Get ready for lower interest rates fellow Fools! Most experts are predicting that the Reserve Bank of Australia will cut the cash rate again to fresh record lows next week.
While the RBA has dismissed following other central banks in using negative rates as a tool to stimulate the economy, this hasn't quelled speculation that rates here are heading towards zero – where it's tipped to stay for a few years.
Zero or negative rates will impact on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index and if you are wondering which ASX shares will perform the best in such an environment, the experts at Macquarie Group Ltd (ASX: MQG) have a few hot tips.
Stocks leveraged to falling yields
"We think bond yields will continue to fall as recent tariff rises negatively impact growth and investment," said Macquarie.
"The recent rise in yields that got so much attention lasted 2-3 weeks and 60-65% of the rise in US and Australian 10-year yields has already been retraced."
The funny thing is that equities usually underperform when bond yields are falling but this hasn't happened this time. In fact, ASX industrial shares have rallied by over 20% since the start of 2019 even though earnings have fallen along with bond yields.
This means price-earnings multiples (P/E) have expanded materially, and that is causing some experts to warn that our market is looking overstretched.
Go defensive
This is why Macquarie favours bond proxies and defensive stocks. Bond proxies are income shares that tend to behave like bonds. When yields are falling, their price increases.
"At a sector level, Transport has been a better [performer] than REITs [real estate investment trusts]," said the broker.
"In defensives, Health has been the top performer, with positive returns even when bond yields rise as aging of the population continues to support growth."
Macquarie is urging investors to have a large exposure to defensives given high market valuations and the ongoing risks posed by the US-China trade war.
Best ASX stocks to buy
The broker's favourite ASX bond proxies include toll road operator Transurban Group (ASX: TCL), gas pipeline owner APA Group (ASX: APA) and diversified property developers GPT Group (ASX: GPT) and Stockland Corporation Ltd (ASX: SGP).
In the defensive space, the stocks that Macquarie likes best are blood products company CSL Limited (ASX: CSL), hospital operator Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC), supermarket group Coles Group Ltd (ASX: COL), waste management group Cleanaway Waste Management Ltd (ASX: CWY), industrial property company Goodman Group (ASX: GMG) and packaging companies Orora Ltd (ASX: ORA) and AMCOR PLC/IDR UNRESTR (ASX: AMC).
