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These US-exposed stocks are tipped to shine

Glenn Freeman  |  04 Jul 2017Text size  Decrease  Increase  |  

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Share market investors should consider US-dollar linked stocks for the second half of this year and into 2018, according to Peter Warnes, Morningstar's head of equity research, Australasia.


Speaking exclusively to Morningstar.com.au as part of his annual market forecast, Warnes says financial markets will soon see a meaningful down-shift. "I think that the markets are due for a correction of some significance--I’m not talking 20 to 30 per cent, I'm saying a good 5 to 10 per cent, and it may well happen between now and next year."

In terms of currency, he says, "there's two sides of the coin: there's what's happening here and what's happening offshore."

"We might have the fundamentals to send our dollar north, but what's happening in the US may send it south, and so you've got to understand that there's two sides.

"What I suggest here is that, domestically, the A-dollar should be coming down…the fundamentals don't support where it is now. In the US, the Fed is starting to tighten…to reduce the balance sheet, and so the interest rate differential will move in favour of the US dollar," Warnes says.

He suggests investors should consider a basket of Australian Securities Exchange-listed stocks that have considerable exposure to US- and European-linked fundamentals.
Healthcare stocks rank particularly strongly on his radar.

One of these is the narrow-moated CSL (ASX: CSL), a major global player in blood-plasma derived biotherapies. Morningstar's senior equities analyst covering healthcare, Chris Kallos, expects CSL's "consistent product innovation to drive high single-digit top-line growth in developed markets" and "mid-teen lower-margin sales in emerging markets".

Earlier in June, he made a slight increase to the company's fair value following the US Federal Drug Administration's approval of Haegarda. This is a new drug for the treatment of hereditary angioedema, a rare genetic disorder.

Another is Cochlear (ASX: COH), which also holds a narrow economic moat. Cochlear is a designer and producer of hearing implants. Its latest fair value movement was also upward, on the back of its investor day held in early May 2017.

Cochlear continues to make strong inroads in its core market, the US, where it targets the fastest-growing population segment with hearing loss: seniors aged 65-years and older.
Earlier this year, its management reiterated full-year guidance, anticipating between $210 million and $225 million in net profit after tax for fiscal 2017.

Other companies within the healthcare space singled out by Warnes are Resmed (ASX: RMD), Ramsay Health Care (ASX: RHC) and Healthscope (ASX: HSO). The former manufactures a sleep apnoea biomedical device while the latter are Australia's two largest private hospital operators.

The US is a key market for ResMed, where sales of devices and masks amounted to a combined $297 million in the third-quarter of fiscal 2017--up 3 per cent and 8 per cent, respectively.

Ramsay has strong exposure in the UK and also France, where it is the market leader in private hospitals. In the UK, a change in UK regulations boosted its earnings before interest, taxes, depreciation and amortisation margins from mid-single digits to more than 15 per cent.

Outside of the healthcare space, Warnes also points to Brambles (ASX: BXB)--a global provider of industrial pallets--and well-known shopping centre operator Westfield Corporation (ASX: WFD). Brambles is regarded by Morningstar as holding a wide economic moat, with a large-scale global business and years of experience.

It reported sales of US$4 billion for the nine months of fiscal 2017, up 4 per cent on the prior corresponding period. This was driven by particularly strong growth in its European operations.

Westfield, a narrow moat business, operates well-located malls in affluent catchment areas, with much of its $25 billion portfolio in the US. It's local Westfield malls are owned by Scentre Group (ASX: SCG).

According to Morningstar equity analyst covering REITs, Tony Sherlock: "The sales performance of Westfield's US malls will outperform the broader retail market, as its malls are aligned to a wealthier demographic, whose discretionary spending capacity is likely to have been less affected by economic events".

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Glenn Freeman is a Morningstar senior editor.

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