As we enter the August reporting season, we see a strong chance of FY19 results beating low expectations, but market estimates for FY20 look too heroic, leaving scope for some disappointment versus very stretched valuations in our view.

With the ASX200 up 20% YTD we think risks remain asymmetric and suggest investors proceed cautiously as the focus turns from macro to the fundamentals.

Turning attention from macro to the fundamentals

Domestic-focused businesses face a difficult operating environment with growth hard to come by, while offshore earners are better placed to grow. While FY19 expectations are low following a raft of downgrades, FY20 growth expectations remain heroic, in our view – and this is where the risk lies.

With such an uncertain outlook, to help direct investors through the noise, in our most recent wire, we provided a comprehensive review of stocks under coverage reporting in August and also key themes to watch. 

Re-setting expectations for lower-for-longer rates

What's becoming clearer is that investor expectations around interest rates, inflation and economic growth are being re-set lower for longer. In Australia, the market is pricing in two more RBA rate cuts by early 2020 while the US interest rate markets are now pricing in a >50% chance of three rate cuts in 2019.

The lower-for-longer thematic has come and gone through multiple iterations since the GFC, and we think we are entering another period where investors will again seek yield and growth.

Five high conviction ASX100 stocks in August

Our high conviction stocks are those that we think offer the highest risk-adjusted returns over a 12-month timeframe, supported by a higher-than-average level of confidence. They are typically our preferred sector exposures.

Here are our five high conviction ASX100 stock picks this month:

Westpac Bank (WBC)

Westpac is Australia's oldest banking and financial services group, with operations throughout Australia and New Zealand.

Key reasons to buy Westac

• WBC has a relatively low risk profile regarding loan book positioning and low reliance on treasury and markets income.
• Concerns about the asset quality and margin ramifications of WBC’s relatively high interest-only home loan exposure continue to weigh on its share price in our view. However, we continue to believe these concerns are overblown. WBC has reduced its interest only exposure from 50% of its Australian home loan book at Mar-2017 to 32% at Dec-2018 without its asset quality underperforming peers in any material way and its group NIM has been broadly flat over this period.
• Strong capital position and sound asset quality support dividend. WBC reported a CET1 capital ratio of 10.6%, above APRA's 'unquestionably strong' benchmark.

Oil Search (OSH)

Oil Search is a major oil and gas developer/ producer. Its key asset is a 29% interest in the world-class PNG LNG Project/ Development, operated by ExxonMobil.

Key reasons to buy Oil Search

• We continue to rate OSH as a top large cap pick in oil and gas based on the strength of its earnings and quality of its growth profile.
• Despite a challenging political backdrop, OSH and its partners have continued to make progress on its global-scale organic growth profile, with high margin/value growth from expansion of its PNG-based LNG operations and the upsizing and development of its large greenfield oil project in Alaska (also high margin).
• We view OSH's current share price as adequately reflecting the value of existing production from PNG LNG T1 & T2 operations, while we believe the market remains too conservative on the upside potential for the PNG expansion and Alaska projects

OZ Minerals (OZL)

OZ Minerals is a copper-focused international company based in South Australia.

Key reasons to buy Oz Minerals

• OZL enjoys robust cashflows from an established production base in copper, which has among the best outlooks in the commodities suite, driven by electrification of the developing world. OZL's balance sheet and cost structure provide good downside protection.
• We think OZL’s counter-cyclical growth strategy will be rewarded as the Carrapateena development project is gradually de-risked in the coming 1-2 years, and can justify valuations closer to $13.00ps upon successful commissioning.
• We think that recent price weakness has been driven by macro-economic uncertainties, which we think can pass in time.

ResMed (RMD)

RMD is a global company involved in the development and manufacturing of medical products for the treatment of respiratory disorders, with a focus on sleep-disordered breathing.

Key reasons to buy ResMed

• We continue to view the company as well-positioned, with solid growth expected across the core business, an "exciting" pipeline of new products and a growing digital platform via new module launches, new customer adds and price increases.
• 4Q results beat across top and bottom lines, underpinned by continued double-digit sales growth and adjusted op income on new products and strength in the company's leading connected-care offering.
• RMD targets a very large potential market opportunity. The National Heart Blood and Lung Institute estimates that 12m Americans suffer from sleep apnoea; according to RMD, fewer than 4m are diagnosed or treated each year.

Sonic Healthcare (SHL)

SHL is an international medical diagnostics company, offering laboratory medicine/pathology and radiology services to the medical community.

Key reasons to buy Sonic Healthcare

• We see Sonic as being ideally positioned as a global diagnostic and pathology provider, backed by defensive earnings, growing scale and a strong balance sheet. We forecast high single digit earnings growth through 2021.
• SHL’s valuation is currently in line with its historical average 12-month forward PE multiple of 20.8x and offers a 3.5% partially franked dividend yield.
• The strategic Aurora Diagnostics acquisition not only increases scale in anatomical pathology, but also offers cross-selling opportunities in clinical pathology, supporting margin uplift and profit growth.