Bigger has been better for the Australian market in 2022. The 50 largest companies on the ASX have experienced more limited losses compared with their mid (ASX 51-100) and small cap counterparts though this year. Domestic large cap companies are, on aggregate, more mature, generate strong cashflows and hold dominant market positions than smaller companies, all characteristics which have been favoured by investors in 2022. Additionally, large caps have been helped by the solid performance of large cap resources stocks.
Chart 1: Bigger is better: Australian large caps limit losses in 2022
While the economic cycle is maturing and the RBA has now signalled a strong intent to combat inflation with sharp increases in interest rates, the earnings environment for the ASX 200 is yet to reflect any heightened recessionary risk over the next 12 months. In fact, earnings estimates for the ASX 200 have been revised higher in every month so far in 2022, underpinned by broad-based strength in commodity prices flowing through to the earnings of the resources sector.
Chart 2: Earnings trends robust, defying rising recessionary risks
The shift in tone by the RBA at its most recent monetary policy meeting to signal a sharper hiking cycle in coming months has been reflected in the share prices of the major banks. With more economists now forecasting a sharper slowdown in the housing market, this has led to much weaker performance across the banking sector. Westpac and Commonwealth Bank, the two banks with the highest exposure to residential mortgages, have underperformed the market the most in the last few weeks.
Chart 3: Banks underperform on hawkish Reserve Bank of Australia