While many key global equity indices have struggled in the first few months of 2022, the Australian market has performed much better, with the benchmark ASX 200 only slightly lower than the beginning of the year despite the numerous headwinds that have emerged. An ongoing supportive earnings environment has underpinned this outcome, with earnings revisions continuing to trend higher. In particular, resources have led the way on the back of rising commodity prices, helping to lift the earnings of mining and energy companies by more than 30%.
Chart 1: Robust earnings: revisions since start of the year
The market’s recovery from the height of the COVID crisis has been marked by two distinct periods whereby cheaper ‘value’ stocks have outperformed their more expensive ‘growth’ counterparts. The first occurred around the announcement of the vaccines, with investors piling into companies that suffered the most impact from lockdowns. The second has played out through much of 2022 as an increasingly sharp monetary policy cycle is anticipated, leading to a surge in nominal and real interest rates. Consequently, cheaper stocks in the Australian market have now completed their fourth successive month of outperformance over growth.
Chart 2: Value outperformance continues over growth (MSCI Australia Value – Growth monthly returns)
With earnings and dividends trending higher amidst more volatile equity markets, the forward dividend yield of the ASX 200 has also lifted back closer towards its pre-COVID level of 4.0-4.5%. However, the composition of the market’s yield has changed significantly in the last two years. Industrials currently trade on a yield of around 1% lower than the ASX 200 and financials no longer offer a yield premium. Meanwhile, resources now trade on a yield of almost 7%, though are seen as a less sustainable source of dividends given their dependence on commodity prices.
Chart 3: Resources dividends supporting market’s yield (Forward dividend yield)