The ASX 200 has lost ground recently, following falls in the U.S. market triggered by investors worried about the prospect of the first rise in interest rates in almost a decade.
For U.S. companies, rising rates mean that the U.S. dollar is likely to push higher, impacting international revenue and/or making U.S. products less affordable for foreigners. Higher interest rates also increase the cost of borrowing money, which can result in lower profits and lower incentives for expansion.
On the other hand, higher U.S. interest rates and a higher U.S. dollar enable Australian exporters to be more competitive. So why is the Australian market falling and how can we as investors benefit from rising U.S. interest rates?
There are a few reasons that the U.S. rate rise may be a negative for the Australian market.
A rise in the interest that investors can get from keeping their money in cash reduces the need to seek high-yielding investments in Australian companies such as Commonwealth Bank of Australia (ASX:CBA), National Australia Bank Ltd (ASX:NAB), Westpac Banking Corp. (ASX:WBC), Australia and New Zealand Banking Group (ASX:ANZ) and Telstra Corporation Ltd (ASX:TLS).
This may see U.S. investors pulling out of ASX-listed companies. Likewise, an increasing U.S. dollar reduces the USD value of these AUD-denominated investments, which may cause additional selling from U.S.-based investors and fund managers.
Additionally, if U.S. growth is constrained by the rise in interest rates, companies that buy from or sell to the U.S. may be impacted.
Although these factors may negatively affect many ASX-listed companies, there are some that could profit. Demand for goods and services in the U.S. is likely to remain strong as the U.S. Federal Reserve would only be comfortable raising interest rates at this point of the post-GFC recovery if it was satisfied that the U.S. economy is growing at a sustainable rate. The 295,000 jobs added to the economy in February are testament to this.
Therefore, Australian companies such as Amcor Limited (ASX:AMC), CSL Limited (ASX:CSL), ResMed Inc (ASX:RMD) and Westfield Corp Ltd (ASX:WFD) that sell to the U.S. market are likely to benefit.
Packaging company Amcor derives 30% of its earnings from the U.S. and 95% from outside Australia.
Vaccine and plasma blood products manufacturer CSL generates 42% of its sales from North America.
ResMed manufactures medical equipment to diagnose and treat sleep disorders and in 2014 sales from North and Latin America accounted for 54% of net revenue.
Finally, shopping centre operator Westfield Corp runs a number of shopping centres throughout the USA and will bring in a greater proportion of its revenue from the U.S. when the US$1.4 billion Westfield World Trade Centre opens in 2015.
Foolish takeaway
Rising U.S. interest rates provide some Australian companies with additional prospects for growth. Buy shares in companies that have exposure to U.S. dollar earnings and those with a strong U.S. presence to maximise the investment opportunities that the changing interest rate dynamic presents.
