Watch the Fed: rising US rates will support these Australian blue chips

All eyes will be on the Fed tomorrow but regardless of the timing of a US rate rise, the environment is supportive for Australian equities, particularly blue chips. Find out why and which stocks have most to gain.

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The market is fixated on what the US Federal Reserve will say post its interest rate decision tomorrow (our time), but whatever happens it probably won’t matter much to investors.

Sure, the gyrations of US bond yields will impact on sentiment towards equities in the short run, but the timing of the Fed’s decision to lift rates for the first time since the global financial crisis won’t change the fundamentals, which are supportive of Australian stocks.

The Australian dollar will remain on a back foot for 2015, if not longer, and the Reserve Bank of Australia will likely cut interest rates once, if not twice.

This means the Australian dollar probably has at least another down leg to endure to under US75 cents, although as I pointed out last week, the path of the US dollar isn’t a one-way street.

While investors aren’t expecting the Fed to change rates tomorrow, they will be keenly watching to see if the Fed drops the word “patient” in its monetary statement. If that happens, it will make a lift in US interest rates in June a sure thing.

There is still great debate over this as the most recent batch of US economic data has come in under expectations. Bloomberg reports that negative economic surprises are the worse they have been since the GFC in 2009.

A weaker local currency is, on a net basis, a positive for our share market as it will help pad margins and bolster offshore earnings of some of Australia’s most widely held stocks.

I am referring to stocks like blood products maker CSL Limited (ASX: CSL), building products group Brambles Limited (ASX: BXB) and mining giants BHP Billiton Limited (ASX:BHP) and Rio Tinto Limited (ASX: RIO), just to name a few.

Meanwhile, the easing bias by the RBA will positively impact on ASX shares as a lower risk free rate (which is typically benchmarked to local government bonds) will increase valuations and make dividend yields more attractive on a relative basis.

However, these tailwinds will be more supportive of blue chips than small caps as larger companies tend to have international operations, while small companies tend to be importers and would be hurt by a weak Aussie dollar.

But there are a number of exceptions. Engineering services company Cardno Limited (ASX: CDD), theme park and leisure facilities operator Ardent Leisure Group (ASX: AAD), and medical device maker Impedimed Limited (ASX: IPD), are some with material US dollar earnings.

The low Australian dollar and interest rates will be the dominant theme for 2015, and this is why I believe equities will be among the best performing asset classes for the year.

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Motley Fool contributor Brendon Lau owns shares in BHP, Rio Tinto, Ardent Leisure, Impedimed and CSL. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.​

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