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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.

  • The Morningstar Global Markets Index has returned more than 17% year to date and 18% over the past year.
  • The market-cap-weighted price/fair value ratio for our equity analysts' coverage universe is 1.04.
  • Communication services is the most undervalued sector, with a price/fair value ratio of 0.94. Basic materials is the most overvalued sector, with a price/fair value ratio of 1.37.

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

Another stock-specific story we're telling is for

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

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

Energy: All Roads Point to Oversupply in 2018

Financial Services: Banks Can't Rest Easy

Healthcare: Stock Selection Key as Valuations Rise

Industrials: Worldwide Growth Is Resilient, But Valuations Look Full

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

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About the Author

Elizabeth Collins

Head of Credit Operations and Standards

Elizabeth Collins, CFA, is global head of equity research for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. In this role, she leads the global equity research team, which focuses on providing in-depth, fundamental equity research based on sustainable competitive advantages and long-term valuation analysis. Collins is a member of the Morningstar Research Services Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. She serves on the regulatory governance board for Morningstar Credit Ratings, LLC. Collins is also coauthor of Why Moats Matter: The Morningstar Approach to Stock Investing, published by John Wiley & Sons in 2014.

Before assuming her current role in 2018, Collins was director of North American equity research. She has also served as director of basic materials equity research, chair of the Morningstar Research Services Economic Moat committee, and a senior analyst on the energy team. She joined Morningstar in 2005. Previously, Collins worked as a youth program coordinator for a public housing community organization in Boston.

Collins holds a bachelor’s degree in psychology from Boston College and a master’s degree in business administration from DePaul University. She also holds the Chartered Financial Analyst® designation.

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