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The August 2021 reporting season confirmed the strong earnings recovery in FY21. Consensus earnings for 2022 are expected to moderate, although Fund managers surveyed by JANA recently have indicated an upside risk to EPS. Whilst valuations remain expensive, market sentiment, fiscal and monetary stimulus, plus COVID-19 vaccines have the potential to continue to provide a tailwind for the market, while the regulatory regime may also prove supportive.
Before the August 2021 reporting season, Australia had benefited from the strongest earnings upgrade cycle in decades, with net positive Earnings Per Share (EPS) revisions for the ASX300 for 11 months in a row between September 2020 and July 2021.
Looking forward to FY22 EPS forecasts, there were 2 downgrades for every upgrade with the dominant thematic driving most downgrades being COVID-19 and supply chain shortages. In terms of market performance, COVID losers (Discretionary Retail, Travel and Leisure) outperformed COVID beneficiaries (Health, Auto, Staples) as investors repositioned for the economic re-opening given the increasing National vaccination rate.
At the time of writing two-thirds of the Market had provided guidance for FY22 with only 16% not providing earnings guidance given the uncertain outlook.
Small Caps continue from strength to strength
Small caps have continued their momentum from the 1H21 with 39% of companies beating expectations over the 2H21 relative to 35% who missed expectations. ASX 100 earnings results for the 2H21 relative to 1H21 were evenly mixed.
Forward guidance for small caps also fared better with the number of companies downgrading because of lockdowns also materially less than the ASX100.
Capital management – Dividends exceed expectation
Reporting season provided dividends per share (DPS) results that exceeded market expectations. Dividends were materially better than expected, with the number of June half DPS beating estimates more than double the number of misses.
In aggregate, the June half dividends totalling $40bn was nearly $3bn higher than expected. In aggregate this resulted in $3bn more dividends than the market expected with the strong iron ore prices through 2021 providing support to the materials sector as it delivered $1.9bn of this outperformance.
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