In Brief: Is The Aussie Market Misunderstood?

This story features QBE INSURANCE GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: QBE

Weekly Broker Wrap: In a world of hyper changes UBS challenges the narrative around Australian equities, a pleasant surprise for some.

-Should investors re-adjust their perception of the Australian share market?
-Insurers poised for more resilience versus previous cycles
-Online classifieds, Gaming, Tech and Telcos; what’s hot and what’s not?

By Danielle Ecuyer

Quote of the week stems from one of my favourite market commentators, John Authers at Bloomberg:

“This is a disconnecting world…. with a move away from US exceptionalism, the popular name for the dominance of the dollar and the Magnificent Seven group of tech platforms that has been a feature of the last decade. But it goes further. Rather than the globalized free markets that have held sway since the end of the Cold War, the world is reallocating itself into independent groups or spheres of interest. This is a new form of mercantilism, or, autarky, the economic term for national self-sufficiency. If the US has turned away from globalization, some autarkic direction is inevitable. But there’s still huge uncertainty over how the new economic power blocs will be configured.”

The ASX has moved on, like the rest of the world

At a time when growth stocks are under the microscope and investors globally are rotating into cheaper-valued companies, UBS undertakes a bold consideration of the Australian share market, re-assessing how the market has shifted compositionally over time and arguing investors need to pay attention, and maybe change their ways.

As an Australian institutional equities broker back in the day in London, I can attest to UBS’s comments that Australia had and largely has a reputation as a safe but boring market with a perception the local economy is heavily tilted to resources.

But is that perception and reputation by now out of date? Have the facts changed?

UBS answers in the affirmative, detailing how Australian companies have become more growth-oriented with global expansion intentions.

Like most change, this process has been in train for over two decades, but has only more recently reached a “tipping point”.

Case in point is the shift in sector weightings from the early 1980s when mining and energy stocks represented around 80% of the Australian share market’s capitalisation.

Anno 2025 that 80% from back then has turned into a mere 20%, as the likes of healthcare, technology, online classifieds, insurance, and wealth platforms have grown in size and importance.

Even the insurers and telco sectors’ market cap weighting has shrunk.

Equities that are categorised as ‘Growth’ (as opposed to ‘Value’) now represent around one-third of the Australian market.

Correspondingly, the services sector domestically now represents 66% of Australia’s GDP versus 69% for the OECD.

So much for riding on the sheep’s back.

Investors have a propensity to highlight the Australian market’s differences from its Asian neighbours, emphasising the ASX lacks the linkages and growth of sectors such as semiconductors for Japan, Taiwan, and Korea.

UBS argues this narrative belies the fact that underneath the surface, the composition of the Australian equities market has shifted, and improved understanding will increase overseas investors’ interest.

Key to the argument is the market is now offering more capital-light and growth-oriented companies, such as traditional media losing business to online classifieds and general insurers losing out to insurance brokers and wealth platforms.

The same shift to capital-light models is replicated across more traditional sectors such as REITs, which are transitioning to an asset management model, and the Big-4 Banks moving away from branches to online banking. Even the miners are exhibiting better capital management, UBS research posits.

Aggregate balance sheets have also taken a leg up compared to one or two decades ago as the capital-heavy models have been replaced with capital-light ones.

Australian companies have also shown a propensity to grow overseas through M&A, which is not only increasing revenue sourced in countries such as the US, but also lowers the bias to domestic earnings while franking credit weights decline.

With growth equities now comprising one-third of the index and, as a group, trading on a forward price-to-earnings multiple of over 22x, the valuation ascribed should be retained assuming earnings growth momentum remains.

UBS believes the shift to more offshore earnings and growth-focused companies for the ASX should translate into higher returns for investors. As the domestic market becomes progressively “less boring” and more of a growth-tilted index, the historic “world-leading returns” over the longer term should continue for investors.

Insurance cycle not over yet

Post-reporting season, Citi updates its assessment of insurance companies, highlighting the outlook for general insurers remains positive, despite some signs of softness across specific lines. Claims inflation is also slowing as an offset.

Post strong share price performances, the broker doesn’t envisage the tailwinds for the sector fading as quickly as in some previous market cycles.

Although anecdotal evidence from an insurance broker highlights commercial property rates are weakening at the upper end of the market, Citi notes Australia’s three general insurers are more exposed to small and medium-sized businesses.

In the run-up to the Federal election, political and regulatory risks remain but are viewed as more rhetoric as opposed to real changes.

Citi has Buy ratings on all three of QBE Insurance ((QBE)), Insurance Australia Group ((IAG)), and Suncorp Group ((SUN)).

QBE is nominated as the sector top pick with a target price of $23.30 and is expected to report a better-than-expected core operating ratio, versus guidance for FY25 at 92.5%. The analyst stresses, with a few “big if” caveats, QBE could further outperform guidance subject to a turnaround in its crop insurance performance, achieving the planned improvement in North America with the exit from non-core businesses, and not exceeding its CAT allowance.

Both Insurance Australia Group and Suncorp have unchanged target prices of respectively $9.05 and $20. Citi anticipates slowing but solid growth in gross written premiums and margins for both. The broker believes both are trending to the upper end of FY25 earnings guidance and both are sufficiently provisioned with CAT allowance for Tropical Cyclone Alfred’s impacts.

The preference is for Insurance Australia Group over Suncorp.

Regarding private health insurers, Medibank Private ((MPL)) and nib Holdings ((NHF)) are both rated Hold-equivalent, with unchanged target prices of $4.85 and $6.95, respectively.

The approved rate rises for the sector are better than anticipated, and claims inflation is considered broadly under control, although there might be emerging political risks around the latter.

Citi views Medibank as offering a robust outlook for profitability over the next year and a half if rate increases can remain above claims inflation to benefit margins in the residents’ business, on top of further contributions from the higher-margin non-residents’ business.

The outlook for njb looks more uncertain to the analyst post-FY25 due to the possibility of higher reserves and a robust rate rise offset by changes if claims inflation moves higher due to government pressures resulting in more tangible impacts.

Morgans’ top picks across momentum sectors

Technology stocks had been the recipient of momentum chasers, underpinned by generally strong earnings growth, topped up with a major secular mega-trend, GenAI, for most of 2023 and 2024.

The past few weeks under the Trump Administration, including fiscal austerity, tariff impositions, and more, have led to a sharp spree of selling across both momentum stocks and technology, as valuations recalibrate lower to a changing global trade paradigm and a possibly slowing US economy.

Against this backdrop, Morgans has revisited the Tech, Media, Telco, and Gaming sectors post-results.

The broker retains an Overweight rating on Gaming, meaning the view is positive for the sector generally and investors can consider allocating more capital to it.

Light & Wonder ((LNW)) is the top pick in the sector. Post-earnings results, gaming sector revenue forecasts were lifted 2.5%, underlying earnings (EBITDA) by 0.3%, and EPS estimates by 8%.

Light & Wonder took out the best-performing stock mantle on a better-than-feared fourth-quarter result for 2024, and management also offered a more upbeat outlook for the first quarter of 2025 onwards. The share price responded with a 10% rally.

Morgans likes the Glover acquisition and views the land-based business as well-positioned to generate growth with hardware releases and strong content.

In the Technology sector, Megaport ((MP1)) is highlighted as the best-performing stock post-results, up around 20%, but like other technology companies, has since been subjected to risk-off sentiment sell-offs following Nasdaq weakness.

Tech is ascribed a Neutral rating.

Post-results, revenue, earnings (EBITDA), and EPS forecasts were lifted by 4%, 1%, and 1%, respectively.

Morgans explains investors are seeking more confirmation of demand for AI products, services, and infrastructure, as well as their applications and successful monetisation.

Despite the boardroom travails and governance question marks, WiseTech Global ((WTC)) is the top tech pick, with investors asked to look past these issues to what is believed to be an attractive valuation when measured against FY26 forecasts.

Megaport is the other top pick, with a re-acceleration in sales and potential upside guidance from both organic growth and forex translation on USD earnings exposure.

Post-results, the analyst’s aggregate Media sector forecasts were lowered, with FY25 revenue, underlying earnings (EBITDA), and EPS down by -0.5%, -0.3%, and -3.5%, respectively. Volumes remained relatively stable, with pricing and yield offsetting volume pressures. This sector is assigned a Neutral rating.

REA Group ((REA)) was the best-performing stock, up 8%, but has since sold off. Car Group ((CAR)) is the top stock pick and was recently upgraded to a Buy-equivalent rating (Add) with a target price of $41.40.

The Telecommunications sector is rated Underweight, with Telstra ((TLS)) being the best-performing stock post-results, up around 5%, after maintaining FY25 guidance and announcing a $750m share buyback. Morgans has lowered aggregate revenue forecasts by -2%, while underlying earnings (EBITDA) rose 0.3%, and EPS increased 5%.

Superloop ((SLC)) is the top pick in the sector, with upside risks seen to earnings and optionality around M&A. The analyst expects ongoing intense competition in the fixed-line market, with mobile competition also set to increase as TPG Telecom ((TPG)) looks to expand market share. Optus and Telstra are considered most at risk from TPG’s ambitions.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms