In its Australian Large Companies Sector Wrap-Up, the research house said that as a result of the “difficult landscape” the resources sector faces after a decade of growth, investor sentiment during the middle of 2013 was “close to all-time lows”.
However, for savvy investors, there is still value to be found in the sector.
“Morningstar’s own equity research team is also of the view that the materials and energy sectors are looking attractive,” Morningstar Australasia research manager Tom Whitelaw said.
“Our analysts calculate a stock’s expected return over the next three years in excess of a hurdle rate that takes into account the stock’s risk factors.
“We have, however, seen a stemming of the declines in quarter three, and although no-one is predicting resources boom 3.0, the general view is that there is now value in those companies strong enough to survive what is expected to be a tough global economic outlook with lower demand growth from emerging markets.”
Morningstar said that with investors looking for yields in the face of this falling sentiment towards resources, there have been large scale re-ratings across the financial, telecommunications and consumer sectors.
Despite these high-yielding S&P/ASX50 equities remaining expensive, Morningstar said with falling cash rates and bonds looking expensive, the income of these stocks will continue to be attractive, particularly if the interest rate is cut later in the year.
Of the 71 equities strategies that Morningstar rated, five earned the highest-possible analyst rating of gold, including Fidelity Australian Equities, Greencape Wholesale Broadcap, Greencape Wholesale High Conviction, Perpetual Wholesale Australia and Schroder Australian Equity Fund.
Fourteen strategies were given silver ratings and 20 strategies were given bronze ratings.
The research house also looked at equity income funds and noted that unless investors were cashing out the income distributions, the strategy offered similar results.
“While equity income funds of either sort may offer relatively attractive risk-adjusted returns, they are more similar to traditional large-cap Australian equity strategies than they are different,” Morningstar research analyst Kathryn Young said.
“Since local equity strategies are widely held in sizable allocations, most investors need not rush out to jump on the equity income bandwagon.”