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6 stocks to watch as Australia’s economy slows

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The trade war isn’t ending and interest rates keep falling, so which companies are going to deliver you profit?

Interest rates are at record lows, political dramas are causing trade turmoil and house prices are still dropping. Meanwhile, Australian shares are reaching pre-GFC all time highs once more. It’s no wonder Australia’s stock market doesn’t know which direction to run.

On top of all that, the Reserve Bank is predicted to make at least 2 more rate cuts over the next 12 months. With all that in mind, where should Australian investors hunt for a bargain, and are local stocks or international stocks the safer bet?

I asked six investment experts to name one stock they thought investors should consider over the next year and why. Here’s what they came up with.

Stock 1: Aristocrat Leisure (ALL)

  • Type: Australian stock
  • Expert: Jun Bei Liu, portfolio manager, Tribeca Investment Partners
ALL stock

Source: ASX

A casino game company won't float everyone's boat, but Tribeca Investment Partners’ portfolio manager Jun Bei Liu says Aristocrat Leisure has some solid buffers against Australia's slowing economy.

The Australian casino game developer Aristocrat Leisure made a name for itself as one of the world’s biggest slot machine producers, but it has since moved into online gaming, paving the way for massive growth in the global market.

“Its recent foray into online digital gaming opens up enormous opportunities for further growth,” says Liu. “We believe the stock will perform well even if the Australian economy slows down, as the company generates most of its earnings offshore.”

Besides which, if Australia’s economy does continue to weaken and the Australian dollar falls, it means the company’s majority US dollar earnings should still benefit.

Liu thinks ALL continues to be one of the cheapest growth stocks in the Australian market, predicting a return of close to 20% over the next 12 months.

  • Current price: 29.52 (15.07.19)
  • 1 year high: 33.060
  • Franking: 100%
  • Annual dividend yield: 1.66%

Stock 2: Siemens AG (ETR:SIE)

  • Type: Global stock (Germany)
  • Expert: Peter Wilmshurst, portfolio manager, Templeton Global Growth Fund
Siemens stock price 1 year

Source: Bloomberg

Global powerhouse Siemens has its hand in sectors spanning from factory automation and electrical equipment to power generation and rail transportation.

It's diversification in a stock, but portfolio manager of Templeton Global Growth Fund Peter Wilmshurst thinks there's another reason it’s a good buy this year.

Read more: How to buy international stocks

The company is undergoing a major restructure (largely through job cutting) that should result in lower overhead costs. On top of that, the company is spinning-off its Siemens gas power arm, which Wilmhurst thinks will unlock further stock value.

He says: “Recent setbacks to a proposed merger of the rail division and continuing difficulties within gas turbines have contributed to the stock trading at a meaningful discount to peers and its underlying asset value. Importantly though, the stock is not currently pricing in the potential for change or developments that could flow from improved clarity around the operational divisions.”

  • Current price: 99.71 (15.07.19)
  • 1 year high: 121.70
  • Franking: -
  • Last dividend yield: 3.81%

Stock 3: Challenger Financial (CGF)

  • Type: Australian stock
  • Expert: Michael McCarthy, chief market strategist, CMC Markets
CGF stock price 1 year

Source: ASX

Investment management firm Challenger Financial (CGF) has seen its share price fall to a near 4-year low in recent weeks thanks to a June profit warning, but chief market strategist at CMC Markets Michael McCarthy thinks prices are set for a reverse if interest rates stay low.

“One of its key products is annuities – it is the market leader,” says McCarthy. “These products are especially desirable to retirees searching for capital stable returns, and the turnaround in central bank stances from tightening to easing could see CGF’s earnings pick up substantially.”

Challenger is likely to benefit from Australia’s ageing population, with the number of retirees (its main clientele base) on track to grow by about 70% over the next 20 years. And if interest rates stay low for some time, annuities become more attractive against savings accounts for retirees.

  • Current price: 6.7 (15.07.19)
  • 1 year high: 12.64
  • Franking: 100%
  • Annual dividend yield: 5.25%

Stock 4: Xero (ASX: XRO)

  • Type: Australian stock
  • Expert: Michael Wayne, managing director, Medallion Financial Group
XRO stock price 1 year.

Source: ASX

Medallion Financial Group’s managing director Michael Wayne thinks cloud software accounting provider and growth stock Xero still has a long way to run as it expands globally with its small business platform.

Xero is the biggest provider of cloud accounting software to small and medium-sized businesses across Australia, New Zealand, United Kingdom and the United States. In the last financial year its subscriber numbers have grown by 31% to hit 1.82 million.

“Xero’s capital-light business model offers a high return on invested capital and has strong potential for further expansion by focusing on growing their small business platform. Their strong subscriber growth and first positive free cash flow announcement makes it an attractive long-term opportunity,” says Wayne.

  • Current price: 61.79 (15.07.19)
  • 1 year high: 64.490
  • Franking: -
  • Annual dividend yield: -

Stock 5: Bharti Infratel (NSE: INFRATEL)

  • Type: Global stock (India)
  • Expert: Steven Glass, deputy portfolio manager, Pengana International Equities
Picture not described

Source: Bloomberg

India’s economy is growing faster than any other G20 country and it’s enroute to overtake Japan as the world’s third largest by 2025. Investors looking to make a profit from this powerhouse might start with the burgeoning telco sector.

On that note, Steven Glass, portfolio manager at Pengana International Equities, thinks Bharti Infratel is a good bet. The Indian telecom operator leases to the country’s three largest telecom operators – Bharti Airtel, Reliance Jio and Vodafone Idea.

The company’s price has fallen after several Indian telecom operators went bust in recent years. However, Glass believes a new merger between Vodafone India and Idea Cellular should see demand for telecom towers increase.

Glass says: “Mobile data usage has skyrocketed in India since the rollout of 4G in 2016, increasing by more than twenty times over a two-year period. In order to maintain a high level of service as well as increase 4G coverage, the telecom services providers will all need to lease additional telecom towers.”

“Bharti Infratel is currently in the process of merging with Indus Towers, the largest telecom tower operator in India. Post-merger, the combined company will have more than 160,000 telecom towers and about 50% market share in terms of tenancies.”

  • Current price: 262.95 (15.07.19)
  • 1 year high: 326.05
  • Franking: -
  • Annual dividend yield: 5.66%

Stock 6: IDP Education (IEL)

  • Type: Australian stock
  • Expert: Eleanor Creagh, Saxo Bank – Australia market strategist
IEL stock price 1 year.

Source: ASX

Considering the current market, Saxo Bank strategist Eleanor Creagh thinks investors should look to stocks with reliable dividends and exposure to long term growth trends. In her view, global education company IDP Education (IEL) fits the bill.

Australia’s education sector is now our third largest export sector and growing. As IDP offers student placements around the world as well as language testing and credentials, it’s in a good position to benefit from the growing market.

Creagh says: “Their investment in digital channels will continue to drive margin expansion and growth prospects in India and other emerging economies represent substantial scope for expansion. A weaker Australian dollar will also benefit this company.”

“As well, slowing economic growth often drives increases in studying in order to increase job prospects. The company is not cheap but is high quality and has exposure to a number of secular growth thematics so makes an attractive long term addition to a diversified portfolio.”

  • Current price: 18.53 (15.07.19)
  • 1 year high: 19.0
  • Franking: 50%
  • Annual dividend yield: 0.99%

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