Twelve months ago, the ASX financials sector was the talk of the market.

The S&P/ASX 200 Financials Index (ASX: XFJ) rose 24.3% in FY25, making it the best-performing sector of all eleven ASX 200 market sectors.

Commonwealth Bank of Australia (ASX: CBA) was the standout, rising 45% to close FY25 at $185, just days after hitting a record high of $192.

Investors who held the banks through FY25 were handsomely rewarded.

FY26, however, was a completely different story.

What the numbers show for FY26

CBA shares fell approximately 11% over FY26, reversing a significant portion of the 45% gain that made the sector’s FY25 performance look so impressive.

National Australia Bank Ltd (ASX: NAB) shed approximately 4% over the full year. Westpac Banking Corp (ASX: WBC) fell approximately 11%.

The S&P/ASX 200 Financials Index moved into negative territory, making it one of the weaker sector performers in a year when the broader market managed only a 3% gain.

Why did this happen? Three specific forces converged to drive the banks from sector darling to under-performer in the space of twelve months.

Force one: three rate hikes the market did not expect

The RBA delivered three consecutive cash rate increases in February, March, and May 2026. This took the official rate to 4.35%, its highest level since late 2011.

Higher rates are a double-edged sword for banks.

On one side, rising rates expand net interest margins as lending rates reprice faster than deposit costs.

On the other, they increase mortgage stress across the banks’ enormous home loan books, raise the risk of credit losses, and weaken demand for new lending.

In FY26, the second side of that equation dominated.

Force two: the valuation problem

Coming into FY26, CBA was trading at approximately 26 times forward earnings. This was one of the highest valuations in its history and a premium that left virtually no room for earnings to disappoint.

When CBA’s Q3 FY2026 trading update showed flat operating income and a 1% decline in unaudited cash NPAT. These results came in below the elevated expectations the market had built in, the shares fell sharply.

A premium valuation stock that misses elevated expectations does not merely stop going up. It falls hard, and it falls fast.

NAB and Westpac faced similar dynamics, with both trading at multiples that reflected optimism rather than the more cautious credit environment that was actually developing.

Force three: the policy shift that hit the mortgage book

The federal budget’s decision to restrict negative gearing for established residential properties directly hit the banks’ most profitable mortgage customers.

Jarden analyst Matthew Wilson estimated the changes could cut housing credit growth by as much as 25%, naming CBA as the most exposed given its investor loan concentration.

CBA’s own economists confirmed the policy would reduce dwelling prices by approximately 3% relative to what they otherwise would have been. They forecast dwelling price growth of just 3% to December 2026, down from a prior forecast of 5%.

For a sector whose earnings are deeply tied to the health of the Australian property market, that represents a direct headwind on both credit quality and lending volume simultaneously.

Where CBA, NAB, and Westpac stand heading into FY27

The picture heading into FY27 for ASX financials is nuanced rather than uniformly bearish.

CBA remains the most expensive of the three at approximately 25 times forward earnings, leaving it the most exposed to any further earnings disappointment.

NAB is cheaper at approximately 15 times forward earnings but faces its own credit quality headwinds given its business banking concentration.

Michael Gable from Fairmont Equities retained a sell rating on NAB shares, saying:

Despite a significant share price fall, NAB valuations aren’t cheap, leaving the stock exposed to downside risk.

Westpac, with approximately 69% of its loan book in residential mortgages, is the most directly exposed to any further deterioration in the housing market.

The RBA’s decision to hold at 4.35% in June and signal that further hikes remain possible but are not certain is the most important variable for all three heading into FY27.

A rate-cutting cycle, when it eventually arrives, may change the sector’s fortunes.

Until then, the forces that drove FY26’s underperformance have not fully resolved.

Foolish takeaway for ASX financials

The ASX financials sector went from the best performer in FY25 to an under-performer in FY26 because three specific forces hit simultaneously: unexpected rate hikes, stretched valuations, and a direct policy attack on the sector’s most profitable customer segment.

None of those forces have completely reversed.

FY27 will test whether the rate cycle has peaked and whether Australian credit quality holds up.

The answer to both questions will determine whether the sector can recover.

The post ASX financials went from the best sector in FY25 to negative growth in FY26. Here’s what changed appeared first on The Motley Fool Australia.

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Motley Fool contributor Mark Verhoeven has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

As Aussies submit their end-of-financial-year (EOFY) tax returns, some may be looking to invest their returns to generate returns.

EOFY is often when investors revisit existing positions and look for opportunities the market may have overlooked.

A new report from VanEck has highlighted a sector that is largely being overlooked – international small-caps.

International small caps remain attractively valued despite improving earnings and manufacturing activity, making them an overlooked EOFY investing opportunity.

Trading below historical averages

According to the report, despite signs that economic conditions are proving more resilient than expected, international small caps remain one of the few areas of global equity markets trading below historical valuation averages.

The recent Federal Reserve meeting reinforced this view, suggesting the backdrop may not be as weak as many investors had anticipated.

For investors reviewing portfolios ahead of EOFY, that disconnect between improving fundamentals and cautious valuations may be worth paying attention to.

Economy remains resilient

VanEck argues that while the US Federal Reserve’s more hawkish stance has led markets to expect interest rates to remain higher for longer, the broader economic backdrop is becoming increasingly supportive for international small-cap companies.

A resilient labour market, improving hiring intentions, and a return to expansion in US manufacturing activity suggest a reflationary environment that has historically supported stronger earnings growth and outperformance among quality small caps.

As economic activity and corporate earnings improve, VanEck believes current small-cap valuations may present an attractive investment opportunity.

While the macro environment may be supportive, the most compelling reason for investing in this space may lie in where valuations are at.

International small caps are one of the few major equity asset classes still trading below their long-term average valuation levels.

Earnings beginning to respond

According to VanEck, one of the more encouraging signs for small-cap investors is that earnings expectations are starting to improve.

Forward earnings forecasts for global small companies have begun accelerating after an extended period of weakness.

Historically, this has been an important signal, with improvements in earnings expectations often accompanied by stronger small-cap performance.

How to gain exposure to quality small-caps

For those looking to turn their tax return into a growth opportunity, one ASX ETF to consider is the VanEck Msci International Small Companies Quality ETF (ASX: QSML).

It provides exposure to 150 of the world’s highest quality international small companies, selected using a disciplined framework focused on high return on equity, earnings stability and low financial leverage.

This approach seeks to capture the growth potential of small companies while maintaining a focus on businesses with stronger fundamentals.

 

 

The post Looking to target high upside shares with your tax return? Here’s where VanEck sees opportunity appeared first on The Motley Fool Australia.

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Motley Fool contributor Aaron Bell has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

ASX 200 healthcare shares are up 23% in just over a month as value investors plough funds into beaten-down stocks like CSL Ltd (ASX: CSL) and Pro Medicus Ltd (ASX: PME).

The healthcare sector appeared to turn on 3 June when the S&P/ASX 200 Health Care Index (ASX: XHJ) hit a 9-year low following a 39% fall over 12 months. 

Many headwinds were at play for the healthcare sector in FY26.

They included the weaker US dollar; cost of living pressures; higher shipping and labour costs, and US regulatory uncertainty for the biotechs. 

Several major players in the healthcare sector lost significant market valuation in FY26.

They included Cochlear Ltd (ASX: COH) shares, down 59%, and CSL shares, down 52%

Resmed CDI (ASX: RMD) shares also fell 27%, and the Sonic Healthcare Ltd (ASX: SHL) share price dropped 22%. 

However, things seemed to have changed on 3 June.

ASX 200 healthcare shares have ripped 23% since then in a rapid rebound that has caught many investors by surprise.

Here are two ASX 200 healthcare shares that Bell Potter has speculative buy ratings on for FY27. 

4DMedical Ltd (ASX: 4DX)

This 4DMedical share price was in a league of its own in FY26, and the best performer of the entire ASX 200 for capital growth.

The ASX 200 healthcare share skyrocketed 1,786% in FY26 to close out the year at $4.53. Since the healthcare sector turned on 3 June, 4DMedical shares have gained 15%. 

The respiratory imaging technology company gained US Food and Drug Administration (FDA) approval for its CT:VQ product in September 2025. 

CT:VQ is the world’s first non‑contrast post‑processing technology that transforms routine chest CTs into quantitative, lobar ventilation (V) and perfusion (Q) maps.

Since approval, the technology has been deployed at several renowned academic hospitals and clinics.

Bell Potter has a speculative buy rating on 4DMedical shares.

Last week, the broker raised its 12-month target price from $4.50 to $6. This suggests more than 35% upside ahead. 

In a note, the broker discussed 4DMedical’s launch of CLEAR (Contrast-free Lung Evaluation for Acute Risk in pulmonary embolism (P/E)).

CLEAR is a clinical evidence program designed to fast-track CT:VQ into the US$2.5 billion acute PE market in the US.

Pulmonary embolism is a major acute cardiovascular condition.

The broker said:

The CLEAR study is essential to accelerate adoption of CTVQ in front line emergency departments and for inpatient use.

The broker added:

4D Medical is not required to seek further FDA approval or a label expansion to the current 510K approval, however, the clinical data from the CLEAR study will provide the necessary evidence to further support broad adoption for diagnosis of PE.

Mesoblast Ltd (ASX: MSB) 

The Mesoblast share price rose by a very respectable 18% in FY26 to finish at $1.96 on 30 June. 

Bell Potter reiterated its speculative buy rating last week with an unchanged target of $4.45. 

This implies the Mesoblast share price could more than double over the next 12 months. 

The broker said: 

The key overhang on the stock remains clinical trial risk with three massive valuation events over the next 18 months being adult GvHD, back pain and the BLA approval for the first indication in HF.

None of these are priced in.

Looking ahead, the broker said:

The recent clinical trial fail by Cynata and its MSC in adult GvHD highlights yet again the risks involved in drug development.

MSB will shortly enrol the first of 180 patients in its randomised, controlled, double blind label expansion study for Ryoncil, also in adult GvHD, albeit with risk of failure mitigated by numerous factors.

These factors include a tried and tested potency assay, more aggressive dose (up to 300% higher than the Cynata product) and a 2nd line patient population that has progressed following steroid therapy.

The post 2 ASX 200 healthcare shares to buy after sector rebounds 23% in a month appeared first on The Motley Fool Australia.

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Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and Cochlear. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Pro Medicus. The Motley Fool Australia has recommended CSL, Cochlear, Pro Medicus, and Sonic Healthcare. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.