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2 in 3 ASX 200 stocks are now cheap – but don’t buy just yet

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Shares are currently undervalued, but are unlikely to rally until inflation passes.

The latest pullback has seen 2 in 3 shares fall below their fair value, but it might not be time to buy just yet, an industry expert has revealed.

This is according to the latest findings by Morningstar, which now suggests that every single sector of the market is undervalued.

In fact, the stock analysts say 56% of companies have either a 4- or a 5-star buy rating, which besides the COVID-19 crash is the highest proportion in a decade.

But even with shares falling, it might not be buying season just yet.

Morningstar's senior equity analyst Adrian Atkins points out markets will continue to follow economic developments.

"Overall, we think the market is undervalued on a long-term view, but there is potential for near-term downside as higher rates flow through the economy," he wrote in his latest report.

The market outlook is "fairly grim"

Even with the current market falls, there's no denying asset prices will remain under pressure.

Especially as the economic story continues to develop.

According to Janus Henderson's head of multi-asset, Paul O'Connor, economists are continuing to downgrade their forecasts.

"Where the growth story is concerned, consensus economic forecasts show that the developed economies are now rapidly losing momentum, with the outlook for next year looking fairly grim," O'Connor said.

Atkins agrees, pointing out that the full impacts of inflation and rising rates might not be felt by the markets.

"We recommend some near-term caution though as there is a chance high inflation and rising interest rates could persist for longer than expected," Atkins said.

The market analyst also highlights how central banks will be different to what investors have experienced in the past.

"In a high inflation environment, central banks cannot ride to the rescue of asset prices and the economy without fanning inflation, which is the bigger issue," Atkins said.

But this short-term pain is creating a long-term gain

Even with the market falling it is not all doom and gloom.

Atkins points out that these falls are actually creating opportunities.

"On a long-term view, we think the market is undervalued, with our Australia and New Zealand coverage trading at an average discount to fair value of 14%, compared with a premium of 10% in early January," Atkins said.

Although it's a market where certain sectors will outperform.

"We see best value in energy, real estate, financial services, communications, and technology."

"We recommend sector diversity and bias toward lower risk and moat stocks," he said.

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