The ASX is evolving: Growth stocks overtake value, volatility climbs, global ambitions grow

Often dismissed as a "boring market" dominated by miners and banks, the Australian share market has undergone a remarkable transformation, with companies now increasingly defined by their growth and global reach, believes major broker UBS.

In a research note titled "APAC Focus: Changing Perceptions; Now a Growthy and Global Market", UBS strategist Richard Schellbach emphasises investors must re-evaluate the outdated valuation benchmarks they’ve relied on, while suggesting overseas investors may benefit from boosting their exposure to ASX-listed growth stocks.

Below, we'll highlight some of the key findings and data points from the report.

#1 Resource shrinkage

In the early 1980s, the Mining and Energy sector accounted for almost 80% of the Australian market. Today, the two sectors account for just under 20%.

"Replacing them in today's market are generally more capital light and growth focused businesses. For example, the decline of traditional Media has coincided with the rise of Online Classifieds, whilst General Insurers have lost weight as Insurance Brokers and Wealth Platforms grew," the report said.

Sectors such as Healthcare and Information Technology have grown their market weightings by over three-fold over the past twenty years to become well-established segments of the market.

Source: UBS

#2 Business are more productive

While sectors like mining, banks, and real estate maintain stable market weightings, their business models have evolved, Schellbach notes:

• Mega-cap miners now exhibit tighter capital discipline and reduced earnings volatility.

• REITs have shifted to a leaner, asset-management focus.

• Big-4 banks have shed sprawling branches and commercial property holdings.

• Retailers handle inventory cycles with greater finesse than before.

From a fundamental perspective, this means Australian companies require less assets to generate revenue and carry less debt than the past.

Source: UBS

#3 Growth is taking over

Growth stocks have shed their minority status on the Australian market. "In 2024 we saw our definition of 'growth stocks' outweigh 'value stocks' within the ASX 200 for the first time," says Schellbach.

Source: UBS

The shift of Australia’s large-cap universe toward a growth-style bias stems from various forces, most notably the COVID shock. This jolt propelled previously untested or nascent business models, with online retailing standing out as the prime example.

Australian equity market revenue streams, once tied to commodities or capital-heavy sectors like beverages, have diversified. Non-Australian earnings now span multiple industries. Notably, companies are targeting developed markets, especially the US, over Asia or China for offshore growth.

#4 Higher valuations

The ASX 200 has consistently traded above its long-run average PE ratio for the past decade. While the immediate thought is that the market is expensive, Schellbach says historic valuation norms do not take into account the structural improvements of the market.

"Versus 10 or 20 years ago, Australian stocks now have better balance sheets, are less capital intensive (and potentially value destructive) and have improved offshore growth...we believe that the valuation premium the market now sits at to its long run average is largely structural and justified," he said.

What does this mean for investors?

More volatility: Australian stocks have seen rising price volatility – highlighted by the latest February reporting season, which flagged record result-day swings. This is because growth-driven earnings are difficult to forecasts and valuations remain vulnerable to weaker-than-expected earnings.

Source: UBS

Fewer dividend options: As ASX-listed companies lean toward offshore growth, their focus may shift from dividends. Given Australia’s high-yield legacy, income investing won’t vanish, but income seekers may crowd into a small handful of dividend-rich stocks (and boosting valuation premiums for stocks offering high, franked dividends).

Offshore interest: International investors are often underrepresented in the registries of growth-focused ASX companies. Schellbach expects this to change as: 1) Aussie growth stocks gain undeniable prominence, and 2) the share of dividend and income stocks in the market shrinks.