Is the market cheap or expensive in October?

Global equity markets continued getting cheaper through September. Fewer Australian stocks are rated as bargains compared to Europe or the U.S.

Fernando Luque

05 October 2022

September was the worst month of the year for global equities, with a 7.2% slide in the Morningstar Global Markets Index. This development has increased the abundance of stocks deemed undervalued on Morningstar's star rating scale.

The star rating has a distinct advantage over traditional Price/Fair Value calculations in that it incorporates a level of uncertainty in its estimations. Two companies can have a very similar Price/Fair Value, but that does not necessarily translate into the same Morningstar rating.

Therefore, looking at the number of stocks getting four and five stars (stocks considered as a buy—in green in the chart below) and the number of stocks with one or two stars (considered as a sell—in red) offers a better clue as to whether the stock market is cheap or expensive.

In September, the percentage of stocks with 4 or 5 stars across our entire database of 1,461 companies jumped sharply from 52% to 67%. That 67% level was last reached in March 2020, which means that worldwide share prices are about as cheap now as they were in the worst days of the COVID crisis.

The percentage of overvalued stocks with 1 or 2 stars is also very similar to that of March 2020. At that time the percentage was 9%, compared to 8% now.

The Australian case

In contrast to global stocks, the undervaluation for Australian stocks has not reached pandemic-trough levels in September. The percentage of 4 and 5 stars stocks stood at 55% last month compared to 67% at the end of March 2020.

Distribution by sector

Communication Services is the sector with the highest percentage of 4 and 5 stars stocks, suggesting it is currently the cheapest basket, while Defensive Consumer is the sector with the highest percentage of 1 or 2 star companies, making it the most expensive by this metric.

It should be noted that market capitalization is not taken into account in these calculations, whereas in sector funds or ETFs, larger companies tend to have a higher weighting.

While consumer defensive stocks lead the pack of the most-overvalued sectors, the next three most-overvalued industries are economically sensitive.

AUSTRALIAN EQUITIES

GLOBAL EQUITIES

STOCKS

VALUATION

AUTHOR

Fernando Luque
is the Senior Financial Editor of www.morningstar.es

© 2024 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 report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. 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 financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.