The analysts at Alphinity Australian Share Fund admit that they have a pessimistic view of the direction that the S&P/ASX 200 Index (ASX: XJO) is heading.
"[It's] a market with limited overall earnings growth and earnings revisions that, despite some stabilisation more recently, appears to have more risk to the downside than upside," they said in a memo to clients.
The team has thus reduced its exposure to the banking sector as well as mining.
However, picking the right ASX 200 shares can still deliver superior returns.
"Companies which can deliver growth, and especially growth ahead of market expectations, should be well rewarded," read the memo.
"The fund remains well exposed to these types of companies overall and we look forward to confirmation of this as we approach the August reporting season."
Here are two such ASX 200 stocks that the Alphinty team recently bought:
'Likely further earnings upgrades'
The fund bought shares in James Hardie Industries plc (ASX: JHX) despite previous concerns with its "ability to manage margins and continue taking market share in a soft US house siding market that is increasingly competitive".
"While the overall market environment remains challenging, housing starts have stabilised at lower levels in recent months."
Indeed many investors have already recognised this, pushing up the share price for the construction materials supplier more than 53% year to date.
"More importantly, however, James Hardie has managed the weak environment well from a cost and sales perspective, resulting in a better-than-expected margin outlook and likely further earnings upgrades."
The rapid ascent of James Hardie shares despite steep interest rate rises in both the US and Australia is a testament to how the stock market is forward-looking.
The stock is a darling among professional investors at the moment.
According to CMC Markets, 12 out of 17 analysts currently rate James Hardie as a buy.
Once-in-a-5-years chance to pick up this quality stock
Similar to James Hardie, the Cochlear Limited (ASX: COH) share price has also rocketed this year in the face of dark economic clouds.
The stock is now trading more than 21% higher than where it started 2023.
The planets are aligning for the hearing implant provider, according to Alphinity analysts.
"Cochlear is benefitting from the dual tailwinds of a post-COVID recovery in implant surgeries and the successful launch of its latest generation sound processor, the Nucleus 8."
Processor upgrades come along once every five years or thereabouts, so now is a unique opportunity to pick up Cochlear on an upward curve.
"The latest version, which is smaller and has better connectivity than its predecessor, should enable Cochlear to not only gain share of new patients but, importantly, also trigger strong demand from N6 and N7 users that will now be eligible for an upgrade, funded by their health insurers."
Alphinity's peers are less than convinced, with only two out of 13 analysts currently surveyed in CMC Markets rating Cochlear shares as a buy.
