Best and worst performing ASX sectors of 2024

As we conclude the year of historical market rallies my few last articles focused on some of the biggest winners and losers of the ASX 100. In continuation of this theme, we look at some of the ASX sectors that dominated 2024 and others that failed to impress.

Below is an overview of the sectors and their approximate share price returns this year:

• Financials: +34%
• Healthcare: 9%
• Information Technology: +52%
• Energy: -21%
• Materials: -13%
• Industrials: +13%
• Consumer Discretionary: +26%
• Consumer Staples: -2%
• Communication Services: +8%
• Utilities: +11%
• Real Estate: +17%

As illustrated above, information technology (+52%) and financial services (+34%) had a particularly strong year whilst the energy sector (-21%) felt the most pain.

Energy

Despite overall stretched valuations against weak economic fundamentals, Morningstar maintains that many sectors look attractive.

Energy in particular, took a major hit in 2024 sparked by market concerns about falling demand amid slowing global economies. However, it remains our most undervalued sector based on our fair value estimates.

Our Star Rating methodology finds the sector has the highest number of 4 and 5 star picks meaning many companies meaning they currently trade at attractive prices. Conversely, financial services and real estate are less abundant in opportunities after strong rallies this year on the softening interest rate outlook.

Morningstar analyst Mark Taylor believes that energy transition fears are overblown. Oil and gas demand is growing with current predictions of a near-term peak followed by a rapid decline likely premature. We forecast a gradual, rather than sudden, decline in demand due to the unfeasibility of eradicating all oil demand.

The outlook for liquified natural gas (“LNG”) is positive given the increasing GDP per capital in regions short of gas deposits, with an opportunity for LNG to displace coal in emerging markets and for gas as a firming power backup for renewables. Wood Mackenzie forecasts demand for LNG to increase by almost 60% over the next decade.

Strong demand tailwinds from developing countries looking for reliable power will likely need gas generation which will offset European efforts to reduce gas consumption. Even if oil prices fall, we see limited downside given our midcycle Brent price assumption of USD 60/barrel is already below the trailing five-year average of just above USD 80/barrel.

Woodside Energy Group Ltd WDS (“Woodside”) remains our top pick in the sector.

• Fair Value Estimate: $40
• Uncertainty Rating: Medium
• Moat Rating: None
• Star Rating: ★★★★★

Trading at a price to fair value estimate of 0.59 (Undervalued) with a share price of $23.52 (as at 17th December 2024). The share has fallen ~25% this year and has largely underperformed the broader market which gained ~9%.  

Despite this, the robust cashflows and positive implications for shareholder returns makes it a worthy pick, trading on a materially lower multiple than its global peer group. Woodside has recently been covered by my colleagues in What did Morningstar subscribers buy and sell during November and Two five-star picks in the ASX's cheapest sector.  

Information Technology

The technology sector has seen a 52% rise and now screens as materially overvalued.

We believe the potential of generative AI has filled investors’ imaginations as software behemoths rush to create new products that integrate AI. This has since proved difficult for companies however software stocks still outperform the broader market.

Another driver of sector frenzy appears to be the re-election of Donald Trump, whose campaign was on deregulation and fiscal stimulus which has generally benefitted tech companies.

Despite the market chatter, Morningstar remains disciplined with our approach to valuing technology companies through economic and technological hype cycles. At current prices few companies still screen as attractive with exceptions like FINEOS FLC and SiteMinder SDR.

Morningstar analyst Roy Van Keulen believes that the market views SiteMinder as a consumer discretionary company rather than the industry-leading software company it really is. Meanwhile FINEOS is still pushing the secular transitions towards Software as a Service in the life insurance industry, which once the tipping point is reached, should benefit the company’s revenue and margin growth.

SiteMinder SDR

• Fair Value Estimate: $10.00
• Uncertainty Rating: High
• Moat Rating: Narrow
• Star Rating: ★★★★

SiteMinder presents itself as a well-positioned industry leader likely to win its large market opportunity. At a price of $6.29 (as of 17th December 2024), the business trades at a price to fair value estimate of 0.63 (Undervalued).

Van Keulen expects the hotel industry to consolidate around scaled software providers like SiteMinder than can fractionalise large, fixed tech and regulatory costs over a larger customer base. In our view, economic downturns will only accelerate this process. It is also expected that new platform products will increase switching costs and help establish network effects, resulting in significantly higher terminal margins.

Morningstar previously reported on SiteMinder after earnings season. The company has since seen a share price appreciation of ~ 25% after posting revised cash flow reports with considerably better numbers.  

Financial Services

This article wouldn’t be complete without an honourable mention for the financial services sector who rebounded in grand fashion up 34% after a lacklustre performance last year. Notably, Commonwealth Bank CBA is up almost 42% since the begging of 2024. We think the company deserves a premium to its peers given its moat, however the gap is extreme.

Strong performance from major banks and insurers this year have left most of them overvalued despite mixed consensus on cash rate expectations. However, Morningstar does not expect lower rates in Australia to materially impact bank earnings, rather broader economic conditions and competition are likely to have a stronger effect.

General insurance saw higher claims being matched with higher premium rates. The outlook for asset managers is that average earnings growth for those within our coverage to likely improve through to fiscal 2025, given better fund flows. This will likely moderate beginning fiscal 2026. Most firms under our coverage lack the strong performance needed to attract significant inflows therefore we expect them to keep losing market share to exchange-traded funds and industry superfunds.

NIB Holdings NHF is currently the cheapest player in the financial services sector.

• Fair Value Estimate: $7.20
• Uncertainty Rating: Medium
• Moat Rating: Narrow
• Star Rating: ★★★★

The insurer is trading at approximately 0.78 price to fair value by its $5.61 share price (as at 17th December 2024). The share has tanked 25% this year after disappointing guidance lower than market consensus.

The player is the fourth-largest private health insurer in Australia and New Zealand with strong record of policyholder growth. Despite a sudden decline in margins in 2H FY24 spooking investors, the company has been overearning in recent years given fewer hospital admissions and dental claims during and after the pandemic.

NIB and the insurance industry has been consistently able to recoup claims inflation with premium rate increases, so we don’t think the downward margin pressure will materially worsen. The short-term outlook on demand may waver with government caps on incoming international students however growth in foreign workers and premium rate increases should support medium-term growth.

At current prices, select companies mentioned in this article screen as materially undervalued. It is important to consider your overarching goals and strategy before investing in individual shares. You can learn more about that here.  

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.