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Citigroup picks the best ASX industrial stocks to buy for 2020

Every sector on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index will likely register gains in 2019 with healthcare taking the crown for the year.

The best performing sector is on track to deliver 50% gains this year thanks to the strong rally in the CSL Limited (ASX: CSL) and RESMED/IDR UNRESTR (ASX: RMD) share prices.

The tech sector isn’t far behind with a 40% increase this year thanks to the big jump in WAAAX shares, while the de-rating of the big banks leaves the financial sector with a more modest 13% increase.

A sector that can surprise in 2020

The question facing investors is where the best gains are for 2020 and Citigroup thinks the industrials sector could hold a few gems.

“In spite of heavy headwinds throughout 2019 – ranging from slowing global growth, political upheaval, trade wars, falling housing and commodity markets – Basic Industrial stocks delivered strong performances,” said the broker.

“Many of these themes should persist, but 2020 is shaping up to be a better year, with emerging green shoots of a cyclical recovery.”

Brightening outlook for industrials

I think many would be surprised that the industrials sector recorded gains of around 27% in 2019. At the start of the year, few would have thought these stocks could outperform given the uncertainties buffeting the market.

But as Citigroup pointed out, the sector could again surprise on the upside in 2020. Concerns about global growth is receding with the US and China making progress to deescalate trade tensions. The Brexit risks are also abating and the housing market is rebounding strongly in the US and Australia.

Further, Citi highlights infrastructure construction, raw material costs and the potential rotation into value stocks as possible tailwinds next year.

Top stocks to buy for 2020

While many industrial stocks have performed well, the sector still represents value as trading multiples are not stretched compared with healthcare and IT stocks.

Investors looking for more attractively priced stocks with a positive outlook may increase their focus on industrials.

Against this backdrop, Citi picked its three top industrial stocks for 2020. This includes building materials company James Hardie Industries plc (ASX: JHX), packaging group AMCOR PLC/IDR UNRESTR (ASX: AMC) and steel products maker BlueScope Steel Limited (ASX: BSL).

James Hardie best placed to benefit

“JHX is our top sector pick, given a recovering US housing market, falling raw material costs and strong early traction on its three-year strategic transformation,” said the broker.

“We are Buy rated on BSL, which we believe will be a key beneficiary of receding global growth (and trade war) fears, which should see steel spreads mean revert.”

The broker also likes Amcor due to its relatively defensive earnings stream, synergies from its acquisition of Bemis and the potential for more mergers and acquisitions (M&As).

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Brendon Lau owns shares of BlueScope Steel Limited and James Hardie Industries plc. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has recommended Amcor Limited and ResMed Inc. 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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