Morningstar: 5 undervalued ASX sectors to watch as the market turns expensive

A lot can change in just a few months.

When Morningstar last released its quarterly equity market outlook in April, it noted that the Australian market was trading at a discount, creating an opportunity for investors looking for quality names. The tech sector had been particularly hard-hit at the start of 2026 – it has since staged a significant recovery, though Morningstar suggests there is still more to come.

In the latest Australian Equity Market Outlook: Q3 2026, Market Strategist for Morningstar, Lochlan Halloway notes that the Australian market is now sitting at a premium, and “the largest, most liquid names have been bid up in a flight to safety, reinforced by passive money, superannuation flows, and the pull of franking credits.”

Halloway points to more attractive opportunities appearing in small and mid-cap ASX-listed companies, and the sectors he highlights include Real Estate, Energy, Healthcare and the consumer sectors. It’s worth noting that healthcare and real estate were also opportunities in the last quarter.

In this article, I’ll look at the performance of the stock opportunities highlighted for the last quarter, the outlook for the equity market and discuss some of the opportunities in the sectors that Morningstar has highlighted.

How the previous opportunities have performed in the last quarter

Source: Morningstar Investor. Data as at close of trading Friday 17 July 2026.

It’s safe to say you wouldn’t be shooting the lights out if you’d invested in the above, you’re probably in the red – but it’s also worth noting that each of these stocks still feature as opportunities in Morningstar’s latest report with the view there’s more to come for these. Bear in mind that August reporting is coming and that can shift investment views too.

Woodside and Santos have both benefited from spot LNG prices – and there remains a structural opportunity in the gas market, especially as markets reduce their reliance on coal.

Charter Hall Social Infrastructure REIT focuses on properties offering essential community services, like childcare, healthcare and government services. It could stand to benefit from ongoing demand for such services as the population continues to grow, but can be affected by shifts in government policies and subsidies.

Alternatively, Dexus may benefit from the growing appetite for real estate, with commercial real estate transactions more than doubling in the 12 months to March 2026, compared with the 2023 trough (Source: Cushman & Wakefield).

WiseTech and Siteminder both fall in an opportunity set termed as ‘thick software’. Analysts Roy van Keulen and Shaun Ler explain that there are companies with “feature-rich products customers rely on” and these are least likely to be disrupted by AI. 

For example, competitors would be hard-pressed to replicate WiseTech’s Cargowise software and WiseTech is also using AI to continue to offer new features for customers.

The outlook for the equity market

It’s no secret that Australia is still experiencing inflationary pressures. While the RBA held rates in its latest June meeting, the market is pricing in expectations for another hike before year-end. The hikes at the start of the year are still yet to flow completely into economic data, but price pressures continue in housing and services sectors. Oil prices have fallen, which Halloway expects to ease the headline rate of inflation.

Halloway notes that GDP growth was soft in the quarter, which has been largely driven by data centre investments in the last quarter. There has also been a jump in unemployment in the start of the quarter which has since eased slightly.

Commodity prices continue to look stretched and financials have cooled on the basis of rate hikes and a slowing housing market.

Halloway views real estate and energy as the most attractively priced sectors, followed by healthcare and consumer sectors. While technology hasn’t been noted in this list compared to the last quarter, analysts still see an SaaS recovery underway and believe there is value in software names.

Diving in deeper to these sectors…

Real estate has had some recovery in the last quarter, assisted by lower bond yields but analysts Yingqi Tan and Alex Anderson note that it is still underperforming the broader market and there has been some impact from the changing CGT and negative gearing rules. They are starting to see increasing appetite for property investments and remind investors that Australia is structurally undersupplied in the housing market.

Energy continues to be undervalued, despite the spike in oil prices earlier this year. Brent crude has fallen in price, and analyst Mark Taylor believes that there is enough spare capacity to help drive prices down. Spot LNG prices have been double contract prices, which is supportive for the LNG market. Futures have deteriorated, though Taylor notes that shares across the market are trading materially below his views on fair value.

Australia’s healthcare index shed 8% in the last quarter. Healthcare has been trending down in the past few years, but CSL and Cochlear’s announcements of earnings downgrades have pushed the sector into unloved status.

Analysts Lochlan Halloway and Alex Anderson highlight this as a large opportunity, stating: “For the first time in almost two decades, investors are being asked to pay less for healthcare than for the broader market. That seems like a reasonable bet to us.”

Inflation has put significant pressure on both consumer sectors, with fuel costs and rising labour costs adding to thinning margins. 

Analysts Angus Hewitt and Johannes Faul expect spending to soften as households continue to struggle with mortgage interest rates and increased costs of goods and services. Spend will reduce in certain parts of the cyclical sector – with Hewitt and Faul seeing hardware as an opportunity for growth, while inflation may be positive for sales growth in the Consumer Defensive sector but a negative for overall profitability. 

For businesses in the defensive sector, managing operations to improve costs will be valuable.

Stock opportunities in Real Estate, Energy, Healthcare, Consumer Cyclical and Consumer Defensive sectors

Scroll across to see Broker consensus ratings for each stock. Source: Morningstar Investor. Data as at close of trade Friday 17 July 2026. Broker consensus data is taken from Market Index.

Investors might take particular note of a few things.

Firstly, only two stocks on the list have a broker consensus of Strong Buy – Aristocrat Leisure and Santos.

Aristocrat Leisure (ASX: ALL) was referenced in last week’s Buy Hold Sell episode, with Pendal’s Elise McKay selecting it as a Buy and noting that it is a quality play with exposure to growth in the US. 

FNArena’s Rudi Filapek-Vandyck also tipped it as an all-weather portfolio pick because “it combines a dominant, high-return land-based gaming franchise with growing digital earnings from social casino and online gaming.”

Investors can find a deep-dive into the latest on both Santos and Woodside in this analysis from Livewire’s Carl Capolingua, while back in May, Leithner & Company’s Chris Leithner noted Santos and Woodside are amongst the biggest holdings in his portfolio.

The second thing to note is that one stock has a consensus Sell on it – Sonic Healthcare (ASX: SHL) . This doesn’t necessarily mean it isn’t worth buying but there are concerns worth taking the time to fully appreciate.

Sonic Healthcare was discussed in a May episode of Buy Hold Sell where Paradice’s Julia Weng expressed her desire to see operating leverage and strong cashflow come through and some concerns over the regulatory backdrop for the business.

By contrast, Schroder’s Martin Conlon recently discussed his concerns over the market butterfly effect caused by rising bad debts, rising asset prices to fuel growth and an AI capex boom and pointed to Sonic Healthcare as one of the holdings he views as a quality business able to deliver profits with using rising asset prices.

Morningstar’s Halloway and Anderson note of Sonic that: “Australia’s most common blood test earns basically the same rebate as in 2000. With its scale advantage over smaller peers, Sonic is best placed to withstand the margin squeeze and take market share.”

Lastly – the elephant in the room – CSL (ASX: CSL) as an opportunity.

CSL has had a tough few years and the earnings downgrade in May saw prices significantly fall and hit the broader healthcare index. It has rallied somewhat in July and some experts suggest investors shouldn’t move too far away.

Analysts Halloway and Anderson believe that investors have given up on a turnaround rather than simply lowering their expectations. Halloway notes that the balance sheet is still sound and that CSL is one of a three-player oligopoly in the plasma therapies market. Halloway also refers to CSL’s strong long-term track record in R&D (despite some recent challenges) with ongoing investment ahead of its competitors.

Elston Asset Management’s Bruce Williams holds a favourable view on CSL, saying that underlying performance was actually meeting or exceeding expectations and “a turnaround will take time, but at today’s multiple, we believe CSL offers good value.”

MPC Market’s Mark Gardner also noted CSL as one of the best quality defensive names on the ASX and where he is positioning in the current market off the back of concerns about debt levels and record low fund manager cash levels.

Looking for value in an expensive world

There are plenty of risks to be concerned about in the current market and some companies and sectors are looking expensive. But, for the diligent investor, there are always opportunities to be found in unloved parts of the market.

Will the above-mentioned stocks form part of your research for your portfolio, or where else are you looking for value?