Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Australian market approaches 'fair value' territory: Morningstar

Gareth James  |  19 Apr 2022Text size  Decrease  Increase  |  
Email to Friend
  • The average 4% decline in share prices of our coverage in the March quarter means we now see the market as very close to fairly valued, trading at a 2% premium on average to our estimates.
  • Energy, technology, and financial services sectors offer most value, with basic materials and consumer cyclicals most overvalued. We believe the market is underestimating natural gas producers' longevity, active fund managers' potential to outperform, and technology stocks' earnings growth

The Australian equity market digested a profound change in investor sentiment in the first quarter of 2022. This was not reflected by the pedestrian 1% increase in the Morningstar Australia Index. Although the market capitalisation-weighted index was broadly flat by quarter end, the average price return across our coverage was a fall of 4%.

Market weakness was caused by higher-than-expected global inflation and increasing investor expectations that central banks will raise interest rates during 2022. Government bond yields consequently jumped, with the 10-year Australian government bond yield increasing to 2.76% from 1.68% at the start of the quarter. Shorter-term maturities had much bigger percentage jumps in yields.

Australian Equities Yields Look Reasonable Despite Rising Bond Yields 

Australian Equities Yields Look Reasonable Despite Rising Bond Yields

 

Rising government bond yields reflect a transition toward a "normalisation" of interest rates from coronavirus pandemic near zero levels. This despite the governor of the Reserve Bank of Australia claiming last year that the target cash rate was unlikely to increase before at least 2024.

Morningstar's fair value estimates are based on "midcycle" interest rates which aren't affected by short-term interest rate movements. Generally speaking, we didn't materially cut earnings forecasts during the first quarter of 2022 and our fair value estimates were reasonably stable. Falling share prices combined with reasonably stable fair value estimates to drive an improvement in the average price/fair value ratio across our coverage to 1.02 from 1.10 at the start of the quarter.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

Australian Equities' Price/Fair Value Ratios Continue to Improve

Australian Equities' Price/Fair Value Ratios Continue to Improve

In isolation, rising interest rates are negative for equity prices but some sectors, such as technology, are particularly sensitive to interest rates. This explains the technology stock rally between March 2020 and late 2021 but also its 20% fall in the first quarter. However, the recent selloff has significantly improved the sector's price/fair value ratio in our view.

Australian equity market valuation improvement has been broad based, and five of the 11 sectors now have an average price/fair value ratio of below one. This represents a significant improvement relative to 2021, when energy was the only undervalued sector for most of the year.

Technology Stock Valuations Improved the Most in the First Quarter

 

Australian Equities Yields Look Reasonable Despite Rising Bond Yields

 This article forms part of Morningstar's Australia and New Zealand Equity Market Outlook Q2 2022. Download the full report

 

is a senior equities analyst at Morningstar Australasia

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend