Energy and small caps offer Aussie investors best opportunities for 2025, Morningstar says
Aussie companies with US-based supply chains and operations could be among the best buys for investors heading into 2025 amid Donald Trump’s America first policies.
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Australian companies with US-based supply chains and operations could be major winners under US president-elect Donald Trump’s second term, according to market watchers, who say discount energy stocks also present opportunities for investors in 2025.
The S&P/ASX 200 has increased 9 per cent since the start to near record highs, and mirrored gains on Wall Street since Trump’s election win last month as investors reacted to promised corporate tax cuts and deregulation.
The benchmark index now trades at an 8 per cent premium compared to a 10 per cent discount in October 2023, according to analysis by Morningstar, which says banks and real estate groups no longer represent good buying opportunities.
Morningstar equity market strategist Lochlan Halloway says the europhia around Trump’s election by Australian investors did not stack up, given it was hard to see the benefit to Australia’s economy of an America-first, anti-China agenda.
“Pockets of our market may emerge winners. Companies with US-based supply chains and operations, such as BlueScope, James Hardie, and Pro Medicus, look like the more obvious candidates,” he said.
It comes as the economy grew 0.3 per cent economic growth rate in the September quarter, driven by a 2.4 per cent uplift in government spending amid the nation’s longest per capita recession on record.
Mr Halloway said that the bigger question was the future trajectory of iron ore miners — BHP, Rio Tinto, and Fortescue — which account for 15 per cent of the ASX 200 and are inextricably linked to China’s prospects.
He added that if China’s economy struggled further from a trade war, it would slow growth in the world’s second-largest economy, along with steel production and demand for iron ore. Morningstar said while the market appeared unfazed, iron ore could fall to $US70 per tonne.
“Perhaps investors hope a US-China trade war may portend another, more substantive, round of stimulus from the Chinese authorities. A statement from China’s politburo this month pledged support for the economy, but this is unlikely to manifest until Trump’s policy priorities are made clear,” Mr Halloway said.
Morningstar analysis shows 36 per cent of Australian stocks were trading at a discount, compared to the 10-year average of 25 per cent. Those trading at the largest discount receive a 5-star rating, while stocks trading at the largest premium are 1-star.
Energy was the cheapest sector, while 60 per cent of fall stocks offering the best value were small caps, having missed out on the gains of larger peers.
Large cap valuations were stretched. The S&P/ASX 20 has returned 25 per cent since mid-2023, but aggregate earnings fell modestly in fiscal 2024 and were unlikely to increase noticeably in 2025.
“Eventually, something’s got to give, either earnings growth improves to justify higher valuations, or valuations adjust to reflect lower earnings. These things can take time, but in the long run, stock market growth is dictated by economic growth,” Mr Halloway said.
Energy has been weighed by concerns about demand amid a slowdown in the economy, while there were fewer buys in the financial services and real estate sectors following strong gains in 2024 on the softening interest rate outlook.
Mr Halloway said demand for oil and gas was growing, with predictions of a near-term peak followed by rapid decline likely premature. LNG demand is expected to increase by almost 60 per cent over the next 10 years, according to Wood Mackenzie
“Significant hydrocarbon investment is required in most demand scenarios to backfill a natural supply decline,” he said. “It is not feasible to eradicate all oil demand, which contributes to our forecast for a gradual, rather than sudden, decline in demand,” said Mr Halloway, adding that developing countries looking for cheap, reliable power would like to install gas generators along with renewables, which would offset declines in Europe.
Among those companies that offer the best value for investors currently is Iluka Resources in materials, which has a current price of $5.48 compared to its fair value estimate of $9.50. TPG Telecom, Domino’s Pizza Enterprises, Woodside and Santos were also seen as attractive buys.
Originally published as Energy and small caps offer Aussie investors best opportunities for 2025, Morningstar says
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