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Large-cap stocks to watch

Glenn Freeman  |  02 Jan 2018Text size  Decrease  Increase  |  
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While Australian companies in the mining and materials sectors were among the best performers in the ASX200 index at the end of 2017, that's not the full story.

The rise in commodity prices at the tail-end of last year, including crude oil at two-and-a-half year highs and a surging copper price, prompted some cause for optimism in mining and energy stocks, according to AAP reports.

Morningstar's economic research update from December points to the industrials and mining sectors as booking some of the largest gains over 2017, up 15.9 per cent and 14 percent over the year, respectively.

In market movements at the end of last year, BHP Billiton gained 0.2 per cent to $29.57 and Rio Tinto rose 1.2 per cent to $75.81.

However, Morningstar adopts a long-term outlook, beyond the "overwhelmingly positive commentary" on China's infrastructure outlook which is supported by the mining majors, according to Morningstar senior equity analyst, Mathew Hodge.

While many expect Chinese infrastructure expansion will continue to drive further growth in steel demand, and in turn for iron ore, Hodge believes "the likely spend on BRI…is small in context of China's already heady spending on fixed asset investment".

"Major iron ore miners such as BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), and Fortescue (ASX: FMG) all expect [China's Belt and Road Initiative] to drive further growth in steel demand in China, and in turn support growing demand for iron ore," Hodge says.

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He believes the recent uptick in commodity demand and prices is "just a cyclical upturn driven by China’s 2016 stimulus. Long term, structural headwinds remain, and China’s steel consumption is likely to decline in the next decade".

Looking again at short-term market performance in December, Australia's big four banks weighed on the S&P/ASX200 late last year, with Westpac the worst performer, down 0.6 per cent, followed by National Australia Bank (down 0.3 per cent), Commonwealth Bank and ANZ--each down 0.2 per cent.

Peter Warnes, Morningstar's head of equities research, believes banks will struggle in 2018 as the Royal Commission takes a toll on their earnings.

Healthcare tipped to perform

Warnes is considerably more optimistic on the outlook for healthcare companies, with Ramsay Health Care (ASX: RHC), Healthscope (ASX: HSO) and Sonic (ASX: SHL) among some of his favoured companies for 2018.

"Healthcare is one of the industries that will do well. And on a global scale, we have CSL (ASX: CSL), Cochlear (ASX: COH) and ResMed (ASX: RMD) that are global players, leaders in their industry and with 35 per cent, 40 per cent of the global market," Warnes says.

Though he points to their elevated prices in recent times, "if we get a correction, then put those on your shopping list," he says.

"Stocks that are already good value in that space are Ramsay Health Care, Healthscope and to a lesser degree, Sonic. So, you can shop there," Warnes says.

Two of these are listed in Morningstar's latest Australia and New Zealand Best Stock Ideas, released in January 2018 and available to Premium subscribers.

Hospital operators

Ramsay is a global hospital group with 223 hospitals across Australia, the United Kingdom, France, Indonesia and Malaysia. It is regarded by Morningstar as holding a narrow moat of competitive advantage.

"The scale of Ramsay’s operations in the Australian context underpins, in our opinion, a sustainable competitive advantage that drives both cost advantage and a reasonable level of pricing power in negotiations with private health insurers," says Morningstar equity analyst, Chris Kallos.

In addition to benefiting from the Australian healthcare system's "unique blend of public and private service," he also points to government policies supporting private health insurance membership and "current inefficiencies of the public hospital system, which protect private hospitals from major funding related disruptions".

Distinct from Ramsay's larger operation, Kallos says Healthscope's less diversified business has earnings "largely driven by the domestic hospital portfolio and, as a result, more reliant on timely completion and ramp-up of its ongoing brownfield projects".

Despite some recent disappointments in 2017, including slower-than-expected volume increases at several sites in the state of Victoria, he is "encouraged by progress being made" in other locations, and views the shares as significantly undervalued at current levels.

More from Morningstar

• Top performing funds of 2017

• 5 lessons for SMSFs from 2017 and how to prepare for 2018

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Glenn Freeman is a Morningstar senior editor.

© 2018 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 'class service' have 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. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. 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 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 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.

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