Weekly market update - 7th of March 2022
Written and accurate as at: Mar 07, 2022 Current Stats & Facts
Australia is proving to be the most defensive of markets, with the S&P/ASX 300 up 1.8% last week. It is down 3.5% so far in 2022 compared to -8.2% for the S&P 500 and -13.4% for the NASDAQ. It has also done much better than European or Japanese equities.
US equities struggled to follow through on their rally at the end of last week, but have held up relatively well in the face of the poor news. The S&P 500 fell 0.5% last week. It continues to face the triple headwind of rising oil prices, rising rates and a stronger US dollar. The Euro STOXX 50 fell 10.4%. The European economy is much more vulnerable to the challenges highlighted above. But it is unusual for markets to disconnect to this degree in the short term and the relative moves need to be watched to see if acts as a lead indicator.
Australia’s bounce reflected a “catch-up” on the US for the prior week. It also reflects the higher weighting in mining and energy companies. There has been huge dispersion this year on the ASX. The Energy sector is up 25.4% versus a 10.2% fall in the bond-sensitive AREIT sector. Nevertheless, this move remains small in a historical context, suggesting there could be plenty more to go.
The key conclusion from reporting season is that the underlying performance of Australian companies is in good shape, with the number of positive revisions almost double the long-term average. One theme was that lower multiple stocks saw better revisions, reflecting an improved outlook for the domestic economy and higher rates helping financials. Overall earnings per share (EPS) for the market is set to grow 13.8% for the financial year, versus 11.5% expected in January. This leaves the price/earnings ratio at 15.4x. At this point, FY23 is expected to see flat EPS growth.
Looking at the market’s components:
- Industrials: EPS for FY22 rose to 5.8% from 4.8% and the sector trades on 27x PE. FY23 EPS growth is now expected to be 13%, down from 14% previously.
- Banks: EPS growth for FY22 increased to 13% from 11.2% previously and it trades on 13x P/E. FY23 expectations shifted from 6.8% EPS growth to 6.1%.
- Miners: The market is expecting 10% EPS growth in FY22, then -17% in FY23. It trades on 9.3x PE.
- Energy: EPS is expected to be +77% for FY22 and +6% in FY23. Trades on 11x P/E. Clearly, both energy and mining could see material changes to these numbers.
The earnings shifts within the market mean the unwinding of the growth premium has not been as material as price movements would indicate. There was not too much to report at a stock level post reporting season. Resource and energy stocks saw strong rotation last week as commodity prices rose. Insurance stocks were hit by the floods, although they all have a lot of protection from reinsurance contracts and the price reaction is substantially overstating the cost.