New risks weighed on ASX stocks in June quarter: Morningstar
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The news: Australian and New Zealand stocks traded lower in the June quarter, as weaker commodity prices and concerns about sticky inflation weighed on the local market, according to a Morningstar market report.
The numbers: Morningstar said that as of 28 June, its Australia and New Zealand coverage traded close to its fair values on average, compared with a 10% discount in October 2023. The S&P/ASX 200 Index declined about 2% to finish the June quarter at close to 7,770.
The report found that the materials sector, which accounts for about 21% of the index, underperformed, with the big iron ore miners dragging down the index. The sector, the research house said, was overvalued on average but there was better value in mining. Overvalued Fortescue was a big loser, down 17% in the June quarter after falling 13% in the March quarter, while fairly valued BHP and Rio Tinto also fell.
Financials, which makes up more than 30% of the ASX 200 Index, was buoyed by rising rates and the prospect of less margin pressure in the June quarter. Commonwealth Bank's price rose 6%, NAB nearly 5%, and Westpac 4%, with ANZ the outlier falling 4%.
Close to 40% of Australian and New Zealand stocks under Morningstar's coverage are now either 4- or 5-star-rated, well above the trailing 10-year average of 25% despite the market rally since October. Most of the 4 star and 5 star rated opportunities, the research house said, were in healthcare, real estate, communication services and energy.
The context: Morningstar said "some emerging risks" weighed on the local market after an "unexpectedly strong" March quarter.
The upcoming August 2024 reporting season is set to close off a "difficult year" for Australian retailing, which navigated soft demand and soaring labour costs.
It said there has been a "large divergence" between sectors since late last year, with those likely to benefit from lower interest rates such as consumer cyclical, financial, real estate, and technology outperforming, while basic materials, consumer defensive, and healthcare have struggled.
Morningstar also set out its top picks in each sector which were:
- Nufarm, Iluka Resources and Newmont in basic materials;
- Nine Entertainment, TPG Telecom and Telstra in communication services;
- SkyCity Entertainment, Bapcor and Domino's in consumer cyclical;
- IDP Education, Endeavour Group and A2 Milk in consumer defensive;
- Woodside Energy, Santos and Whitehaven Coal in energy;
- ASX, Insignia Financial and AUB Group in financials;
- Ramsay Health Care, ResMed and Ansell in healthcare;
- Brambles, Aurizon and Amcor in industrials;
- Dexus, GPT Group and Charter Hall Group in real estate;
- SiteMinder, Fineos and Pexa Group in technology; and
- Manawa Energy, APA Group and AGL Energy in utilities.
The source: Morningstar Equity Market Outlook Q3 2024
