Are Australian stocks finally cheap? Morningstar thinks so

There’s not a lot of good news to be found in the media of late, so disheartened investors might find a silver lining in Morningstar’s latest report, the Australian Equity Market Outlook Q2 2026.

According to Morningstar Equity Market Strategist Lochlan Halloway, more than half of Morningstar’s coverage is undervalued at present and “stocks haven’t looked this attractive since the enactment of the April 2 2025 US tariffs.”

He notes that real estate and energy are particularly compelling in this market, despite energy being up 35% in the year, while the tech sector is being punished. For the careful investor though, he believes the businesses with proprietary data or strong network effects will be better protected. Halloway also notes that small caps are deeply discounted, and “this seems a reasonable time to look at the better-quality names more closely”.

Value hunters could start their research in these spaces.

The outlook for the Australian economy

Australia started the year with an inflation problem and the oil shock has only made it worse. The major banks all anticipate another rate hike in May, and there’s likely to be at least one more after that. Between inflation, fuel prices and rate hikes, it’s not an easy time to be an Australian consumer.

Halloway notes that economic growth is sluggish, though employment is in good shape with unemployment at a 50-year low.

Ongoing volatility and a rapidly shifting geopolitical environment are making it hard to predict any recovery in either the market or the economy. However, that can be an opportunity for investors planning for longer term holdings.

As Halloway points out, Morningstar’s coverage is trading at an 11% discount to fair value on an equal-weighted basis, the lowest in a year, and many of these are high-quality (4 or 5 star rated) with a third of undervalued stocks holding a moat. It’s worth noting that the S&P/ASX 200 has had a slight rebound since the date of the report on 31 March 2026, though has been flat at the start of this week, given Tehran has rejected a second round of peace talks.

Opportunities across sectors

Inflation is the biggest story when it comes to challenges across the sectors, though AI disruption receives an honourable mention.

Technology has had a more challenging start to the year, with an AI-led pullback on high valuations. This might not be entirely bad news.

Analysts Roy van Keulen and Shaun Ler suggest that the sector is undervalued, close to levels last seen in the aftermath of late 2022 rate hikes.

“We see a resilient outlook for platforms embedded in complex, regulated workflows such as WiseTech and SiteMinder,” van Keulen and Ler said.

They pointed to greater risk in enterprise software providers and opportunities for larger players like SAP to compete more effectively using lower AI development costs.

The materials sector (ex-Oil and Gas) experienced a pullback due to concerns over oil prices, but commodity prices are stronger on the whole. Analyst Jon Mills highlights that some players in the sector, such as gold miners and coal, are looking expensive, though there are some opportunities to be found. An example is Iluka, which Mills believes will see benefit from higher prices in rare earths.

Communications Services has been strong – particularly in telecommunications which has benefited from a flight to safety. Morningstar analysts Brian Han and Alex Anderson tip the growth of mobile virtual network operators as a trend to watch in this space. On the other hand, media companies are looking cheap – but are under structural pressure.

Analysts Angus Hewitt and Johannes Faul anticipate rising fuel prices and rate hikes to rein in consumption, which could hit consumer cyclical stocks, but note this should ease when there is a resolution to the conflict in Iran. Consumer defensive stocks should offer more shelter, though suppliers like Inghams look better value than supermarkets.

Despite the conflict in Iran and higher energy prices, analyst Mark Taylor notes there’s value to be found in this space. He notes that oil and gas producers are trading materially below fair value and sees significant earnings increase opportunities in the next two years off the back of stronger futures forecasts.

Financial Services faces margin pressure and fee compression in the wake of rising inflation and rate hikes. The banks continue to look expensive in this environment. Insurance brokers have been hit by AI disruption concerns and are looking undervalued.

Healthcare is typically defensive and is currently looking undervalued, according to analyst Shane Ponraj. Many healthcare names shifted in value off the back of February reporting, with Ponraj noting that Ramsay Healthcare (which gained) still looks cheap and he expects “margins to rebound on higher pricing and efficiency gains.”

Investors should expect continued weakness in industrial names, according to analyst Esther Holloway, but she highlighted that balance sheets remain strong. She expects profit pressure in airlines particularly, given rising fuel costs.

Real estate could be an opportunity in this period of rising rates, with analysts Yungqi Tan and Alex Anderson noting that “all sectors now trade below their underlying asset values, with retail relatively less discounted.” While AI concerns are creating challenges for the office space, Tan and Anderson believe “high-grade well-located buildings are likely to remain sought after”.

Ongoing pressure on energy prices is bringing both risk and opportunity for utilities, with analyst Adrian Atkins noting that both Australian and New Zealand utilities screen as slightly undervalued on average. The ongoing conflict could see prices surprise to the upside, but Atkins also highlights solid financial commitments to renewable energy projects in Australia.

Stocks to watch in three opportunity sectors

Based on the sector outlooks, Halloway highlighted that energy and real estate are looking compelling – and tech hunters may find opportunities off the back of an AI sell-off.

Some of the stocks to watch in these spaces follow.

Woodside Energy (ASX: WDS)

The oil and gas producer has been an obvious beneficiary of a spike in oil prices. Morningstar’s forecasts for earnings have increased substantially for the next two years for oil and gas companies.

Analyst Mark Taylor noted that “Spot LNG is double the contract price which is important for Woodside and Santos, selling around 30% and 20% of their LNG into spot, respectively. The persistent premium suggests market tightness boding well for pricing.”

MPC Markets’ Mark Gardner pointed to Woodside Energy as a preferred ASX energy play in the current environment.

“Trading at roughly 10x forward earnings with a 6%+ fully franked yield – pricing in none of the LNG upside,” Gardner said.

Santos Energy (ASX: STO)

Similarly to Woodside, Santos has benefited from rising energy prices.

It was also tipped as a pick by Gardner, who noted it was trading at only ~5x operating cashflow.

ETF Shares’ David Tuckwell viewed Santos as a better pick for if the Iran crisis remains an oil shock rather than escalating into a prolonged energy crisis, explaining that the business has no hedges in place for contracts and the highest oil price sensitivity of any upstream energy major in the Asia-Pacific region.

Dexus (ASX: DXS)

The real estate manager and owner has been hit by AI disruption as investors anticipate less workers needing office space. Analysts Tan and Anderson note that office has actually shown signs of improvement despite this, particularly in quality holdings.

“Dexus nearly doubled office leasing volume in the first half compared with the same period last year, as tenants shift to quality city centre locations and from the pre-leasing of new developments,” they stated.

Allan Gray’s Suhas Nayak also discussed Dexus as an opportunity, considering how office workers link with banks. He argued that the market has already priced in AI-fuelled unemployment to Dexus but this doesn’t match with forecasts for the banks which don’t include a credit impairment cycle.

Charter Hall Social Infrastructure (ASX: CQE)

The listed real estate trust invests in social infrastructure, like childcare centres, education facilities, health and transport assets and government services.

By being positioned in essential services with stable tenants (like government), it has resilience against inflation and rising rates and Morningstar views it as undervalued currently. Morningstar’s fair value price is $3.70. As at 20 April, it was priced at $2.67.

WiseTech (ASX: WTC)

The shipping logistics software provider has had a somewhat controversial few years, between its founder’s alleged relationships, an ASIC and AFP raid in 2025 and AI-fuelled layoffs more recently.

Analysts van Keulen and Ler forecasts strong revenue growth for Wisetech and a resilient outlook.

“Smaller competitors are unlikely to develop a financially viable point solution with AI, especially as WiseTech can also leverage AI to integrate any features into its own mission-critical platform,” they said.

WiseTech has surged this week, with ETF Shares’ William Taylor highlighting in an article for Livewire that WiseTech forms part of a new guard for ASX technology, as “cash generative utilities that dominate their respective industries”. 

He argues that WiseTech has turned AI from a competitive threat to a structural margin accelerant.

QVG’s Josh Clark also recently discussed WiseTech as a position he has been adding to the QVG Long/Short Fund.

SiteMinder (ASX: SDR)

The hotel commerce platform has been hit with AI concerns for disruption, but van Keulen and Ler see similarities to WiseTech in terms of resilience and industry-specific logistics that are difficult to replicate.

It recently announced new platform capabilities and partnerships to extend hotel distribution into AI channels (ChatGPT and Claude) and its first AI demand partner – DirectBooker.

SiteMinder has had conflicting views on Livewire in the last few months.

Seneca’s Ben Richards recently named it as a tech name he has been accumulating where share prices have been disconnected from intrinsic value. By contrast, TenCap’s Jun Bei Liu sees greater disruption risk and is avoiding SiteMinder for now.

Hunting for value?

It’s an interesting time to be investing and volatility can throw up opportunities to find value opportunities.

In the process of finding opportunities, consider your investment strategy, stock quality and fundamentals, along with longer term outlook for the company as part of your research. And, of course, consider expert advice to help you with your decisions.