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Overview
The first half of 2021 has been notable for the significant rebound in earnings for the ASX 200, with aggregate earnings for the benchmark up an incredible 24% for the six months. Analysing the change in the sectors of the market, however, reveals an uneven contribution across the board. Cyclicals have been the key beneficiaries this year, particularly the resources sector (on the back of commodity price strength), along with industrials and financials. Meanwhile, the winners of 2020, being structural growth sectors and defensives, have lagged though have still seen earnings expansion. These include health care, IT and consumer staples.
Chart 3: ASX 200: Cyclicals lead upgrades in the first half of 2021
Source: Bloomberg
While commodity price strength has helped to underpin the earnings of the ASX 200 this year, this has clearly not been reflected in the performance of the energy sector. Benchmark Brent oil prices are up around 40% year to date, yet the domestic energy index is little changed from the end of 2020. Several stock-specific issues have no doubt contributed to this outcome, though a growing focus on ESG has also been highlighted, with the energy sector facing much higher climate policy risks than much of the rest of the market.
Chart 4: Energy sector not responding to oil price strength
Source: Bloomberg
With Sydney under lockdown for more than a month now and Victoria also facing similar measures, there are obvious earnings risks for the domestic market the longer these persist, despite the broad expectation of an economic bounce once restrictions are lifted. The current situation is likely to yet again lead to a cautious approach by companies in relation to guidance in the upcoming reporting season. While the Australian market rebounded strongly once the Melbourne lockdown was lifted in October last year, the ASX 200 lagged global equity markets by more than 6% in the first two months once it was announced. So far for the current Sydney lockdown, the ASX 200 has underperformed developed equity markets by just under 2%.
Chart 5: Lockdown risk to Australian market: ASX 200 relative performance to MSCI Developed Markets
Source: Bloomberg
