Large-cap stocks to watch
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.
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.
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.
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Glenn Freeman is a Morningstar senior editor.
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