Equities have continued to recover from their sell-off late last year; income-oriented asset classes like property and infrastructure have been in strong demand and this will likely be prolonged as rate cuts are increasingly priced in.
Looking ahead, the most likely scenario is that the global economy will find ways to grind higher, although the likely pace of business activity now looks slower than previously expected.
We expect two rate cuts in 2019
Last quarter's inflation print fell well short of the RBA's target range of 2-3% underlying inflation. The softening in underlying inflation now gives scope for the RBA to cut interest rates. We now expect two to come in 2019. In terms of broader investment trends, a rate cut will prolong the chase for yield and growth as the low interest rate environment will tempt investors into the higher returning asset classes.
We think assets such as Banks, Infrastructure and REITs that offer high and sustainable dividend yields will find support.
Two removals from our High Conviction picks this month
We have removed PWR Holdings (PWH) and Volpara Health Technologies (VHT) from our ex-ASX100 stock picks in May. Both stocks have experienced strong share price appreciation this year and, taking a 12-month view, upside from the current share price is limited. We still retain an Add recommendation on both stocks and view them highly. We will look to add them to our High Conviction picks again on any share price weakness.
Five high conviction ASX100 stocks in May
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:
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 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.
RMD is a global company involved in the development and manufacturing of medical products for the treatment and management of respiratory disorders, with a focus on sleep-disordered breathing.
Key reasons to buy ResMed
- The company remains well positioned in our view, with continued growth across masks and devices, a solid pipeline of new products and an expanding digital platform helping to drive resupply, low setup costs and improve adherence rates.
- We were impressed by the margins achieved at the recent Q2 result – a sixth straight quarter of improving leverage and double-digit operating income growth. This continues to reflect the strength of the global business modal.
- RMD targets a very large potential market opportunity. The National Heart Blood and Lung Institute estimates that 12 million Americans suffer from sleep apnoea. According to RMD, fewer than 4 million are diagnosed or treated each year.
Reliance Worldwide (RWC)
RWC is the world's largest manufacturer of push to connect (PTC) plumbing fittings and specialist water control valves.
Key reasons to buy Reliance Worldwide
- RWC hold the #1 market position in a number of product categories and is the clear market leader in the US with around 90% market share in the US PTC fittings market.
- It has a stable earnings growth profile focused on the less cyclical residential R&R sector with operations in North America, Asia-Pacific and Europe.
- PTC fittings penetration in the US is only around 12%. Given its strong value proposition we believe there is still a lot of potential for further penetration of the category over the long term.
Sonic Healthcare (SHL)
Sonic Healthcare 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 SHL 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 20.9x and offers a 3.5% fully 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.
Westpac Bank (WBC)
Westpac is Australia's oldest banking and financial services group, with operations throughout Australia and New Zealand.
Key reasons to buy Westpac
- WBC has a relatively low risk profile in terms of loan book positioning and low reliance on treasury and markets income.
- The bank stands to benefit most from re-pricing of investor home loans.
- Strong captal position and sound asset quality support the dividend. WBC reported a CET1 capital ratio of 10.6%, above APRA's 'unquestionably strong' benchmark.
Contributed to Livewire from the Morgans Blog.
I am sorry to inform you that Sonic Healthcare’s dividend is not fully franked. The last dividend was only 20% franked
Westpac , not cutting dividend now, looks like wounded giant saiyng : "I'm OK, I'm fine!"
For RWC the exit of founding shareholder is a negative that needs to play out IMO.