A new year brings some optimism – and that’s certainly true of markets currently. After all, inflation has peaked – noting that the Australian headline consumer price index for November was 4.3%, the slowest rise since January 2022 and slightly under expectations. It’s the second consecutive month of falls.
Markets are pricing for an end to the interest rate tightening cycle – and in some cases, starting to price for cuts in the US market later this year.
Of course, this is all balanced alongside slowing economic activity globally – we are far from out of the woods. Will we see a soft landing or is a recession in 2024?
But such conditions are enticing for the bulls – and going by Livewire’s Outlook Series 2024, there are many fund managers taking advantage of these market conditions by adding to their portfolios.
But for those ready to run with the bulls, where should you look?
For value investors, the starting point for research might be Morningstar’s Australian Equity Market Outlook Q1 2024, where once again, the research house outlines its view on conditions and the stocks tipped as undervalued for the quarter.
The most pressing concern for the Australian economy still comes back to inflation. While the inflation print has been slowing, Morningstar’s head of equities research ANZ, Peter Warnes, notes that tight monetary policy remains and a further rate rise in February can’t be ruled out.
“The surprising economic resilience through 2023 is fading fast and will roll into 2024 as the lagged effects of a cumulative tightening of 4.10% in official interest rates and high and rising non-discretionary cost-of-living expenses drive a contraction in real household disposable income,” says Warnes.
He points to the likelihood retail sales will be subdued for the March quarter, in turn affecting GDP growth. Cost pressures remain linked to government spend on infrastructure and the energy transition, while business investment has been subdued.
Consistent with the previous quarter, Adrian Atkins, senior equities analyst, utilities, says the Australian and New Zealand market is trading at a 9% discount to fair value on average.
Morningstar’s Australian Equity Market Outlook Q1 2024
In his analysis, Atkins has found high-quality stocks to generally be expensive, but believes there are still opportunities for investors, with stocks perceived as higher risk showing the biggest discounts.
“The real estate sector is most undervalued on fears of rising debt costs and the potential for discounted equity raisings. While a headwind to earnings, we think most REITs are in sound financial health and see good long-term value.
"We also see plenty of opportunities across healthcare, consumer cyclical, financials, technology, energy, and communications,” says Atkins.
We’ve narrowed down the picks from Morningstar to the top star ratings in each sector, then by the lowest price to fair value rating. Morningstar’s rankings are based on data as of 1 December 2023. Prices and broker consensus ratings are sourced from Market Index as of 10 January 2024.
Southern Cross Media Group
The a2 Milk Company
Real estate was prominent in the last quarter for Morningstar, with Lendlease featuring as a value pick for the last few quarters.
Equity analyst Alex Prineas believes real estate could be well positioned for the coming year, despite a difficult 2023.
“Rapid population growth should support rents for retail, residential, industrial and to an extent, office property. Current population growth is likely exceeding the already high forecasts from the recent 2023 Intergenerational Report,” Prineas says.
He is also seeing value in retail names like:
Charter Hall Retail REIT
Lendlease, as the most undervalued real estate pick, is starting to pick up appeal with brokers too. Last quarter, Market Index’s broker consensus tool rated Lendlease as a Hold. As at 10 January 2024, that consensus had upgraded to a Buy.
Prineas believes that the trading price has been overly pessimistic and points out that core operating profits rebounded in fiscal 2023.
“We expect further substantial uplift in development earnings in 2024, and management earnings longer-term,” he said.
Lendlease 1-year performance. Source: Market Index, 10 January 2024
Lendlease also featured in a recent episode of Buy Hold Sell, with Atlas Fund’s Hugh Dive viewing it as his pick against short seller interest. He notes that the quality of the business has improved and it has low expectations. He argues it could also be a takeover target.
“They've got rid of engineering, which was a never-ending source of torment for investors, and they also have a funds management business of $48 billion in property funds being largely undervalued by the market,” says Dive.
Based on Morningstar’s valuations for these sectors, it tipped:
Southern Cross Media Group
Of these, Market Index’s Broker Consensus tool rated Kogan as a Strong Sell while both Southern Cross Media Group and the ASX were Sells. On the other side, Santos was a Strong Buy while ResMed was a Buy. For the purpose of this wire, I'll focus on the Buys.
Santos is a hot topic given merger talks with Woodside Energy which has seen interest in both stocks surge.
Livewire’s Carl Capolingua recently discussed the implications of this here, with brokers mixed in their views on the activity. It also featured in a Buy Hold Sell discussion, where David Wilson from First Sentier named it as a Buy.
“We think that what we're going to see from Santos over the next three or four years is their projects come along in Barossa, in PNG, and in Alaska, that the cashflow is going to come through very quickly over the next three or four years, and the company will de-gear very quickly to the point where Woodside is at the moment,” says Wilson.
Turning to ResMed, the company is a quality buy which joined the picks last quarter. Healthcare underperformed on the whole in 2023 but has since recovered 8% - could now be a good time to take a closer look at the sector?
Equity analyst Shane Ponraj, CFA says of the sector: “The most attractive names are ResMed, where we expect continued strong revenue growth, and Ramsay and Ansell where we see margins expanding. Meanwhile, Pro Medicus, Cochlear, and Ebos are our most overvalued stocks.”
Cordis Asset Management’s Jacob Celermajer recently wrote on Resmed, affirming a strong positive outlook for the business.
“Resmed continues to strategically strengthen its market position with continued growth and innovation amidst the share market’s preoccupation with GLP-1. Once the noise and hype surrounding the GLP-1 class of drugs subside and fundamentals begin to take front and centre again, investors can expect to see a more dominant version of ResMed than they have seen for years,” he said.
This article was first published on Livewire Markets.
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