Can cyclicals continue to deliver upside surprise?

About the author:

Tom Sartor
Author name:
By Tom Sartor
Job title:
Senior Analyst
Date posted:
01 February 2021, 9:00 AM
Sectors Covered:
Junior (Emerging) Resources, Bulk Materials

Australian equities (like other markets) have surged well ahead of traditional 12- month valuation metrics which remain unhelpful. Consensus EPS forecasts expect market earnings (ASX200 ex-Resources) to recover to 2019 levels during early 2023, after the sharp 24% fall in CY20.

The current 2023 price to earnings multiple of the market of ~17x represents reasonable value, but investors are clearly being asked to be patient and to bear elevated risks in the interim.

So the market continues to look through reduced 2021-22 earnings, placing higher importance on the forecast earnings recovery remaining intact.

Recent trends in 2021 EPS forecasts have been encouraging (up 9% since August) and we think this momentum will be validated in February, led by domestic cyclicals.

Predicted positive responses to February results by sector

Domestic cyclicals outperforming overly fearful market expectations was a dominant theme in August 2020.

Retailers and travel stocks proved far more resilient than expected, helped by government subsidies and adaption to the rapid shift in consumer trends.

Consumer credit, insurers and general industrials also reported ahead of expectations (Ansell (ASX:ANN), Bluescope Steel (ASX:BSL), Credit Corp Group (ASX:CCP), Suncorp Group (ASX:SUN)).

Beating market expectations

Previews of the 184 stocks under Morgans coverage reporting in February suggests this trend will continue.

Of the ASX100 and Ex-ASX100 stocks under coverage, Morgans analysts expect that 28% in each category will deliver a positive price response. Correlating this to “beating” market expectations, then the projected “beat-rate” looks far higher than usual, as was the case in August.

Of particular interest is that a strong 70% majority of stocks predicted to deliver a positive response comprise Cyclicals.

Of these, Retailers (9 stocks), Resources/ Energy (7), and Online/IT (6) dominate the list of 52 stocks Morgans analysts believe will react positively to February results.

Reporting Season Playbook

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Disclaimer: Analyst may own stocks. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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