What to expect from the ASX 200 during earnings season

In today’s environment, company guidance is likely to be more important than ever.

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The S&P/ASX 200 Index (ASX: XJO) has given up its earlier gains and is currently right about where it ended on Friday.

This comes after the ASX 200 closed for a new all-time high on Friday. With the index currently wobbling between a small loss and a small gain, it could still set a new record close today.

The bigger question facing investors, though, is what to expect from the ASX 200 during the upcoming earnings season, when a company’s full year report can send its share price strongly higher…or lower.

Guidance will be critical for ASX 200 shares

The full 2021 financial year results of ASX 200 companies are set to deliver runs from 1 July 2020 through to 30 June 2021.

That means most of the impact from the recent surge in COVID-19 cases, and the resultant lockdowns across 3 states, won’t be baked into the financials yet.

For that reason, Saxo Market’s Australian market strategist, Eleanor Creagh notes that:

Forward guidance will trump those backward-looking results. And outlooks and guidance for those impacted will be tempered by the current lockdowns. This is where investors will be seeking clarity from management about what comes next.

Despite the new wave of lockdowns, Creagh said that “household balance sheets generally remain strong and income support measures are in place for those affected by local lockdowns, though to a lesser degree”.

With strong balance sheets, limited abilities to splurge on travel, and buoyed by strong housing prices, Creagh forecasts a positive outlook for consumption.

She adds that, “[M]any businesses are impacted both positively and negatively by lockdowns, but we have also seen the reopening can be just as impactful. This inconsistency is likely something that will continue until we see vaccine penetration rates picking up.”

The bar to beat expectations is low

Markets are said to be forward looking. Meaning that expected future performance is already factored into the price.

This also means when an ASX 200 company exceeds expectations it will generally see its share price rise. On the flip side, disappointing expectations to the downside usually sees shares fall lower.

Creagh says that analysts have largely been slow to upgrade their forecasts heading into earnings season. For that reason, “the bar to beat expectations is low”.

What does that mean for companies trading on the ASX 200?

According to Creagh:

As with prior reporting periods, companies should broadly exceed expectations with the final tally likely skewed to upside surprises. However, as the profit cycle has progressed the magnitude of earnings surprises will be less.

Given the current circumstances, she reminds us, the “focus will be on the guidance and outlooks as market participants look ahead”.

Dividends poised to rebound

Income investors didn’t have the best of years in 2020, as most ASX 200 dividend shares scaled back or even cut their dividend payments entirely. The big banks, classically a favourite play for income investors, cut their dividend payments more than 50% in 2020, year-on-year.

However, Saxo Markets sees an upside for dividends in the upcoming earnings season. “At an index level, dividends will be well on their way to recovery, maintaining a decent premium over 10-year government bond yields,” Creagh said.

Though Saxo forecasts the banks’ dividend payments won’t yet reach past payout ratios, Creagh said that, “dividends will significantly improve on the last payment period for the banks.”

Prior to the new wave of lockdowns, the cashed-up banks were widely forecast to return capital to shareholders.

According to Creagh, that’s still likely. Though there are risks to this consensus outlook:

Given current lockdowns there is a possibility that the banks take a more cautious approach to capital management relative to consensus expectations. Though this week, as restrictions have tightened, ANZ [Australia and New Zealand Banking Group Ltd (ASX: ANZ)] has already announced an on-market share buyback program of up to $1.5 billion beginning in August.

This strengthens our confidence in the potential for capital management.

Also in the dividend spotlight are ASX 200 mining heavyweights BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO), and Fortescue Metals Group Limited (ASX: FMG).

Creagh notes that:

The miners (BHP, RIO, FMG) will continue to pay high dividends in absolute terms. Iron ore prices have remained elevated throughout the financial year and other commodities have also seen prices appreciate. Stronger balance sheets, robust revenues and profits, along with elevated commodity prices mean miners are in a strong position to continue to return cash to shareholders.

As for ASX 200 travel shares?

Creagh says that, “Airlines, travel agencies, accommodation and entertainment companies remain under pressure and at the mercy of the current unpredictable circumstance with respect to domestic travel.”

Despite recovering strongly from the panic selling in February and March 2020, companies in the travel and leisure sector are still broadly trading well below their pre-pandemic levels. For this reason, Creagh says, “There remains a catch-up trade in play for those taking a longer-term view, particularly with vaccine penetration stepping up investors can look ahead more clearly to what lies on the other side of the pandemic.”

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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