The RBA and banks have noted the significant balances held within offset accounts following the pandemic, which is likely a positive, however higher rates hit the hip pocket directly. No one is comfortable seeing their savings reduce, nor seeing less of their pay packet available to spend at the end of the week. Small businesses may well be the hardest hit.

There is likely a growing risk that the combination of higher prices destroying demand and higher interest rates doing the same, sends the global economy into recession, or worse, stagflation. But only time will tell. In the meantime, there are a number of investment opportunities that may be emerging for those able to take a long-term view.

The first, and most boring of all, is the sudden jump in term deposits rates, with two and three year deposits now exceeding 3 per cent from many banks. They are clearly trying to cover ‘holes’ within their funding, but a 3 per cent, government guaranteed assets is hard to pass up given the growing uncertainty.

Sticking with the lower risk end of the market, and government bonds are once again attractive. The 10 year yield is now above 3 per cent and the income produced from simply buying and allowing bonds to mature is over 3.5 per cent. Similarly, with the recent underperformance, the diversification benefits of bonds are also beginning to return.

If you are truly worried about a recession, this could be the time to double down on the technology and growth sectors that have been so badly hit in the beginning of 2022. I’m not referring to profitless, venture capital type companies, but rather quality, growing, monopolistic technology companies that are dominating their sectors. These companies, whether growing at 8 or 20 per cent per quarter, will only get more valuable in a recessionary environment.

Debt and credit markets may well be challenging in the current environment, as the impacts of higher interest rates flow through the economy. This extends to the banking sector, which many see as an inflation hedge via the ability for these institutions to pass on higher interest rates to their customers and generate higher margins. There is a fine line, however, between higher profits and putting your mortgagees under pressure, which makes me hesitant to invest further, at least for now.

Backing those companies with large amounts of cash on their balance sheet will likely remain in favour, with the likes of Apple able to keep buying back stock, or Challenger, able to generate higher returns on their cash. And finally, it is to back smaller and medium sized businesses once again, but on a global scale.  Global SMIDS, as they are known, are generally trading at decade low valuations but have historically delivered stronger long-term returns.