Uncovering Australia's Hidden Stock Gems in 2025

As we step into 2025, investors are eager to identify undervalued stocks with strong growth potential in the Australian market. With the domestic equity market delivering a reasonable absolute return in 2024, investors are looking for opportunities to capitalize on potential growth. In this article, we will explore the Australian small cap market, undervalued stocks, and the role of macroeconomic factors in uncovering hidden stock gems.



The Australian Small Cap Market in 2024

The Australian small cap market delivered a mediocre performance in 2024, with the S&P/ASX Small Ordinaries Index returning 6.3% (as at 20 December 2024). This underperformance relative to large caps continued the trend of the previous two calendar years. However, a select group of high-quality companies was able to grow earnings faster than underlying economic growth, driven by market share gains via product innovation, market penetration, and offshore expansion. These companies include HUB, NWL, ARB, PWH, TNE, BRG, PMV, CDA, PME, AUB, IRE, and DTL.

Undervalued Stocks in the Australian Market

Investors can identify undervalued stocks in the Australian market by analyzing specific sectors and industries, as well as individual companies. Some sectors and industries that may harbor hidden stock gems in January 2025 include Energy, Financial Services, Technology, Basic Materials, Communication Services, Consumer Cyclical, Consumer Defensive, Healthcare, Industrials, Real Estate, and Utilities.

One example of an undervalued stock is GQG Partners Inc (ASX: GQG), a funds management business offering a variety of investment funds focused on US shares, global shares, international shares, and emerging market shares. Despite a 37% drop in the GQG share price over the past six months due to uncertainty relating to its Adani investments, the company's long-term investment track record of outperformance of respective funds' benchmarks is expected to encourage client net flows to recover. With a forecast P/E ratio of 8x FY25's estimated earnings and a forward dividend yield of 11.5%, GQG appears to be trading at a significant discount to its long-term intrinsic value.

Another example is Charter Hall Retail REIT (ASX: CQR), a real estate investment trust (REIT) that describes itself as a leading owner of property for convenience retailers. With an NTA of $4.51 at 30 June 2024, the current Charter Hall Retail REIT share price is trading at an approximate 30% discount to its underlying value. Despite high interest rates, the REIT expects to deliver like-for-like net property income growth in FY25 and pay a distribution per unit of 24.7 cents, which translates into a distribution yield of 7.8%. A possible RBA interest rate cut in 2025 could increase customer visitation at the shopping centres and also help the ASX shares' valuation.



Macroeconomic Factors and Hidden Stock Gems

Macroeconomic factors play a significant role in uncovering hidden stock gems in Australia. In 2024, the domestic equity market delivered a reasonable absolute return, driven by fiscal dominance, a soft-landing narrative, the start of the interest rate cutting cycle by major global central banks, and expectations of easing domestic financial conditions. However, this performance was partially overshadowed by the RBA's monetary policy status quo, given stickier domestic inflation, disappointing Chinese economic growth, an absence of aggregate earnings growth, and a weaker Australian dollar.

Looking to the year ahead, the key drivers for Australian small cap outperformance are expected to be in place, including a supportive global stimulatory backdrop and expectations of falling domestic interest rates. The RBA is expected to start interest rate cuts early in 2025, with the market factoring in close to 0.75% reduction by year-end. This set-up is expected to be supportive and renew investor interest for Australian small caps.

In conclusion, investors seeking undervalued stocks with strong growth potential in the Australian market should focus on specific sectors and industries, analyze individual companies, and consider the role of macroeconomic factors. By staying informed about the latest trends, data, and insights, investors can uncover hidden stock gems and capitalize on potential growth opportunities in 2025.