• Mixed signals for ASX, so choose wisely says Morningstar
  • Telcos and energy strong, but some sectors are overpriced
  • Retail and healthcare under pressure, but there’s promise

 

The ASX is full of mixed signals right now, with some sectors looking a bit overpriced while others offer a decent opportunity for growth.

But this might be a good time to carefully pick your spots, balancing potential with realistic valuations.

Morningstar’s latest report breaks down all 11 ASX sectors, giving the lowdown on each and picking out stocks that could help investors navigate the waters:

 

Materials

Jon Mills from Morningstar believes the basic materials sector is coming closer to fair value, primarily due to a disappointing stimulus in China.

But the sector’s up against some serious long-term hurdles as China moves away from a commodity-heavy economy as a result of its ageing population.

But there’s still hope, Mills said, thanks to supply issues in markets like high-grade titanium dioxide and zircon, which should eventually lead to higher demand for mineral sands.

As for gold, the sector remains steady after reaching historical highs, but Mills notes that the market is expensive, apart from Newmont Corporation (ASX:NEM), which is considered undervalued.

Mineral Resources (ASX:MIN), meanwhile, looks cheap in the long run due to high debt levels and subdued lithium prices, Mills said.

“And while BHP (ASX:BHP) and Rio Tinto (ASX:RIO) are fairly valued, Fortescue (ASX:FMG) remains materially overvalued.”

 

Telecommunications

When it comes to telcos, Morningstar’s Brian Han suggests the sector’s outlook is mixed, but there’s optimism for mobile services.

Average revenue per user (ARPU) continues to rise in that space, especially with the focus on returns from heavy 5G investments.

Mobile accounts for about half of the earnings of telcos, and as a result, the dividend outlook remains solid.

While telcos are enjoying stable margins, media companies still have to manage costs, particularly in the wake of a downturn in advertising.

Media stocks are trading at low multiples — but are “cheap for good reasons,” according to Han.

He believes the media sector still holds value thanks to the growth of digital assets and strategic pivots away from traditional advertising.

 

Consumer Discretionary

In the consumer cyclical space, Angus Hewitt and Johannes Faul reckon discretionary spending will bounce back in FY25, thanks to higher wages and tax cuts.

Some retailers are already seeing stronger sales, but a few investors might be getting a bit too carried away with the recovery hype.

The analysts note that valuations of retailers, in some cases, look stretched, while others offer a good entry point.

“Fast-food operators Domino’s Pizza Enterprises (ASX:DMP) and Collins Foods (ASX:CKF) are undervalued,” said the duo.

However, smaller players are feeling the pressure from the migration to online shopping, with retailers like Bapcor (ASX:BAP) struggling in the do-it-yourself auto parts space.

 

Consumer Staples

Looking at consumer defensive stocks, it’s clear that supermarkets are under some pressure.

Woolworths (ASX:WOW) and Coles Group (ASX:COL) are seeing softer demand as consumers tighten their belts.

The rise of e-commerce is adding another layer of pressure, with online grocery sales typically having lower margins than in-store.

Coles is investing heavily in automated distribution centres to ease the labour burden, but margins are still likely to feel the squeeze.

“Shoppers are shifting to cheaper products, volume growth is soft, shelf prices are easing, and cost inflation is lingering,” said Morningstar.

Morningstar, however, remains optimistic about long-term growth, particularly for companies that can adapt to changing consumer spending habits.

 

Energy

Mark Taylor’s analysis of the energy sector provides a counterpoint to the doom and gloom often surrounding fossil fuels.

While some pundits predict the end of oil and gas, Taylor argues that demand is still growing. Oil prices might dip slightly, but there’s a long road ahead before a rapid decline in demand.

This is especially true in heavy transport and aviation, where electric alternatives aren’t yet viable.

“Significant hydrocarbon investment is required in most demand scenarios to backfill a natural supply decline of 5% to 6% per year,” said Taylor.

He also points out that liquefied natural gas (LNG) has a bright future, particularly in emerging markets, where it’s being used to replace coal and complement renewables.

With global LNG demand set to rise nearly 60% over the next decade, the sector remains a solid bet, Taylor said.

 

Financial Services

In financial services, Nathan Zaia and Shaun Ler argue that while banks and insurers are holding up well, their share prices are looking a bit stretched.

Because of that, the upside seems limited for banks, even though dividends remain well-supported.

One standout is Commonwealth Bank (ASX:CBA), which has a strong market position and deserves a premium, the analysts said.

As for insurers, companies like Insurance Australia (ASX:IAG) and Suncorp Group (ASX:SUN) are benefitting from higher premiums.

For asset managers, growth is expected to improve into 2025, but after that, things could slow down as ETFs and industry super funds continue to gobble up market share.

 

Healthcare

Over in healthcare, Shane Ponraj thinks the sector as a whole is a bit pricey, but there are still some good buys around.

Names like Ramsay Health Care (ASX:RHC) and Sonic Healthcare (ASX:SHL) are looking solid, with expanding margins and good growth prospects.

Meanwhile, ProMedicus (ASX:PME), PolyNovo (ASX:PNV), and Sigma Healthcare (ASX:SIG) are currently overpriced, said Ponraj.

“The big news in the December quarter was Sigma Healthcare’s regulatory approval for its acquisition of Chemist Warehouse.”

While this move should give Sigma some serious cost advantages and a stronger market position, the share price is currently too high, he added.

But overall, the long-term growth prospects are positive for the sector, driven by the ageing population and increasing demand for health services.

 

Industrials

In industrials, Esther Holloway suggests investors should look beyond the usual construction-focused stocks and focus on more defensive plays, like Amcor (ASX:AMC) and Brambles (ASX:BXB).

Both have diversified customer bases, mainly in food and beverage packaging, which makes them more resilient in tough times.

A potential wildcard in this space is Bluescope Steel (ASX:BSL), which might benefit from rising tariffs on steel imports, especially in the US.

But Holloway notes that, in the long run, higher steel prices could lead to more competition.

And if you’re into logistics, Aurizon Holdings (ASX:AZJ) is looking cheap right now, with earnings likely to improve as coal exports bounce back to near-peak levels, she added.

 

Real Estate

The real estate sector is a bit tricky, with interest rate changes playing a big role in pricing.

Winky Tan notes that while the sector trades below fair value on average, some stocks – like Goodman Group (ASX:GMG) – are getting ahead of themselves, mainly due to enthusiasm around data centres.

However, despite the interest rate challenges, office landlords like GPT Group (ASX:GPT) and Dexus (ASX:DXS) should still benefit from a growing demand for office space, particularly in Sydney and Melbourne’s CBDs.

Retail-focused Scentre Group (ASX:SCG) and Vicinity Centres (ASX:VCX) also look solid, although sales growth is moderating under cost-of-living pressures.

Both have long lease terms and near-full occupancy, which helps cushion any downside risks.

Residential developers like Mirvac (ASX:MGR) and Stockland (ASX:SGP) are in a good position too amid the ongoing housing shortage, Tan said.

 

Technology

The technology sector is on fire, but Roy van Keulen and Shaun Ler argue that it’s also massively overvalued right now, mainly due to the hype around artificial intelligence.

With the success of ChatGPT, tech stocks have soared, but the analysts pointed out that not all of them are going to live up to the hype.

“Some of these investments will prove little more than pipe dreams,” they said.

Companies like Salesforce and Microsoft are struggling to create meaningful AI products, yet their stock prices have been rising.

Despite this, the analysts highlighted a few exceptions, such as SiteMinder (ASX:SDR), which is unfairly being labelled as a consumer discretionary company instead of the software leader it really is.

Another standout, according to Morningstar, is Fineos (ASX:FCL), which is tapping into the trend of life insurers moving towards Software as a Service (SaaS) products.

Once this transition reaches a tipping point, it could drive solid revenue and margin growth for Fineos.

 

Utilities

In the utilities space, Adrian Atkins sees a bit of a soft patch ahead, with earnings likely to dip in the next couple of years.

However, the medium-term outlook remains positive, especially if electricity prices continue to stabilise.

Despite some recent bumps, like power station outages and weather disruptions, the sector is generally undervalued.

“Our top pick is APA Group (ASX:APA), which has been down about 40% in the past couple of years,” said Atkins.

APA, which owns gas pipelines, looks good right now with a solid 8% yield. Costs should level out, and earnings should improve over time, he added.

Morningstar said that in general, gas pipeline companies are getting more stable, so the future looks promising, though it’ll depend on electricity prices in the next few years.

 

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.

 

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