All sectors are undervalued: Morningstar quarterly equity market outlook – part two
Australian equities remain attractive thanks to limited exposure to the rising inflation and rates gripping markets.
In part one of this series, we looked at the basic materials, communication services, consumer cyclical, energy, and consumer defensive sectors.
In this article we will cover healthcare, financial services, and technology.
Healthcare
As a defensive sector, Healthcare is immune from economic cycles due to the essential nature of their products and services. This should also allow them to weather inflation and pass along cost increases to consumers.
“We see several buying opportunities in healthcare with about half our healthcare coverage trading in 4- or 5-star territory. The most attractive names are: Ansell where we see margins expanding ResMed where we expect supply constraints to alleviate Sigma, Fisher & Paykel, and Avita,” says equity analyst Shane Ponraj.
Narrow moat Ansell (ASX: ANN) is currently trading at an 30% discount to its fair value of $32.00. Ponraj believes the market has overreacted to near-term gross-margin pressures which he expects to ease.
Financial Services
Banks have been whipsawed this year as the positive impact of rising interest rates has given way to investor fears that central banks will plunge the economy into a recession that will cool loan volumes and raise delinquencies.
Equity analyst Nathan Zaia believes many of these fears are overblown. He expects revenue upside for banks as the rising cash rate is passed on onto existing customers.
In addition, “we expect a reduction in discretionary spend to help keep delinquencies down, and households with record equity buffers and savings should also help,” he says.
The financial services sector has fallen 13.5% over the last quarter in what Morningstar considers an overreaction to earnings and valuation risk. This has left the sector undervalued as it enters Q3.
Moreover, Morningstar expects a modest increase in dividends over this year as “banks are well-provisioned and capitalised which provides comfort that equity raisings are not likely and dividends can be maintained.”
Insurance company AUB Group (ASX: AUB) is trading at an 37% discount to its fair value of $28.00. The narrow moat insurance broker is expected by Morningstar to benefit from rising insurance premiums and switching costs.
Technology
Despite dramatic sell offs of technology companies, Morningstar retains its thesis for the sector with the belief that firms will eventually deliver on long-term potential.
“While a recession may slow the strong expected growth for the sector, it's unlikely to materially change the long-term trajectory of the sector as technological adoption continues” says equity analyst Gareth James.
Technology stocks have recently suffered as higher interest rates have a disproportionally negative effect on growth securities with a disproportionate amount of projected cash flows far out into the future.
The central bank campaign against inflation has have led to fears of a global recession and triggered a painful sell off of new fintech companies. EML Payments and Tyro Payment are down 62% and 78% respectively over the past year.
Narrow moat WiseTech Global (ASX: WTC) is currently trading at a 42% discount to its fair value of $65.00. James believes the company is “significantly undervalued” as it has many attractive attributes including switching cost benefits, large global market, strong balance sheet and large recurring revenue base.
