Posts by: Julia

The NotSo Daily Bulletin No. 378

 

Top Stories  
Today, March 18, the ASX fell for the 2nd day in a row to finish at 6746.

We are up 1% for the month, but it seems we are back in a trading range where we move between 6650 and 6900. This has been the case for much of this year, even though we had a good reporting season, a positive economic recovery (drop in the unemployment rate) and likely global stimulus in a post-vaccine world.

So we are likely to break on the upside, assuming the Bond traders don’t want to take on the Central Banks. 

Got to go. Footy is back. 

We are still cautiously Optimistic.   

Annual Advice Agreements (AAA) – Existing clients
These agreements will replace the 2 YEAR OPT-IN forms and the Fee Disclosure statements. The AAA is mandatory for all ongoing clients and the legislation provides little leniency regarding the timeframe of the agreements.

We will send these agreements out each year, 1-2 months before they are due to expire. IF THEY ARE NOT RETURNED BEFORE THE DUE DATE WE HAVE TO TERMINATE OUR ONGOING SERVICES AND FEES which may mean a new statement of advice (SOA) and additional cost.

Should you have any questions, please contact Chris Pyle.   

US Federal Reserve – rate forecast unchanged
The US Federal Reserve (Fed) met overnight, as the market was expecting an update on when the US Fed was likely to raise interest rates. The Fed had previously said not before 2024. 

The market didn’t believe in this and moved the Bond rates higher to tempt the Fed to decide. However, the Fed held firm and re-stated their plan of waiting until 2024. 

There is a key change in strategy from the old Fed to the current Fed. Previously, they were trying to regulate inflation by being “in front of the curve”, meaning they would increase rates on the prospect of inflation, which would then become a headwind for any economic recovery. However, in the last 20 years, inflation has been materially low, so the Fed wants to see some inflation before acting, therefore moving to be “behind the curve” as they don’t want to stop the recovery from the Pandemic.  

Markets are having trouble with this change. It could lead to bouts of volatility as market players try to 2nd guess the Fed, especially now with the economic data starting to improve and the vaccines rolling out. Below is a chart showing the 10 year Bond rate rising above the Cash rate. It indicates that if the Fed is holding rate firm for an extended period of time, then Bond rates aren’t likely to push much higher, which means there could be a rally back into Equities, especially those providing profit growth and a dividend.   
   
All-Time Highs
The Australian market is still 5% below the All-Time Highs (ATH) peak before the pandemic.

However, the US markets continue to hit new ATH, with the Dow Jones hitting a new one last night. While ATH can be a sign of a pricey market, it’s not always a sign of an overpriced or a bubble market, as the chart below shows that ATH are reached most years. Over the last 40 years (since 1980), ATH have been reached in 27 years which suggest the market continue to grow over time as company profits and returns increase. In fact, since 2013, there have been 260 new ATH established. 

Therefore new ATH’s are part of the journey. Let’s hope for many more! 
   
Australian Market 

CITIGROUP’s (Citi) research update on the Aussie Market
The Australian sharemarket continues to lag global peers due to a lack of exposure to Growth industries, despite successfully navigating the pandemic so far. Australia is currently trading at  PE 18.0x compared to the US at PE 21.9x.

At a sector level, Citi is positive on resources, building materials and retail. In resources, they expect elevated commodity prices, strong cash flow, and high dividends to continue. Conversely, building materials and retail upside come from underperforming the market YTD despite earnings upgrades. Citi expects earnings growth and the utilisation of healthy balance sheets for dividends and M & M&A to be the main source of upside for the year ahead.

Australian market underperforms due to lack of Growth — The Australian sharemarket continues to lag behind its global peers, particularly the US. This underperformance is driven by the structural differences in the two markets. In contrast, Australia lacks the same exposure to technology and health care stocks but over indexes in resources and banks.

The Australian share market, trading at 18x 12 month forward PE, is above its long-term average but consistent with a low-interest-rate environment. Banks have re-rated in the past three months, but resources are below their long-term PE relative.

Drivers of sector performance mixed — Strong year-to-date performance for resources has been driven by upward revisions to FY22 earnings. Banks performance has been driven in equal parts by both earnings upgrades and a re-rate to the sector. Conversely, strong earnings revisions have been offset by a de-rating in building materials, on concerns about a weaker rebound in infrastructure and multi-residential, despite strong detached housing.

Citi’s preferred sectors — While the market is near fair value in Citi’s view, they see the potential for earnings growth; they expect resources and banks to be the market’s key drivers in the next twelve months. Additionally, many companies are sitting on very healthy balance sheets. Dividends, mergers and acquisitions will be key thematics creating upside risk.

The chart below shows the different sectors of the ASX market and how they have performed since 2008.

The best performer has been growth sectors led by health care and technology. This is starting to wane from the rising Bond rates. This is probably a dip rather than a structural change. 

Resources and Banks have started to move higher after having a period of under-performance. The yield stocks (utilities, transport property trusts) have a poor time with the pandemic and rising bond prices. While there has been plenty of talk about switching from Growth to Value stocks, this hasn’t appeared in the Value stocks (apart from Resources and Banks which are considered Value sectors). 
  
   

Global Market Summary 

Morgans provided a summary of the market position. 

US equities dipped in late February after the 10-year US Treasury note yield rose above the S&P 500 dividend yield, erasing the stock market yield’s advantage and driving weakness in equities.

The NASDAQ also saw a sharp fall. Technology stocks are particularly sensitive to rising yields because their value rests heavily on future earnings, which are discounted more deeply when rates go up.

While bond market volatility is disconcerting, the move up in (depressed) bond yields is a positive signal around economic growth, which is ultimately positive for markets.

Other tailwinds are Joe Biden’s $1.9 trillion economic aid package, the latest US economic data pointing to a solid consumer recovery and better than expected earnings for cyclical companies both overseas and domestically.

The S&P500 finished 2.6% higher while the ASX200 finished up around 1% in February.  

Other Stories   
– $25.8bn of dividends will be paid to ASX shareholders in the coming weeks. 
– The Australian unemployment rate fell unexpectedly to 5.8% from 6.3%. The market was expecting 6.3%   

Broker Target Price changes 

Goldman Sachs
BHP increased from $47.50 to $53.40
Rio Tinto (RIO) increased from $114.60 t $118.80

Ord Minnett/JP Morgan 


Morgans


Morgan Stanley
Computershare (CPU) decreased from $16.50 to $16.30
Nine Entertainment (NEC) increased from $3.42 to $3.50

Macquarie


Bell Potter/Citigroup
Goodman Group (GMG) increased from $20.50 to $21  

Today’s Sector Movements
Best –    Materials +0.1% 
Worst –  Healthcare -1.7%   

Core Watchlist Index 
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 92.01% to 91.63%.  

Overall Earnings Per Share (EPS) 
FY21 Increased from 25.76% to 25.79% 

Most expensive – Seek.com (SEK) 115.8%.   
Least expensive – Next DC (NXT) is the cheapest at 75.1%. NXT is where “cloud computing” is stored.  

The CORE Watchlist is still mixed with 2 (3) stocks trading above 100% while 6 (3) are trading below 85% (AMC BXB COL NEC NXT & ORG)

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $14.67    Broker range $17.00 to $19.00
AMP current price $1.41      Broker range $1.45 to $1.80
BXB current price $9.89      Broker range $11.70 to $13.84
COL current price $15.57     Broker range $17.30 to $20.70
CSL current price $256.09   Broker range $261 to  $310
NEC current price $2.87      Broker range $3.25 to $3.80
NXT current price $10.64     Broker range $13.50 to $14.80
ORG current price $4.63      Broker range $4.76 to $6.85
ORI current price $13.40      Broker range $13.60 to $16.20
SHL current price $32.35     Broker range $33 to $39.70
WOW current price $38.75   Broker range $40.65 to $44.50
WPL current price $24.92     Broker range $25.91 to $34.10
  AMP added  

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 is indicating the Banks are fully priced. 

The Banking Index decreased from 100.3% to 99.6%.

Banks have continued to rally on the back of rising bond rates which is good for them. ANZ is up 7.5% in March (market up 1%), CBA 5% NAB 5.6% and WBC 2.6%. 

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. SUMMARY                  FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.13% 127.5 4.53% 139.3 4.95% 149.0 5.29%
CBA 298.0 3.48% 337.5 3.94% 377.8 4.41% 385.3 4.49%
NAB 60.0 2.31% 106.5 4.09% 122.3 4.70% 132.0 5.07%
WBC 31.0 1.27% 115.3 4.72% 127.5 5.22% 137.5 5.63%
MQG  430.0 2.84% 475.2 3.14% 548.4 3.62% 609.4 4.02%  

Other Indicators 
US VIX Index decreased from 20.69 to 19.23. first time below 20 in a couple of weeks. Returning to near normal 
Iron Ore increased from $165.44 to $166.19.  Hit a nine-year high of $177.98. 
Copper decreased from $4.13 to $4.11. Near ten year high of $4.35. A good sign for a commodity boom!!  
Gold increased from $1724 to $1749. Bounced off 9 month lows. Record high $2063.
AUD/USD increased from 77.47c to 78.18c.  Some forecast 80c+
USD/CNY remained at  $6.50  The lowest point $6.45 in 2.5 years Asian markets – UP    
US 10 year Bonds decreased from 1.64% to 1.68%. Rates are rising again. Hit a low of 0.31%. A recent high of 1.69% The US 30 year Bond increased from 2.20% to 2.45% The highest level 2.47% for 18 months. 
German Bonds increased from -0.31% to -0.30%. Hit a low of -0.9%. Highest for some time -0.2%
Japanese Bonds decreased from +0.10% to 0.10%   
Aussie Bonds 10 year Bonds increased from 1.79% to  1.80%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.051% 2 year  0.10% 4 year 0.48% 5 year 0.77%. 15 year Bonds 2.17%. Global interest rates have moved slightly higher on inflation expectations.  
Oil price decreased from $66.14 to $64.19 US inventory levels higher than expected.  
Tungsten rose again from $263-$268mtu to $268-$275mtu.    

This week & next week 
Last “Not So” opened in 5 Aust states (missing ACT SA WA), US 3 states ( South Carolina California & Georgia) &  Singapore 

This week –  March reviews 

Next week –  March reviews 
    
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

The NotSo Daily Bulletin No. 376

 

Top Stories  
Today, March 10, saw the ASX rollercoaster continue after two positive days; the market dropped 57 points to close at 6714, which was slightly less than 61 points gained over the last two days.

We are still positive for the month, but the main drops came from banks and resources, which have been the positive areas of late.

The NASDAQ jumped after several down days on Wall St, so it was back to technology stocks hit late during to rising Bond rates. 

We need to note the US 10 year Bond rate is still lower than it was pre-COVID, so it isn’t a major concern given it’s still at 1.5%. Market traders are likely to get excited about the smallest moves as it gives them volatility to trade with, giving the finance media something to “scare the punters” with.

So, we still think this volatility will be a dip rather than a market changer. However, at the moment, the dips don’t seem to last long. 
We are still cautiously Optimistic.   

Investment Committee 

Kevin and I had our regular meeting this morning. 

We noted the following:

Economics 
– Global vaccines are providing economic confidence, but economies still require Govt support fiscal and monetary.
– Interest is being kept down by Central Banks. RBA saying not moving until 2024.
– Bond rates are starting to rise due to fear of inflation.
– Australian GDP grew faster than expected by 3.1%. Economic confidence at 11 yr high.

Markets
– Markets continue to be supported with liquidity and a lack of returns from fixed interest.
– Bond rates increasing have sparked some volatility as markets believe CB won’t hold off until 2024 before raising rates. The difference between 10 yr rates and cash are at their widest levels in some time. It’s likely to limit the 10 yr rather than force CB’s to increase rates. “Don’t bet against the Fed”. See charts below.
– Frothy parts of the market are coming off with Tesla down 37% this year and other non-profit techs and high priced IPO’s giving up ground.
– Rotation from growth to value with DOW hitting a new record high and the NASDAQ down 2% on the same day (Monday 8th)
– Valuations are above historic levels but so are interest rates. Relative valuations remain reasonable, with an economic recovery picking up as the Vaccine outlook improves.
– Still being selective as volatility likely to increase with the Bond rates moving.
– A successful reporting season has given a clearer view in Australia, better virus controls and strong business confidence.      
Annual Advice Agreements (AAA) – Existing clients
These agreements will replace the 2 YEAR OPT-IN forms and the Fee Disclosure statements. The AAA is mandatory for all ongoing clients and the legislation provides little leniency regarding the timeframe of the agreements.

We will send these agreements out each year, 1-2 months before they are due to expire. IF THEY ARE NOT RETURNED BEFORE THE DUE DATE WE HAVE TO TERMINATE OUR ONGOING SERVICES AND FEES which may mean a new statement of advice (SOA) and additional cost.

Should you have any questions, please contact Chris Pyle.   

Other Stories
– China iron ore imports rise by 2.8% for the first two months. 
– US warning companies about Chinese computer hacking following the recent attack on Microsoft. Looks like more money being spent on cybersecurity (HACK)
Macquarie changed the forecast for copper from 247k t global surplus to 226k t global deficit, mainly due to increased global manufacturing incl. increased electric vehicle demand.  They have lifted their copper price forecasts by more than 20% for the next 4 years.  Benefit BHP, RIO, OZL, SFR or MVR.
– US auctioning $38bn of US 10 year notes at 5am AEDT. If lacking demand it could send rates higher with knock-on effect into equity markets.   

Broker Target Price changes 

Goldman Sachs


Ord Minnett/JP Morgan 


Morgans


Morgan Stanley
BHP decreased from $48.05 to $47.50

Macquarie
BHP increased from $50 to $55 
Rio Tinto (RIO) increased from $135 to $142
Woodside (WPL) decreased from $28.25 to $28.20

Bell Potter/Citigroup

Today’s Sector Movements
Best –    Technology 3.2% 
Worst –  Materials -2.5%  

Core Watchlist Index 
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 91.29% to 91.13%.  

The CORE below 90% has shown in the past to be a good entry point to the market. 

Overall Earnings Per Share (EPS) 
FY21 Increased from 25.55% to 25.57% 

Most expensive – CBA 110.5%.   
Least expensive – Next DC (NXT) is now the cheapest at 73.6%. NXT had a good result and saw increases in the TP. For those who don’t know. NXT is where “cloud computing” is stored.  

The CORE Watchlist is still mixed with 4 (4) stocks trading above 100% while 6 (6) are trading below 85% (BXB COL NXT ORG SHL & TLS )

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $15.17    Broker range $17.00 to $19.00
BXB current price $10.11     Broker range $11.70 to $13.84
COL current price $15.45     Broker range $17.30 to $20.70
CSL current price $252.21   Broker range $276 to  $310
JBH current price $47.65     Broker range $48 to $55.10
NEC current price $3            Broker range $3.25 to $3.80
NXT current price $10.43     Broker range $13.50 to $14.80
ORG current price $4.50      Broker range $4.76 to $6.85
ORI current price $12.48      Broker range $13.60 to $16.20
SHL current price $30.55     Broker range $33 to $39.70
WOW current price $38.90   Broker range $40.65 to $44.50
WPL current price $24.96     Broker range $25.91 to $34.10
  AMP 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 is indicating the Banks are fully priced. 

The Banking Index decreased from 101.3% to 100.6%.


Banks have continued to rally on the back of rising bond rates which is good for them. ANZ is up 10% in March (market up 1%), CBA 7% NAB 7% and WBC 4%. 

Based on Monday’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.
   

FY20 % FY21 % FY22 % FY23 %
ANZ 60.0 2.09% 127.5 4.44% 139.3 4.85% 149.0 5.19%
CBA 298.0 3.41% 337.5 3.87% 377.8 4.33% 385.3 4.41%
NAB 60.0 2.27% 106.5 4.03% 122.3 4.63% 132.0 4.99%
WBC 31.0 1.25% 115.3 4.66% 127.5 5.15% 137.5 5.56%
MQG  430.0 2.90% 475.2 3.21% 548.4 3.70% 609.4 4.11%  

Other Indicators 
US VIX Index decreased from 24.66 to 24.03
Iron Ore decreased from $174.11 to $164.41.  Dropped 5.7% Hit a nine-year high of $177.98 last week. 
Copper decreased from $4.03 to $4.01. Near ten year high of $4.35. A good sign for a commodity boom!!  
Gold increased from $1705 to $1710. Bounced off 9 month lows. Record high $2063.
AUD/USD decreased from 76.99c to 76.76c.  Some forecast 80c+
USD/CNY increased from $6.50 to $6.51  The lowest point $6.45 in 2.5 years
Asian markets – MIXED    
US 10 year Bonds decreased from 1.58% to 1.54% Hit a low of 0.31%. A recent high of 1.61% The US 30 year Bond decreased from 2.30% to 2.25% The highest level 2.34% for 18 months. 
German Bonds decreased from -0.31% to -0.31%. Hit a low of -0.9%. Highest for some time -0.2%
Japanese Bonds increased from +0.11% to 0.12%   
Aussie Bonds 10 year Bonds decreased from 1.78% to  1.72%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.055% 2 year  0.11% 4 year 0.49% 5 year 0.77%. 15 year Bonds 2.07%. Global interest rates have moved slightly lower, but inflation expectations are still around.  
Oil price decreased from $67.42 to $63.50. 
Tungsten increased again from  $260-$265mtu to $263-$268mtu   

This week & next week 
Last “Not So” opened in 5 Aust states (missing Tas ACT SA), US 2 states ( South Carolina California) &  Singapore 

This week –  March reviews 

Next week –  March reviews 
    
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

The NotSo Daily Bulletin No. 373

 

Top Stories

Today, February 26, saw the ASX have a large drop of 161 points or 2.4% to finish the month at 6673. The month of February was positive up 1% but it was well above 4% a week ago. Interestingly, this is the 3rd Friday in a row where the market has a reasonable drop. 

We have been mentioning the rising Bond rates and whether it would or not cause an equity sell-off. Well, we didn’t have to wait too long as the US markets fell from recent highs due to rising rates. 

The 10 year Bond rates are still below 2%, so there is little to really fear, but market sentiment is probably looking for a volatility event as markets have been lacking some in recent months. 

The Bond market saw rates rise on the “fear” of rising inflation. The market is fearful of inflation, as have Central Banks in the past, and they have raised rates in front of inflation happening.
 
However, this time Central Banks have said they want to see inflation and are happy for inflation to be even higher than the 2-3% target. US Federal Reserve Chairman Powell said during the week; he’s comfortable with rising Bond rates.
 
So, I think this volatility will be a dip rather than a market changer. However, not sure whether it will last a day, a week or a month.

We are seeing more weakness in the COVID winners which are the technology areas. This is likely to provide a good entry point for medium-term growth as the global recovery story isn’t being unwound by rising rates. The rates are rising because of economic recovery.     

Annual Advice Agreements (AAA)
These agreements will replace the 2 YEAR OPT-IN forms and the Fee Disclosure statements. The AAA is mandatory for all ongoing clients and the legislation provides little leniency regarding the timeframe of the agreements.

We will send these agreements out each year, 1-2 months before they are due to expire. IF THEY ARE NOT RETURNED BEFORE THE DUE DATE WE HAVE TO TERMINATE OUR ONGOING SERVICES AND FEES which may mean a new statement of advice (SOA) and additional cost.

Should you have any questions, please contact Chris Pyle.   

Market Outlook 

AMP’s Shane Oliver provided his weekly market outlook. As noted in yesterday’s Not So regarding the Bond sell off, Shane has been close to the market movements.
– Shares remain at risk of a further short-term correction after having run up so hard in recent months – with the back up in bond yields possibly being a trigger. But looking through the inevitable short-term noise, the combination of improving global growth helped by more stimulus, vaccines and still low interest rates augurs well for growth assets generally in 2021.
– We are likely to see a continuing shift in performance away from investments that benefitted from the pandemic and lockdowns – like US shares, technology and health care stocks and bonds – to investments that will benefit from recovery – like resources, industrials, tourism stocks and financials.
– Global shares are expected to return around 8% this year but expect a rotation away from growth heavy US shares to more cyclical markets in Europe, Japan and emerging countries.
– Australian shares are likely to be relative outperformers helped by: better virus control enabling a stronger recovery in the near term; stronger stimulus; sectors like resources, industrials and financials benefitting from the rebound in growth; and as investors continue to drive a search for yield benefitting the share market as dividends are increased resulting in a 4.5% grossed up dividend yield. Expect the ASX 200 to end 2021 at a record high of around 7200.
– Ultra-low yields and a capital loss from rising bond yields are likely to result in negative returns from bonds this year.
– Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield but the hit to space demand and hence rents from the virus will continue to weigh on near term returns.
– Australian home prices are likely to rise another 5% to 10% this year and next being boosted by record low mortgage rates, government home buyer incentives and the recovery in the jobs market but the stop to immigration and weak rental markets will likely weigh on inner city areas and units in Melbourne and Sydney. Outer suburbs, houses, smaller cities and regional areas will see relatively stronger gains in 2021.
– Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
– Probably now taking the $A up to around $US0.85 by year end.  

Profit results 
The profit results have finally been delivered and the overall position is quite positive and better than expected.

On February 8 the ASX was 6881. Today it closed at 6834 or 0.6% lower, however this amount may be due to some trading without their dividend. 

Over the same time frame, the CORE Watchlist was trading at 96% of target prices. This has now dropped to 91%. This shows that over the time of the reporting season, the market has virtually moved side but the target prices have increased 5%. Additionally, the profit expectations have increased by nearly 10% which provides fundamental support and suggests the Aussie market can cope with higher bond yields.  

 The CORE Watchlist stocks reported their profits on the following dates;

Jan 29 Resmed (RMD) – the quarterly result was up 12% 
Feb 10  CBA Profit dropped 20% but increased dividend to $1.50. Price -1% 
Feb 11
AMP Profit dropped 33% No dividend Price -10%
Telstra (TLS) Profit dropped 2.2% maintained 8c dividend. price +2.5%  – Transurban (TCL) dropped to a loss of $448m given the reduction in COVID traffic. Price -0.67% 
Feb 15
JB Hi Fi (JBH) up 86% to $317m Dividend doubled to $1.80. Price up 3%
Feb 16
BHP $3.8bn but this was after a one-off write-down of $2bn from coal assets. Dividend US $1.01 which is up 55%. Price increased 2%
Brambles (BXB) profit $465m up 7% Dividend 13.08c Price up 1.5%
Feb 17
Coles (COL) $560m up 14.5% Dividend 33c up 10% Price down 5%
Rio Tinto (RIO) results after market. Profit $9.7bn up 22% for full year. Record dividend including special of $US4.02.  
Feb 18
CSL Profit 1.8bn up 44% Dividend US$1.04 up 9%. Price 2.79%
Crown (CWN) net loss & no dividend. Price up 0.41%
Origin Energy (ORG)  underlying profit of $224m Dividend of 12.5c 0% franking. Price Down 2.17%
Wesfarmers (WES) Profit $1.41bn up 25% Dividend 88c up 17.3% Price up 0.63%
Woodside (WPL) underlying profit $447m (large write down) Dividend US$0.12. Price Down 2.39%
Orora (ORA) Profit $91m  up 19% Dividend 6.5c 0% franking, up on last year. Price up 5.5%
Sonic Health (SHL) Profit $678m up 166% on 18m COVID tests, ex-COVID revenue down 1%. Dividend 36c up 6%. Price up 1.16% 
Feb19
Goodman Group (GMG) profit $615m up 16% Dividend 15c remained the same. Gearing dropped to 4.8%. 
Feb 22
Lend Lease (LLC) profit $205m down 26%. Dividend 15c  50% franking ex-Feb 26. Still $100bn+ in work pipeline. Price up 2.8% 
Feb 24
Woolworths (WOW) profit $1.1bn up 16% Dividend 53c up 15%. ex Mar 4. Price up 1%. Nine Entertainment (NEC) profit $178m up 50%. Dividend 5c 100% franked up 100%. Price up 6%.  
Feb 25
NextDC (NXT) – the cloud computer storage facility. $3m loss, mainly depreciation. $66m before EBITDA. which is up 20%. Upgraded FY21 guidance.  

Not all companies report at this time of year.      Other Stories   
AMP and US-based Ares Management enter into a joint venture. The market liked it with AMP up 10% today.    

Broker Target Price changes 

Goldman Sachs
NextDC (NXT) increased from $13.20 (lowest broker) to $13.50 (still lowest broker)

Ord Minnett/JP Morgan 

 
Morgans
NXT increased from $13.89 to $14.02

Morgan Stanley



Macquarie


Bell Potter/Citigroup

Today’s Sector Movements

Best –  Materials +1.7% 
Worst Industrials -0.7%   

Core Watchlist Index 

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 91.76% to 89.63%.  The CORE has fallen below 90% for the first time since 2 October when the ASX was at 5792 and Trump caught COVID. 

The CORE below 90% has shown in the past to be a good entry point to the market. We will have a look next week.  


Overall Earnings Per Share (EPS) 
FY21 26.42% 

Most expensive – CBA 104.2. Seek was the most expensive but after their results the market sold it off. It shows the analysts were right again.  
Least expensive – Next DC (NXT) is now the cheapest at 78%. NXT had a good result and saw increases in the TP. For those who don’t know. NXT is where the “cloud computing” is stored.  

The CORE Watchlist is still mixed with 4 (4) stocks trading above 100% while 5 (6) are trading below 85% (AMC BXB COL NXT & ORG)

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $14.24    Broker range $17.00 to $19.00
ANZ current price $26.17     Broker range $26.50 to $31
BXB current price $9.90      Broker range $11.70 to $13.84
COL current price $15.33     Broker range $18.00 to $20.70
CSL current price $262.59   Broker range $276 to  $310
JBH current price $43.41     Broker range $50 to $55.10
NAB current price $24.64    Broker range $24.75 to $28.73
NEC current price $2.87       Broker range $3.25 to $3.80
NXT current price $11.20     Broker range $13.50 to $14.80
ORG current price $4.50      Broker range $4.76 to $6.85
ORI current price $12.56      Broker range $16.50 to $19.00
SHL current price $31.73     Broker range $36 to $39.70
WBC current price $23.82    Broker range $24.50 to $27.50
WOW current price $39.40   Broker range $40.65 to $44.50
WPL current price $25.43     Broker range $25.91 to $34.10
 
AMP removed
ANZ JBH NAB WOW added  

Banking Index 
Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 is indicating the Banks are fully priced. 

The Banking Index decreased from 97.6% to 95.4%.

Over the month, the index started at 97.9%, so it has slightly fallen, however, the target prices have been moved higher as ANZ NAB & WBC are up 10.4  4.7% and 12.7% respectively. While CBA traded ex-dividend and fell 2.3% for the month.  

Based on yesterday’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

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.24% 128.3 4.79% 139.0 5.19% 148.7 5.55%
CBA 298.0 3.56% 337.5 4.03% 377.5 4.51% 385.3 4.60%
NAB 60.0 2.39% 106.5 4.23% 122.0 4.85% 131.7 5.24%
WBC 31.0 1.27% 117.0 4.80% 127.2 5.22% 137.2 5.63%
MQG  430.0 2.96% 475.2 3.27% 548.4 3.77% 609.4 4.19%  

Other Indicators 
US VIX Index increased from 21.34 to 28.89. That’s a 35% increase.   
Iron Ore decreased from $172.05.05 to $171.10. . Hit a nine-year high of $176.45. 
Copper decreased from $4.35 to $4.21. Near ten year high of $4.35. A good sign for commodity boom!!  
Gold increased from $1797 to $1766. Record high $2063.
AUD/USD decreased from 79.73c to 78.29c.  Some forecast 80c+
USD/CNY increased from $6.46 to $6.47 The lowest point $6.45 in 2.5 years
Asian markets – DOWN 2%   
US 10 year Bonds increased from 1.40% to 1.49% Hit a low of 0.31%. A recent high of 1.49% The US 30 year Bond increased from 2.27% to 2.29% (if this one start to rise, then it could provide inflation and volatility sign). The highest level for the 18 months. Volatility happened today. How long for?  
German Bonds increased from -0.31% to -0.20%. Hit a low of -0.9%. Highest for some time -0.2%
Japanese Bonds increased from +0.133% to 0.16%   
Aussie Bonds 10 year Bonds increased from 1.74% to  1.87%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.056% 2 year  0.12% 4 year 0.58% 5 year 0.84%. 15 year Bonds 2.24%. Global interest rates have moved higher over the week on more liquidity from US COVID funding and a growing expectation of inflation. 
Oil price decreased from $63.46 to $62.83. 
Tungsten remained at $250 to $255mtu.   

This week & next week 
Last “Not So” opened in 7 Aust states (missing NT) US 3 states ( Virginia, South Carolina & California) &  Singapore 

This week –  Back from Central NSW. 

Next week – Catching up!

    
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



The NotSo Daily Bulletin No. 370

 

Top Stories
Today, February 18, the ASX was flat to finish at 6886. This was after reaching an 11.5 month or pandemic high of 6912 on Tuesday. 

Profit season is full-on this week with most profits being better than expected and providing some comfort to investors. Additionally, the 3rd quarter bank results have been great which has seen WBC up 15% ANZ up 11% MQG up 11% & NAB up 8% this month. Other good results from BHP up 11% and RIO up 16% on record dividend payments. 

Tomorrow we will provide more detail regarding some of the dividend opportunities.   

Early in the economic cycle
Research from Morgan Stanley (MS) today stated we are still early in this current economic cycle. This means the best, in economic terms, is yet to come. 

Some of the observations made
1) The health of businesses will continue to improve from here as profits return and grow again.The following sectors are best poised to benefit going forward: Financials, Energy, Consumer Discretionary, Consumer Durables, Healthcare and Industrials.

2) Long term interest rates will continue to rise. Whether at a fast or slow pace, they will increase as the economy improves, resulting in a steeper yield curve. For the critical US 10-Year Treasury yield, Morgan Stanley forecasts this rate will reach 1.45% by the end of 2021 (~1.3% today). In Australia, they have already exceeded our year-end target of 1.2% for the Australian Government 10-Year Bond.

3) Corporate default rates should remain low, so credit risk should remain muted. Lending money to lower quality companies in return for higher yields might not be as risky compared to if we were towards the end of the economic cycle.

4) These forecasts are underpinned by the substantial amount of monetary and fiscal stimulus already injected into the global economy.


Looking at Australian shares
1) Long duration, defensive securities like utilities, airports and toll roads are our least preferred companies.

2) Dividends are likely to surprise during this reporting season due to capital raising activity during Covid.

3) The worse seems to finally be behind the Australian banks. MS see limited opportunity for robust profit growth, the major banks’ dividends look poised to return.

4) The Resources sector for its exposure to a recovering global economy. 

5) The like fiscal winners. These companies help Australia deliver the government’s infrastructure pipeline of works or directly benefit from the Australian government. DOW, BLD, SGP, REA, WES.  

Rising Bond Yields 
Global equity markets have continued to move higher with the US again hitting record highs, Japan hitting three-decade highs and the ASX pushing towards 7000 and near all-time highs. 

At the same time, global Bond rates (10-year rates) have also moved higher by 0.25% in the last couple of weeks to around 1.3% in the US and 1.4% in Aust. The rise has been due to the expectation of an economic recovery POST COVID vaccines and higher inflation. 

Equity valuations have increased (PE ratios) due to the lower interest rates. Still, the latest move in Bond rates higher has some market strategists asking whether we are likely to see an equities sell-off. 

While we can never discount a sell-off (predicting future is difficult at the best of times), the chart below shows a history of the US Equity Market Valuations and Bond Yields over the last 160 years. 

There are a couple of interest points to note;

1. Interest rates have NEVER been lower than they are today. 
2. Global Central Banks led by US Fed ECB & RBA are looking to keep short term interest rates down for an extended period of time (years) and allowing inflation to occur before raising rates.
3. The previous low for interest rates was during WWII (just below 2%). It took 10-15 years for rates to move to 3.5%. Like today, most of the world debt is owned by Governments.
4. There is still an expectation of large stimulus programs by Governments to be announced in the POST VACCINE world. Therefore Governments and Central Banks will want to restrict Bond rates from rising. 
5. As a comparison, Bonds at 1.5% are trading on a PE of 66.6, whereas ASX PE is around 20. US PE is higher due to growth stocks. 
6. PE valuations can sustain higher Bond rates in the medium term, but if they rise sharply to say 1.5-1.75% in the next few weeks, we will likely see Equity markets have a wobble as institutions may take some profits.

In short, interest rates are likely to remain down for several years. PE valuations are important, and it’s something we are monitoring. However more than half of the CORE stocks have a PE’s below 20. This is why we are more monitoring the current earnings season to understand the profits and dividends.      
Profit results 
There is a raft of profit results coming in the next two weeks. Accord to Coppo Report (Bell Potter). He has found after looking at 5 years of data that there is a strong correlation between the price movement of the stock on the day of the results and the price direction over the next 4 months, this is not to say a down stock won’t turn around ‘but he has found it will take time. I have recorded the price movement on day 1. 
The CORE Watchlist stocks are due to report their profits on the following dates;

Jan 29 Resmed (RMD) – quarterly result was up 12% 
Feb 10  CBA Profit dropped 20% but increased dividend to $1.50. Price -1% 
– Feb 11 AMP Profit dropped 33% No dividend Price -10%
Telstra (TLS) Profit dropped 2.2% maintained 8c dividend. price +2.5%  – Transurban (TCL) dropped to a loss of $448m given the reduction in COVID traffic. Price -0.67% 
– Feb 15 JB Hi Fi (JBH) up 86% to $317m Dividend doubled to $1.80. Price up 3%
– Feb 16 BHP $3.8bn but this was after one off write down of $2bn from coal assets. Dividend US $1.01 which is up 55%. Price increased 2%
Brambles (BXB) profit $465m up 7% Dividend 13.08c Price up 1.5%
– Feb 17 Coles (COL) $560m up 14.5% Dividend 33c up 10% Price down 5%
Rio Tinto (RIO) results after market. Profit $9.7bn up 22% for full year. Record dividend including special of $US4.02.  
Feb 18
CSL Profit 1.8bn up 44% Dividend US$1.04 up 9%. Price 2.79%
Crown (CWN) net loss & no dividend. Price up 0.41%
Origin Energy (ORG)  underlying profit of $224m Dividend of 12.5c 0% franking. Price Down 2.17%
Wesfarmers (WES) Profit $1.41bn up 25% Dividend 88c up 17.3% Price up 0.63%
Woodside (WPL) underlying profit $447m (large write down) Dividend US$0.12. Price Down 2.39%
Orora (ORA) Profit $91m  up 19% Dividend 6.5c 0% franking, up on last year. Price up 5.5%
Sonic Health (SHL) Profit $678m up 166% on 18m COVID tests, ex-COVID revenue down 1%. Dividend 36c up 6%. Price up 1.16% 
– Feb19 Goodman Group (GMG)
– Feb 22 Lend Lease (LLC)
– Feb 24 Woolworths (WOW)

Not all companies report at this time of year.   

Other Stories     

Broker Target Price changes  

Goldman Sachs
Brambles (BXB) increased from $13.69 (highest broker) to $13.84 (still highest broker)
BHP decreased from $47.90 to $47.50
Coles (COL) increased from $20.40 to $20.70
JB Hi Fi (JBH) increased from $51.60 to $54.50
NAB increased from $24.72 to $28.73 (highest broker)
Rio Tinto (RIO) decreased from $118 to $114.60
Westpac (WBC) increased from $21.43 (lowest broker) to $25.76

Ord Minnett/JP Morgan 
BHP decreased from $53 (highest broker) to $52 (still highest broker) 
COL decreased from $19 to $18 (lowest broker)
JBH increased from $50 to $55
NAB increased from $26.50 to $27.10
RIO increased from $151 (highest broker) to $154 (still highest broker)
WBC increased from $22.40 to $24.50

Morgans
BXB increased from $11.90 (lowest broker) to $12.10 (still lowest broker)
BHP increased from $40.55 (lowest broker) to $42.20 (still lowest broker)
COL increased from $19.40 to $19.45
JBH decreased from $52.19 to $50 (lowest broker)
RIO increased from $109 (lowest broker) to $113
WBC increased from $25.50 (highest broker) to $27.50 (Still highest broker)  

Morgan Stanley
JBH increased from $48 (lowest broker) to $52
NAB increased from $24.50 to $25.30
Origin Energy (ORG decreased from $5.86 to $5.10
Orica (ORI) decreased from $18 to $16.50 (equal lowest broker)
Wesfarmers (WES) increased from $48 to $53
WBC increased from $24.60 to $25.30

Macquarie
BXB decreased from $12.35 to $11.70 (lowest broker) 
COL decreased from $18.50 to $18.20 
JBH increased from $53.10 to $55.10 
NAB increased $24 (lowest broker) to $26.50
Nine Entertainment (NEC) increased from $2.90 to $3.80 (highest broker)
RIO increased from $125 to $135 
WBC increased from $23 to $25.50 


Bell Potter/Citigroup
BXB decreased from $12.90 to $12.89
COL decreased from $21.20 to $19
Orica (ORI) decreased from $19.45 to $18.65  

Today’s Sector Movements
Best –  Materials +1.5% 
Worst Consumer Staples -3.5%  

Core Watchlist Index 
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 95.32% to 94.08%.  The ASX has increased over this period which means the target prices have increased at a quicker rate than the overall market. This has been going on since the US election & the discovery of the vaccine. At that point, the CORE index was 98.08% and close to fully priced and the ASX was 6498. 

Since then the CORE index has dropped to 94.08% (or 4%) while the ASX has increased to 6886 or 6%. This means the analysts have increased their target prices by 10%. 

In the 10 years I have been recording this data. I haven’t seen a sustained period (3months) where the ASX has been going up and the CORE going down – see chart below ASX pink CORE brown Banking blue. 

Overall Earnings Per Share (EPS) 
FY21 increased from 32.09% to 33.67% a new record. This is not uniform as some are expecting large bounces LLC 344% SEK 121% SHL 119%, but it suggests that we are likely to receive a recovery in profits. Bank profits are now being factored in.   

Most expensive – Seek.com (SEK) 125.9% 
Least expensive – Lend Lease (LLC) is the cheapest at 79.4%.

The CORE Watchlist is very mixed with 7 (7) stocks trading above 100% while 5 (5) are trading below 85% (AMC BXB LLC ORG & ORI)

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $14.68    Broker range $17.00 to $19.00
AMP current price $1.35      Broker range $1.45 to $1.55
BXB current price $10.50     Broker range $11.70 to $13.84
COL current price $16.23     Broker range $18.00 to $20.70
LLC current price $11.77     Broker range $13.16 to $17.17
NEC current price $2.66       Broker range $2.75 to $3.80
NXT current price $11.82     Broker range $13.20 to $14.75
ORG current price $4.50      Broker range $4.76 to $6.50
ORI current price $15.19      Broker range $16.50 to $19.70
SHL current price $33.97     Broker range $35.50 to $40.10
WPL current price $25.34     Broker range $26.01 to $32.50
  CSL removed   Banking Index 
Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 is indicating the Banks are fully priced. 

The Banking Index decreased from 100.8% to 98.7%. The quarterly updates from NAB WBC and ANZ this week have shown a very strong recovery. Part of the recovery is the allowance of expected bad debts the banks had provisioned for (partly at the behest of APRA) during the dark days of the pandemic, haven’t materialised, so this amount has been added back to their profits. As an example, NAB’s bad debt provision fell 98% from last quarter. 

This has seen an increase in target prices as noted above and an increase in future dividends. ANZ quarter was out today and so we are expecting TP and dividend forecasts to be released tomorrow. Overall this is a good result which has fed into the share price with WBC up 15% this month. The PE’s of the banks are still reasonably low at 15 to 18 times.  

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. 
   
FY20 % FY21 % FY 22 %
ANZ 60.0 2.32% 103.7 4.01% 125.5 4.86%
CBA 298.0 3.54% 337.5 4.00% 377.5 4.48%
NAB 60.0 2.34% 106.5 4.16% 122.0 4.77%
WBC 31.0 1.32% 108.5 4.61% 123.5 5.25%
MQG  430.0 2.95% 415.4 2.85% 552.6 3.80%  
Other Indicators 
US VIX Index increased from 19.98 to 21.5. Briefly below 20.  10-17 is normal.   
Iron Ore remains at $166.88. China on holidays. Hit a nine-year high of $176.45. 
Copper increased from $3.83 to $3.91  Nine years high $3.91. A good sign for commodity boom!!  
Gold decreased from $1822 to $1781. Record high $2063.
AUD/USD decreased from 77.85c to 77.53c.  Some forecast 80c+
USD/CNY increased from $6.45 to $6.46 The lowest point $6.45 in 2.5 years
Asian markets – MIXED   
US 10 year Bonds increased from 1.21% to 1.28% Hit a low of 0.31%. A recent high of 1.31% The US 30 year Bond increased from 2.01% to 2.05% (if this one start to rise, then it could provide inflation and volatility sign). The highest level for the 18 months. No volatility as yet, but will keep watching.  
German Bonds increased from -0.42% to -0.37%. Hit a low of -0.9%
Japanese Bonds increased from +0.07% to 0.087%   
Aussie Bonds 10 year Bonds increased from 1.32% to  1.37%. Lowest point 0.68%  Recent high is 1.40% 
– Other rates 1 year 0.052% 2 year  0.13% 4 year 0.33% 5 year 0.51%. 15 year Bonds 1.72%. Global interest rates have moved higher over the week on more liquidity from US COVID funding and a growing expectation of inflation. 
Oil price increased from $60.83 to $61.55. US weather causing demand.  
Tungsten remained at $250 to $255mtu.   

This week & next week 
Last “Not So” opened in 6 Aust states (missing SA & ACT) US 4 states ( Virginia, South Carolina, Georgia  & California) & UK.

This week –  Starting February reviews

Next week – A road trip to Central NSW (haven’t been on one of these for many months).  

    
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

 


The NotSo Daily Bulletin No. 367

 

Top Stories  
Friday, February 5, the ASX finished up 75 points at 6841. This is a gain of 234 points for the week and a strong rebound from the light sell-off in the last week in January. 

This is the highest point since the pandemic and sets up an interesting month as companies start to report the last six months profits results with CBA the big one on Wednesday. The brokers have CBA’s target price 15% below the current price; they expect a poor result. We will see who wins. 

The US profit season has been OK and expects a reasonable sized COVID package with president Biden having the majority in the Senate. 

This week also sees the 2nd impeachment Senate trial of former President Trump. It’s likely to be a side-show for markets but a circus for the TV.     

Investment Committee meeting 
The Provincial Wealth investment committee meets tomorrow (Monday, Feb 8) with Brad Matthews (independent investment consultant and sounding board) who’s making the trek from Sydney (non-COVID area) to Deniliquin. I will report the outcomes and observations from the meeting over the next couple bulletins.   

January 2021 review 
Most of January continued the rally from last year with all markets up strongly. Still, in the last week, a couple of factors appeared to create some market volatility – COVID, online punters with Gamestop and mixed economic data. This saw some markets finishing in the red for the month. 

HK was the best performer as the Chinese economy was the only major economy that actually grew in 2020. While the US & German markets reached new ALL TIMES during the month, they finished in the red. The perennial performer NASDAQ was again up with a gain of 1.42%. That makes it 21% for the last 6 months and a staggering 42% for the year.    

However, this isn’t a one-off as the NASDAQ continues to be the best performer over the last 5 10 and 15 years. While it’s dividends aren’t the same as the ASX, the capital growth more than offsets this. Over the last 5 years the NASDAQ is 150% in front of the ASX, 10 years it’s 340% better off and 430% over the last 15 years. It would seem that investment decisions shouldn’t always focus on the income and franking credits.       January – CORE Watchlist and ETF’s

The performance of those investments we watch closely were again mixed. Below are the best and worst for the month and the financial year to date (7 months). These exclude dividends. 
 
CORE  1mth Jan-21 FY (7mth)
Market 0.31%   12.02%
Best      
Westpac (WBC) 9.09% Nine Entertainment (NEC) 74.64%

Wesfarmers (WES) 8.35% National Aust Bank (NAB) 29.20% Woodside (WPL) 7.61% Seek.com (SEK) 28.14%        
Worst      
Lend Lease (LLC) -8.32% AMP -19.95% Orora (ORA) -7.04% Origin Energy (ORG) -18.84% Goodman Group (GMG) -6.50% Orica (ORI) -8.29%        

ETF’s  1mth   FY (7 mths)        
Best      
Asia (IAA) 8.76% Spheria Small Co (SEC) 49.61% China (IZZ) 6.65% Korea (IKO) 37.42%
Emerging Markets (EMKT) 6.09% Asia (IAA) 29.98%      

Worst      
Aust Property (MVA) -6.89% Magellan Infrast (MICH) -3.89% Vanguard Property (VAP) -5.66% China New (CNEW) 1.13% Aust resources (MVR) -4.88% Global Health (IXJ) 1.25%  

David v Goliath
From the last couple of Not So’s, we referred to the hottest story in financial markets. The collaboration of small investors (David’s) on investment forums (Reddit/ Robinhood) taking on the Wall St Hedge funds (Goliath) who are short selling the stocks.

The main stock was Gameshop (GME) which rose to a ridiculous value of $483 per share, closed Friday $63. I mentioned this was more akin to a casino rather than investing with punters playing a game of musical chairs. Well, most of the chairs have been removed and the value has collapsed. 

The table below shows the total value of GME. 
Jan 4: $1.2 billion
Jan 11: $1.4 billion
Jan 19: $2.7 billion
Jan 25: $5.4 billion
Jan 26: $10 billion
Jan 27: $24 billion
Jan 28: $35 billion
Jan 29: $23 billion
Feb 1: $16 billion
Feb 2: $6 billion
Feb 3: $4 billion

The general public heard about this story on Jan 26-Jan 28. Unfortunately, if they punted they are staring at some large losses. The so-called revolutionary change that some were hoping for last about a week. However, hopefully, there will be some regulatory changes regarding  – short selling.  

Shane Oliver sums it up well.
Concerns about the Reddit/GameStop/Robinhood frenzy driving broader volatility in share markets have faded. And for good reason. After surging 600% or so GameStop has plunged to be back near where it started. The Reddit crowd will work out just like everyone else has over the decades that there is no free lunch when it comes to investing and excitement does not necessarily equal investing success. As always it may take a bit of pain to learn that lesson. But meanwhile, share markets will continue to see the normal pattern of booms and busts and euphoria and despair against a long-term rising trend driven by the fundamentals of earnings and interest rates.  

Investment Market Outlook 
AMP’s Shane Oliver – weekly market outlook

– Shares remain at risk of a short-term correction after running up so hard recently, and 2021 is likely to see a few rough patches along the way. But timing such moves will be hard and looking through the inevitable short-term noise, the combination of improving global growth helped by more stimulus, vaccines and low-interest rates augurs well for growth assets generally in 2021.
– We are likely to see a continuing shift in performance away from investments that benefitted from the pandemic and lockdowns – like US shares, technology and health care stocks and bonds – to investments that will benefit from recovery – like resources, industrials, tourism stocks and financials.
– Global shares are expected to return around 8% but expect a rotation away from growth heavy US shares to more cyclical markets in Europe, Japan and emerging countries.
– Australian shares are likely to be relative outperformers helped by better virus control enabling a stronger recovery in the near term; stronger stimulus; sectors like resources, industrials and financials benefitting from the rebound in growth; and as investors continue to drive a search for yield benefitting the share market as dividends are increased resulting in a 4.5% grossed-up dividend yield. Expect the ASX 200 to end 2021 at a record high of around 7200.
– Ultra-low yields and a capital loss from a 0.5-0.75% increase in yields are likely to result in negative returns from bonds.
– Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield. Still, the hit to space demand and hence rents from the virus will continue to weigh on near term returns.
– Australian home prices are likely to rise another 5% or so this year is boosted by record-low mortgage rates, government home buyer incentives, income support measures and bank payment holidays. Still, the stop to immigration and weak rental markets will likely weigh on inner-city areas and units in Melbourne and Sydney. Outer suburbs, houses, smaller cities and regional areas will see relatively stronger gains in 2021.
– Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
– $A may see bouts of volatility but is likely to move towards 80c. 
– Eurozone shares rose 0.4% on Friday as did the US S&P 500, as softer than expected US payroll employment added to expectations for more stimulus in the US. The positive global lead saw ASX 200 futures rise 5 points, or 0.1%, pointing to a modestly positive start to trade on Monday for the Australian share market.  

Profit results due 

The CORE Watchlist stocks are due to report their profits on the following dates;

Jan 29 Resmed (RMD) – quarterly result was up 12% 
Feb 10 Amcor (AMC) CBA Orora (ORA)
Feb 11 AMP Telstra (TLS) Transurban (TCL) 
Feb 15 JB Hi Fi (JBH)
Feb 16 BHP Brambles (BXB)
Feb 17 Coles (COL) Orora (ORA) Sonic Health (SHL) Rio Tinto (RIO)
Feb 18 CSL Crown (CWN) Origin Energy (ORG) Wesfarmers (WES) Woodside (WPL)
Feb19 Goodman Group (GMG)
Feb 22 Lend Lease (LLC)
Feb 24 Woolworths (WOW)

Not all companies report at this time of year. 

A BIG WEEK COMING UP.   

Other Stories     
Broker Target Price changes  

Goldman Sachs
Computershare (CPU) increased from $14.42 to $15.01
Origin Energy (ORG) decreased from $7.85 (highest broker) to $6.50 (still highest broker)
Nine Entertainment (NEC) increased from $2.95 to $3 (equal highest broker)
Resmed (RMD) increased from $28.50 to $29.10 
Seek.com (SEK) increased from $22 to $24.90

Ord Minnett/JP Morgan 
Crown (CWN) increased from $8.10 (lowest broker) to $8.80 (still lowest broker)
Orora (ORA) increased from $2.60 to $2.85
ORG decreased from $6.16 to $5.30

Morgans
Amcor (AMC) decreased from $17.30 to $17.10
ANZ increased from $26 to $28.50 (highest broker)
NAB increased from $22 to $27.50 (highest broker)
ORG decreased from $6.29 to $6.04
RMD decreased from $30.99 (highest broker) to $30.09 (still highest broker)
Westpac (WBC) increased from $25.50 to $27.50 (highest broker)

Morgan Stanley
AMC increased from $18 (highest broker) to $19 (still highest broker)
Brambles (BXB) decreased from $12.80 to $12.40
CSL decreased from $294 to $272 (lowest broker)
ORG increased from $5.83 to $5.86
RMD decreased from $29.20 to $27.40
Sonic Health (SHL) decreased from $40.40 (highest broker) to $40.10 (still highest broker)

Macquarie
AMC decreased $17.26 to $17.19 
Coles (COL) increased from $18.30 (lowest broker) to $18.50 (still lowest broker)
ORG decreased from $5.58 (lowest broker) to $5.35 
SEK increased from $19.90 (lowest broker) to $28.30 (highest broker)
Wesfarmers (WES) increased from $49.70 (highest broker) to $60 (still highest broker)
Woolworths (WOW) increased from $40.75 to $44.50 (equal highest broker)
Woodside (WPL) increased from $27.85 to $28.30

Bell Potter/Citigroup
ORG decreased from $6.55 to $4.76 (lowest broker)   Today’s Sector Movements
Best –     
Worst   

Core Watchlist Index 
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 93.39% to 95.92%. 

Overall Earnings Per Share (EPS) 
FY21 increased from 30.8% to 30.89%. 

THE FOLLOWING HASN’T BEEN UPDATE SINCE THE LAST NOT SO

Most expensive – Seek.com (SEK) 128.1% 
Least expensive – Origin Energy (ORG) is the cheapest at 74.3%.

The CORE Watchlist is very mixed with 6 (5) stocks trading above 100% while 7 (7) are trading below 85% (AMC BXB LLC NEC NXT  ORG & ORI)

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $14.38    Broker range $17.00 to $18
ANZ current price $23.71     Broker range $24.43 to $26.20
BXB current price $10.57     Broker range $11.90 to $13.69
COL current price $18.21     Broker range $18.30 to $21.20
CSL current price $271.72   Broker range $290 to $329
LLC current price $12.01     Broker range $13.16 to $17.17
MQG current price $131.40  Broker range $136.81 to $155 
NEC current price $2.41       Broker range $2.75 to $3.00
NXT current price $11.60     Broker range $13.20 to $14.75
ORG current price $4.74      Broker range $5.58 to $7.85
ORI current price $15.26      Broker range $16.50 to $19.70
WBC current price $21.13   Broker range $21.43 to $24.60 


Banking Index (not updated since last Not SO) 

Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 is indicating the Banks are fully priced. 

The Banking Index decreased from 99.7% to 97.9%. Ords and Macquarie updated their target prices and the market pullback over the last two days. We have seen the brokers reviewing their forecasts as the economic picture improves. We are expecting more given a couple of brokers haven’t reassessed their numbers this year yet.

Ords and Macquarie also increased their dividend forecasts with the figures below. Investors are likely to be focussing on the growing dividend yields 

Based on yesterday’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. 

FY20 % FY21 % FY 22 %
ANZ 60.0 2.48% 103.7 4.28% 125.5 5.18%
CBA 298.0 3.50% 299.8 3.52% 347.5 4.08%
NAB 60.0 2.51% 95.0 3.97% 116.8 4.88%
WBC 31.0 1.44% 99.2 4.62% 117.0 5.45%
MQG  430.0 3.22% 375.4 2.81% 560.6 4.20%  

Other Indicators 
US VIX Index decreased from 30.21 to 20.87. The fear index nearly halved in the last two weeks as the GME casino settled. 10-17 is normal.    – Iron Ore remained at 157.42. Hit a nine-year high of $176.45. 
Copper increased from $3.55 to $3.64  Eight years high $3.64. A good sign.  
Gold decreased from $1844 to $1815. Record high $2063.
AUD/USD increased from 76.39c to 76.77c.  Some forecast 80c+
USD/CNY increased from $6.46 to $6.47 The lowest point $6.45 in 2.5 years
Asian markets – UP  
US 10 year Bonds increased from 1.05% to 1.17% Hit a low of 0.31%. 
The US 30 year Bond which increased from 1.80% to 1.98% (if this one start to rise, then it could provide inflation and volatility sign). The highest level for the 18 months.  
German Bonds increased from -0.54% to -0.43%. Hit a low of -0.9%
Japanese Bonds increased from +0.046% to +0.06%  
Aussie Bonds 10 year Bonds increased from 1.10% to  1.25%. Lowest point 0.68%   
– Other rates 1 year 0.05% 2 year  0.11% 4 year 0.28% 5 year 0.44%. 15 year Bonds 1.61%. Global interest rates have moved higher over the week on more liquidity from US COVID funding and a growing expectation of inflation. 
Oil price increased from $52.04 to $57.07. 
Tungsten increased from $240 to $245 mtu to $245 to $250mtu. King Island Scheelite (KIS) received a $10m loan from the Tassie govt. This has increased in all the tungsten players who are considered critical metals by UK, Europe, US and Australian governments.    

This week & next week 

Last “Not So” opened in 6 Aust states (missing SA & ACT) US 4 states (Virginia, South Carolina, Georgia  & California) & UK.

This week –  Back in the office. Investment Committee meeting with Brad Matthews

Next week – February review meetings start


    
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

The NotSo Daily Bulletin No. 364

 

Looking forward to a better 2021.  

Top Stories  
Today, January 25, the ASX finished with a gain of 24 points to finish at 6825. January is continuing the move higher and moving away from the technical triggers (charting). This is the highest point in 11 months, or since 25 Feb 2020 as the sell-off just started. We are now less than 5% from the ALL-TIME HIGH. While this is an impressive recovery, the most global markets are above their Jan 2020 figures.   

The US reporting season starts this week and hopefully it provides a good lead into our reporting season which starts in earnest in a couple of weeks. Expectations are high for good profit rebounds and improved dividends. A rising currency may take some gloss of globally orientated companies as they have lagged the market this month. 

HAPPY AUSTRALIA DAY for tomorrow.   

The Barbells are back

Morgan Stanley research update suggested the old “barbells” of the Australian market – Bank and Resources are seen as being at either end of the Australian economy (barbells), and they are likely to perform nicely in a post-COVID market, 
These two sectors are the largest on the ASX and dominated returns for twenty years. Morgan Stanley thinks Resources and Banks will see tailwinds in the POST COVID recovery as Resources benefit from the commodity boom and expansion and Banks recover with losses being less than expected. They are also expecting dividend yields to increase to 4% as cashflow improves.   

Reporting Season
The upcoming reporting season should be one of the best we have seen if you compare it to the last reporting season, which was COVID impacted.

According to Citigroup  

They think companies will show COVID-19 impacts less than feared — Australian reporting season for February 2021 is likely to show that domestic-focused companies have performed well with many reporting strong earnings growth. While the earnings could surprise on the upside, companies are likely to remain very reluctant to provide any guidance and may conserve cash on their balance sheets. Companies with the ability to demonstrate structural improvements in their market share and profit margins are likely to outperform.

Potential for upside surprises (to consensus) to outweigh downside ones — In aggregate, Citi analysts see the potential for upside surprises to outweigh downside ones by two-to-one. Retail and mining are expected to have the most positive surprises, while the downside surprises are more idiosyncratic. Citi analysts see the biggest upside risk to these buy-rated companies: WOW, SHL, HVN, CHC, MGX and AFG. The following companies have downside risk to earnings and are sell-rated: ASX, DMP, BKL and NAN.

n Domestic-facing corporates are likely to benefit — Retailers are likely to have stellar earnings growth, benefiting from the structural pivot towards at-home spending, temporary wage-subsidies and rent-reductions the redirection in spending due to travel restrictions. The focus will be on how much is sustainable vs. temporary. Housing-related companies are also expected to benefit from the upturn in the housing cycle, with calendar 2021 outlook a key driver of performance.

n FY21e outlook for mining companies is promising — Resilience in the Chinese economic recovery through COVID-19 has resulted in persistently elevated iron ore prices. Mining companies should report strong dividend yields from strong cash flow generation and low debt levels this reporting season. We may see some pay special dividends.

n Corporate balance sheets remain healthy — Citi analysts have called out retailers, miners, and healthcare companies as having strong cash flow and better balance sheets. Free cash flow yields may entice companies to undertake greater acquisition activity over the next six months. In contrast, FCF generation and gearing levels will be key to watch for oil and gas companies as they enter a CAPEX-heavy phase.

n Company guidance uncertainty remains this reporting season — Owing to uncertainty over the pandemic and macro outlook, we expect a continued broad lack of guidance given there have been impacts on both revenue and costs. We expect outlook statements to point to rising AUD/USD as a potential headwind for those stocks with offshore earnings.  
Profit results due 
The CORE Watchlist stocks are due to report their profits on the following dates;

Jan 29 Resmed (RMD)
Feb 10 Amcor (AMC) CBA Orora (ORA)
Feb 11 AMP Telstra (TLS) Transurban (TCL) 
Feb 15 JB Hi Fi (JBH)
Feb 16 BHP Brambles (BXB)
Feb 17 Coles (COL) Orora (ORA) Sonic Health (SHL) Rio Tinto (RIO)
Feb 18 CSL Crown (CWN) Origin Energy (ORG) Wesfarmers (WES) Woodside (WPL)
Feb19 Goodman Group (GMG)
Feb 22 Lend Lease (LLC)
Feb 24 Woolworths (WOW)

Not all companies report at this time of year.   

Macquarie Banking SCAM
Macquarie Bank has notified us there is a phone scam around where a caller says they are from Macquarie and they ask for a 6 digit pin that has been sent to your phone to complete a maintenance check on your account.

DO NOT provide them with the digit pin. Please ring our office.   

Other Stories   

– Citigroup forecast Aust GDP of 3.6% for 2021 with no interest rate move for at least 2 years.
– US earnings big week ahead.
– Morgan Stanley increased the price target to 7,100 from 6,700.   – Wesfarmers (WES) – all-time high. 
– Morgans currency forecasts  AUD/USD to average 75.5c in 2H21, then 79c in FY22 and 78c in FY23 with the AUD/USD to settle at 74c over the long term.  

Broker Target Price changes  

Goldman Sachs
BHP decreased from $48.70 to $47.90
Woodside (WPL) increased from $31 (highest broker) to $32.50 (still highest broker)

Ord Minnett/JP Morgan 
Amcor (AMC) decreased from $17.80 to $17.30
Brambles (BXB) decreased from $12.16 (lowest broker) to $11.90 (still lowest broker)
BHP decreased from $53 (highest broker) to $52 (still highest broker)
Orora (ORA) decreased from $2.67 to $2.61 

CIMB/Morgan
BHP decreased from $40.90 (lowest broker) to $40.55 (still lowest broker)

Morgan Stanley
ANZ increased from $21.90 (lowest broker) to $26.20 (highest broker)
CBA increased from $68.50 to $78.50 
NAB increased from $20.10 (lowest broker) to $24.50
Transurban (TCL) decreased from $14.80 to $14.50
Westpac (WBC) increased from $20.40 to $24.60
 
Macquarie
Amcor (AMC) decreased from $17.85 to $17.26
BHP decreased from $51 to $50
Goodman Group (GMG) decreased from $19.86 to $18.77
Lend Lease (LLC) decreased from $13.86 to $13.16 (lowest broker)

Bell Potter/Citigroup
AMP increased from $1.55 to $1.60
CSL decreased from $320 to $310
WPL increased from $25.62 to $26.01
   
Today’s Sector Movements
Best –  Consumer Discretionary +1.2%   
Worst Energy -1.2%   

Core Watchlist Index 
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 increased from 96.10% to 96.49%. 

Overall Earnings Per Share (EPS) (including new stocks) 
FY21 increased from 30.36% to 30.54%. In recent weeks the upgrades have come via resources (even with the rising currency) however I’m now seeing rising retail (JB HI FI) and Banking profit expectation. This should be a good thing for the market and the reporting season. 

The other important observation. The average dividend yield is 2.69% and 3.39% with franking. This is the lowest level since I’ve started the CORE however is coincides with profit payout ratio (how much of the profit is paid in dividends) being at it’s lowest level of 53.03% of the profit. I’m expecting in the upcoming profit season to see a lift in profits and dividends. 

Most expensive – Seek.com (SEK) 131.7% 
Least expensive – Origin Energy (ORG) is the cheapest at 78.6%.

The CORE Watchlist is very mixed with 8 (11) stocks trading above 100% while 5 are trading below 85% (AMC BXB NEC NXT  & ORG)

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $14.40    Broker range $17.25 to $18
BXB current price $10.62     Broker range $11.90 to $13.69
CSL current price $275.54   Broker range $289 to $329
LLC current price $12.53     Broker range $13.16 to $16.65
NEC current price $2.41       Broker range $2.75 to $3.00
NXT current price $11.81     Broker range $13.20 to $14.75
ORG current price $5.01      Broker range $5.58 to $7.85
ORI current price $15.81      Broker range $16.50 to $19.70

COL SHL removed  

Banking Index 
Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 is indicating the Banks are fully priced. 

The Banking Index decreased from 105.7% to 103.6%. This is partly due to Morgan Stanley increasing their target prices. 

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.   
FY20 % FY21 % FY 22 %
ANZ 60.0 2.43% 99.2 4.02% 120.0 4.86%
CBA 298.0 3.49% 289.8 3.40% 340.8 4.00%
NAB 60.0 2.49% 91.7 3.80% 111.8 4.63%
WBC 31.0 1.42% 94.2 4.32% 113.7 5.22%
MQG  430.0 3.14% 375.4 2.74% 560.6 4.09%  

Other Indicators 
US VIX Index decreased from 23.24 to 21.91. The fear index is above normal (10-17)
Iron Ore decreased from $171.33 to $169.97. Hit a nine-year high of $176.45
Copper remained at $3.63  Eight years high $3.64. A good sign.  
Gold increased from $1850 to $1853. Record high $2063.
AUD/USD increased from 77.20c to 77.37c.  Some forecast 80c+
USD/CNY remained at $6.47 The lowest point $6.45 in 2.5 years
Asian markets – UP  
US 10 year Bonds increased from 1.09% to 1.10% Hit a low of 0.31%. It has increased on the back of further US stimulus $1.9trillion. The US 30 year Bond which decreased from 1.84% to 1.84% (if this one start to rise, then it could provide inflation and volatility sign). Near the highest level for the year.  
German Bonds increased from -0.53% to -0.51%. Hit a low of -0.9%
Japanese Bonds decreased from +0.031% to +0.030%  
Aussie Bonds 10 year Bonds increased from 1.05% to  1.08%. Lowest point 0.68%   
– Other rates 1 year 0.044% 2 year  0.11% 4 year 0.27% 5 year 0.42%. 15 year Bonds 1.46%. Aussie Bond market has pushed off ALL-TIME LOWS ON BACK OF RISING US RATES. 
Oil price decreased from $53.35 to $52.24. Saudis restricted production and prospect of more stimulus will mean more demand.
Tungsten remains at $235 to $240 mtu.   

This week & next week 

Last “Not So” opened in 5 Aust states (missing SA ACT &, NT) US 2 states ( Virginia, South Carolina  & California) & Singapore.

This week –  Australia Day holiday tomorrow. Then I have my mother’s memorial service in Wodonga on Wednesday. Back on deck Thursday- Friday.

Next week – Scott taking holiday Feb 1 to Feb 5.


    
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





 

The NotSo Daily Bulletin No. 359

 

Looking forward to a better 2021.  

Top Stories  
Today, January 5 the ASX finished with a small drop of 2 points to finish at 6682. However, the drop would have been bigger, given Wall St dropped over 1%, had it not been for the Resources sector, BHP up 2.9% and RIO up 2.2%.

The US Senate run-off in Georgia is being held tomorrow. If the Democrats turn both, then they will control the Senate and all three houses of power. I’m not sure the market has factored this in yet. So we could see some volatility of this were to occur. However, I think it would be a buying opportunity rather than a run to the door as Biden needs to govern in the Centre and not be pulled to the whacky left or right.     

The UK has entered its 3rd lockdown as have other European countries. it would seem the only answer for them is a vaccine. VERY THANKFUL Australia is one of the few countries that have the virus under control. We are ranked 100th country in total cases. Not bad when our population ranks 55th.   

Investment Outlook for 2021
Trying to predict the future is difficult at the best of times, and I have never thought at the beginning of a year, that investment markets will be worse in 12 months (optimistic). So with this in mind, I outline our best guess regarding the investment areas over the next 12 months. 

Before outlining each asset class, the economic backdrop is positive for growth assets. Low inflation, historically low-interest rates, high government debt and a high likelihood of further global government stimulus.

Cash
The RBA has cut rates to a historic low of 0.1%. They could cut again, but it’s unlikely. However, they are unlikely to raise rates this year due to high government debt, government stimulus, and low inflation. So the amount held in cash should be emergency funds only. 

Fixed interest
These investments are linked to cash rates. Globally rates are low, and so returns from fixed interest are likely to follow. On the domestic front, term deposits are also low, with 0.3% being a typical 6-month rate. 

That’s why we prefer the Macquarie Accelerator account at 0.5% with no fixed period instead of term deposits.

We have been working with our investment consultant and found several Fixed interest Bond funds that we expect to earn 2-4% over the year, but the minimum time frame for these investments should be 2-3 years. 

Overall fixed interest is likely to provide a low-income return than other assets, but it has little volatility, so its primary aim is capital stability.    

Property & Infrastructure
There are many types of property, and COVID has impacted them all differently. Residental is likely to see support from low-interest rates and lower mortgagee sales than first predicted. While immigration will be  0 this year (normally 200k), this will put a hole in demand, but we may continue to see a move from city to regional areas. 

Industrial property is likely to remain strong, again due to low rates, as long as the tenant remains in business. This is likely to be a concern for retail and shopping centres who are likely to see permanent business closures from COVID. An oversupply and lack of demand may mean rents are dropped to retain tenants. In turn, this could put pressure on prices, but the listed property investments in these areas have already factored in a price drop (back in March-April). 

The office property is likely to see a permanent shift to working from home for some employees, whether part-time or full time. Again this is likely to put pressure on rents.

Infrastructure investments are the most favoured in this area due to the increased spending from governments globally as part of their re-stimulation of the economy. There will be trillions spent in this area to kick start economic growth. Additionally, infrastructure investments have a reliable income stream. 

Real Estate Investment Trusts (REITS) the way we are playing these investments as they are listed on the ASX and generally provide exposure to most of the areas mentioned above. Income expectation ranges from 2-4% while we are likely to see 2-4% from capital growth.    

Australian Shares
The ASX has recovered well with strong gains over the last quarter (up 12%). Until that point, the Australian market had underperformed the rest of the world. Still, the prospect of a vaccine, heightened government spending and low COVID numbers has provided the Aussie market with a boost. The boost also came to areas that had been poor through 2020, namely financial, industrials, resources and energy. The VALUE stocks were and probably still are considered cheap. When we break shares into two major groups VALUE and GROWTH (stocks that have ongoing growth prospects above the economy), we find Australia doesn’t have many growth stocks (CSL and some small tech stocks). 
However, there are a couple of things in the ASX’s favour this year.  
1. Dividend yields are higher than most other markets, especially with the restriction on banks removed. There will be a global search for yield given low-interest rates. 
2. The domestic economy re-opening means business profitability (EPS) is likely to improve given the extra stimulus and liquidity in the economic system.
3. A global commodity boom looks likely as nearly all countries stimulate their economies.
4. Price to Earnings (PE) ratios have expanded to historic highs; they are still low compared to other assets. Which means prices can push higher without increasing profits. For example, a 1% return on 10-year Govt Bond is a PE of 100. At present, the ASX is on a PE of around 20 times. While I’m reluctant to chase sectors with high PE’s (priced for perfection), there are parts of the market that are still reasonably priced with PE’s sub 20. Some of the CORE PE’s are mentioned below.
5. The AUD is likely to be stronger on the back of a weakening USD and a commodity boom. Therefore preferring domestically orientated stocks with dividend yield. 
6. Low-interest rates could see increased takeovers which generally provides a lift to the market.   

International Shares
In recent years, global share markets have provided a higher return than the Australian market, especially from a growth perspective. This is likely to continue; however, overall Australia may do better, especially if the currency becomes a headwind. Therefore we are recommending to hedge the currency where we can.  

We are still very keen on the global themes (thematic) that we have discussed in review meetings as they are providing growth well above most sectors. This means investing in those themes such as healthcare, technology, robotics, 5G and cybersecurity. Additionally, we are likely to see other areas of the world apart from the US performing well. This means Asia and Emerging Markets are likely to benefit from a lower USD, lower interest rates, lower energy costs, lower wages and lots of liquidity and stimulus. 

Summary
In short, I see a year that will provide a reasonable return from shares and property due to the factors mentioned above. Still, the importance of diversity and liquidity remains as normal as the odd hiccup along the way is likely. 

Buy the DIP
This has been one of my strongest investment mantras over time. BUY THE DIP. The market never goes up in a straight line and in recent months, the down days have been only for a few days. The chart below shows the US S&P 500 annual value since 1964 (56 years) –BLACK LINE.  The direction of the market is UP. 

The RED LINE indicates the movement of the market during the year. While last year (2020) was a volatility year moving approx 70% within the year, it wasn’t the most volatile. However, the chart does indicate a reasonable amount of movement in most years and any sell-offs should be used as buying opportunities for investors.      
CORE Watchlist and ETF performance
The returns from investments we watch closely were again varied.  Below are the best and worst for the month, financial year (FY) and the whole of 2020. These exclude dividends.     
Cash rates
Bank account interest rates are virtually 0%, and term deposits aren’t much better. 

We have just been advised by Macquarie the Cash Management Account (CMA) interest rate will drop to 0.12% (it normally tracks the RBA cash rate, currently 0.10%). The Macquarie Accelerator account will remain at 0.5%. 

At this point, we prefer the Accelerator account for short term holdings. Still, if money has an investment profile of more than 2 years, then it should be allocated to other areas, including fixed interest.   

Other Stories   
US political circus continues. Georgia votes for Senators Jan 5 and confirming Biden’s Presidency Jan 6 (sideshow from some Republicans). In meantime, Trump pressured Georgian secretary of state to find more votes.
– China offers trade talks to BIDEN administration.
– CNBC reports some Chinese cities are having electricity blackouts due to reduced supply of coal. The Chinese have a ban on Australian Coal at this point.   

Broker Target Price changes  
Broker research will be light on in January, so little changes expected.  

Goldman Sachs



Ord Minnett/JP Morgan 


CIMB/Morgan


Morgan Stanley
Rio Tinto (RIO) increased from $113.25 to $116
 
Macquarie

Bell Potter/Citigroup

Today’s Sector Movements
Best –  Materials +1.8% ( 2 days in a row)   
Worst Energy -1.1% 

It’s strange these two went in opposite directions today. They are usually closely linked.   

Core Watchlist Index 
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 96.02% to 95.77% 

As mentioned above PE ratios have moved higher in recent months. Higher there are still some reasonable PE around. 

Amcor (AMC) 14.9 ANZ 15 BHP 11.3 Lend Lease (LLC) 12.9 Macquarie 16.9 NAB 14.9 Nine Entertain (NEC)  17.3 Orora (ORA) 17.2 Orica (ORI) 17.4 Rio Tinto (RIO) 9.3 Sonic Health (SHL) 14.9 Westpac (WBC) 14 Woodisde (WPL) 18


Overall Earnings Per Share (EPS) (including new stocks) 
FY21 remained at 28.67% Little broker research

In the medium term, markets need profit growth to see the indices increase in value. 

Most expensive – Seek.com (SEK) 133.1% 

Least expensive – Origin Energy (ORG) is the cheapest at 74.6%. Energy demand will increase.

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 

AMC current price $15.08    Broker range $17.25 to $19
BXB current price $10.55     Broker range $12.16 to $13.69
CSL current price $285.62   Broker range $294 to $330
NEC current price $2.37       Broker range $2.75 to $3.00
NXT current price $12.29     Broker range $13.20 to $14.75
ORG current price $4.79      Broker range $5.47 to $7.85
ORI current price $14.95      Broker range $16.50 to $19.70
SHL current price $33.06     Broker range $34.57 to $40.40
WBC current price $19.52    Broker range $20.20 to $23.50    

Banking Index 
Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 is indicating the Banks are fully priced. 

The Banking Index decreased from 101.7% to 101%. 

Based on yesterday’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.  
SUMMARY             
FY20 % FY21 % FY 22 %
ANZ 60.0 2.60% 97.5 4.23% 120.0 5.21%
CBA 298.0 3.56% 287.3 3.43% 338.3 4.04%
NAB 60.0 2.62% 90.0 3.92% 111.8 4.88%
WBC 31.0 1.58% 91.7 4.67% 112.0 5.71%
MQG  430.0 3.07% 375.4 2.68% 560.6 4.00%  

Other Indicators 
US VIX Index increased from 22.75 to 26.97. Is the market repricing a Democrat win in Georgia. 
Iron Ore increased from $160.47 to $165.29. Hit a nine-year high of $176.45
Copper increased from $3.57 to $3.58  New recent high $3.58. A good sign.  
Gold increased from $1927 to $1943. Record high $2063.
AUD/USD increased from 75.56c to 76.97c Fell to a low of 55c but USD weakening, so AUD increasing. Some forecast 80c+
USD/CNY decreased from $6.55 to $6.49.The lowest point $6.49 in 2.5 years Asian markets – UP, better Chinese data.
US 10 year Bonds increased from 0.93% to 0.94% Hit a low of 0.31%. I‘m adding the US 30 year Bond which increased from 1.67% to 1.68% (if this one start to rise, then it could provide inflation and volatility sign). Near the highest level for the year.   German Bonds increased from -0.58% to -0.57%. Hit a low of -0.9%
Japanese Bonds increased from +0.01% to +0.018%  
Aussie Bonds 10 year Bonds increased from 0.97% to  0.99%. Lowest point 0.68%   
– Other rates 1 year 0.047% 2 year  0.076% 4 year 0.19% 5 year 0.34%. The RBA is 0.1% Aust 15 year Bonds 1.34%. The short rates have dropped to new ALL-TIME LOWS.
Oil price increased from $47.68 to $49.03. 
Tungsten remained at $230 to $235mtu.   

This week & next week 
Last “Not So” opened in 5 Aust states (missing ACT, SA & NT) US 3 states (South Carolina Virginia & California)

This week –  TIDY UP. Chris and Kevin are still on holidays. 

Next week – Back into the swing of things.


    
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

The NotSo Daily Bulletin No. 342

 

Top Stories

Today, October 27, the ASX 200 dropped 105 points to close at 6051 or 123 points lower than the last Not So.

As mentioned in the last “Not So”, the market is waiting for the next catalyst. Overnight the US market dropped more than 2% as growing COVID numbers and uncertainty regarding the US election is like to cause some market flux as the VIX (fear index) is now above 30 (normal 10-17).

October has been a very good month, but it has given a little back in the last couple of days and may remain volatile until we have a clear election result. After that the focus will be on COVID and impact will have until we have a vaccine.

From that perspective Australia looks better with restrictions being lifted in Victoria after two days of NO cases. ANZ results out Thursday may provide some domestic guidance but we are likely to remain range bound while the COVID storm continues.

In Europe, cases hit 200k per day with restrictions being re-introduced while the US added another 70k cases and the highest weekly total since the pandemic started. While a total lockdown isn’t likely, total economic freedom is unlikely until numbers are vastly reduced or a vaccine.

As stated a number of months ago in the Not So. A prominent US Fund Manager said that while Americans think their liberty and freedom are more important than their obligation to the rest of society, the virus will continue to win. As we near 9m US cases and 230k death”. The virus is unfortunately winning!

After nine months of this virus, there are only nine countries who have no active cases and the biggest population of those is Solomon Island (692k). This is going to be with us for some time to come.

Australian Equities


Citigroup updated their research on the Aussie market. They think the Australian market underperformance versus the rest of the world might be over as Australia has managed COVID better than most which should lead to stable business conditions and employment (depends on the industry).

Their ASX 200 target is 6200 by June 2021, which only slightly higher than the current level, which suggests not all areas will do well. At present, they have a preference for domestic cyclicals (financials, insurance and industrials) plus resources as a POST COVID world is likely to see commodity prices push higher as inflation starts to increase.

The overriding caveat would be finding a vaccine, which may provide a growth boost to other areas. However, we won’t be holding our breath just yet.

US Election over soon!


It seems like the US election campaign has been going on for years. Finally, there will be a vote on Nov 3 (Nov 4 our time).

A blue (Democrat) or Red (Republican – GOP) wave where either party controls the three houses, this will mean a sizeable COVID package of $2-$3trillion.

At this point, voter turnover is expected to be larger than in 2016 with already 62 million votes cast (many postal). The postal votes may take a few days to count which could mean the overall result may not be known and Trump has cast doubt on his acceptance of the vote. If this occurs it could create market volatility unless there is a strong wave of either colour. A total of 123m were cast in 2016.

Morgan Stanley believes markets are going to remain range-bound until they have clarity on the US election and COVID, but using any weakness as an opportunity because the virus will eventually have a solution.

Aberdeen Investments have outlined the following scenarios and their probability.

Scenario 1 Description Probability
Democrat clean sweep President Biden with Democrat majority in House and Senate 50%
Policy impact
• Significant increases in taxes for corporates and high earners (dependent on majority).
• Higher spending on entitlements, infrastructure, education, green technology and jobs.
• Tighter environmental, tech and financial regulation.
• Multilateral approach to China and progress on the OECD digital tax initiative.

Scenario 2 Description Probability
Biden with split Congress President Biden with Democrat majority in House and Republican majority in Senate 25%
Policy impact
• More rapid fiscal consolidation due to gridlock in Congress.
• Tighter environmental, tech and financial regulation.
• Multilateral approach to China and progress on the OECD digital tax initiative.

Scenario 3 Description Probability
Trump with split Congress President Trump with Democrat majority in House and Republican majority in Senate 20%
Policy impact
• Highly uncertain path for fiscal policy based on the ability to find compromise.
• Loose environmental and financial regulation.
• Erratic and unilateral approach to China and other trading partners including EU.

Scenario 4 Description Probability
Republican Clean Sweep President Trump with Republican majority in House and Senate 5%
Policy impact
• Slow tightening in fiscal policy.
• Lower taxes for corporates and households.
• Looser environmental and financial regulation.
• Erratic and unilateral approach to China Uncertainty over next Fed Chair

Graph below is from Peter Switzer. This shows the value-added under each President.  

Banks reporting soon


The banks provide excellent insight into the rest of the economy.

Goldman Sachs research piece.

ANZ: Reports on Thursday, October 29. We expect 2H20 cash earnings growth (continued operations) of -8% to A$2,670 mn, diluted cash EPS growth of -13% to A86.1¢, and a Dividend (DPS) of A40¢.

WBC: Reports on Monday, November 2. We expect 2H20 cash earnings growth (company basis) of -37% to A$2,223 mn, diluted cash EPS growth of -37% to A62.0¢, and a DPS of A25¢.

NAB: Reports on Thursday, November 5. We expect 2H20 cash earnings growth (company basis) of -17% to A$2,512 mn, diluted cash EPS growth of 7% to A79.5¢, and a DPS of A37¢.

In order of likelihood to surprise:

1) Bad debts: Expect 2H20E sector bad debts (BDDs) to fall to 44 bp down from 54 bp in 1H20.
2) Profit margin pressure to persist in 2H20E but then subside in 1H21E given deposit repricing done late in 2H20.
3) Volumes: We expect negative sequential volume growth in 2H20E due to the unwind of commercial lending that happened late in 1H20, in response to Covid-19.
4) Expenses: Underlying expense growth of 3% in FY20E but expect management to be more optimistic about productivity opportunities into FY21E.
5) Capital: All majors to report capital ratios >11%; DPS to resume.
6) Markets: We expect continued trading income momentum in 2H20E.

In the near term, we think the sector’s fundamentals can be supported by:

i) loosening monetary, fiscal and macroeconomic policy to support 5% system mortgage volumes in 2021, ii) while medium-term net income margins (NIM) pressures from lower rates remain, we think the full-year impact of deposit repricing that has taken place through the back-end of FY20 can provide some support to FY21E NIMs, and
iii) loan deferrals are starting to cure, and we remain of the view that the market underestimates the level of collateral that sits behind the SME loan book on deferral.

Therefore, with the sector multiples are cheap, we think valuation support exists.

Other Stories

• Sports Bet – US Election Trump $2.80 ($2.70). Biden $1.47 ($1.50).
• Coke Europe has made a bid for Coke Australia (CCL). A reasonable premium to the last traded price.
• US Senate has confirmed Amy Barrett as US Supreme Court judge.

Broker Target Price changes
Goldman Sachs
Coles (COL) increased from $20 to $20.40
Crown (CWN) decreased from $9.40 to $9
JB Hi Fi (JBH) increased from $48.30 to $49.10
National Aust Bank (NAB) decreased from $21.06 (highest broker) to $20.89
Westpac (WBC) decreased from $20.71 to $20.65
Wesfarmers (WES) increased from $45.50 to $46.90
Woolworths (WOW) increased from $38.80 to $39.30
Woodside (WPL) decreased from $33.40 (highest broker) to $31 (still highest broker)

Ord Minnett/JP Morgan
Resmed (RMD) increased from $20 (equal lowest broker) to $21

CIMB/Morgan
AMP decreased from $1.66 to $1.50
Orora (ORA) increased from $2.37 to $2.67
WPL decreased from $23.40 to $23.30

Morgan Stanley
BHP decreased from $41 to $40.45
WPL increased from $20.60 (lowest broker) to $21.20 (still lowest broker)

Macquarie
Transurban (TCL) decreased from $14.49 to $14.33

Bell Potter/Citigroup

Today’s Sector Movements

Best – Nil
Worst – IT -3.3%

Core Watchlist Index


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 93.79% to 92.15%

Overall Earnings Per Share (EPS) (including new stocks)
FY21 increased from 20.64% to 21.82% forecasts of some companies to have a large rebound after the 15% drop in FY20 profits.

In the medium term, markets need profit growth to see the indices increase in value.

Most expensive – Seek.com (SEK) 117.5% (buoyed by jobs growth)

Least expensive – Origin Energy (ORG) is the cheapest at 64.4%.

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).

AMC current price $14.82 Broker range $17 to $18
BHP current price $34.94 Broker range $39.40 to $45
BXB current price $10.05 Broker range $12.05 to $13.67
COL current price $17.21 Broker range $18.90 to $21
CWN current price $8.53 Broker range $8.60 to $12
LLC current price $12.58 Broker range $13.25 to $16.74
NXT current price $13.09 Broker range $13.20 to $14.75
ORG current price $4.26 Broker range $5.35 to $7.80
RIO current price $92.30 Broker range $97.10 to $121
TLS current price $2.71 Broker range $3 to $3.60
WPL current price $18.00 Broker range $21.20 to $31

CWN and NXT have been added.

Banking Index


Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 is indicating the Banks are fully priced.

The Banking Index increased from 99.4% to 98.2%.

See Goldman Sach piece above.

Other Indicators
• US VIX Index increased from 29.18 to 32.46. This is elevated above normal levels (10 to 17) More volatility expected, especially when it’s above 30.
• Iron Ore decreased from $120.49 to $114.63. A six-year high was $130.17
• Copper decreased from $3.18 to $3.10. Recent high $3.18.
• Gold decreased from $1916 to $1911. Record high $2063.
• AUD/USD increased from 70.86c to 71.34c Fell to a low of 55c. Expecting interest rate cut.
• USD/CNY increased from $6.67 to $6.7 The lowest point was $6.67.
• Asian markets – DOWN
• US 10 year Bonds decreased from 0.81% to 0.80% Hit a low of 0.31%. I’m adding the US 30 year Bond which decreased from 1.62% to 1.60% (if this one start to rise, then it could provide inflation and volatility sign). Near the highest level for the year.
• German Bonds increased from -0.58% to -0.57%. Hit a low of -0.9%
• Japanese Bonds decreased from +0.03% to +0.026%
• Aussie Bonds 10 year Bonds decreased from 0.83% to 0.81%. After Reserve Bank Governor Lowe’s speech stating another rate was possible. Lowest point 0.68%
• Other rates 1 year 0.09% 2 year 0.12% 4 year 0.19% 5 year 0.29%. The market is starting to price in a November rate cut to 0.10% or 0.15%. However, we need to watch the long end of the yield curve. Aust 15 year Bonds 1.12%. They are nearing ALL TIME LOWS.
• Oil price decreased from $39.82 to $38.82. A Biden win could see increasing energy prices. WATCH THIS SPACE!
• Tungsten remained at $215-$220 mtu.

This week & next week
Last “Not So” opened in 5 Aust states (missing ACT NT & Tas) US 3 states (South Carolina Virginia Georgia & California) & Singapore

This week – October reviews

Next week – October reviews

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

The NotSo Daily Bulletin No. 340

 

Top Stories  

Today, October 20, HSC started for NSW Year 12. Good luck to all!
The ASX 200 dropped 45 points to close at 6185. This is after reaching a new seven month high of 6229 yesterday.

Global markets had a poor night, so a pullback wasn’t a surprise given the recent strong run.  The US VIX (fear index) has increased to near 30, which is generally a sign for further volatility. We are now 2 weeks from the US election, and global COVID cases are still increasing with a new daily high of 416k on Friday, so anything is possible.   

Commodities rising 

Morgans updated their commodity prices and research. 

They believe major commodity complexes remain in good fundamental shape, with the stimulus-fueled recovery in Chinese demand playing an important role. Further helped by a weaker US dollar and rebounding views on global growth for post-Covid. They are encouraged by the commodity recovery broadening beyond precious metals and iron ore, with most base metals also now performing well and some energy resources showing tentative signs of recovery. Their most preferred commodity exposures are #1 Copper, #2 Oil, and #3 Gold. They view now as an opportune time to invest in resources, with supportive demand recovery conditions in several commodities visible and bottom-up developments being better rewarded by the market. Post revisions to commodity price assumptions upgraded the rating on BHP to Add (from Hold).

In terms of spot commodity prices compared to consensus forecasts for the calendar year 2021, the two standouts unsurprisingly are iron ore (+27%) and oil (-22%) at either end of the field. For iron ore, benchmark prices have held up better-than-expected against a backdrop of recovering Brazilian supply (which now stands at ~7mt/week up from ~3- 4mt/week 6 months ago), as expected this has started to translate into increasing China port stockpiles but regardless iron ore prices have remained firm on continuing demand. Meanwhile, oil remains heavily impacted by global Covid restrictions, given its use in transportation. They view this sensitivity as setting oil up as an appealing Covid-exit trade, as consumption growth is likely to closely track the lifting of global/domestic travel restrictions in key consuming regions.

The largest changes are 1) iron ore prices (15-25% upgrades to 2021/22 forecasts), 2) alumina (10-20% downgrades to 2021-24 forecasts), and 3) gold and silver (10-20% upgrades to 2021-24 forecasts).   

5G wireless technology is coming

– Last week Apple launched iPhone 12 which includes its first 5G iPhone. Macquarie research provided the following. The launch of Apple’s (AAPL) first 5G iPhone is likely to be the catalyst for a global handset replacement (super) cycle as well as the accelerant for the adaption and proliferation of 5G technological benefits.
– 5G will provide faster speeds, higher bandwidth (handle more devices) and reduced latency (response times). It is expected that 5G will allow the “connectivity” of everything (billions and billions of devices) and in turn fuse the physical with the digital, in real-time.
– This may sound futuristic, but this wireless technology is expected to be the accelerator for the fourth industrial revolution and with it, the potential to drive (almost) boundless possibilities via advancements that lead to outcomes such as smart cities and industries (i.e. agriculture, manufacturing), autonomous vehicles, telemedicine, virtual reality and more broadly the ‘Internet of Things’ (IoT).
– At this stage, the most obvious exposure is via chipmakers/hardware providers, telcos Telstra (TLS) and retailers JB Hi-Fi (JBH). Longer-term use-cases should see accelerating demand for data and artificial intelligence and we look towards more broad exposure via BetaShares Global Robotics and Artificial Intelligence ETF (RBTZ).

Macquarie expects the launch of Apple’s 5G compatible iPhone to drive the first global 5G handset upgrade (super) cycle. The roll-out of 5G wireless technology has been a long time coming and intermittent coverage suggests the benefits to both consumers and businesses will be constrained for some years to come. However, the consumer handset upgrade cycle will increasingly raise the awareness of the extent to which 5G technology will impact the world via real-time connectivity.

If 3G / 4G was focused on the consumers mobile experience, 5G can be considered as spreading the benefits to business via the connectivity of everything. 5G has been described as the accelerator of the fourth industrial revolution (1.0: steam, 2.0: electricity, 3.0: information technology, and 4.0: the internet) and with the potential to drive boundless and currently unthought-of possibilities.

For some, this might appear a set of grandiose statements, but it has been said that 5G will offer the potential to seamlessly fuse the physical with the digital world in real-time and, via connectivity that allows the collection, transmission and sharing of near-limitless data, allow us to reimagine a world which could be safer, smarter and faster (futuristic? … yes).

What will 5G look like in Australia? All three Australian mobile networks have commenced the rollout of 5G networks in major cities across Australia. However, the rollout is at an early stage with coverage patchy in the major cities and mostly not available in rural areas. Australia is a vast country and it will take years for 5G to be widely available across the country and become the new mobile standard. To access 5G, users will need: 1) a 5G device (such as an iPhone or 5G modem); 2) a 5G plan from a network provider (Telstra, Optus); and 3) in an area where 5G is covered by the network provider (mostly Metro currently). Consumers should see material improvements to 5G in the year ahead. Telstra has the most advanced 5G network, covering 41% of the population and expects to cover 75% of the population by June 2021. Optus and TPG / Vodafone are also investing aggressively in their 5G networks.    
Other Stories   

– Sports Bet – US Election Trump $2.45 ($2.88). Biden $1.57 ($1.40). Trump closing gap, but not sure attacking Dr Fauci while COVID cases are rising is a winning strategy.  
– AFL grandfinal Richmond $1.80 Geelong $2.10. GO TIGERS
– NRL grandfinal Melbourne Storm $1.72 Penrith $2.20 GO STORM
– Chinese quarterly GDP figures 4.9% which was better than last quarter but a little lower than expected. Retail sales were better at 3.3% as was Industrial Production up 6.9%. The Chinese economy looking like it’s POST COVID. 
– Westpac signed a deal with Afterpay (APT)  

Broker Target Price changes  

Goldman Sachs
Rio Tinto (RIO) decreased from $98.10 (lowest broker) to $97.10 (still lowest broker)

Ord Minnett/JP Morgan 
Orica (ORI) increased from $16.80 to $17
RIO decreased from $122 (highest broker) to $121 (still highest broker)
Sonic Health (SHL) increased from $36 to $36.50

CIMB/Morgan
BHP increased from $37.80 (lowest broker) to $39.70 (still lowest broker)
 
Morgan Stanley
Macquarie Group (MQG) increased from $133 to $152 (highest broker)

Macquarie
RIO decreased from $112 to $111

Bell Potter/Citigroup
National Aust Bank (NAB) increased from $19.90 to $21
   
Today’s Sector Movements
Best –  IT 1.7% 
Worst Financials -1.2%  

Core Watchlist Index 
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 new stocks include in the CORE WATCHLIST 
Amcor (AMC) Brambles (BXB) JB Hi-Fi (JBH) NextDC (NXT) ResMed (RMD) and Trasurban (TCL).  

The Core index decreased from 94.97% to 94.27 

Overall Earnings Per Share (EPS) (including new stocks) 
FY21 increased from 20.25% to 20.33% forecasts of some companies to have a large rebound after the 15% drop in FY20 profits.   

In the medium term, markets need profit growth to see the indices increase in value. 

Most expensive – Seek.com (SEK) 118% (buoyed by jobs growth)  

Least expensive – Origin Energy (ORG) is the cheapest at 67.5%. 

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 

AMC current price $15.94   Broker range $17 to $18
BHP current price $35.90    Broker range $39.70 to $45
BXB current price $10.49    Broker range $12.05 to $13.67
COL current price $17.85    Broker range $18.90 to $21
LLC current price $12.67    Broker range $13.25 to $16.74
ORG current price $4.46      Broker range $5.35 to $7.80
RIO current price $94.13     Broker range $97.10 to $121
TLS current price $2.80       Broker range $3 to $3.60
WPL current price $18.28    Broker range $20.60 to $33.70  

Banking Index 
Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 is indicating the Banks are fully priced. 

The Banking Index decreased from 99.8% to 98.6%.

The budget has provided a strong boost to the banks and reduced the chances of bad debts. For October, banks are up 10%.  

ANZ, NAB and WBC have their half-yearly results in early November. 

There are mixed views regarding the prospect of dividends. ANZ is mostly likely to increase theirs whereas NAB (capital raising) and WBC (Austrac fine) may pay a little or suspend their dividend.  

Other Indicators 
US VIX Index increased from 26.40 to  29.18. This is elevated above normal levels (10 to 17)  More volatility expected, especially when it reaches near 30.
Iron Ore increased from $119.52 to $119.53. A six year high was $130.17
Copper increased from $3.05 to $3.08. Recent high $3.10. 
Gold decreased from $1904 to $1904. Record high $2063.
AUD/USD decreased from 71.34c to 70.43c Fell to a low of 55c.  Expecting interest rate cut.
USD/CNY decreased from $6.72 to $6.69 The lowest point was $6.69. China decided to stop strengthening by fixing it. 
Asian markets – DOWN  
US 10 year Bonds increased from 0.72% to 0.77% Hit a low of 0.31%. I’m adding the US 30 year Bond which increased from 1.56% to 1.56% (if this one start to rise, then it could provide inflation and volatility sign). Near the highest level for the year.  
German Bonds decreased from -0.57% to -0.63%. Hit a low of -0.9%
Japanese Bonds  decreased from +0.022% to +0.017%  
Aussie Bonds 10 year Bonds decreased from 0.76% to 0.76%. After Reserve Bank Governor Lowe’s speech stating another rate was possible.   Lowest point 0.68%   
– Other rates have slightly fallen 1 year 0.11% 2 year  0.14% 4 year 0.20% 5 year 0.29%. The market is starting to price in a November rate cut to 0.10% or 0.15%. However, we need to watch the long end of the yield curve. Aust 15 year Bonds 1.07%. 
Oil price decreased from $41.12 to $40.57. 
Tungsten remained at $215-$220 mtu.   

This week & next week 
Last “Not So” opened in 5 Aust states (missing ACT, SA & Tas) US 4 states (California, South Carolina Virginia & Georgia) 

This week –  Starting October reviews 

Next week – October reviews 


    
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

The NotSo Daily Bulletin No. 338

 

Top Stories  

Today, October 13, the ASX 200 continued its post-budget rally with a 1% jump to a seven month high of 6196. It’s now above the recent trading range and at it’s highest point since early March, just before the 30% oil sell-off when Russia and Saudi Arabia disagreed.

Global markets are still counting on Government stimulus and low-interest rates, even though the US can’t agree on how many trillions for the next package.

The US pre-election melodrama continues, while Europe increases restriction on rising cases. We are unlikely to see another hard lockdown as the W.H.O has indicated it doesn’t;t work and has other unintended consequences. There is still only nine countries that have removed active cases. Even the Vatican has seven new cases today.   

Provincial Wealth (PW) Investment Committee
Kevin Hanson and I had our weekly investment discussion. We thought we would share with you some of our current thinking. 

Big Picture
The global economy and markets are a mixture of lots of moving parts and not all in the same direction.

Research from Macquarie suggests the leading economic indicators in the US and Europe are moving to the expansion phase of the economic cycle as they are following the Chinese economy out of recession.

We noted the recovery is two speed (K economy). The first (up leg) those sectors that are open and functioning at near-normal levels are doing reasonably well. The second (down leg) are parts of the economy that are still closed or heavily restricted due to social distancing. These industries are struggling and may do for some time (travel, hospitality, retail & other consumer discretionary sectors). At the moment, these areas are supported by government stimulus, but the support won’t last forever (2021). Unfortunately, most are small businesses and not large listed (stock exchange) companies. This is part of the reason why we are seeing stock markets rallying. 


On a sector basis
 
Cash rates may be cut in Australia at the next RBA meeting (Melbourne Cup day), but they aren’t rising anytime soon. 

Fixed Interest 
Interest rates globally remain down and will for many years. We are watching the long end of the interest rate curve (10 years plus) for any movement of inflation. Bonds remain unattractive given the low rates.
US     10 year bonds    0.779% 30-year bonds    1.577%  Aus    10 year bonds    0.85%

These rates have flowed into regular term deposits that are below 1%. We are looking at several options regarding searching for higher income, but the numbers are still meagre. 

Property/Infrastructure
These sectors sold off in March. Prices have recovered, but question marks remain on the outlook for shopping, office and some residential property. 

The excellent quality properties will still be an attractive option based on low-interest rates and consistent rental income. The market might have seen the bottom already; however, it will depend on how banks and other lenders treat the businesses that don’t reopen. 

Infrastructure is seen as preferred in this area, given the likely boost from government spending and consistent income stream from providing essential services. 

Australian Shares
The “kitchen sink” budget, friendly interest rates and COVID controls are likely to see a better economic position than forecast. These, coupled with a good recovery in our major trading partners China, Korea and Japan will assist our recovery. However, a growing list of Chinese bans could be a concern. 

The Australian market has underperformed the recovery compared to other parts of the world as our market is seen as being “öld economy” or value-orientated. According to Macquarie, the expansion phase is when “value” stocks perform better as investors look for reasonable value and income. The ASX has outperformed in the first year after the last four US recessions. 

International Shares
The world is still trying to deal with growing COVID numbers as no major country has been able to eradicate the virus. This means COVID limitations are likely to remain until a widely used vaccine removes the spread. This could be late 2021 and into 2022 (assuming vaccine works). 

Government stimulus and low-interest rates will remain in short to medium term. 

Specific markets, notably the US, Germany, China & Japan, have bounced well with the technology and healthcare sectors being the best. These areas are bringing change and/or disruption to age-old business models. We think this change will continue and even quicken in the POST COVID expansion world. That’s why are still firm believers in the global growth themes we have referred to many times in the past.    

In the short term with the US election drawing closer, anything is possible, and so we remain wary but optimistic. The US markets are likely to be comfortable with a change or the status quo. What they won’t like to see is a disputed result.      

Other Stories   

– Sports Bet – US Election Trump $2.88 ($2.80). Biden $1.43 ($1.40). Trump needs a hail mary from here based on these odds. 
– Apple is having a product launch tomorrow.
– Chinese exports grew by 10% YOY. Especially strong were medical supplies (CNEW).
Morgan Stanley recently said NextDC (NXT) will rise above the market due to 1) Growing cloud computing market. 2) Asian JV opportunities 3) Capacity expansion & 4) Refinancing debt to lower rates.  The latter occurred today with an expected saving of $10m in interest.
– Telstra AGM – chairman stated they were prepared to overshoot the dividend payout ratio to back the current dividend level. 
– Banks are showing loan deferrals are reducing and bankruptcies are down but government stimulus is delaying some businesses from hitting wall. Signs of the K economy.  
– Johnson and Johnson (JNJ) has suspended COVID trial.  


Broker Target Price changes  

Goldman Sachs


Ord Minnett/JP Morgan 
ANZ increased from $19.50 to $20
CBA increased from $65.30 to $66.30
NextDC (NXT) increased from $13 to $14
Westpac (WBC) increased from $18.20 to $18.80


CIMB/Morgan


Morgan Stanley
Goodman Group (GMG) increased from $20 (highest broker) to $20.90 (still highest broker)
NXT increased from $13.40 to $14.60 (highest broker)

Macquarie


Bell Potter/Citigroup
ANZ increased from $20 to $20.50
Orica (ORI) increased from $18.30 to $19.50 
Woodside (WPL) increased from $21.64 to $21.67


Today’s Sector Movements

Best –  Communications +2.2% 
Worst Materials -0.3%  

Core Watchlist Index 

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 new stocks include in the CORE WATCHLIST 
Amcor (AMC) Brambles (BXB) JB Hi-Fi (JBH) NextDC (NXT) ResMed (RMD) and Trasurban (TCL).  

The Core index increased from 93.1% to 94.47 

Overall Earnings Per Share (EPS) (including new stocks) 
FY21 decreased from 19.75% to 19.74% forecasts of some companies to have a large rebound after the 15% drop in FY20 profits.   

In the medium term, markets need profit growth to see the indices increase in value. 

Most expensive – Seek.com (SEK) 119.7% (buoyed by jobs growth)  

Least expensive – Origin Energy (ORG) is the cheapest at 66.3%. 

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 

AMC current price $15.89   Broker range $17 to $18
BHP current price $36.31    Broker range $37.80 to $45
BXB current price $10.86    Broker range $12.05 to $13.67
COL current price $17.91    Broker range $18.90 to $21
LLC current price $12.15    Broker range $13.25 to $16.74
ORG current price $4.38      Broker range $5.35 to $7.80
RIO current price $96.55     Broker range $98.10 to $122
TLS current price $2.89       Broker range $3 to $3.60
WPL current price $18.50    Broker range $20.60 to $33.70

MQG moved out due to rising price.    

Banking Index 

Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 is indicating the Banks are fully priced. 

The Banking Index increased from 97.2% to 100.4%.

The budget has provided a strong boost to the banks and reduced the chances of bad debts. For October, ANZ up 13% WBC 12% CBA 9% NAB 9%. 

ANZ, NAB and WBC have their half-yearly results in early November. 

There are mixed views regarding the prospect of dividends. ANZ is mostly likely to increase theirs whereas NAB (capital raising) and WBC (Austrac fine) may pay a little or suspend their dividend.  

Other Indicators 

US VIX Index decreased from 29.48 to  25.07. This is elevated above normal levels (10 to 17)  More volatility expected.
Iron Ore – increased from $123.47 to $125.72. A six year high was $130.17
Copper decreased from $3.07 to $3.06. Recent high $3.10.
Gold increased from $1915 to $1923. Record high $2063.
AUD/USD increased from 71.8c to 71.86c Fell to a low of 55c.  The future direction is more about the USD rather than the AUD. 
USD/CNY increased from $6.71 to $6.75 The lowest point was $6.71. China decided to stop strengthening by fixing it. 
Asian markets – MIXED  
US 10 year Bonds decreased from 0.77% to 0.76% Hit a low of 0.31%. I’m adding the US 30 year Bond which decreased from 1.57% to 1.56% (if this one start to rise, then it could provide inflation and volatility sign). Near the highest level for the year.  
German Bonds decreased from -0.53% to -0.55%. Hit a low of -0.9%
Japanese Bonds  decreased from +0.029% to +0.027%  
Aussie Bonds 10 year Bonds remained at 0.85%  Lowest point 0.68%    – Other rates have slightly fallen 1 year 0.11% 2 year  0.16% 4 year 0.22% 5 year 0.32%. The market is starting to price in a November rate cut to 0.10% or 0.15%. However, we need to watch the long end of the yield curve. Aust 15 year Bonds 1.16%. 
Oil price decreased from $41.13 to $39.85. 
Tungsten remained at $215-$220 mtu.   


This week & next week 

Last “Not So” opened in 6 Aust states (missing NT & Tas) US 4 states (California, South Carolina Virginia & Georgia) & Singapore

This week –   Starting October reviews

Next week – October reviews and HSC (good luck to Georgina) and all in year 12.

    
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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