Morningstar: Australian Equities Overvalued, but Opportunities Remain

Australian equities are currently 6% overvalued, according to Morningstar's fair value estimates. Despite this, Morningstar sees attractive opportunities across most sectors, with about a third of stocks rated four or five stars and a third of those having a "moat." Healthcare and consumer sectors are considered particularly undervalued, with energy being the most undervalued sector. Morningstar expects solid earnings growth from fiscal 2026 for healthcare stocks like Ramsay Health Care and Sonic Healthcare, and a 4% increase in retail sales in FY26 to support retail spending.

Australian equities are currently 6% overvalued, according to Morningstar's fair value estimates, but the research firm identifies attractive opportunities across most sectors [1]. Speaking in an equities update on Thursday, Morningstar strategist Lochlan Halloway stated that the market was back to overvalued following a sharp rally since April. The ASX finished the June quarter at 8,542 points, up 9% on March and just shy of a record [1].

Morningstar considers a fair price-earnings ratio for the ASX to be 17 times at the moment. Currently, the market is trading at around 20 times, which suggests it is overvalued. However, Halloway noted that the Australian market has been significantly more overvalued for much of the previous decade, making current valuations less concerning [1].

Despite the overvaluation, Morningstar sees plenty of attractive opportunities across most sectors. About a third of stocks in Australia are rated four or five stars, and a third of those have a "moat," meaning they have a sustainable competitive advantage [1]. Many of these attractive stocks are in the healthcare and consumer sectors.

Healthcare stocks have underperformed in recent years due to factors such as inflation, difficulty in raising prices, and US tariffs. However, Morningstar expects solid earnings growth from fiscal 2026 for healthcare stocks like Ramsay Health Care and Sonic Healthcare. Cost inflation is subsiding, and private hospital visit prices have risen about 4% in the past year, which will drive solid earnings growth for Ramsay Health Care [1].

The outlook for consumer stocks is also improving. Cost-of-living pressures are easing as household disposable incomes are now growing faster than inflation. Most of the improvement in incomes is being saved, but as the savings rate increases to long-term averages of around 6%, more income will start being diverted to spending, benefiting retailers [1]. Morningstar expects retail sales to increase by around 4% in FY26, which should offset higher wages and other costs, pushing profits higher.

Energy is considered the most undervalued sector despite high share prices in recent months. However, Morningstar doesn’t see much value in financials or utilities. For instance, they consider CBA to be around 75% overvalued while ANZ is 6% undervalued [1].

Scott Power, a senior healthcare analyst at Morgans Financial, also notes a rotation back into the healthcare sector. ASX health stocks have rallied 5.4% over the past five days, with key stocks like CSL and Cochlear showing momentum [2]. Power believes that renewed investor interest in healthcare is driven by improving market sentiment and the long-term drivers of the sector, such as an ageing population and high levels of government funding.

References:
[1] https://www.investordaily.com.au/news/57527-australian-equities-overvalued-again-but-opportunities-remain-morningstar
[2] https://stockhead.com.au/health/scott-power-asx-health-stocks-catching-a-bid-up-5-4pc-in-past-five-days/