February reporting season will have everything to talk about but little to show in terms of earnings growth. The Omicron variant, which ripped through much of the country over summer, has cast a shadow on the near-term earnings recovery. A shadow lockdown was in place for much of the summer with government or simply self-imposed mobility restrictions. Few sectors have escaped the impact but materials, energy, and financials have been minimally impacted.
Earnings are still expected grow half on half (1H22 vs 2H21), albeit now at low single-digits in this reporting season. For 2022, consensus estimates imply ~10% EPS growth over 2022, with industrials, energy and technology sectors leading the way.
It is worth noting that since earnings recovery for Australian equities started in 3Q20, the upward revision cycle has only been broken by COVID-19 interruptions. There remains a risk that Omicron may lead to consensus earnings downgrades over February.
While this result season is likely to carry a lot of noise around the still lingering impacts of COVID-19, we remain optimistic that Australian earnings can still grow in 2022. This view is underpinned by:
- Optimism that we will see a cleaner COVID-19 reopening this half
- Buoyant commodity prices with spot prices implying material sector earnings +70% higher
- Improved bank earnings (rising bond yields will begin to assist here)
Importantly from a price perspective, the relative cyclicality of Australian earnings (particularly vs US earnings) suggests the Australian market can still deliver mid-high single-digit returns this year, even against a potential backdrop of rising global interest rates (and likely RBA rate rises in 2H22). We upgraded our view on Australian Equities this week to take advantage of the price weakness which emerged through January.
Looking through the lens of the Wilsons Australian Equity Focus List, we would highlight the following companies as having upside share price risk through results season. BHP Group (BHP), HealthCo (HWC), James Hardie (JHX), News Corp (NWS), Seven Group (SVW), SEEK (SEK), Santos (STO), and Silk Laser (SLA).
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Written by
John Lockton, Australian Equities
John is a leading investment strategist with 20 years experience.