Morningstar reports that a recent market pullback has brought Australian equities back to fair value, presenting opportunities across various sectors. According to Morningstar market strategist Lochlan Halloway, Australian equities are now more reasonably priced after trading at elevated levels for most of 2025. As of November 30, the market trades only 2 per cent above fair value on an equal-weighted basis, a significant drop from the near-10 per cent premium observed at the August peak.
Sector valuations have diverged, with financials remaining the most expensive. Major banks are trading at an equal-weighted premium of almost 30 per cent. However, opportunities exist outside the banking sector, particularly in energy. Woodside Energy and Santos are trading at nearly half of Morningstar’s fair value estimates. Morningstar is a leading provider of independent investment research, offering data, analytics, and insights to investors. Woodside Energy is an Australian petroleum exploration and production company.
Small-cap stocks also appear more reasonably priced than large-cap stocks, although Halloway noted the presence of lower-quality businesses in this group. Across Australia and New Zealand, 36 per cent of stocks hold a four or five-star rating, exceeding the 10-year average of approximately 25 per cent. A third of these undervalued stocks also possess an economic moat rating. The most attractively valued sectors include energy, healthcare, and consumer defensives.
Technology is also beginning to show value following the US AI-driven sell-off, with WiseTech Global now a five-star stock and added to Morningstar’s Best Ideas list. Regarding interest rates, Morningstar believes it is premature to declare the end of the easing cycle. While inflation has risen for a few months, softer labour data or a benign CPI print could potentially revive the possibility of rate cuts next year. However, continued inflation could prompt the next rate move to be upwards. No changes to the cash rate are anticipated until at least mid-2026.
