Experts point to where the best gains are for FY19

We may have exited FY18 with robust returns but this year is likely to be a lot tougher to eke out double-digit returns.

In fact, I think we will be lucky if the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) can deliver a 9% total return (this includes dividends) this financial year, although you can greatly increase your chance of squeezing the best outcome from getting your capital allocation right.

This means targeting the most attractive stocks in the sectors with the brightest outlook for the next 12-months, if not beyond, and a number of top fund managers who spoke to the Australian Financial Review have provided some tips on the sectors they like the best.

The overwhelming consensus is to go overweight on miners even though the sector produced some of the best returns on our market with capital gains of over 30% while staying underweight on the banks – a position I had been advocating through FY18.

Interestingly, the big miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) aren’t anywhere close to the very top of the league table that is dominated by the likes of consumer financing business Afterpay Touch Group Ltd (ASX: APT) and artificial intelligence firm Appen Ltd (ASX: APX) with their 200% plus gain each.

This is actually a good thing. While BHP and Rio Tinto did generate an outsized return of between 30% and 40%, the fact that they haven’t climbed to dizzying heights means the stocks have more room to zoom ahead in FY19.

The fundies interviewed by the AFR point to two key reasons for their bullish assessment. The first is commodity prices. We don’t need more gains in metal prices to justify valuations. At around current spot prices, that is enough for most mining stocks to look cheap.

The other supportive factor is capital returns. Rio Tinto and BHP are flushed with cash from their operations and asset sales. They clearly have more than what is required for their businesses and shareholders are expecting these mining giants to return much of the excess funds in the way of a capital return.

On the flipside, the outlook for banks isn’t improving. If anything, it’s probably getting worse as house prices are falling faster than most experts have been forecasting.

Meanwhile, bank funding costs are rising and the threat of legal action and additional industry regulation stemming from the Banking Royal Commission have created a perfect trifactor that will keep our banks under a dark cloud this year.

The share prices of the big four Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) have underperformed the top 200 stock benchmark in FY18 and are still likely to lag over the coming months.

However, my gut tells me this could turn later in the year. The banks could present a buying opportunity in the not too distant future – possibly around August or September. We just need a bit more water to flow under that bridge and for the fall in the housing market to ease (not reverse as that could be 18 months out).

There are other good opportunities for investors in other sectors. The experts at the Motley Fool are particularly bullish on the outlook of this niche sector.

Click on the link below to find out what this sector is and the stocks best placed to ride this emerging boom.

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Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO, Australia & New Zealand Banking Group Limited, BHP Billiton Limited, National Australia Bank Limited, Rio Tinto Ltd., and Westpac Banking. The Motley Fool Australia owns shares of AFTERPAY T FPO, Appen Ltd, and National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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