Stock Market Outlook: China Rebalancing Presents Winners and Losers
China's economic rebalancing means an overvalued basic materials sector, but consumption growth creates opportunities in areas such as telecom.
Although communication services does stand out as the most undervalued sector when looking at price/fair value of the companies we cover, we don't have any 5-star ratings on communication services companies, and in fact only 11 companies in this sector sport a 4-star rating.
This speaks to the overall dearth of 5-star or even 4-star opportunities we see today. That said, one of the most important stories we're telling about the communication services sector is that China Mobile (CHL) is undervalued, based on our expectations for market share gains and the competitive benefits of the industry shift to 4G. The Chinese telecom market is one of our analysts' favorites in the region, with organic growth stemming from favorable consumption growth over the next 10 years.
Another stock-specific story we're telling is for Roche (RHHBY), although we don't see the healthcare sector as being particularly undervalued overall when looking at price/fair value. At the start of the year, the healthcare sector sported a price/fair value of 0.87, but since then, concerns about branded drug prices have abated and the overall sector looks more fairly valued now.
Still, our analysts argue that the market underappreciates Roche's drug portfolio and industry-leading diagnostics that in combination create formidable advantages over peers. The collaboration between Roche's diagnostics and drug-development groups gives the firm a unique in-house angle on personalized medicine.
More broadly speaking, the most emphatic message from our coverage universe is that the basic materials sector is overvalued. The miners we cover are particularly overvalued, reflecting our expectation of a structural change in demand growth from China as its economy matures and transitions toward less commodity-intensive economic growth.
Take BHP Billiton (BHP), which is trading at a 36% premium to our fair value estimate. The company's future profits will be determined primarily by prices for iron ore, copper, and metallurgical coal. In addition to the shift away from China's commodity-intensive economic growth, these metals are likely to suffer from the bearish forces of rising scrap availability, which will add material amounts of supply to the market.
More Market Outlooks
Credit Market Insights: A Solid Quarter for the Bond Markets
Basic Materials: Valuations Propped Up by Shaky China Fundamentals
Communication Services: Smaller Rivals Call the Shots in U.S. Wireless
Consumer Cyclical: Tepid Mall Traffic Could Constrain the All-Important Holiday Season
Consumer Defensive: Valuations More Reasonable After Third-Quarter Retreat
Financial Services: Banks Can't Rest Easy
Healthcare: Stock Selection Key as Valuations Rise
Real Estate: Enter With Caution
Technology: Valuations Painting Overly Rosy Scenarios
Utilities: Valuations Still Running Out of Control
M&A Outlook: High Prices Impede Dealmaking in the U.S.
Private Equity Outlook: Larger Funds, Larger Deals
Venture Capital Outlook: Exits Come Into Focus as Valuations Continue to Climb
U.S. Stock Funds: Steady as She Goes
International-Stock Funds: The Beat Goes on
Bond Funds: A Period of Relative Calm
Elizabeth Collins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.