| The Not So DAILY BULLETIN 20 December 2022 No.527 Top Stories This will be the 2nd last Not So for the year. On behalf of the team (Ashleigh, Maddy, Chris, Kevin and Scott), we wish everyone a Merry Christmas and a Happy New Year. We hope you enjoy your family gathering and stay safe. We finish on Friday, December 23 and restart on Tuesday, January 3. Tuesday, December 20. The ASX200 fell 110 points or 1.5% to finish at 7024. Coppo’s report today suggests the BEAR MARKET rally is over as markets are starting to focus on the issues for 2023. I have updated the market headwinds below as some are settling down, whereas others are potentially yet to begin. There are growing suggestions that some investment approaches that have worked over the last 20 years in a falling interest and inflation environment may need to be revised in the future with higher interest rates and inflation. It’s being called a NEW REGIME. We will explore this in more detail in Friday’s email. Market Headwinds Over the past year, we identified 12 market headwinds that could restrict the market from moving higher. The last update was on September 19. Given we are nearly at the end of the year. I wanted to update them and see whether they are likely to continue causing grief and if other headwinds have emerged. 1. INFLATION – I suggest that until inflation is under control, global markets are unlikely to settle. This year has been volatile; since 1950, only 1974, 2002 and 2008 have seen more declines of 1% plus. The signs suggest inflation has peaked, especially on the supply side (goods and energy inflation). However, inflation remains elevated at 6% plus, and concerns are that it will stay above 2% for some time. PEAKED 2. INTEREST RATES – Central Banks (CB) have been saying it all year. They will keep raising rates to ensure inflation is dead; however, markets have been looking for a PIVOT that is slowing rates. This is the wrong approach, as CBs will keep going. On September 22, the market thought the US cash rate would peak at 4.39% in March. It’s expected to peak at 5.1% and is currently in the 4.25%-4.5% range. In Australia, the market expectation was 3.89% by April. That is still about the same. Rates will continue to rise to kill inflation as long as jobs aren’t being slashed. At the moment, we are seeing job growth still. STILL RISING 3. RECESSION RISK – the likelihood of a US recession is still high. The only indicator not pointing to this is the strong job growth. Everything else suggests a recession by mid-2023. This being the case, it may mean a recession is mild. However, some still forecast a harder recession given the rate interest rate rises and the liquidity reduction from quantitative tightening QT. The US Fed is forecasting a rise in unemployment to 4.6%. This is an increase of 1.1% from current levels. The US has never avoided a recession when unemployment has increased more than 0.5%. In Australia, most are still saying we are likely to prevent a recession, but it will be low growth, and the immigration bump we are likely to receive may keep Australia from having a mild recession. US INCREASINGLY LIKELY 4. GLOBAL SUPPLY CHAINS – this was the initial source of inflation as container costs jumped from $1,000 to $20,000. Over the last year, prices have been reduced as countries have re-opened in a post-COVID world (still waiting on China). The container costs have declined below $2,000, seeing good inflation fall reasonably fast. Computer chip prices are also falling, reducing the cost of other goods, such as used cars. VASTLY IMPROVED 5. RUSSIA INVASION AND EUROPEAN ENERGY After the supply chain issues, this was the next major cause of the inflation spike, with energy prices (oil) rallying to $125 per barrel and a range of other commodities that Ukraine supplied to the world. The oil price has fallen back to around $75 to 80, and the Europeans have been frantically sourcing oil and gas from other producers (Woodside is sending 12 ships to Germany). The Europeans believe they have enough energy for the winter and are madly building other storage sources. While energy prices are still elevated, they are coming down and reducing inflation. However, markets would like to see a cease-fire or a Ukraine victory. ENERGY PRICES DROPPED 6. COMMODITY PRICES have fallen back to more normal levels. Apart from oil, most commodities jumped, but they have returned. Ukraine has started to export food, and various countries have had time to find other markets. Again, the supply side of inflation is improving. RETURNED TO NORMAL 7. CHINA ZERO COVID policy is showing signs of loosening. China has been the world’s growth engine for 30 years, and in 2022 has stalled. Premier Xi’s re-election has relaxed the hard-line ZERO Covid policy, as economic growth is essential to China’s growing prosperity. They look like they are setting a GDP target of 5% for 2023. This would require a new round of stimulus and an open economy. IMPROVING SLOWLY. 8. CENTRAL BANKS (CB), since the GFC, CBs have stimulated the economy with interest rate cuts to emergency levels and provided extra liquidity (quantitative easing QE). They are now tightening interest rates to defeat inflation and reducing liquidity via (quantitative tightening QT). The CB’s primary focus is inflation, not keeping the economy growing. While this might be tough love in the short term, it is the right approach in the medium term, as higher inflation will be more destructive than higher rates for a (short time). TOUGH LOVE in the short term. 9. US DOLLAR – The US dollar has recently weakened in recent weeks from multi-decade highs against most major currencies. By weakening, it has provided some support to other markets and has reduced the risk of other CBs having to raise interest rates further to defend the currency. A REDUCED HEADWIND. 10. COMPANY PROFITS, after inflation and interest rates, this is the market’s primary concern. So far, profits and jobs have remained positive. However, history shows that when interest rates rise, profits and employment generally fall, especially with QT being implemented. Company profits are generally looking back. In Australia, six-month profits from January 22 to June 22 are announced on August 22 or September 22. The interest rate rises didn’t start until May 22. The upcoming July 22 to December 22 results announced on February 23/March 23 may show the impacts of changing consumer spending and sentiment. The drop in valuations over the last year has been a change in PE ratios for some stocks related only to Price (P). It assumed Earnings (E) would remain constant. However, if earnings fall by 10% to 20%, the share price is likely to also. Unless the PE has already discounted it (trading at lower levels). Asia 12 times, Europe 12 times, Aust Banks 13 times. The chart below from Bank of America shows their global EPS (earnings per share). It shows a likely 15% drop in earnings. WAITING FOR THE WIND TO INCREASE.  11. CONSUMER SPENDING – the consumer represents 60% to 70% of GDP in most Western economies. After the pandemic, household balance sheets are in good order, given the low-interest rates and the free handouts (stimulus). However, rising interest rates and the rising cost of living (inflation) are reducing households’ savings. Companies are likely to retain workers as there is a skills shortage. Plenty of part-time jobs are available if mortgage or rent stress becomes a real issue. The move to “tap and go” has made spending easier than using cash. Will the Christmas bill shock in the new year, coupled with slowing economic growth, put the breaks on consumer spending and, therefore, lower profits? History would suggest these dots are joined eventually but will the skills shortage break that nexus? SPENDING IS HOLDING UP FOR NOW. 12. And finally, FEAR itself. It can be a self-fulfilling prophecy. Bear markets generally finish with a capitulation event where some investors throw in the towel and sell everything. That usually sees the VIX (Volatility Index) above 40. It’s currently 22, higher than pre-COVID but in the normal range. If profits and consumer spending drop in the new year, we may see the final sell-off. However, it may be for a short period as many global investors have positioned cash for such an event, so the recovery may be swift. China re-opening and Commodities More signs China is slowly re-opening. They stated they are looking to stabilise the economy and its growth. UK Broker – SP Angel – China’s new state-run iron ore buyer, China Mineral Resources, is set to begin major purchases next year for the Country’s top 20 steelmakers. – The Country is in negotiations with Rio Tinto, Vale and BHP. – Officials hope a centralised body of CMRG’s scale will enable discounted contracts. – Iron ore futures have fallen 4% in Singapore this morning. – China buys c.75% of the world’s iron ore currently. However, appetite has waned on the Country’s property market slump. Goldman Sach has updated its view on commodities, and they think it will be one area that performs well in 2023. Financial Planning Snippets – PHONE financial fraud. We are aware of a number of examples of fraud being committed by people ringing. PLEASE DO NOT GIVE YOUR BANK DETAILS OR CREDIT CARD NUMBER to a person who has RUNG YOU. – The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate). – Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. Other Stories (research since last Not So) – ANZ reduces GDP forecast for 2023 to 1.5% from 1.8%. They expect a sharp slowdown from consumer spending and as fixed mortgage rollover from very low levels. They think Australia will avoid a recession but think interest rates will hit a high of 3.85% and no cuts until 2024. – Coal has passed iron ore as Australia’s largest export in 2022. – Sunrice (SGLLV) announced a half-yearly dividend of 10c (same as last year). Yield 6% plus franking. Broker Target Price changes Ord Minnett/JP Morgan BHP increased from $42.80 to $44 Rio Tinto (RIO) increased from $93 to $95 Woolworths (WOW) increased from $30 to $31.10 Morgans Morgan Stanley Macquarie Bell Potter/Citigroup RIO increased from $115 to $120 UBS WOW decreased from $35.50 to $34.50 Today’s ASX sector Movements Best – Worst – IT -4.4% 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 BHP price $38.56 Av. Target Price $39.73= 97.1% (meaning 2.9% upside over next 12 months) + income 7.11% (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 90.84% to 87.81%. Back under 90%. Usually good buying. Overall Earnings Per Share (EPS) FY22 increased from 21.33% to 21.34% (this includes some stocks using CY21). FY23 decreased from 5.95% to 5.88% Profit forecasts aren’t falling as expected. Is this still to come in the new year? Most expensive – CBA 112.6% Least expensive – Lend Lease (LLC) 64.3% The CORE Watchlist has 4 (6) stocks trading above 100%, they are BHP CBA RIO WOW lowest number ever is 0. While 12 (8) are trading below 85% (highest 18). ALL CPU GMG LLC MQG NEC NXT ORA ORG RMD SEK STO (Figures in brackets is last Not So). Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 16 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 8. ALL current price $30.85 Broker range $40.50 to $43 ANZ current price $23.79 Broker range $25.50 to $30 CPU current price $25.93 Broker range $28 to $40.25 CSL current price $285.92 Broker range $312.20 to $340 GMG current price $17.10 Broker range $20 to $24.10 LLC current price $7.11 Broker range $8.74 to $13.40 MQG current price $166.10 Broker range $172 to $215 NEC current price $1.86 Broker range $1.91 to $3.20 NXT current price $8.78 Broker range $11.75 to $14.00 ORA current price $2.91 Broker range $3.40 to $3.95 ORG current price $7.08 Broker range $7.83 to $9 RMD current price $31.04 Broker range $32.50 to $38.50 SEK current price $20.32 Broker range $20.70 to $34 SHL current price $29.56 Broker range $31.30 to $38.60 STO current price $7.13 Broker range $8.60 to $10 WBC current price $23.28 Broker range $23.60 to $30 Added MQG NEC RMD SEK Removed Banking Index 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 increased from 96% to 96.2%. Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is for increased dividend payments and still very attractive yields. PLUS FRANKING. FY 22 % FY 23 % FY 24 % ANZ 146.0 6.14% 157.5 6.62% 162.8 6.84% CBA 385.0 3.66% 435.3 4.13% 453.2 4.30% NAB 150.2 4.96% 171.3 5.66% 174.2 5.75% WBC 125.0 5.37% 144.8 6.22% 150.0 6.44% MQG 622.0 3.74% 636.4 3.83% 664.6 4.00% Updated to include 2024 for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year. FY22 cps % FY23 cps % FY24 cps % BHP 451.00 9.96% 318.40 7.03% 297.6 6.58% RIO 727.17 6.42% 724.33 6.40% 698.8 6.17% Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS). Other Indicators (changes since last Not So) – US VIX Index decreased from 22.55 to 22.42 Trading range is likely to be 17-28. Over the last 25 years, market bottoms have seen VIX reach a minimum of 48. We are still waiting for this event! – Iron Ore decreased from $110.30 to $109.20. Was below $80 last month. ALL-TIME HIGH of $237.57. Av expected for 2023 has increased to $102.50 – Copper decreased from $3.87 to $3.74 Shortage is expected next year. It hit an ALL-TIME HIGH $5.03 at the start of the Russian invasion. – Gold decreased from $1821 to $1799 Climbed above $2000 at the start of the Russian invasion. Record high $2063. – AUD/USD increased from 68.4c to 66.47c. – USD/CNY increased from $6.96 to $6.98. Lowest $6.31 Highest in recent years $7.35 China gaining on re-opening talk. – Asian markets – DOWN – US 10 year Bonds increased from 3.49% to 3.68%. Inflation rolling over may see lower rates. The recent high is 4.23% (8 year high). US 30 year Bond decreased from 3.41% to 3.74% The highest level was 4.27%. US Federal Reserve maybe raising rates by 0.5% at next meeting. Plus BOND selling of $95bn per month (QT). The US 2 year rate has increased from 4.2% to 4.28% (4.88%, highest since 2007). The gap between the 2 yr and 10 years an inverse -0.6%. It was -0.71% but still inverted, which historically has suggested a recession. Widest inverse gap is -0.83%. This is the most it has been inverted in 42 years. – German Bonds increased from 1.93% to 2.21%. 2.43% highest in eight years – Japanese Bonds increased from 0.247% to 0.388% 0.388% highest in many years. Widened the range to 0.5% Japan had highest inflation read for some years last month. – Aussie Bonds 10 year Bonds increased from 3.37%to 3.73%. Recent high is 4.21% – Other Aussie Bonds 1 year 3.28% 2 year 3.29% 4 year 3.36% 5 year 3.43% 15 year Bonds 3.99%. The yields have continued to flattening across the curve. Very close to inverting with the cash rate now at 3.1%. – Oil prices increased from $75.23 to $75.50 on weakening global demand and Russian $60 cap. – Tungsten – Baltimore & Rotterdam $345-$350 mtu. China $325-$335mtu. This week & next week Last “Not So” opened in 6 Aust states (excl NT ACT Tas), US 4 states (California, Massachusetts Colorado South Carolina) & Sweden. This week – Finishing jobs and reviewing investment strategy Next week – Holiday – hoping cricket goes for more than 2 days. Office closing for Christmas – Friday December 23, re-opening Tuesday January 3rd 2023 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.au maddyl@provincialwealth.com.au |
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