Whenever the Reserve Bank lifts rates, the market tends to react to consumer stocks in a fairly predictable way. Commentary turns to “the consumer”, the retail names fall together, and a sector made up of dozens of very different businesses is repriced as though they all shared a single customer who had just been handed a larger mortgage repayment. The reflex is understandable, and on the first day it is usually right. The trouble comes over the following months, when results arrive and the businesses turn out to have very little in common.
The market is in one of those moments now. On 29 September the RBA lifted the cash rate by 25 basis points to 4.60%, its fourth increase this year and the highest setting since late 2011. The decision was unanimous. The Board noted that house prices had fallen in most capital cities and that new housing lending had declined, and made clear it was prepared to move again if inflation does not ease.
Rates up, spending down, sell retail. That is the obvious trade, and for a good part of the sector it may well prove correct. The problem lies in applying it evenly, because the businesses being sold together have very different exposure to what the RBA is doing.
Inflation has been stubborn, and households are adjusting
The inflation data explains why the Board moved. The ABS reported annual CPI of 4.0% in the year to August, up from 3.5% in July, with fuel prices rising 14.8% in the month as global oil prices climbed and the last of the federal fuel excise relief was wound back. Petrol on its own would not have troubled the RBA greatly. The trimmed mean, its preferred measure of underlying inflation, is the bigger concern, having now held at 3.6% for three consecutive months.
Households are responding much as expected. ABS figures show total household spending was flat in August, and once fuel is excluded it fell 0.3%. Within that, discretionary spending fell 0.3% while spending on essentials rose 0.6%. Unemployment has edged up to 4.6%.
Read closely, the data does not describe a consumer who has stopped spending. It describes one who is moving money from things that can wait into things that cannot. Shifts of that kind tend to open a wide gap between the businesses on either side of them.
Who actually pays for a rate rise
Part of the difficulty lies in the phrase “the consumer”. It suggests a single household with a single budget, and the rate cycle does not work that way. It works largely as a transfer from people who borrow to people who save.
Finder estimates that a borrower with a A$731,000 home loan on a typical variable rate will pay around A$113 a month more after this hike alone. Add the three earlier increases this year and mortgage holders have absorbed a meaningful cut to their spare cash. A retired couple with no mortgage and savings in term deposits, by contrast, is earning more interest than at any time in over a decade. Renters sit somewhere else again, squeezed through rents rather than repayments.
Seen this way, the more useful question for investors is not whether “the consumer” is weakening. It is which households a particular business sells to, and whether it sells mainly to Australian households at all.
Four things the sector label hides
Four questions go a long way towards separating consumer businesses in a rate cycle. The first is where the revenue is earned. A retailer selling almost entirely in Australia is fully exposed to the RBA. One that earns most of its revenue in Japan or the United States answers to different central banks, different housing markets and different shoppers, even if its head office is in Sydney and its ticker sits in the same index.
The second is the balance sheet. A company carrying debt is paying more for it this year, much like its customers. A company with net cash is being paid more on that cash, and has room to keep investing and gain market share while more stretched competitors pull back.
The third, which receives less attention than it deserves, is working capital. Some retailers must buy and pay for stock months before they sell it, so a slowdown ties up cash at precisely the wrong time. Others collect from customers before they pay suppliers, which means growth funds itself and a weaker patch can be managed without asking shareholders for more money.
The fourth is pricing power. A business with a brand customers value can usually protect its margin when volumes soften. A business that competes mainly on price tends to discount, and in a downturn discounting has a way of turning a sales problem into a profit problem.
None of this appears in an RBA statement or a CPI release. It appears in company results, usually some months after the share prices have already moved.
An example from this week’s newsletter
Ron Shamgar’s article this week on The Koala Company (ASX: KOA) illustrates the point. Koala is usually described as an Australian online furniture retailer, and few purchases are easier to postpone than a new sofa. On the label alone, it is the sort of stock a hiking cycle would be expected to punish.
The numbers are more nuanced. In the first eight weeks of FY27, 60% of Koala’s revenue came from outside Australia. The company finished FY26 with no debt and A$71.2 million of net cash, and it runs a negative working capital model. Views on the valuation will differ, and Ron sets out the risks in full, but its exposure to the RBA is clearly much smaller than its sector classification suggests. It serves here as an example of how much a label can conceal; the investment case belongs in Ron’s article.
What the market expects from here
Before the September meeting, a Reuters poll found 26 of 31 economists expected the cash rate to remain at 4.60% at the end of December. ANZ was the main exception, forecasting a further increase to 4.85%. Most economists expect rates to stay on hold through the middle of 2027, after which forecasts diverge considerably.
Two dates matter in the near term. The September quarter CPI is released on 28 October, and the RBA meets on 3 November, Melbourne Cup Day, which seems a fitting occasion for a market fond of a punt. When the CPI lands, consumer stocks are likely to be traded as a group once again, sold together if the number is hot and bought together if it is soft. Over the next couple of years, though, the differences between individual businesses within the sector are likely to matter far more than the difference between one CPI outcome and another.
What history can and cannot tell us
The last time the cash rate was this high, in late 2011, it proved to be close to a near term peak. That is an interesting parallel but not a reliable guide. The inflation mix is different, the economy is different, and the RBA now operates with a different board and a different set of priorities.
The more dependable lessons from history are behavioural. Investors tend to extrapolate whatever has just happened, selling cyclical exposure hardest when bad news is most visible and buying it back once the recovery is already evident in the data. That does not mean the low point has been reached for Australian consumer stocks, and with house prices falling and unemployment rising it may not have been. It does suggest that periods of widespread gloom are often a better time to examine well funded businesses than periods of widespread comfort.
A sensible approach for long term investors
None of this is an argument for taking a large position on the next move in the cash rate. Forecasting the RBA one meeting at a time is a game that very few people win consistently, and those who claim otherwise tend to have short memories.
A more productive exercise is to look beneath the sector label and work through those four questions business by business. Companies that answer them well, yet are still being sold because of the group they belong to, are where opportunity is most likely to form. Companies that answer them poorly may look cheap and still have further to fall, so a lower share price on its own says very little. It also makes sense to be cautious about treating the next CPI figure as a verdict on businesses whose earnings depend mainly on economies the RBA does not influence.
Where this argument could go wrong
The risks to this view deserve to be stated plainly. Rates may not have peaked. A hot September quarter CPI would make a fifth hike a real possibility, and in a broad sell off the market rarely pauses to check which companies have net cash.
Offshore revenue offers no guarantee either. Overseas consumers face their own pressures, tariffs and trade rules can change quickly, and a stronger Australian dollar reduces foreign earnings when they are converted back.
Falling house prices also matter beyond the monthly repayment. Households that feel poorer tend to spend less even when their cash flow has not changed, and that wealth effect can weigh on demand for longer than most rate models assume. Finally, the market can continue pricing businesses by their label for some time, so a mispricing only rewards investors with the patience, and a sensible position size, to wait for it to close.
TAMIM Takeaway
The RBA has raised the cash rate four times this year to 4.60%, underlying inflation remains at 3.6%, and households are shifting spending away from discretionary items towards essentials. The market’s natural response has been to treat every consumer facing company as equally exposed.
In practice the exposure varies enormously. Rate rises fall mainly on borrowers, and their effect on a business depends on where it earns its revenue, the strength of its balance sheet, how its working capital behaves and whether customers value its brand. For long term investors, the more useful work over the coming months is likely to be identifying where the market has priced a company by its sector label rather than its actual exposure, with a close eye on balance sheets, cash flow and valuation.
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Disclaimer: The Koala Company Limited (ASX: KOA) is held in TAMIM portfolios as at the date of article publication. Holdings can change substantially at any time.