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| Our work family (Scott, Kevin, Chris and Maddy) wishes you and your family a Merry Christmas and a Happy and Safe New Year. We return on Monday, Jan 6. On Thursday, 19 December 2024, the ASX ran into a massive headwind with a drop of 141 points or -1.7% to finish at 8168. This is a drop of 3.2% in December, as the Santa Rally may have finished early this year. Today, the markets ran into the US Federal Reserve headwind. The interest rate cut caused the sell-off, as a cut of 0.25% was expected. The commentary accompanying the cut spooked the market, with the US DOW JONES dropping 2.5%, which saw it down for 10 days in a row. This is the longest down stretch since 1974. However, the drops have been gradual, with the DOW down 6% (including today’s drop) from the ALL-TIME HIGH reached earlier this month when it climbed above 45,000 for the first time. The NASDAQ dropped 3.5% after hitting an ATH on Tuesday, but it’s still up 29% for the year. I have outlined more information below regarding the US Fed Hawkish cut! The consensus is that the world economy will continue to grow (not evenly) with increasing levels of volatility, given the change in US leadership. China is likely to provide stimulus, but it might keep its powder dry until it sees policy action from the new US administration. The rest of the world hopes not to be hit by any global trade war. I have revisited our view of 2024, written on 12 January 2024. Our rough forecasts have been pretty close. 2025 will be more challenging to predict as we enter the 3rd year of a BULL MARKET. The graph below shows the movement of the ASX 200 (pink) (right-hand scale RHS) for FY25, up 5% since June. As you can see, it reached a high of 8500 before coming back. The Banking index (blue) (LHS) has been well above 100% and hit a high of 129%. The Core Index (30 ASX stocks) (brown using LHS) has been trading near 100% for the 6 months. Each time it hit 100% or was within 0.5%, the market dropped back, continuing the history of suggesting the market is fully priced at 100%. We are happy for you to share our Not So Daily Bulletin with family and friends, and if we can help them, we are also happy to chat.  US Federal Reserve Hawkish cut! The US Federal Reserve cut interest rates by 0.25% to the range of 4.25% to 4.50%. The midpoint is near the RBA cash rate of 4.35%. The US has cut by 1% over the year, but Chair Powell indicated they would be going slower as inflation had been sticker than expected, the economy was doing better than expected and the new US administration had policy uncertainty. The market reaction was one of disappointment, and we saw a reasonable sell-off across the board. The other interesting point to note is that over time, the Fed has been cutting interest rates by 1%, and the 10-year Bond rate has increased by 0.8% over the same period. There are several reasons for this; – Inflation remains higher than expected. – The interest rate yield curve is moving towards normal, with long-term rates being higher than short-term rates. – US debt will likely become an issue, especially if the new administration can’t reduce its deficit. – The US economy is going well, with reasonable job growth. Below is the US inflation chart, which shows a slowly falling inflation rate over the last six months, but services inflation (blue) remains sticky.  Revisiting & Reviewing our Outlook for 2024 The black writing is from our 12 January 2024 Not So Daily. Blue is our review today. The Australian and global economies continue to grow but at a slower pace. Inflation has reduced with the global supply chain normalising, meaning energy and good inflation has returned to zero; however, services (sticky) remain problematic for Central Banks as it’s reducing but at a slower pace and still risks rising; that’s why the CB’s are unlikely to cut rates too aggressively this year (unless a major downturn in the economy). Demand for jobs and skills is STILL STRONG, which means consumer spending is supporting the economy and, at this point, looks like it will assist in avoiding a recession. This is the main difference from previous slowing economic cycles, where rising interest rates usually end in a recession. Pretty happy with that assessment So, our base case on the asset classes is as follows; Cash – The US, UK and Euro CB have finished raising rates, and the next move is likely down (but not until mid to late this year). The RBA is also likely to be finished at 4.35%, but will be reluctant to cut for fear of restoking inflation. They may cut rates in the 2nd half of the year. If looking for a defensive position, cash is still preferred as the income is similar to Bonds and term deposits, but you retain liquidity and have no capital volatility. Rates have started reducing globally but at a slower pace than the market had been expecting. RBA still not ready to cut. Maybe in the first half of 25 Fixed Interest – Bond rates look to have peaked in October, with US and Australia 10-year rates reaching 5%. They have dropped back to around 4%, and the likelihood of being lower (closer to 3%) by the end of 2024. This will provide positive capital returns for Bonds. Others in the Fixed-interest space. Bond rates initially fell when the US Fed started cutting down to 4%, but have reversed and have increased in recent weeks to 4.5%. Term Deposit – rates have likely reached their highest point. Either lock in for 1 to 2 years or move to other fixed interest areas. Hybrids – these are float rate bank notes. They performed very well when rates were rising. Their capital growth will be limited as rates drift lower; however, yields with franking are well above Bonds & Term Deposits. This has played out as we thought. Property (ex-residential) – has lagged other markets over the last year or two due to work from home and rising interest rates. Good quality assets will retain value and be sought after by renters; however, lower grade property (shopping, commercial & industrial) will struggle as the full change in interest rates hasn’t flowed through to valuations yet, and the vacancies may rise as the economy slows. This sector has performed better than expected, with vacancies remaining low and workers slowly returning to work. Listed Property – still selective about the areas. Goodman Group (GMG) continues to deliver based on higher quality site warehouses and has moved into data storage. Lend Lease (LLC) cheapest on the CORE. They need to deliver for the market to believe, but they will jump if they do. GMG had another stand-out year, up 45%, as data centres become an important asset in AI development. LLC has still struggled but the company has finally announced a restructuring that they are starting to deliver on. Resi–cashed-up buyers and immigration are keeping property prices buoyant. Interest rates and a slowing economy haven’t impacted and are unlikely to see a sell-off due to the strong overall debt position of homeowners; however, banks have tightened credit, which means borrowers will be able to borrow less based on the same income, which eventually has an impact on prices. By then increased supply from loosening of local and state govt regulation might help (but that might be wishful thinking). Housing prices have slowed up over the year. Australian Shares – traded within a range of 7000 to 7500 for most of 2023, with the market nearing an all-time high in early 2024 of 7628 as the market hoped for early interest rate cuts. We think this is too soon for cuts. However corporate earnings have held up well in the face of rising interest rates as the economy and consumer backed by strong employment continue to allow a soft or no landing scenario. The ASX has powered higher, with 26 ATH being set in 2024. It’s mainly driven by banks with resources lagging, so it’s been a stealth bull market (not all boats rise). However, we think, we are likely to see more volatility this year as the economy continues to slow and the impact of previous rate rises impacts different parts of the economy. Unemployment (u/e) is the key. If job demand remains strong, then the economy will keep rolling, and so will the market; however, if u/e starts to rise meaningfully, it could provide a market drop. The banks hid some of the volatility as resources, health and consumer staples struggled. The Core Watchlist index (30 stocks representing over 50% of the ASX) was below 90% (meaning at least an average of 10% from the current price to the target price. Under 90% has traditionally been a good entry point) in October. However, it has risen with the Santa Rally to start 2024 around 95%, its highest point since Aug 2021 (when the ASX was at 7583). There are currently 10 of the 30 stocks trading above 100% of their target price, which makes us a little cautious about the market pushing higher from here. Most researchers have been on holiday for the past six weeks, so it will be interesting to see whether we see upgrades or downgrades to target prices and earnings over the next few weeks/months. We still think the small company space is undervalued. Momentum seemed to be the major trend in 2024. Those stocks that were overvalued at the start of the year remained overvalued for the whole year, as there are still 9 above 100%. The researchers upgraded 409 times compared to 273 downgrades. This provided the ASX with the ability to push higher, up around 9% for the year. The banking index (4 major banks) is trading well above 100% at 109%, which is an indication of overpricing and suggests some caution should be warranted across the market. Highest ever point 116%. We are selective about the stocks and sectors we like at this point based on valuations and are more likely to look to buy any dips. The Banks kept on rallying. The new high for the index was 129% as the analysts were still reluctant to move the target prices higher, especially when forecasting little profit growth. CBA reached 156% above the target price. International Shares – international markets outperformed the ASX by a reasonable margin in 2023, mainly based on a strong US, but also a reasonable Europe and Japan. The only real lagging area was China and some parts of Asia. The weak AUD also helped over the year, but it actually finished only down 0.1% against the USD in 2023. We are again being selective regarding our international choices, but we think some International markets will continue to outpace the ASX, as was the case in 2023. Most global markets outperformed the ASX apart from France and the UK. Additionally, the AUD has fallen 5c against the USD, increasing International returns. We are still trying to use our fundamentals to assess value. This shows reasonable relative value in Global Quality (large and small), Europe, Asia, and Emerging Markets, and we are still strong on the long-term themes of cybersecurity, health, and robotics/AI. We would probably look to buy the dips, and should the Chinese economy recover, then the AUD may continue to strengthen, so we are looking to hedge some of the International exposure. The investment themes have remained in place, and our conviction in these areas remains as we believe there is a strong medium to long-term growth in them. The Chinese recovery is taking time with markets still awaiting the stimulus to turn the market around, this inturn should provide a boost to Australian Resources and the AUD. The currency will also depend on whether President Trump wants a weak or strong USD. Summary We think markets will provide a positive return in 2024 as the economy transitions into a higher interest rate world (albeit with some cuts) and a slowing inflation which only returns to target by 2025. This means a slowing economy, which will affect companies and sectors differently and provide a reasonable amount of volatility and dips as buying opportunities. This year’s theme is probably – patience is a virtue!! Again pretty happy with that summary, given we are looking into the future We will save our outlook for 2025 for when we return in early January. Artificial Intelligence transforming the way we live Investment Manager Walter Scott, who partners with Macquarie wrote an interesting article about AI. The AI journey has progressed to the extent that a growing array of leading companies across the world are exploring, embracing, and harnessing the opportunities afforded by this evolving technology. The ‘compute’ element AI has supercharged the demand for semiconductors, with generative AI (gen AI) requiring substantially more computational power. This demand for leading-edge ‘compute’ – processing power – is particularly positive for Taiwan Semiconductor (TSMC) and Dutch semiconductor lithography company ASML (IEU QUAL SEMI). TSMC (SEMI QUAL IAA) is the world’s largest maker of semiconductors with Apple and Nvidia among its customers. The company’s competitive advantage that has maintained its market leadership lies in its pure foundry model, which eliminates potential competition with customers. It also has a record of strong execution, and has high levels of research and development spending. AI-enabled devices (like smartphones and PCs) are expected to see a material increase in silicon required to manufacture those products, boosting demand across other parts of TSMC’s businesses. The Walter Scott team recently had a rare tour of ASML’s “cleanrooms” – the moniker given to their manufacturing facilities due to the cleanliness required – in the Netherlands, witnessing the manufacture of extreme ultra-violet (EUV) and High NA – the next-generation EUV tools. Each of these tools are critical workhorses of leading-edge chip manufacturing helping chipmakers like TSMC reduce the process steps, costs and cycle time, i.e. the length of time required to produce a semiconductor chip. With its monopoly EUV position, ASML remains a linchpin in the drive towards smaller, cheaper, more powerful and energy-efficient semiconductors. AI’s demand for advanced semiconductors is highly beneficial for ASML. Developing the infrastructure Beyond this ‘compute’ element, infrastructure companies provide the foundational technology and services necessary for AI development, deployment and scaling. These businesses enable client companies and developers to build, train and run AI models more efficiently, with Microsoft (QUAL IVV NDQ GXAI) and Alphabet (Google) (IVV NDQ QUAL GXAI) having developed leading positions in this area. Microsoft’s Azure cloud computing platform in collaboration with OpenAI has democratised access to advanced AI, accelerating the development and deployment of state-of-the-art models such as ChatGPT, DALL-E and Codex. Furthermore, AI will be built into every Microsoft cloud solution through its Copilot application. Copilot is an AI-powered tool to improve productivity and creativity across tasks such as ideas generation and preparing presentations. As a result, Microsoft’s management is confident that this will be one of the fastest growing business areas in the company’s history. Alphabet is establishing a leading position in the AI investment and application race, rolling out its own Search Generative Experience – which will be part of Google – that will craft responses to open-ended queries, responding to prompts with images and text, offering improved user experience and precision. Crucially, Google enjoys three significant advantages. In search channels, Google owns Android, which has over 70 per cent of the mobile operating system market. In its product suite, Google has nine consumer-facing products with over one billion users, all of which are free. And then there is the brand. Google is a verb and is synonymous with search, and advertisers have years of experience placing high-traffic, high return-on-investment ads with Google via its search platform, YouTube, AdMob, Maps, Shopping and Travel. Harnessing AI A growing array of companies are harnessing AI to enhance their products, services and profitability. The AI ‘gold’ for these companies will be in generating incremental revenues, selling more products or services, expanding into new markets or developing new business strategies, or looking to improve the cost or capital efficiency of their operations. There is often a common thread to market-leading companies in that they tend to have more data and stronger digital capabilities, the trust of customers, more capital to invest, and have management teams which have been proactive in thinking about how to use AI. Adobe (IVV NDQ QUAL), with over a decade of AI investment, recently announced the launch of Adobe Firefly, an AI-powered creative tool that will be integrated across its applications. Firefly uses gen AI and simple text prompts to create higher-quality images with better composition, photorealistic details and improved mood and lighting. Adobe expects this will provide users with an easier to use, more powerful and personalised experience. Technological progress is rarely linear, and Walter Scott expects the same to be true for AI. There will be periods when the market will get overexcited in terms of usage expectations and the pace of adoption or monetisation, and for some businesses AI integration may be a slower burn than some of the more bullish proponents of the technology expect. But how fast will the technology be adopted? How will it change our lives? And what AI-enabled products and services are we willing to pay for? The next transformational AI wave will be dominated by a growing list of companies that are identifying real-world use cases for the technology. Consequently, as long-term investors, a focus of our fundamental analysis over the coming years will be on how companies are employing AI to reach customers, more efficiently and more profitably, and with better products and services. Financial Planning Snippets PLEASE BE VIGILANT regarding financial scamming. If anyone is requesting financial information from you (via phone, email, text, or social media), please contact us first or ask them for their ABN. Super Guarantee (SGC) for employees increases to 11.5% from 1/7/24 Concessional super contributions increases from $27.5k to $30k from 1/7/24 Commonwealth Seniors Health Care card has seen the income limit increase to $152k(couple) $95.4k (single). If you are of Age Pension age and don’t have the card, please let us know. Other Stories – Chinese Economic Conference, this week, no stimulus announced. Are they keeping powder dry until Trump shows his hand? – NZ recession worse than expected. – No interest rate cut from Bank of Japan. Broker Target Price changes Target Prices should be viewed as a compass (the general direction) rather than a GPS destination. Ord Minnett Morgans Morgan Stanley Macquarie Amcor (AMC) decreased from $8.04 to $8 Bell Potter/Citigroup UBS Tracking changes for 2024 Upgrades 409 Downgrades 274 Core Watchlist Index (changes since last Not So) The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95 Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking). To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know. The Core index decreased from 97.79% to 96.35%. Overall Earnings Per Share (EPS) FY24 remained at -0.19% FY25 remained at 3.93%. Profit expectations are still declining while prices have risen. Most expensive – CBA 151.6% Least expensive – Nine Entertainment (NEC) 70.0% The CORE Watchlist has 9 (9) stocks trading above 100%; they are; ANZ BXB CBA CPU JBH NAB TCL WBC WES, lowest number ever is 0, highest is 14. While 7 (6) is trading below 85% (the highest is 18, and the lowest is one). CSL NEC NXT ORI S32 STO WDS (Figures in brackets are last Not So). STOCKS TRADING BELOW ALL BROKER FORECASTS ARE AS FOLLOWS; (it has been a handy indicator in the past). 9 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest is 2. BHP current price $39.68 Broker range $42 to $48.95 CSL current price $278.79 Broker range $310 to $345 NXT current price $15.16 Broker range $19.40 to $21.20 ORA current price $2.38 Broker range $2.45 to $2.90 ORI current price $17.39 Broker range $18.85 to $21.50 RIO current price $117.40 Broker range $120 to $136.50 S32 current price $3.36 Broker range $3.60 to $4.40 SEK current price $23.41 Broker range $25.40 to $30 STO current price $6.36 Broker range $7.50 to $8.70 Added SEK Removed Banking Index (changes since last Not So) Like the CORE Watchlist index, the Banking index is the four major banks’ average target price based on research from up to 6 brokers. The percentage below 100% is the potential upside over the next 12 months (not including income). If at or over 100%, then this indicates the Banks are fully priced. The Banking index decreased from 122.6% to 119.4% The individual numbers are CBA 151.6% NAB 113.2% QBC 119.2% ANZ 102.6% and the 5th musketeer (not in the index) is MQG at 99.8%. Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is slightly increased dividend payments and still attractive yields. PLUS FRANKING. FY 24 % FY 25 % FY26 % ANZ 166.0 5.80% 166.2 5.81% 167.2 5.84% CBA 465.0 2.98% 472.5 3.03% 484.3 3.10% NAB 169.0 4.54% 169.8 4.56% 171.8 4.62% WBC 166.0 5.18% 158.2 4.94% 161.6 5.04% MQG 644.0 2.87% 649.0 2.90% 764.8 3.41% Dividend expectations for BHP and RIO. The forecasts below are for the full year. FY24 cps% FY25 cps% FY26 cps% BHP 216.83 5.46% 184.00 4.64% 192.3 4.85% RIO 627.83 5.35% 700.50 5.97% 707.5 6.03% Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS). Other Indicators (changes since last Not So) US VIX (Fear) Index increased from 14.69 to 27.62. A jump from yesterday of 74% in one day. Normal levels are (10 to 17). Iron Ore decreased from $104.75 to $102.40. If China stimulates, it may increase. If trade wars break out, then it might fall. The average expectation for 2025 is $99.80 Copper decreased from $4.18 to $4.09. It bottomed in early August at $3.95. Copper is needed to electrify the energy system. It should be good under most scenarios, but not a trade war. Gold decreased from $2670 to $2621. A new ATH of $2,794.40 last month. AUD/USD decreased from 63.60c to 62.22c. This is the lowest all year. CHN/USD Yuan increased from $7.28 to $7.30. The Yuan weakened against the USD after the Trump win. Tariffs! Weakest since July 2024 Asian markets – DOWN US 10 year Bonds increased from 4.40% to 4.52%. 2 year rate 4.35% Yield curve is starting to slope upwards. German 10 year Bonds increased from 2.24% to 2.26%. Japanese 10 year Bonds increased from 1.047% to 1.073%. Highest since Oct 2011 1.106%. Official interest rates increased to 0.25% Aussie Bonds 10 year Bonds increased from 4.31% to 4.41%. Recent high 4.95% Oil prices decreased from $70.60 to $70.19. Will Trump’s mantra of drill baby drill, bring lower oil prices or will OPEC have other plans to combat US oil production? Tungsten—China price $338mtu. The European price is $345mtu. This week & next week Last, “Not So” opened in 6 Aust states (excl Tas & NT), US 6 states (California, Massachusetts, Virginia, Colorado Washington DC and New Jersey), Bulgaria, Israel, Sweden, UK, Romania and NZ (Canterbury). This week coming – December clean up Next week – HOLIDAY We will be closed from Friday December 20 to Monday January 6. Contact details PO BOX 149 Deniliquin NSW 2710 125 End St Deniliquin NSW 2710 Ph. 03 58950100 Fax 03 58950101 Mobile 0412113524 scottm@provincialwealth.com.au kevinh@provincialwealth.com.au chrisp@provincialwealth.com.a maddyl@provincialwealth.com.au |
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