The Australian sharemarket offers plenty of attractive investment opportunities despite being overvalued, according to investment research firm Morningstar.
Senior Equity Analyst Adrian Atkins said the market was about 6% overvalued following the sharp rally since April. However, it had been significantly more overvalued for much of the past decade.
“So current valuations are not a huge concern for us and most importantly, we do continue to see plenty of attractive opportunities across most sectors,” he said on Moringstar's Australian Equity Market Outlook webinar.
Atkins said one-third of stocks under coverage by Morningstar in Australia had four or five star ratings and a third of those had moats, or sustainable competitive advantages.
Many of the quality stocks trading at attractive prices were in the healthcare and consumer sectors, energy remained the most underrated sector, basic materials and consumer sectors offered good value but little value was seen in financials or utilities.
The firm’s top picks include:
- Telecommunications: Spark New Zealand (ASX: SPK)
- Media: Nine Entertainment (ASX: NEC)
- Consumer: Endeavour Group (ASX: EDV), and
- Energy: Woodside Energy (ASX: WDS)
Equity Market Strategist Lochlan Halloway said the stocks Morningstar covered were about 4% above fair value but large capitalisation companies were closer to 20% overvalued.
“So we see that the larger cap space is generally speaking more expensive and with far less margin for error,” he said.
Only three ASX stocks in the top 20 were rated with four or five stars: CSL (ASX: CSL), Woodside Energy and Santos (ASX: STO).
He said the firm saw a stark divergence between opportunities in the financials and mining sectors with the former trading well above fair value and miners closer to or a little below fair value.
“So that's a nice thing for investors to have,” Halloway said in the webinar.
Morningstar believes Commonwealth Bank of Australia (ASX: CBA) was about 75% overvalued while ANZ (ASX: ANZ) was 6% undervalued.
“So we think the market is being a bit irrational with the pricing here,” Halloway said.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
