The Australian sharemarket presents many investment opportunities despite high valuations for most quality companies, according to Morningstar.
The investment research firm said concentration was a risk in Australia, with more than half of the 32% return in the two years to August 2025 coming from the Big Four banks and Wesfarmers (ASX: WES).
Commonwealth Bank (ASX: CBA) contributed about 25% of these returns, and banks represented 25% of the Australian Securities Exchange (ASX) by market capitalisation, up from 19% two years ago.
“Valuations of most blue chips look stretched, though a volatile reporting season did throw up new opportunities, including wide-moat Woolworths,” Morningstar Market Strategist Lochlan Halloway said.
“It makes sense to be selective, and we see plenty of opportunities outside the expensive banks.”
He said although the Australian and New Zealand companies it researched were trading at a 5% premium to fair value on an equal-weighted average at 30 September 2025, he saw many opportunities, particularly among companies outside the ASX 50 index.
About 30% of these stocks had four-or five-star ratings, which is comfortably above the trailing 10-year average of about 25%, and almost 40% of undervalued stocks had moats, or sustainable economic advantages protecting them from competition.
Energy was the most attractively priced sector, and healthcare had many undervalued stocks, including narrow-moat CSL (ASX: CSL) and wide-moated consumer defensives like Woolworths (ASX: WOW) and Endeavour (ASX: EDV).
But Morningstar had fewer ideas in financial services, utilities, and real estate.
The firm also said small capitalisation stocks remained more attractively priced than larger companies despite outperforming materially in the September quarter, trading 5% below fair value estimates compared with the 20% premium of the ASX 50.
“Signs of a modest improvement in the domestic economy bode well for the small caps, which derive a greater share of earnings at home compared with larger peers,” Morningstar said.
