| Top Stories Tuesday, 27 June 2023, saw the ASX 200 gain 40 points to close at 7118. This is the first rise in 5 days and continues market trading in a range of 7000 to 7400, which started in March. We are back in positive territory for the month. At this stage, we are looking at a positive financial year as 30/6/22 finished at 6568; however, this was a dip as the market had spent most of FY22 above 7000. The Russian mutiny could have been an interesting event for markets, but it was over in 36 hours (not sure Belarus is a safe haven from the KGB). Hopefully, it provides Ukraine with an advantage, which will see the war over sooner than later. If that were to occur, it would undoubtedly be a positive for markets and the world economy as the rebuild will be significant. More economic data is coming this week, with tomorrow’s Aust monthly inflation number and Thursday’s US GDP. We are seeing a slowing economy, but inflation is still higher than desired, and wage growth is partly fuelling this, so more rate hikes are likely. Citigroup and Morgan Stanley are predicting 0.5% higher, with the end rate being 4.6%. We (the Provincial Wealth investment committee) believe a cautious approach has been and still is required until Central Banks stop raising rates as they haven’t controlled inflation YET. So crosswinds persist with some caution. Importance of diversification “Spreading your eggs into different baskets” is a term we learn early in life. In financial planning, we call it asset allocation or risk profile. It’s essential to have a range of investments, as no asset always performs well. The chart below shows the main asset classes; – Cash – Fixed Interest – Australian and International – Property – Australian Listed Property (REITS) – Shares – Australian and International & Smaller companies The chart shows the performance of the different assets over the last ten years. You can see it always changes. The best performers over that period have been Small companies, International Shares & Australian Listed Property (three times each). Interestingly Australian Shares haven’t been the best in any one year, and Global shares have been better in eight out of 10 years. On the other end, Cash is the worst performer in 5 years. So, having a range of assets is essential as this provides a better return over time, as predicting the future is difficult at the best of times.  Home town bias To continue with the diversification theme. The chart below shows the percentage of the portfolio invested in the home country. For example, Canadians invest 59% of their shares in Canadian shares, representing only 3.1% of the Global Index. It’s even worse in Australia as we have 66.5% of our shares in Australian shares, compared to 1.9% of the global index. There are certainly some advantages to investing in your own country’s market. 1. Knowledge of the company. 2. Tax-advantaged dividend (Aust only) 3. Certainty dividends (knowing when they are paid). 4. Understanding political risk. 5. Avoiding currency risk 6. Perceived nationalism However, investing to increase return and better manage risk is not just a noble idea by supporting your domestic economy. It’s about balancing the risk and return outlooks globally, mainly where higher growth opportunities exist in other markets. Over the last 5, 10 and 20 years The US NASDAQ has gained 73% over the last five years, 274% in the previous ten years and 711% over the last 20 years. The Global Index (MSCI) has gained 34%, 87% and 226% over the same periods. The Aussie (ASX200) has gained 18%, 44% and 136% over the same periods.  Artificial Intelligence (AI) In recent months AI excitement has flowed into the share market in particular the US Nasdaq (NDQ). As we have discussed before we like to invest in future investment themes which includes Cybersecurity (HACK) and Robotics and AI (RBTZ). Below is some commentary from Betashares regarding the performance of HACK, RBTZ & NDQ for May. HACK: up 13% in May With all the excitement about what might be possible with AI, naturally there is also concern. Experts predict the technology will lead to a new arms race in the cybersecurity industry, with both hackers and those trying to stop them benefiting from its use. Either way, investors are betting that it will lead to a surge in demand for the cybersecurity industry, allowing valuations to surge over the month for the companies best-taking advantage of the trend. Broadcom Inc (+31.69%) was the biggest contributor after it announced a new multi-billion dollar deal with Apple to develop 5G radio frequency components in the US. Cloudflare Inc (+50.10%) soared after announcing a ChatGPT plugin to assist developers on its platform, while Palo Alto Networks (+19.43%) touted plans to deploy its own large language models (LLMs) within a year. RBTZ: up 12% in May Unsurprisingly, Betashares’ very own Robotics and Artificial Intelligence Fund also rode the AI wave in May, leading it to a 6-month gain of 33.95%. Nvidia (+39.23%) led the gains in the fund and has turned into the poster child for the AI craze. The company shot up 25% in a day after announcing quarter revenue forecasts that were more than 50% higher than investors had expected, and one day later its market cap crept above US$1tn, becoming the first chipmaker and only the 9th company ever to reach the milestone. The company produces Graphical Processing Units (GPUs), used in computing to perform intensive tasks. For much of the company’s life their main use was in computer gaming, then more recently to mine crypto, and now investors are realising their capabilities to perform the complex calculations required in AI. For example, UBS estimated that it took 10,000 Nvidia chips to produce ChatGPT6. The other top contributors for the month were C3.ai (+129.28%) and Dynatrace Inc (+23.15%). C3.ai develops artificial intelligence platforms for businesses, and Dynatrace uses the technology to monitor companies’ software infrastructure to find bugs and improve efficiency. NDQ/HNDQ: up 10% in May While AI wasn’t the only growth driver for the Nasdaq 100 in May, it certainly played a part. The majority of gains came from the big tech names, who are making up an increasingly concentrated part of the index and the US stock market as a whole. Nvidia was the biggest contributor, followed by Microsoft (+9.38%) and Alphabet (Class A +16.89%, Class C +16.41%). While those certainly aren’t pure-play AI names, the big tech companies have been making big investments in the space with Microsoft’s ChatGPT and Google’s Bard competing fiercely to take early market share in the space. Both companies have announced their chatbots will be integrated into their respective search engines, a space that Microsoft has traditionally struggled in. Outside of AI, the Nasdaq 100 was supported by the macro developments that continued to unfold. US recession fears and the associated hopes that the Federal Reserve would soon be forced to cut rates (or at least stop hiking) encouraged investors back into growth, while they continued to find security in large cap tech amongst continued banking stress and fears over the US debt ceiling. NDQ slightly outperformed HNDQ over the month, as the Aussie Dollar edged lower due to soft data coming out of China. Bank Interest rates Macquarie has lifted their At Call Accelerator account to 4.1%. The transactional CMA is still at 2.5% Below is an updated check of term deposit rates. 3 mths 6 mths 12 mths 24 mths ANZ 3.00% 3.45% 4.60% 3.95% CBA 3.00% 3.50% 4.00% 4.00% NAB 3.00% 3.55% 4.60% 4.00% WBC 3.00% 3.30% 3.95% 4.00% St G 3.05% 3.35% 4.00% 4.05% Bendigo 3.00% 4.05% 4.75% 3.35% AMP 4.60% 4.75% 5.00% 4.95% MQG 4.75% 4.90% 5.00% 3.90% Term deposit rates are probably not far from reaching a plateau as the 2 year rates are below the 1 year rate. This suggests cash rates will be lower in 1- 2 years. Financial Planning Snippets – The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate). – Super Guarantee (SGC) for employees increases to 11% from 1/7/23 – 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. – Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020). Other Stories – Citigroup suggests a US recession is still likely, and the end of 23 target is 4000 (currently 4329). However, then expect a rebound to 4400 by June 24. – Sunrice (SGLLV) announced an increased dividend of 40c, giving a total of 50c of the year or 7.58% plus franking. Broker Target Price changes – Ord Minnett Sonic Health (SHL) increased from $32 to $34 Morgans Morgan Stanley Macquarie BHP decreased from $52 (highest broker) to $49 JB Hi-Fi (JBH) decreased from $42.40 to $41.60 Rio Tinto (RIO) decreased from $122 to $115 Wesfarmers (WES) decreased from $52.80 to $52 Woolworths (WOW) increased from $39.50 to $40 Bell Potter/Citigroup BHP increased from $43 to $44 UBS Tracking changes for 2023 Upgrades 174 Downgrades 165 (we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks). Today’s ASX sector Movements Best – REITs +2% (Listed property) Worst – Communications -0.6% 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 increased from 91.05% to 91.30%. It was 90.92% yesterday. Historically, if the index is below 90% then it usually a good entry point. Overall Earnings Per Share (EPS) FY23 decreased from 4.59% to 4.21% FY24 increased from 8.27% to 8.71% Most expensive – CBA 109.9% Least expensive – Lend Lease 68.2%. The CORE Watchlist has 5 (3) stocks trading above 100%, they are BHP CBA COL SHL WOW, lowest number ever is 0, highest 9. While 7 (6) are trading below 85% (highest 18) lowest for a while is 3. ALL LLC NEC ORI RMD SEKSTO (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). 11 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5. ALL current price $37.42 Broker range $41.20 to $46 ANZ current price $23.12 Broker range $24 to $31 CSL current price $279.05 Broker range $315 to $340 LLC current price $7.13 Broker range $8.03 to $14.45 MQG current price $174 Broker range $175 to $215 ORA current price $3.23 Broker range $3.50 to $3.80 ORI current price $14.81 Broker range $16.50 to $20.30 RMD current price $31.92 Broker range $34.70 to $40.50 SEK current price $21.51 Broker range $22.80 to $33.30 STO current price $7.32 Broker range $8 to $12 TLS current price $4.29 Broker range $4.50 to $4.75 Added Removed WBC 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 94.8% to 95.3%. ANZ is the cheapest at 87.3% and WBC 89.6% 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 6.31% 162.5 7.03% 163.0 7.05% CBA 385.0 3.91% 436.7 4.44% 445.5 4.53% NAB 151.0 5.86% 169.3 6.58% 170.0 6.60% WBC 125.0 5.95% 141.7 6.74% 143.7 6.84% MQG 622.0 3.57% 738.0 4.24% 696.6 4.00% Dividend expectations have been cut 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 10.00% 284.60 6.31% 272.6 6.04% RIO 702.00 6.12% 685.67 5.98% 709.0 6.18% Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS). Other Indicators (changes since last Not So) – US VIX Index increased from 12.91 to 14.25. Bounced off 52 week low. Suggesting US markets are calm. – Iron Ore increased from $111.305 to $108.85. Still some talk of Chinese stimulus ALL-TIME HIGH of $237.57. Av expected for 2023 is $104.20 – Copper decreased from $3.87 to $3.81 – Gold increased from $1926 to $1936. Losing lustre Record high $2063. – AUD/USD increased from 66.95c to 67.12c. – USD/CNY increased from $7.18 to $7.21 Lowest $6.31 Highest in recent years $7.35 – Asian markets – MIXED, but China up strongly. – US 10 year Bonds decreased from 3.78% to 3.74%. Rates moving higher as more rate hikes may be coming, if inflation remains sticky. 4.23% (8 year high). US 30 year Bond decreased from 3.86% to 3.83% The highest level was 4.27%. US Federal Reserve maybe raising rates above 5.25%. The US 2 year rate has decreased from 4.79% to 4.69% (5.08%, highest since 2006). The gap between the 2 yr and 10 years an inverse -0.95%. It was -1.01% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.1%. This is the most it has been inverted in 42 years. – German Bonds decreased from 2.39% to 2.33%. 2.74% highest since 2008 – Japanese Bonds decreased from 0.42% to 0.37% 0.508% highest in many years. – Aussie Bonds 10 year Bonds remain at 3.94%. Recent high is 4.21% – Other Aussie Bonds 1 year 4.32% 2 year 4.12% 4 year 3.88% 5 year 3.85% 15 year Bonds 4.08%. The yield moved higher on expectations of more rises coming. – Oil prices increased from $67.48 to $69.87. expecting lower demand – Tungsten – Baltimore & Rotterdam remained at $340 – $345 mtu. China $325 to $340mtu. EQ Resources (EQR) first blast of mining ore. Starting to process hard rock (waited a long time for this). 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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