RBA leaves rates on hold: 2 shares to profit from the changing rates outlook

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The Reserve Bank of Australia elected to leave the nation’s base lending rate at 1.5% today, while delivering an optimistic picture of global growth across China, the U.S., and other advanced economies.

In Australia it also noted that economic conditions were picking up as the economy continues its transition from the mining boom to other export and investment sectors. It again noted that despite inflation remaining below its targeted range, it is expected to “pick-up” over the course of 2017 in a scenario that would torpedo the main case for further interest rate cuts.

Overall, there was little in the governor’s statement to suggest the bank has any inclination to cut interest rates further and financial markets are now betting the next move will be up, but not for a while yet.

Unsurprisingly, the Australian dollar has moved 60 basis points higher to buy US 76.2 cents in response to the bullish RBA update that shows it won’t cut rates again, unless there’s a big deterioration in domestic economic conditions.

Yield Chase Still On

Nevertheless, investors can expect the hunt for yield that has dominated the Australian share market for the past few years to remain in play for now. The attraction of yield stocks in Australia being magnified by the franking credit system and fact that growth stocks commonly trade on much higher valuations relative to global peers.

Of course investors seeking dividend stocks need to choose carefully as the popular (or crowded) trades can sometimes be the bad ones, with a tendency to unwind quickly. For example shares in Telstra Corporation Ltd (ASX: TLS) are down 10% over the last six months as investors worry over the sustainability of its current dividend payments.

Others at the blue-chip end of the market that I’m inclined to avoid are Sydney Airport Holdings Ltd (ASX: SYD) and Transurban Group (ASX: TCL). These are high-quality businesses, but I suspect their valuations may come down to earth in the years ahead if benchmark debt rates rise around the world. The RBA itself today forecast that “above-trend growth is expected in a number of advanced economies, although uncertainties remain” in a warning for bond-proxy share market investors that the party may be coming to an end.

2 shares I’d back to profit from the changing rate outlook

In this environment, I would look to growth-oriented stocks that are likely to benefit as economic activity ticks up, while having plenty of spare capacity to lift dividend payments over time. Two that come to mind are SEEK Limited (ASX: SEK) and Cochlear Limited (ASX: TPM), both of which will benefit from an improving global economy and should avoid any negative fallout from the end of the yield hunt.

A Big, Fat, Fully Franked Dividend

This company's dividend is almost the stuff of legends. Since it started paying dividends in 2007, it has increased its payout to shareholders every single year, a run that includes 21 consecutive dividend increases.

Based on the last 12-months of dividends, its shares are currently offering a fully-franked 4.8% yield, which grosses up to almost 7% when those franking credits are included. And in stark contrast to the likes of Commonwealth Bank and Telstra, this company just increased its dividend by over 13%, and guided for 2017 profits to grow by 20%!

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Motley Fool contributor Tom Richardson owns shares of Cochlear Ltd. and SEEK Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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