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The FY22 reporting season was quite positive, where ASX-listed companies met or beat expectations more often than they didn’t. Given concerns about inflation and energy prices, rising interest rates and weakening demand, companies dealt with these headwinds better than they were predicted to.

The FY22 earnings season in August was better than expected

Of 344 companies that FNArena recorded as reporting in August, 30.8% beat expectations, 42.4% reported results in-line with expectations and 26.7% of companies missed expectations. It seems to be the case that sell-side analysts were too bearish about the performance of Australian listed companies, where they showed more resilience to global and domestic conditions than expected. Overall, the FY22 earnings season was quite a successful one.

After sell-side analysts took a deep dive into the results, there was a total of 32 rating upgrades and 79 rating downgrades. This was based on a cloudier outlook that some management teams gave about the macroeconomic headwinds they were facing in FY23.

Out of favour sectors outperformed whilst expectations were too high for defensive sectors

The best performing sector relative to expectations was Technology. Rising interest rates tend to impact the Technology sector the most, due to the high-growth, long-duration earnings characteristics of the sector. Analysts turned out to be too bearish on their prospects. Some of our Technology recommendations did particularly well, with printed circuit board software and electronic parts search engine business Altium (ASX: ALU) jumping over 20% after smashing expectations. Cloud connectivity business Megaport (ASX: MP1) jumped over 10% after results showed very strong top-line growth with the business travelling towards profitability in FY24. These results reminded investors that despite valuation headwinds, the underlying companies still had a strong growth story.

On the other hand, Consumer Staples and Utilities fared the worst, due to the high expectations placed on these defensive sectors. Although companies in this sector were able to raise prices and defend their earnings due to the essential nature of their goods and services, they still grappled with higher costs, weakening demand and not fully raising prices at or above inflation levels. With analysts too bearish on the Technology sector, they overcompensated and were ultimately too bullish on Consumer Staples and Utilities.

Opportunities continue to present themselves

Despite some concerns about economic and market conditions moving forward, our philosophy is to always stay invested, especially as higher levels of inflation erode the purchasing power of cash holdings. In general, the team at ASR Wealth Advisers remain bullish on companies that have pricing power or have contracts which pass-through higher costs. Examples of these includes Johns Lyng Group (ASX: JLG), whose building and restoration segment largely uses cost-plus contracts, and Dalrymple Bay Infrastructure (ASX: DBI), in which higher handling costs are passed on to customers of the export facility. We also like companies which have a sticky earnings profile as well as companies that benefit from rate rises, such as those sitting on a large float.

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Please note that ASR Wealth Advisers currently has buy recommendations on Altium (ASX: ALU), Megaport (ASX: MP1), Johns Lyng Group (ASX: JLG) and Dalrymple Bay Infrastructure (ASX: DBI).