Posts by: Scott Mildren

The Not So DAILY BULLETIN 20 July 2022 No.491

 

The Not So DAILY BULLETIN 20 July 2022  No.491
Top Stories
Wednesday, July 20, saw the ASX 200 gain 110 points or 1.6%, to finish at 6759, which is the highest point this month.

Another good day from the US saw its markets gain between 2.5% and 3%. Better than expected profit results from banks and Netflix gave the market a rally but it’s only early in the reporting season.

Some strategists weren’t getting too excited by the jump and considered it to be part of a Bear market rally as turnover was light and maybe short selling covering their bets (short-covering rally). 

I have outlined our current market thoughts in more details in three parts. It’s long-winded but it will help our conversations with you in the coming weeks and months as this market might turn on a number of catalysts or events. 

However, before this, will we see the long-awaited market capitulation where irrational selling occurs and generally provides a good indication of a market bottom. History never repeats, but it does have a good rhythm.  

Still nothing in confession season. 

Still cautious, but hopeful!
ANZ takeover of Suncorp Bank
ANZ has announced a $4.9bn takeover of Qld’s Suncorp Bank.

It will be funded $1.4bn from existing cash reserves and $3.5bn rights issue from existing shareholders. The rights offer of $18.9 per/share is a ~13% discount to ANZ’s last close price of $21.64.

For every 15 existing shares you will have a right to buy another 1 share. You will receive a letter in the mail if you are eligible.  

The acquisition price of $4.9B represents a P/E of 13.8x. ANZ still need regulatory approvals within 12-months (Treasurer, QLD Government, ACCC, APRA). The proposed transaction with Suncorp Bank could see ANZ’s overall market share of total industry assets increase from ~13.5% to 15.4%. ANZ will remain the 4th largest bank.

If existing shareholders don’t want to take up the rights issue, the rights can be sold (but brokerage is payable, which may make the transaction of little value. 

Generally, the brokers are positive about the takeover and noted that ANZ also provided a better than expected 3rd quarter operational update. 
Is the market about to turn? part 1
There is a growing sense that we may see the market bottom and turn UP in the coming weeks or months. Unfortunately, nobody rings a BELL when the market bottoms, so we are looking for signs. 

As previously discussed with many in our meetings, we have made recommendations of where we want to invest cash in the medium term, but due to market weakness and many headwinds, we have been reluctant to implement $$ over the last six months, which so far has been a good call. However, that’s the easy bit. The hard bit is when to implement and invest. That time is getting closer and maybe done in stages as markets are likely to remain choppy. 

There are some interesting observations being made by some major market players that are worth noting. 

1. Bank of America (BoA) Bull and Bear Indicator (1st chart below) has moved to 0.0 from 0.2. This is extreme bearishness & can’t go any lower (as an indicator) & a survey of fund managers showed they were the most bearish since the GFC in 2008.
2. BOA also tracks the cash allocations of global fund managers. The 2nd chart shows that fund managers have the highest amount of cash since the technology bust in 2001, so there is plenty of cash sitting on the sidelines. 

History shows that high cash allocations can lead to market rallies and even the bearish Morgan Stanley suggests that when the market turns it will happen quickly due to the cash on the side. 
Is the market about to turn? part 2
Before looking for the upside, we need to understand why the market is SO BEARISH, and the headwinds markets are facing (these are known & unknown knowns). It doesn’t include the unknown unknowns. 

1. HIGH INFLATION – inflation hasn’t been seen this high for 40 years, and rates are yet to peak. The reason Central Banks have been keeping it low for so long is that it’s difficult to reduce once “the inflation genie is out of the bottle”. High Inflation can impact profits and costs of living and interest rates. 
2. HIGH-INTEREST RATES – we have been living in a goldilocks economy for many years, “not too hot, not too cold”, which has meant low inflation and low-interest rates. To cool inflation, Central Banks are forced to raise interest rates which increases the cost of money for all borrowers, and while investors receive a higher interest rate, it generally is lower than inflation, so in real terms (after inflation), investors lose. Higher interest rates reduces demand and economic growth and raise the chances of recession.
3. RECESSION RISK – many are predicting a recession in various parts of the world (less so in Aust). A recession is two negative quarters of GDP, but the impact of recessions on the economy and community can vary greatly, as it depends on the severity. At the moment, the market is fearful of a recession. At this stage, most are suggesting any recession is likely to be mild due to low levels of unemployment, but if inflation remains high, CB’s will be forced to push rates higher. 
4. GLOBAL SUPPLY CHAINS – supply problems have impacted inflation due to the pandemic, which is different to a normal high inflation environment (inflation is usually caused by too much demand). 
5. RUSSIA/UKRAINE – the war has caused commodity supply issues for many, including energy, food and other raw materials (impacts on computer chips). It has also fuelled increased spending, particularly defence and caused population dislocation. 
6. COMMODITIES are generally an input into many goods, and price rises, especially energy have fed through the supply chain to increase costs. 
7. CHINA’s ZERO COVID policy. China has been the world’s growth engine for the last 25 years, and the zero policy pressures the Chinese economy. The last quarter’s GDP was virtually flat. Several analysts are questioning China’s ability to grow. There are other subset issues such as China/Taiwan and China’s trade relationships with the US, Europe and Australia and China’s property market. 
8. CENTRAL BANKS (CB) – quantitative tightening (QT). Over the last 15 years since the GFC, Central Banks have supported the economy by increasing the money supply and extra liquidity via quantitative easing (QE) with very little inflation. Unfortunately, CBs are starting to tighten their balance sheets which means they aren’t as supportive of the economy.    
9. STRONG US DOLLAR – the US dollar is strong against all major currencies as investors seek safety. This is causing grief for US companies who are exporting inflation (higher prices) to the rest of the world, and if debts are in USD, then the level of debt has increased, which is putting more pressure on global economies. A strong USD is helpful for some Australian companies with most of their earnings in USD (CSL BHP RIO WDS MQG LLC SHL GMG RMD AMC). 
10. PROFIT SEASON RECESSION – most global markets this year have entered a bear market (20% drop). This is mostly a result of price corrections from increases in Bond rates. However, given the above factors, market strategists are expecting company profits to reduce (especially if the consumer sentiment surveys are true), which could have further impacts on the market.  We are tracking CORE stocks closely. 
11. CONSUMER SENTIMENT In most Western economies, the consumer is 65% to 70% of GDP (economy). Recent Consumer sentiment surveys, particularly in the US, have been at record lows. Meaning the consumer isn’t confident about their economic future, and if this rings true, they will stop spending, which impacts the economy and company profits and unemployment. A vicious cycle!!  
12. And finally, we have FEAR itself. Fear of all the above issues. This makes the markets nervous, and fear is a greater emotion than greed. 

So, if you are still with me. We may be seeing some turning points. Part 3 is below.
Is the market about to turn? Part 3.
While there are lots of negatives out there. There are some signs that maybe the market turn could be close (weeks or months). 

Our best current guess is we are still in a global BEAR MARKET, and the rally seen today is part of a Bear market rally. However, the level of cash and market sentiment being SO BEARISH, as noted in the graphs, are at the extremes; this suggests the market could turn quickly on any positive news or catalyst (s).
We need to remember markets look towards the future, say 6-9 months and if things like brighter, then they could rally while things are bleak.

So what could these catalysts be? We need to revisit the list of headwinds.     

1. INFLATION – there are some signs that inflation is peaking in some areas (US). Recent drops in commodity prices, in particular, energy, could see inflation start to fall. The market would like this as opposed to inflation remaining elevated or plateauing. 
2.  INTEREST RATES – CBs have increased interest rates to reduce inflation by reducing demand. But supply is also causing inflation. If CBs slow the pace of interest rates rise or stop below market expectations, then this will be a very big positive for the market. The market has priced in cash rates to be well over 3% by year-end. Many economists don’t think that will happen. CBs will be reluctant to force a recession. The recession we had to have is not a good look in Australia
3. RECESSION RISK – if interest rates are steady, then the risk of recession reduces and, at worst, a mild recession (soft landing) rather than a hard landing (high unemployment, housing collapse, bankruptcies). Strong job demand and low unemployment make a recession difficult to achieve. NO recession risk, market rally. If we have a mild recession. The market could rally from when the recession is called as any recession is like to be short. 
4. GLOBAL SUPPLY CHAINS – some signs supply chains are improving as business inventories increase. Shipping rates are reducing, which is a positive.  
5. RUSSIA/UKRAINE – a ceasefire would be a major catalyst for a rally. While a long, drawn-out war is increasingly likely. Improved weaponry to Ukraine is putting pressure on Russia. 
6. COMMODITIES prices had a strong spike due to COVID and the war, but in recent weeks dropped in many areas by more than 20% (their own bear market). This will take pressure off inflation and interest rates. Again the energy is the key. If oil reduces to $85, then markets could rally.  
7. CHINA. China can cut interest rates and stimulate its economy. If they do push the growth button again, it will be a major catalyst for markets to rally.  
8. CENTRAL BANKS (CB) – can’t stimulate the economy like they have been doing over the last 15 years; however, if they pause quantitative tightening (QT) or slow interest rates rises, markets will take that as a very positive sign.   
9. WEAK US DOLLAR – if the US dollar starts to weaken, then this would be a positive catalyst for the market as this could mean several things. Interest rates and inflation have peaked, the global economy is improving, energy prices are reducing, and investors aren’t seeking a safe haven.  
10. COMPANY PROFITS – if company profits don’t fall as much as some expect by 10% to 20%, then markets will rally. That is why the current profit season in the US and next month in Australia are so important. We are watching the CORE stocks closely. 
11. CONSUMER SPENDING If consumer spending continues as opposed to the sentiment survey, then this will be good for the economy and companies. Unemployment is the key. Household savings and balance sheets have improved during the pandemic and so are not as leverage as during the GFC. This could cause the market to rally. 
12. And finally, if FEAR is reducing, then the recovery can take place and provide a further catalyst that things are on the up. 

We look forward to whatever catalyst(s) turns the markets higher. It’s likely to be choppy and uncertain (as the future always is). 

Please note that this is our current best guess!  
Financial Planning Snippets
– SGC is increasing to 10.5% from July 1
– The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate).
Any questions, please let us know.
Other Stories (research since last Not So)
– Global computer chip shortage is still ongoing and the main reason is the Russia/Ukraine war as a high percentage of required gases such as Neon and Krypton come from these two countries. 
Broker Target Price changes 

Ord Minnett/JP Morgan 
ANZ decreased from $25.10 to $24.20
BHP decreased from $44 to $43
JB Hi Fi (JBH) increased from $42 to $44
Origin Energy (ORG) increased from $6.10 to $6.15
Rio Tinto (RIO) decreased from $100 to $99

Morgans
JBH increased from $48 to $50 (highest broker)
RIO decreased from $114 to $113

Morgan Stanley
ANZ decreased from $24.30 to $23.10 (lowest broker)


Macquarie
BHP decreased from $50 (equal highest broker) to $48 


Bell Potter/Citigroup
ANZ decreased from $30.75 (highest broker) to $29
BHP decreased from $50 (equal highest broker) to $44.50
JBH decreased from $53 (highest broker) to $47

UBS 
JBH increased from $38 (lowest broker) to $42
RIO decreased from $98 (lowest broker) to $92 (still lowest broker)
Today’s ASX sector Movements
Best –   IT +3.8%
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 increased from 87.46% to 88.54%. Trading well below 90%. Will the market rebound? or will the analysts cut their target prices? Maybe a little of both 

Overall Earnings Per Share (EPS) 

FY22 increased from 19.68% to 20.09%. 
FY23 decreased from 7.69% to 7.35%.  

Most expensive – CBA 110.2%   
Least expensive – Nine Entertainment (NEC) cheapest at 58% 

I haven’t updated the rest since last Not So
The CORE Watchlist has 1 (1) stocks trading above 100% lowest (0) while 11 (12) are trading below 85% (highest 18). ALL ANZ BHP GMG LLC MQG NEC NXT SEK STO WBC (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 15 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. 

ALL current price $36.70     Broker range $41 to $46
ANZ current price $21.64    Broker range $23.50 to $30.75
BHP current price $36.97    Broker range $38 to $50
CSL current price $296.66   Broker range $312 to $330
JBH current price $40.88     Broker range $40.90 to $54
LLC current price $9.50       Broker range $11.40 to $14.37
MQG current price $173.33 Broker range $187 to $234
NEC current price $1.89      Broker range $2.20 to $3.80
NXT current price $11.52     Broker range $13.01 to $15.00
ORA current price $3.43     Broker range $3.70 to $4.20
RIO current price $95.27     Broker range $98 to $120 
SHL current price $34.20    Broker range $36 to $40
STO current price $7.16      Broker range $8.60 to $11
TLS current price $3.95       Broker range $4 to 4.85
WBC current price $20.15     Broker range $22 to $29

Added 

Removed  ORI
Banking Index 
Like the CORE Watchlist index, the Banking index is the four major banks’ average target price based on research from up to 6 brokers. The percentage below 100% is the potential upside over the next 12 months (not including income). If at or over 100%, then this indicates the Banks are fully priced. 

The Banking Index increased from 87.5% to 92.7%.

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.  

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.77% 142.0 6.56% 142.0 6.56% 150.6 6.96%
CBA 298.0 3.10% 350.0 3.65% 376.0 3.92% 403.4 4.20%
NAB 60.0 2.02% 127.0 4.28% 148.0 4.99% 162.2 5.47%
WBC 31.0 1.51% 118.0 5.75% 119.4 5.82% 130.6 6.36%
MQG  430.0 2.47% 470.0 2.70% 627.2 3.60% 617.2 3.54%

Interest rate rises are slowing commodity demand and this has seen a reasonable reduction in most commodity prices in the last few weeks. However, commodity prices are elevated and provide good cash flow and profits for producers.  BHP & RIO quarterly production numbers have seen a reduction in dividend forecasts but are still very healthy.  

FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 9.00% 426.20 11.48% 374.00 10.08%
RIO 1444.00 14.76% 1043.80 10.67% 940.40 9.62%

Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS)  
Other Indicators (change since the last Not So)
US VIX Index increased from 24.23 to 24.28 In a rising interest rate environment, the new trading range is likely to be 17-28. Over the last 25 years, market bottoms have seen VIX reach a minimum of 48. We are still waiting for this event! 
Iron Ore increased from $96.60 to $105.26 Brokers expect an average in 2022 to be $135 but falling to $112 in 2023.  ALL-TIME HIGH of $237.57. 
Copper increased from $3.28 to $3.33 It hit an ALL-TIME HIGH $5.03 at the start of Russian invasion. Now fallen 35%. 
Gold decreased from $1713 to $1706. Climbed above $2000 at the start of the Russian invasion. Record high $2063.  
AUD/USD increased from 68c to 69.11c. Some early signs of the USD weakening a little. USD still strongest it’s been against all currencies for 20 years.   
USD/CNY remained at $6.75.  Lowest $6.31 Highest $6.80 USD stronger. Chinese re-opening may see a stronger Yuan.
Asian markets – UP STRONGLY  
US 10 year Bonds increased from 2.93% to 2.99%. Higher inflation is pushing rates up, but we could rates drifting lower as growth expectations fall. The recent high is 3.48% (8 year high). US 30 year Bond increased from 3.10% to 3.15% The highest level was 3.50%. US Federal Reserve increased rates by 0.75% with more to come. Plus BOND selling of $95bn per month (QT).  The US 2 year rate has increased from 3.14% to 3.2%  The gap between the 2 yr and 10 years an inverse -0.21%. It remains at -0.21% but still inverted which historically has suggested a recession. Widest inverse gap was -0.24%   
German Bonds increased from 1.15% to 1.24%. The highest point in eight years 1.71% as the ECB is likely to start raising rates, maybe this week. Higher spending, higher inflation.  All German rates are now positive.
Japanese Bonds remain at 0.24%     0.44% highest in some time. Bank of Japan (BoJ) are buying Japenese Govt Bonds and now own 54%. Some are questioning how long can they keep rates suppressed.   
Aussie Bonds 10 year Bonds increased from 3.47% to 3.56%.  Recent high is 4.20% 
Other Aussie Bonds 1 year 2.65%  2 year 3.04% 4 year 3.31% 5 year 3.37% 15 year Bonds 3.70%.  
Oil prices increased from $98.74 to $102.40.  It reached $125 at the start of the invasion. Now dropped 21% into bear territory. Will help settle inflation 
Tungsten – Baltimore & Rotterdam $345-$350 mtu.. Demand is expected to grow 10% in part due to increased defence spending.  A study by UK firm Nyobolt shows tungsten assists lithium-ion batteries to be safer and charge quicker. This has seen Vietnamese tungsten refiner HC Starck invest $45m in Nyobolt.  
This week & next week 
Last “Not So” opened in 5 Aust states (excl NT Tas ACT) US 4 states (California, Massachusetts South Carolina & Connecticut), Sweden and UK, 

This week – Out of office with COVID – Chris P also has COVID. Maddy and Kevin are in the office. Ashleigh Tues and Thursday
Next week July review meetings.   

    
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 Not So DAILY BULLETIN 30 June 2022 No.487

 

The Not So DAILY BULLETIN 30 June 2022  No.487

Top Stories  

Thursday, June 30, saw a sharp sell-off at the end of the day with a fall of 132 points to finish at 6568. The lowest monthly close since Nov 2020 and a drop of 10.2% for the financial year. 

There were reports that pension fund re-balancing would occur late in the day, which would lead to a market rally. However, it wasn’t to be, and the market fell 30 points in the last 10 mins. 

As noted in the last Not So, the overall theme is for lower expectations as Central Banks have only just started raising rates. The RBA is expected to increase rates by 0.5% on Tuesday. CBA jumped the gun by raising fixed rates by a massive 1.4% today. 

As mentioned last time, most of the inflation is from supply issues, not demand; therefore, rates may not move as high as expected. History is not very kind to Central Bank governors and PMs that force a recession onto the population, as Bernie Fraser & Paul Keatings found out.    
 
The upcoming reporting season will provide further insight into whether the rising inflation and interest rates will likely affect various companies and sectors. It will have significant impacts on some and not on others. The overall market is expected to bottom when some of this clarity is provided. 
 
Caution is still warranted, but nibbling may be around the corner. 

The chart below shows the ASX 200 (purple) left-hand scale. It traded between 7000 and 7500 for most of the year and only broke out of the trading range in the last six weeks. 

The Core Index (Brown) and Banking index (Blue) right-hand scale remain below the 90% level. Over the years, a number below 90 suggested the market was likely to bounce. However, the big question at this point. WILL THE ANALYSTS CUT THEIR TARGET PRICES FURTHER? The research over the last couple of weeks would suggest YES, which means the index will increase without the market moving higher.
   
 
June Markets – CORE and ETFs

Unfortunately, June was the worst month since March 2020. The ASX fell 8.9%, and International markets (MSCI) were little better falling 8.5%.  

The only consolidation apart from holding most recommendations back in cash is the CORE watchlist was 2.2% better for the month. This has been a common theme over the year, with the CORE Watchlist as a group outperforming the ASX by 4.87% over the last six months and 5.63% over the previous year.  

The table below shows the best and worst from our stable of investment options. There are some common themes over the last month, calendar year (6 months) and financial year (12 months). 

Energy has been the stand-out sector with Woodside, Santos and Origin Energy. Computershare has done well as it makes more money when interest rates are higher. 

The worst performers have been Consumer Discretionary – Nine Entertainment, Seek.com, JB HiFi and Wesfarmers, with expectations for consumers to reduce spending. Interestingly, retail sales increased by 0.9% for the 5th month in a row. 

There were mixed results in the Exchange Traded Funds (ETF). International markets have underperformed the ASX over the calendar and financial year by a reasonable amount. 8.6% and 4.6%, respectively. 

The best ETF from the stable for the month and the only positive one was China New Economy (CNEW), up 13.9% as the Chinese economy started to reopen. At the same time, the Australian Banks (MVB) & Australian Resources (MVR) were the worst. They have been good performers over the previous months. 

Supply chains and high growth valuations have hit Robotics (RBTZ) and Nasdaq (NDQ & HNDQ).

Hoping the new financial year brings a better result.   

     
Market weakness but!

UBS research provides the following information

Global Financial Crisis (GFC) style collapse in profits is unlikely for numerous reasons.

Previous economic ‘hard landings’ have seen ASX market-wide earnings estimates cut by >30%. We don’t however see such a sharp profit correction playing out in this cycle given:
1) Our economists are not forecasting a recession,
2) Return on Equity (ROE’s) are not stretched,
3) Earnings do not look out of line with long-term trends and,
4) Balance sheets are sound.

Reduce year-end S&P/ASX 200 market target to 7000.

Top-down, markets have already largely adjusted to a more downbeat macro story: stocks have de-rated, in some cases considerably, whilst bonds now seem to be near their ceiling. But with the baton now being passed onto earnings downgrades, equity prices will be forced to fight against a more negative bottom-up story.

UBS, therefore, cut our year-end 2022 market target for the S&P/ASX 200 to 7000 (was 7700) previously. This would imply a 5% return and a -6% drop for the calendar year.

Staying OverWeight  Resource equities: Consumer Discretionary moved to UnderWeight.
Tightness is still endemic through commodity markets, and although inflation may be near a peak, the elevated bands at which it will stay should ensure that Resource equities maintain leadership within equity markets. Consumer Staples join as an Overweight recommendation, due to the visibility and stability of their earnings streams. By contrast, we switch Consumer Discretionary to Underweight given we are not inclined to fight what looks like a vicious earnings downgrade cycle hitting the sector.  

Financial Planning Snippets
– End of Year tax planning. If you need to plan tax deductions, please make contact with your accountant.
– Super – Concessional contributions (tax deduction) increased to $27.500 this year (this includes the compulsory 10% SGC).
– SGC is increasing to 10.5% from July 1
– Super – Non concessional contributions (no tax deduction, but no contributions tax). Up to $110,000 per year. if thinking of this please ask first because there are penalties if you contribute too much (especially if you have made large contributions in the past using the bring forward rule). 
– The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate).
Account Based Pensions from the super fund. The minimum is half the normal. Please make sure you have taken the minimum pension, otherwise, the super fund could revert back to accumulation and be taxed at 15% as opposed to being tax-free. 

Any questions, please let us know.  

Other Stories 
– Chinese economic data showing signs of improvement. 
– Retail sales better than expected up 0.9% (expecting 0.5%) for the 5th consecutive month. 
– CBA lifts fixed rate loans by 1.4%.  

Broker Target Price changes 
Ord Minnett/JP Morgan 


Morgans

Morgan Stanley
Goodman Group (GMG) decreased from $25.80 to $23.70 
Lend Lease (LLC) decreased from $11.40 to $11.20

Macquarie

Bell Potter/Citigroup
Coles (COL) decreased from $19.60 to $19.30
JB Hi Fi (JBH) decreased from $55 to $53


UBS 
   
Today’s ASX sector Movements
Best –   
Worst Utilities -2.9%      

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 86.49% to 84.73%. Trading well below 90%. Will the market rebound? or will the analysts cut their target prices? Maybe a little of both 

Overall Earnings Per Share (EPS) 

FY22 decreased from 19.76% to 19.66%. Started 30/6/21 with a profit forecast of 33% for FY22, so expectations have reduced over the year.     
FY23 decreased from 7.48% to 7.09%. Started 30/6/21 with a profit forecast of 8.04%, so expectations have only slightly dropped. Will they drop in the coming months as reporting season starts in August? 

Most expensive – CBA 103.7%   
Least expensive – Nine Entertainment (NEC) cheapest at 53.7% 


The CORE Watchlist has 1 (1) stocks trading above 100% lowest (0) while 11 (11) are trading below 85% (highest 18). ALL ANZ GMG JBH LLC MQG NEC NXT SEK STO WBC (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 16 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. 

ALL current price $34.38     Broker range $41 to $46
AMC current price $18.04    Broker range $18 to $19.20
ANZ current price $22.03    Broker range $23.50 to $30.75
CSL current price $269.03   Broker range $295 to $330
GMG current price $17.84   Broker range $22 to $29.50
JBH current price $38.46     Broker range $40.90 to $58
LLC current price $9.11       Broker range $11.40 to $14.37
MQG current price $164.51 Broker range $187 to $234
NEC current price $1.83      Broker range $2.20 to $3.80
NXT current price $10.64     Broker range $13.01 to $15.00
ORG current price $5.73      Broker range $6.06 to $7.70
ORI current price $15.77     Broker range $16.20 to $19.70 
SHL current price $33.01   Broker range $37.30 to $40
STO current price $7.42      Broker range $8.31 to $11
TLS current price $3.85       Broker range $4 to 4.85
WBC current price $19.5   Broker range $22 to $29


Added 
Removed   

Banking Index 
Like the CORE Watchlist index, the Banking index is the four major banks’ average target price based on research from up to 6 brokers. The percentage below 100% is the potential upside over the next 12 months (not including income). If at or over 100%, then this indicates the Banks are fully priced. 

The Banking Index decreased from 86.7% to 84.9%. The banks sold off late today.  
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.   

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.72% 142.0 6.45% 142.0 6.45% 152.6 6.93%
CBA 298.0 3.30% 350.0 3.87% 376.0 4.16% 404.4 4.47%
NAB 60.0 2.19% 127.0 4.64% 148.0 5.40% 162.2 5.92%
WBC 31.0 1.59% 118.0 6.05% 119.4 6.12% 130.6 6.70%
MQG  430.0 2.61% 470.0 2.86% 627.2 3.81% 617.2 3.75%

Demand for commodities and potential reduction of supplies occurring. Commodity prices and Resources usually do well in higher inflation & rising interest rate environment.   

FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 8.10% 461.80 11.20% 395.40 9.59%
RIO 1444.00 14.06% 1259.17 12.26% 976.83 9.51%

Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS)    

Other Indicators (change since the last Not So)
US VIX Index increased from 26.95 to 28.16 In a rising interest rate environment, the new trading range is likely to be 17-28. Above the top of the range (a contrarian view is the higher the VIX, the better buying opportunity). Over the last 25 years, market bottoms have seen VIX reach a minimum of 48. We are still waiting for this event! 
Iron Ore increased from $120.60 to $121.50 Brokers expect an average in 2022 to be $139 down from $142.  ALL-TIME HIGH of $237.57. 
Copper decreased from $3.78 to $3.76 It hit a NEW ALL-TIME HIGH $5.03 
Gold decreased from $1827 to $1817. Climbed above $2000 at the start of the Russian invasion. Record high $2063.  
AUD/USD decreased from 69.27c to 68.79c. USD stronger on higher interest rates from the US Federal Reserve. USD strongest it’s been against all currencies for 20 years.       
USD/CNY decreased from $6.70 to $6.69.  Lowest $6.31 Highest $6.80 USD stronger. Chinese re-opening may see a stronger Yuan.
Asian markets – MIXED  
US 10 year Bonds decreased from 3.18% to 3.10%. Higher inflation is pushing rates up. The recent high is 3.48% (8 year high). US 30 year Bond decreased from 3.30% to 3.22% The highest level was 3.50%. US Federal Reserve increased rates by 0.75% with more to come. Plus BOND selling of $95bn per month (QT).  The US 2 year rate has decreased from 3.09% to 3.04%  The gap between the 2 yr and 10 years was 0.09%. It has decreased to 0.06% & not inverse but very close (inverse suggests a recession).  
German Bonds decreased from 1.54% to 1.51%. The highest point in eight years 1.71% as the ECB is likely to start raising rates, this year. Higher spending, higher inflation.  All German rates are now positive.
Japanese Bonds increased from 0.22% to 0.23%     0.44% highest in some time. Bank of Japan (BoJ) are buying Japenese Govt Bonds and now own 54%. Some are questioning how long can they keep rates suppressed.   
Aussie Bonds 10 year Bonds decreased from 3.74% to 3.69%.  Recent high is 4.20% 
Other Aussie Bonds 1 year 2.42%  2 year 2.99% 4 year 3.36% 5 year 3.45% 15 year Bonds 3.84%.  
Oil prices increased from $105 to $109.95.  It reached $125. EU mostly banning Russia oil and China re-opening. 
Tungsten – Baltimore & Rotterdam $345-$350 mtu  

This week & next week 
Last “Not So” opened in 5 Aust states (excl NT ACT) US 6 states (California, Massachusetts Colorado South Carolina Virginia & Connecticut) and UK, 

This week – Out of office tomorrow – Regional Victoria
Next week Out all week – Port Douglas and Cairns seeing clients.  

    
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 Not So DAILY BULLETIN 31 May 2022 No.480

 

The Not So DAILY BULLETIN 31 May 2022  No.480

Top Stories  

Tuesday, May 31, the ASX dropped 75 points to finish at 7211, which is up from the last Not So, but the ASX is down for May by 3.01%. In recent months, the Australian market has held up reasonably well, but selling pressure and profit-taking have been a feature of any rallies. Today’s drop was after a gain of 104 points yesterday, so the volatility remains high. As I have mentioned, we are still within the trading range of 7000 to 7500, which is a good sign. A change of government seems to have been priced in by the market; however, increased talk of new taxes may change that, given none were mentioned in the election campaign. 

International markets staged a slight recovery last week, with the US having their first positive week in 7. Economic data released last week shows that inflation may have peaked in the US. This would be an excellent signal, and if correct, it could settle interest rate forecasts and put less pressure on stock prices. Another positive is the Chinese lockdowns are being reduced as of tomorrow. This has assisted some of the Asian markets. 

There is still lots of talk of bear markets and even recessions. The Citigroup Bear checklist below explains why they think we won’t have these events; however, we know markets can be very fickle, positive one week or day and negative the next. We believe there is still plenty of volatility to come over the coming weeks, and we haven’t seen the capitulation event yet. Kevin and I will be holding our investment meeting tomorrow to discuss the latest data.
 
Caution is still warranted.    

Market Signals
Most of the financial news we see continues to be negative; 
– Higher inflation
– Rising interest rates
– China lockdowns
– Russia/Ukraine conflict
– Global supply chain issues.
– US economy slowing
– US markets are nearing a BEAR market
 
However, all this news is changing some of the closely watched market signals.

One of the main ones is Citigroup’s Global Bear Market checklist (BMC)

Citigroup noted the global Bear Market Checklist (BMC) wants to buy this dip, given it hit only 8.5/18 red flags at last year’s peak in equity markets (see checklist table below)

When the BMC falls to the current 6/18 red flags, buying has generated healthy 12mth gains (average +31%), even in multi-year bear markets. But we suggest patience; the BMC is not a market-timing indicator. Europe/EM Less Stretched Than US — The US showed more red flags (9/18) than Europe (6/18) or EM (4.5/18) at last year’s global market peak. Hence, the BMC would instead buy the dip in EM/Europe than the US. 

Bear Market Checklist — This looks at a broad range of market and fundamental indicators, including valuation, credit spreads, analyst bullishness, profitability, IPOs, M&A, US yield curve and credit spreads.

At any time, some may give bearish signals, but others look benign. Last December: 8.5/18 Red Flags — The BMC measures the frothiness of the previous market peak. Last December, red flags were raised by stretched valuations, high IPO activity, bullish stock analysts, and peak-cycle profitability. More benign indicators included low credit spreads, middling M&A, low-ish equity fund inflows, and a reasonable equity risk premium.

Buy The Dip8.5/18 red flags is well below 13/18 reached immediately before the 2007-09 bear market and 17.5/18 prior to the 2000-03 drawdown. Hence, the BMC still wants to buy this dip. It is now down to 6/18 red flags. Buying when the BMC declines to this level has led to very healthy 12m gains (average +31%), even in previous multi-year bear markets.

The BMC was designed to suggest action when the inevitable dips come along. If the number of red flags was low as the sell-off began then the signal might be to buy the dip. If it was high, then stay away. The BMC’s last strong call was in the 2020 Covid sell-off. Given there were only 5.5/18 red flags at the February peak beforehand, it always wanted to buy the subsequent dip. The MSCI AC World fell 35% in March, but had recovered all of its losses by September.

While 8.5/18 was the most red flags in 15 years, to signal the next major bear market, it probably needs double digits. We did not get there. The BMC has made its call. It wanted to buy this dip. Sure, there was froth evident at the December 2021 market peak, but not enough to require an extended bear market to clear it out.
     

CORE & ETF’s performance May 2022
The ASX dropped 3% for May. As normal, the performance of individual stocks and sectors were mixed with a range of results. I have included the best and worst three for the month, calendar year CY (5 months) and financial year FY (11 months).

The CORE stock for the month was Amcor, up 8% as their 3rd quarter results were better than expected, and they have contracts where they pass on any cost increases to customers. At the same time, entertainment stock  Channel Nine (NEC) was down 18% on expected lower ad revenue. Goodman Group (GMG) had its first poor month in many years and is now on the BUY radar. 

The Exchange Traded Funds (ETFs) saw a range of results. China New (CNEW) was the best, up 5% as cheap valuations and growing interest in China, with the expected lockdowns to finish soon.

The technology orientated indices are still suffering from a lack of computer chips and supply chain issues. 

Over the CY and FY, Resources, Banks, Infrastructure, and Health have held up well compared to other global market sectors.
     
Other Stories 
– LABOR is likely to finish with 77 seats and a majority. 
– Local Member Sussan Ley (Farrer) is the Deputy Liberal leader & Local Deniliquin resident Perin Davey (Senator NSW) is the Deputy National Party leader. Congratulations to both. Likely to increase the voice of the bush.  
– CBA expecting housing to fall 10% this year.
– Most economists are expecting Aust quarterly GDP to be 0.5% to 0.8%. Released tomorrow.
– EU has agreed to ban most of the Russian oil, but oil prices are up on Chinese demand increasing.
– Chinese lockdown slightly ease in some cities tomorrow.      

Broker Target Price changes 

Ord Minnett/JP Morgan 
ANZ decreased from $29 to $28.30
Goodman Group (GMG) decreased from $23 (lowest broker) to $22 (still lowest broker)

Morgans
BHP decreased from $54.30 to $48.30
Woodside Energy (WDS) decreased from $33.60 to $32.90

Morgan Stanley
GMG decreased from $27.88 to $25.98

Macquarie
BHP decreased from $60 (highest broker) to $57 (still highest broker)
Nine Entertainment (NEC) decreased from $2.80 (lowest broker to $2.20 (still lowest broker)
Origin Energy (ORG) increased from $7.19 to $7.32 
Santos (STO) decreased from $10.50 to $10
Seek.com (SEK) decreased from $32  (equal lowest broker) to $19 (lowest broker)

Bell Potter/Citigroup
BHP decreased from $56 to $50

UBS 
BHP decreased from $43 (lowest broker) to $38 (still lowest broker)
Wesfarmers (WES) decreased from $59 (highest broker) to $56  

Today’s ASX sector Movements
Best –  Utilities 0%
Worst Financials -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 87.73% to 88.56%. Below 90% (usually a good entry point).   

Overall Earnings Per Share (EPS) 

FY22 increased from 19.23% to 19.47%. Bank & Commodity profit forecasts are up.  
FY23 decreased from 7.78% to 7.2%. 

Most expensive – CBA 112.3% 
Least expensive – Nine Entertainment (NEC) cheapest at 64.8% 

The CORE Watchlist is still mixed with 2 (1) stocks trading above 100% while 8 (10) are trading below 85% (highest 17). ALL GMG JBH NEC NXT RMD SEK STO (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 14 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24.  Good value to be found.  

ALL current price $33.79     Broker range $41 to $46
ANZ current price $25.04     Broker range $26 to $32
COL current price $17.53     Broker range $18 to $20.65
CSL current price $271.83   Broker range $295 to $335
GMG current price $20.55    Broker range $22 to $29.50
JBH current price $45.96     Broker range $54 to $62
MQG current price $185.98 Broker range $187 to $234
NAB current price $31.26    Broker range $31.80 to $35
NXT current price $11.01     Broker range $13.50 to $15.00
RMD current price $27.76    Broker range $33.10 to $40.46
SHL current price $36.66     Broker range $37.30 to $40
TLS current price $3.88       Broker range $4 to 4.85
WES current price $47.19    Broker range $50 to $59
WOW current price $34.65   Broker range $36 to $40.50

Added TLS
Removed NEC SEK   

Banking Index 
Like the CORE Watchlist index, the Banking index is the four major banks’ average target price based on research from up to 6 brokers. The percentage below 100% is the potential upside over the next 12 months (not including income). If at or over 100%, then this indicates the Banks are fully priced. 

The Banking Index decreased from 95.9% to 96%.  

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. Slight increases in dividend forecasts from the brokers.   

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.36% 142.0 5.60% 142.0 5.60% 154.2 6.08%
CBA 298.0 2.84% 350.0 3.33% 377.0 3.59% 406.4 3.87%
NAB 60.0 1.93% 127.0 4.08% 147.8 4.76% 163.3 5.25%
WBC 31.0 1.32% 118.0 5.01% 118.4 5.03% 128.2 5.45%
MQG  430.0 2.40% 470.0 2.63% 627.2 3.51% 617.2 3.45%

Demand for commodities and potential reduction of supplies occurring. Commodity prices and Resources usually do well in higher inflation & rising interest rate environment.   

FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 6.99% 430.60 9.01% 348.00 7.28%
RIO 1444.00 13.07% 1292.50 11.70% 993.50 8.99%

Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS)    

Other Indicators (change since the last Not So)
US VIX Index decreased from 28.48 to 26.54 In a rising interest rate environment, the new trading range is likely to be 17-28. Above the top of the range (a contrarian view is the higher the VIX, the better buying opportunity).
Iron Ore increased from $135.97 to $136.60 Brokers expect an average in 2022 to be $142.  ALL-TIME HIGH of $237.57. 
Copper increased from $4.30 to $4.36 However, it hit a NEW ALL-TIME HIGH $5.03 
Gold decreased from $1854 to $1847. Climbed above $2000 at the start of the Russian invasion. Record high $2063.  
AUD/USD increased from 70.8c to 72c. USD stronger on higher interest rates from the US Federal Reserve. USD strongest it’s been against all currencies for 20 years.       
USD/CNY decreased from $6.67 to $6.66.  Lowest $6.31 Highest $6.80 USD stronger. Will the Chinese intervene? 
Asian markets – DOWN  
US 10 year Bonds decreased from 2.84% to 2.83%. Higher inflation is pushing rates up. The recent high is 3.2% (3 year high). US 30 year Bond decreased from 3.04% to 3.03% The highest level was 3.30%. US Federal Reserve is increasing rates and may increase by 0.5% at the next meeting, plus BOND selling of $95bn per month (QT).  The US 2 year rate has decreased from 2.61% to 2.56%  The gap between the 2 yr and 10 years was 0.23%. It has remained at 0.23% & not inverse (inverse suggests a recession).  
German Bonds increased from 1.01% to 1.07%. The highest point in several years 1.10%.  Higher spending, higher inflation.  Only the 1 year Bond is now negative.
Japanese Bonds increased from 0.23% to 0.24%        0.25% highest in some time.   
Aussie Bonds 10 year Bonds increased from 3.32% to 3.35%.  Recent high is 3.56% 
Other Aussie Bonds 1 year 2.04%  2 year 2.73% 4 year 3.06% 5 year 3.15% 15 year Bonds 3.58%.  
Oil prices increased from $109 to $118.59.  It reached $125. EU mostly banning Russia oil and China re-opening. 
Tungsten – China remained at $342-$353mtu. Europe & US remained at $348-$359mtu.    

This week & next week 
Last “Not So” opened in 5 Aust states (excl WA Tas & ACT) US 5 states (California, Massachusetts Virginia South Carolina & Connecticut).

This week –  In the office – May reviews.
Next week Will be in the office Monday and Tuesday. Wednesday- Friday preparing for father (Bill’s memorial service). Passed 9 June 2021.  

    
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 Not So DAILY BULLETIN 22 April 2022 No.472

 

The Not So DAILY BULLETIN 22 April 2022  No.472

Top Stories  

Friday, April 22, the ASX fell sharply by 120 points or -1.6%, to finish at 7473. This brings the ASX back within the recent trading range of 7000 to 7500 as it tried to break higher over the last couple of days.

On Tuesday, we are likely to see the market lower again as the ASX future is lower after the DOW sold off nearly 1000 points and Iron ore fell in Singapore by 11%.

There is a range of reasons for the recent weakness: the Russian invasion, higher inflation, supply chain issues, increasing interest rates, higher commodity prices, labour shortages & Chinese COVID  lockdowns; however, companies seem to be weathering the storm. US reporting season has been reasonable so far, but investors are concerned about the rate of interest rate hikes by the US Federal Reserve. 

The Chinese COVID lockdowns are sending a short term signal that demand may be weaker. It will depend on how long the lockdowns are in place as China continues to target a ZERO COVID strategy. 

The US VIX index (fear index) has moved to 28, at the high end of the range.  In recent years a number higher than this has been a good entry point into the market (contrarian indicator). We will be watching closely. 

Optimism may be a little light on this week as negative headlines appear to be stronger. Australia has its quarterly inflation figure on Wednesday. If it’s bad, the market may sell-off.    

Investment Outlook 

Provincial Wealth’s – Investment Committee Chair – Brad Matthews provided his investment outlook.

Inflation expectations and interest rates adjusted particularly sharply over March. The movements on bond markets appeared to acknowledge the central bank’s commitment to managing inflation and ultimately “normalising” the interest rate structure.
 
Despite the magnitude of the bond yield increase, equity, property and infrastructure markets held up remarkably well last month, in contrast to a past tendency to sell-off in response to tighter monetary conditions. As suggested by the U.S. Federal Reserve Chairman, Jerome Powell, if economic fundamentals are strong, the increase in yields should not derail economic growth and company earnings. Share markets appear to have accepted this logic for now, which is reinforced by economic data that continues to show underlying strength.
 
However, outside of the change in interest settings, other risks to equity markets have also heightened over the past quarter. In particular, cost increases are likely to place pressure on the profit margins of many businesses; whilst the rising price of consumer staples (e.g. energy and food) will act to reduce consumer spending in other more discretionary areas.  These pressures were already in existence prior to the Russian invasion of Ukraine – however this military conflict has heightened their severity.
 
Given the bounce back in share prices over recent weeks, it is arguable as to how much of the increased risk of prohibitive cost pressures are factored into equity market valuations. As such, a more cautious approach to equity market exposures may need to be considered. More defensively positioned sectors are not necessarily the attractive risk minimising option they were a few months ago, as valuations have risen quickly. Global listed infrastructure, for example, has outperformed the broader global equity market by 12.3% over the past 3 months.
 
A geographic region that does stand out as offering potentially attractive valuations is Asia, and more specifically, China. One of the few economies not to be in a monetary tightening phase, Chinese authorities have indicated a willingness to do what is required to stimulate their economy to achieve growth targets. For various reasons, this policy commitment is not reflected in share market valuations or sentiment, with the Chinese equity market now trading 15% below the level recorded one year ago – compared with a positive 11% for the broader global equity market.

Another investment class now offering more attractive valuations is Australian fixed interest duration. Three-year government bond yields at 2.3% appear particularly compelling and somewhat detached from consensus economic forecasts and central bank guidance around the path of cash interest rate increase. It may be that the recent ceasing of the RBA bond purchase program, and the uplift in overseas yields, has resulted in local bond yields rising above what is justified by fundamentals. Hence, an opportunity to introduce more duration into fixed interest portfolios should be considered, given the size of the margin now on offer above variable cash interest rates.  

Stock valuations 

While equity markets are seeing increased volatility due to the Russian invasion, higher inflation, supply chain issues, increasing interest rates, higher commodity prices, labour shortages & Chinese lockdowns.

The Australian market has continued to be seen as a safe haven and has outperformed most of the other major markets in recent months. Overall, this has made us a little more cautious regarding investing in the recommendations, and we continue to take a drip in approach. 

While global indexes still look fully priced with Price to Earnings ratios (PE’s) well above long term averages, our Core Watchlist provides some insights that not all things look overpriced and value lies in some areas. 

Firstly, the CORE Watchlist is currently at 92% (which suggests the market has an 8% upside over the next 12 months. In March, it dipped below 90% when the ASX dropped to below 7000. Historically when the CORE is below 90%, it’s a good entry point. 

Based on the current research, the following stocks in the CORE Watchlist look reasonably priced.

1. Amcor (AMC) – industry – packaging. Target price $18.44, trading at 87% of target price (TP).  Profit growth FY22 11% & FY23 5%. PE 13.8 times. Gross yield 3.98%. Broker research 5 BUY 1 HOLD 0 SELL (5-1-0). Amcor passes any cost pressures on as it’s part of their contracts which should help them manage inflation. 

2. ANZ Bank (ANZ) – industry – banking. Target price $29.60, trading at 93.9% of target price (TP).  Profit growth FY22 -4% & FY23 9%. PE 12.7 times. Gross yield 6.65%. Broker research 4 BUY 2 HOLD 0 SELL. ANZ cheapest of the banks. Results are coming in early May

3. BHP  – industry – materials. Target price $53.33, trading at 90.9% of target price (TP).  Profit growth FY22 34% & FY23 -6%. PE 8.5 times. Gross yield 12.26%. Broker research 5 BUY 1 HOLD 0 SELL. World’s largest miners with huge cashflow. Energy assets being demerged to Woodside.    

4. Goodman Group (GMG) – industry – property trusts. Target price $26.88, trading at 87.9% of target price (TP).  Profit growth FY22 22% & FY23 14%. PE 25.9 times. Gross yield 1.27%. Broker research 3 BUY 2 HOLD 0 SELL. Global property development & manager of industrial warehouses. Continues to deliver 10% profit growth. Internet shopping has continued to grow the demand for warehouses. 

5. Macquarie Group (MQG) – industry – global investment bank. Target price $226.90, trading at 91.5% of target price (TP).  Profit growth FY22 37% & FY23 -7%. PE 19.8 times. Gross yield 3.46%. Broker research 4 BUY 0 HOLD 0 SELL. Global investment bank. Likely to receive a upkick from energy prices. MQG has a history of underpromising and over-delivering.  

6. Nine Entertainment (NEC) – industry – media entertainment Target price $3.54, trading at 79.8% of target price (TP).  Profit growth FY22 21% & FY23 8%. PE 14.3 times. Gross yield 5.47%. Broker research 4 BUY 1 HOLD 0 SELL. Exposure across all media forms. Election spending will help. 

7. Santos (STO) – industry – energy Target price $9.80, trading at 82.7% of target price (TP).  Profit growth FY22 83% & FY23 21%. PE 9.1 times. Gross yield 3.23%. Broker research 3 BUY 3 HOLD 0 SELL. Energy prices are likely to remain high. 

8. Wesfarmers (WES) – industry – retail Target price $54.88, trading at 89.8% of target price (TP).  Profit growth FY22 -9% & FY23 13%. PE 22.6 times. Gross yield 4.93%. Broker research 1 BUY 5 HOLD 0 SELL. High-quality business, suffering due to supply chains and cost inflation. Never looks cheap but a little unloved in recent months. Good quality management.   

BHP/Woodside demerger

BHP is expected to receive WPL shares at completion and determine a fully franked in specie dividend of the WPL shares to BHP shareholders, where BHP shareholders are expected to be entitled to one WPL share for every 5.5340 BHP shares they hold.

WPL shares will increase from a market cap of A$32.7bn (1.45% 200 Index weight) to approximately A$63.6bn (2.82%) based on the last close price of A$32.90 (April 8,2022). Based on WPL’s share price on April 6,2022, the implied BHP Petroleum value is US$23.4bn, which implies the in-specie dividend would be US$4.62 (A$6.2) with US$1.98 (A$2.65) franking credits per BHP share (US$10bn total franking credits)

Listing dates 
Thursday May19,2022- WPLgeneral meeting to vote on whether to approve the merger.
Wednesday May25,2022- First day (commencement of trading) BHP shares trade ex-dividend on ASX
Wednesday, June1,2022- Completion and in specie dividend payment date.
Thursday, June2,2022- New Woodside Petroleum shares start trading on ASX  

Provincial Wealth Management – New Licensee 

We have sent the agreements away; we will be limited to how much information we will have access to. We have been informed that this might mean a period without access. So far, so good.   

Other Stories 
– Australian Federal Election May 21. At the start, Sportsbet: Labor $1.30 Coalition $3.10. Today Labor $1.70 Coalition $2.10. Albanese out with COVID. 
– Russian coal exports down 17%.
– World Bank cuts 2022 GDP to 3.2% from 4.1% (growth was 5.7% in 2021.
UBS expects inflation Wednesday 1.6% for quarter and 4.5% for year. 
Citigroup expects inflation to be 1.8% quarter (headline) and 1.2% (underlying). Year headline 4.7% and Core 3.4%. RBA will pay attention to the CORE numbers.  

Broker Target Price changes 

Ord Minnett/JP Morgan 
Brambles (BXB) decreased from $12.25 to $11.95 
Rio Tinto (RIO) decreased from $118 to $116
Transurban (TCL) decreased from $15.40 (highest broker) to $15

Morgans
BHP increased from $51.80 to $54.30
BXB increased from $10.05 to $11.07
RIO decreased from $117 to $114
TCL increased from $14.29 to $14.42 

Morgan Stanley
BXB increased from $9.50 (lowest broker) to $10.20  (still lowest broker)
Computershare (CPU) increased from $25 to $28.20 (highest broker)
CSL increased from $302 to $310
Santos (STO) increased from $10.40 to $11 (highest broker)

Macquarie
BHP decreased from $61 (highest broker) to $60 (still highest broker)
Lend Lease (LLC) decreased from $12.32 to $12.22
TCL decreased from $14.96 to $14.86
Woodside (WPL) decreased from $31.30 to $29.50

Bell Potter/Citigroup
BXB increased from $12.12 to $12.29
BHP increased from $48 to $56
RIO increased from $120 to $135 
STO increased from $8.05 (lowest broker) to $8.13 (still lowest broker)
 
UBS 
STO increased from $8.90 to $9.90
WPL increased from $29 to $32.90   

Today’s ASX sector Movements
Best –  Energy +1%   
Worst –   REIT’s (Property Trusts) -0.5%  

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 increased from 91.97% to 92.68%. 

Overall Earnings Per Share (EPS) 

FY22 increased from 17.14% to 18.01%. Commodity upgrades
FY23 increased from 7.40% to 8% Commodity upgrades  

Most expensive – CBA 108.7% 
Least expensive – Aristrocrat (ALL) cheapest at 69.2%  

The CORE Watchlist is still mixed with 7 (8) stocks trading above 100% while 6 (7) are trading below 85% (highest 17). ALL CSL NEC NXT SEK STO (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 12 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24.  Good value to be found.  

ALL current price $32.66     Broker range $46 to $49
AMC current price $16.04    Broker range $18.14 to $18.83
ANZ current price $27.78     Broker range $28.60 to $30.50
CSL current price $270.86   Broker range $295 to $335
GMG current price $23.62    Broker range $24.66 to $29.50
JBH current price $51.83     Broker range $54 to $62
MQG current price $207.60  Broker range $209 to $245
NXT current price $11.20     Broker range $13.50 to $15.00
RMD current price $32.30    Broker range $33.10 to $40.46
SEK current price $27.57     Broker range $32 to $35
SHL current price $36.41     Broker range $37.30 to $40
WES current price $49.30    Broker range $50 to $59

Added 
Removed LLC ORA   

Banking Index 

Like the CORE Watchlist index, the Banking index is the four major banks’ average target price based on research from up to 6 brokers. The percentage below 100% is the potential upside over the next 12 months (not including income). If at or over 100%, then this indicates the Banks are fully priced. 

The Banking Index increased from 100.9% to 101.1%.  

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.   

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.16% 142.0 5.11% 143.4 5.16% 153.4 5.52%
CBA 298.0 2.83% 350.0 3.32% 381.2 3.62% 410.4 3.89%
NAB 60.0 1.79% 127.0 3.79% 139.0 4.15% 149.6 4.47%
WBC 31.0 1.28% 118.0 4.87% 120.2 4.96% 130.8 5.40%
MQG  430.0 2.11% 470.0 2.31% 656.0 3.22% 636.8 3.13%

Demand for commodities and potential reduction of supplies occurring. Commodity prices and Resources usually do well in higher inflation & rising interest rate environment.   

FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 6.89% 430.60 8.88% 348.00 7.18%
RIO 1444.00 12.71% 1292.50 11.38% 993.50 8.75%  
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS)    

Other Indicators (movement since the last Not So)
US VIX Index increased from 24.26 to 28.21. In a rising interest rate environment, the new trading range is likely to be 17-28. 
Iron Ore decreased from $154.85 to $150.85 Brokers expect an average in 2022 to be $142 up from $138 last month.  ALL-TIME HIGH of $237.57. Dropped heavily in Singapore on Monday down 11%.  
Copper decreased from $4.73 to $4.58. However, it hit a NEW ALL-TIME HIGH earlier this month of $5.03 
Gold increased from $1976 to $1933. Climbed above $2000 at the start of the Russian invasion. Record high $2063.  
AUD/USD decreased from 74.39c to 72.38c. USD stronger on higher interest rates from the US Federal reserve.       
USD/CNY increased from $6.37 to $6.50. $6.31 lowest since 20014. USD stronger 
Asian markets – DOWN   
US 10 year Bonds increased from 2.80% to 2.97%. Higher inflation is pushing rates up. The recent high is 2.97% (3 year high). US 30 year Bond increased from 2.87% to 2.95% The highest level was 2.95%. US Federal Reserve is increasing rates and may increase by 0.5% at the next meeting, plus BOND selling of $95bn per month (QT).  The US 2 year rate has increased from 2.44% to 2.64%  The gap between the 2 yr and 10 year was 0.36%. It has narrowed to 0.31%, but not inverse.  
German Bonds increased from 0.80% to 0.97%. The highest point in several years 0.8%.  Higher spending, higher inflation.  Only the 1 year Bond is now negative.
Japanese Bonds increased from 0.24% to 0.25%    0.25% highest in some time.   
Aussie Bonds 10 year Bonds increased from 3.08% to 3.12%. Lowest point 0.68%  Recent high is 3.12% 
Other Aussie Bonds 1 year 1.68%  2year 2.40% 4 year 2.84% 5 year 2.93% 15 year Bonds 3.31%.   Rates have risen again. Interesting to see the quarterly inflation number.
Oil prices increased from $100.15 to $101.75.  It reached $125. If sanctions are placed on Russian oil and gas, prices might move higher; however, some Russian oil will find back door ways of entering the market which will bring oil prices down.   
Tungsten – China increased from $335-$347 to $342-$353mtu. Europe & US increased from $345-$352 to $348-$359mtu  

This week & next week 
Last “Not So” opened in 5 Aust states (excl NT WA & ACT) US 5 states (California, Massachusetts South Carolina, Virginia & Connecticut) & UK. 

This week – April reviews/ Licensee issues. 

Next week April reviews/ Licensee issues

    
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 Not So DAILY BULLETIN 28 March 2022 No.467

 

The Not So DAILY BULLETIN 28 March 2022  No.467

Top Stories  
Today, Monday, March 28, the ASX continued its recent rally with another gain of 6 points to finish at 7412. It was up 40 points during the day but faded in the afternoon. This is the highest level since January 17 and continues the strong bounce for the month.

Not all ASX boats (companies) are rising as today’s gain was BHP which was up 2.3% of 20 points. As noted in previous Not So, the gains are mainly in the financial, energy and materials sectors. It seems the Australian safe haven view is continuing for global investors. A number of the research houses have upgraded their commodity forecasts over the last week with the prolonging of the global supply chain issues. 
      
The ASX has performed reasonably well in recent weeks compared to other major markets, as shown by the graph below from the Coppo report. A raft of economic data is being released this week, so markets are likely to remain volatile, especially with the Russian conflict continuing and the Chinese COVIDS lockdown.  

Optimism is on hold for the time being.  
 
Overweight Australian Equities

Ord Minnets head of Institutional research Malcolm Wood provided the following. 

We remain overweight Australian equities despite our concerns that the US Federal Reserve is dramatically “behind the curve” in this tightening cycle. We see six positives for the Australian market.

First, world-leading performance during the COVID crisis that we do not believe is reflected in markets.
Second, strong positioning and fundamentals should drive an extended boom, but without the inflationary excesses confronting the US and other Anglo Bloc peers.
Third, these factors should drive double-digit earnings growth over the next year and increase the chances of soft-landing.
Fourth, liquidity conditions are likely to remain supportive for longer than in the US, as the Reserve Bank can lag well behind the US Fed, and China is easing liquidity.
Fifth, net inflows into super funds have rebounded to the 2nd highest level on record, whilst signs of speculative excess are mainly absent.
Finally, valuation is at a large discount to the US and better prepared for rising bond yields.

All of these point to a reasonable outlook.   

Citigroup Analyst survey 

Citigroup surveys their research analysts quarterly regarding their views on specific Australian stocks. They ask a range of generic questions. I have made a list of the responses related to the CORE Watchlist stocks. 

1. Will an increase in the AUD be a benefit to profit – YES.   AMC BHP BXB CPU NXT ORA
2. Will an increase in the AUD detract from profits – YES. CSL GMG MQG RIO RMD SHL TCL WPL
3. Is the company likely to have a capital share buyback next year. AMC ANZ CBA NAB RMD SHL WBC
4. Is the industry outlook improving. BHP BXB CSL LLC ORI RIO RMD WPL.
5. Is the Industry outlook worsening  GMG MQG NAB
6. Upside surprise to profits BHP BXB COL CPU GMG JBH LLC ORA RIO WOW WPL
7. Increased Capital Expenditure COL LLC NXT ORA RIO TCL WES WPL
 
There is a range of answers, but overall the survey provided a positive view of some of the storm clouds such as inflation, interest rates, supply chain and Russian invasion.   

Commodities

Morgan Stanley’s research said  
Inflation + supply disruption drives commodities upgrades: Inflation expectations, rising input costs (particularly energy), and supply impacts (from Ukraine/Russia)have tipped several commodities into larger deficits than past forecasts (in the near term), which has led to significant commodity price upgrades across a raft of hard and soft commodities.

Upgrades have also occurred from UBS Ords, Macquaire and Morgans in the last week.

The RBA commodities index may push above the 2010 highs in the coming weeks. At the same time, there is an increasing chance (from a low base) of a resolution in the Ukrainian crisis over the next month or so. The knock-on effects in commodity markets are likely to be felt for many months after.
       

Federal Budget 
Treasurer Josh Frydenberg will hand down a pre-election budget on Tuesday night.

Part of the pre-budget announcements included

the extension of the COVID minimum pensions from super funds. This is where 50% of the normal pension amount is paid based on your age. This has been extended for 1 more year until June 2023.  
– temporary freezing of petrol excise. 
– more on infrastructure.  

Semiconductors (computer chips) and changing globalism
 
U.S. Investor Howard Marks – newsletter
 
Capitalism is based on the desire to maximize income. Globalization allows production to be performed where the costs are lowest. The combination of these two powerful forces has had a profound influence on the world over the last half-century. 

Semiconductors present an outstanding example of this trend. Many of the most important early developments in electronics – transistors, integrated circuits, and semiconductors – took place at U.S. companies such as Bell Labs and Fairchild Semiconductor. In 1990, the U.S. and Europe were responsible for over 80% of global semiconductor production. By 2020, their share was estimated to be only around 20%. Taiwan (led by Taiwan Semiconductor Manufacturing Company (TSMC)) and South Korea (essentially Samsung) have taken the place of the U.S. and Europe as the largest producers of semiconductors. Today, “TSMC and Samsung are the only companies capable of producing today’s most advanced 5-nanometer chips that go into iPhones.”  The upshot is well known:

While pandemic-induced shutdowns have hampered supply, the demand for chips has continued surging with reopening economies. The resulting chip shortage has rattled several industries with lead times – the gap between when a semiconductor is ordered and when it is delivered is at a record high of 22 weeks. 
 
The chip shortage is a boon to semiconductor companies, but downstream firms are struggling. Global automakers are set to make 7.7 million fewer cars in 2021, which translates into a $210 billion hit to their revenues. Consumer electronics have taken a blow as well, with popular products like the PlayStation 5 console in short supply. 

While this is likely to impact the short term, main companies are reassessing their supply chains which may change the expanding globalisation as we have known for the last 50 years. Many are looking to other sources and domestic markets which may not be the cheapest option, but more reliable. Time will tell.   

Macquarie Cash Management Accelerator interest rate RISE!
Macquarie has informed us they have increased the interest rate for the Macquarie Accelerator account to 0.6% from 0.4%. This is ahead of the RBA making any changes to the cash rate with most expecting to still happen in the latter part of the year (data-dependent). 

This rate is also higher than most term deposits and doesn’t lock the investment in for a period of time. This rate is likely to move higher over the coming year. 

Morgans Stanley expects the RBA to increase rates by 0.75% this year and be at 1.75% by Dec 23. 
Goldman Sachs expects the RBA to eventually increase cash rates to 2.5% by Dec 2024.   

Provincial Wealth Management – New Licensee  No new news. Timeline for exit 1/4/22.
We will notify you of any other changes. 

Other Stories 
– Russian Ruble rallied to 98 from 102 to the USD over the last week. 12 months ago it was 67. Hit a low of 140. Russia has been paying interest on a number of loans. Talk of India buying cheap Russian oil.   
– Dividends coming. $36bn of dividends ($26bn same time last year) will be paid by Australian companies in the next two weeks. Mainly thanks to resources (BHP & RIO). BHP paying $10bn tonight. CBA $2.9bn  & Fortescue $2.6bn Wednesday, 
– Yemen rebels attacking Saudi oil facility.   

Broker Target Price changes 
Ord Minnett/JP Morgan 
JB Hi Fi (JBH) increased from $57 to $62 (highest broker)
Resmed (RMD) decreased from $38 to $37 

Morgans
BHP increased from $48.70 to $51.80
JBH increased from $57 to $58
NAB increased from $30 (lowest broker) to $30.50 (still lowest broker) 

Morgan Stanley
Rio Tinto (RIO) increased from $122.50 to $130

   
Macquarie
RMD decreased from $38.50 to $37.50 
Santos (STO) increased from $10 to $10.50 (highest broker)


Bell Potter/Citigroup
JBH increased from $54 to $55
NAB increased from $32.50 to $34.50 (highest broker)
STO increased from $7.20 (lowest broker) to $8.19 (still lowest broker)
Woodside (WPL) increased from $25 (lowest broker) to $29.35 
 
UBS 
BHP increased from $42 (lowest broker) to $43 (still lowest broker)
Computershare (CPU) increased from $25 (equal highest broker) to $27 (highest broker)
Rio Tinto (RIO) increased from $90 (lowest broker) to $104 (still lowest broker)   

Today’s ASX sector Movements
Best –  Materials 1.3%   
Worst –  IT -2.7%     

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 91.63%. – UBS research included

Overall Earnings Per Share (EPS) 

FY22 decreased from 15.06% to 16.08% More commodity upgrades.
FY23 increased from 6.24% to 6.96% More commodity upgrades  

Most expensive – CBA 109.5% 
Least expensive – Aristrocrat (ALL) cheapest at 75.2%  

The CORE Watchlist is still mixed with 5 (3) stocks trading above 100% while 8 (8) are trading below 85% (highest 17). ALL AMC CSL GMG NEC NXT RMD STO (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 16 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24.  Good value to be found.  

ALL current price $36.09     Broker range $46 to $49
AMC current price $14.88    Broker range $18.14 to $18.83
ANZ current price $27.79     Broker range $28.050 to $30.50
CSL current price $261.86   Broker range $295 to $335
GMG current price $22.13    Broker range $24.66 to $29.50
JBH current price $53.95     Broker range $54 to $57.80
LLC current price $10.81     Broker range $11.40 to $14.37
MQG current price $200.09  Broker range $209 to $245
NXT current price $11.08     Broker range $13.50 to $15.00
ORA current price $3.62       Broker range $3.70 to $4.07
RMD current price $31.26    Broker range $33.10 to $40.46
SEK current price $28.97     Broker range $32 to $35
SHL current price $35.03     Broker range $37.30 to $40
TCL current price $13.13     Broker range $13.55 to $15.40 
TLS current price $3.87       Broker range $4.00 to $4.90
WES current price $49.74    Broker range $50 to $59


Added RMD WES
Removed NEC  

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 remained at 100.8% Banks have bounced strongly. CBA 113.6% NAB 99.5% WBC 96.6% ANZ 93.4% 

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.   

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.16% 142.0 5.11% 143.4 5.16% 152.4 5.48%
CBA 298.0 2.81% 350.0 3.30% 381.2 3.59% 410.4 3.87%
NAB 60.0 1.88% 127.0 3.98% 139.0 4.36% 149.6 4.69%
WBC 31.0 1.29% 118.0 4.91% 120.2 5.00% 130.8 5.44%
MQG  430.0 2.15% 470.0 2.35% 603.8 3.02% 596.5 2.98%

Demand for commodities and potential reduction of supplies occurring. Commodity prices and Resources usually do well in higher inflation & rising interest rate environment.   

FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 6.56% 413.80 8.13% 308.40 6.06%
RIO 1444.00 12.19% 1331.33 11.24% 1083.50 9.15%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS)    

Other Indicators (movement since the last Not So)
US VIX Index decreased from 22.94 to 20.81. After the initial spike, Russia/Ukraine war has seen the index come down from a high of 38. Normal range of 10-17. 
Iron Ore increased $143.40 to $150.80 Brokers expect an average in 2022 to be $138 up $125 last month.  ALL-TIME HIGH of $237.57. 
Copper decreased from $4.70 to $4.66. However, it hit a NEW ALL-TIME HIGH earlier this month of $5.03 
Gold increased from $1922 to $1943. Climbed above $2000 at the start of the Russian invasion. Record high $2063.  
AUD/USD increased from 74.62 to 75.29. AUD is seen as a safe haven and a stronghold for commodities, which may move higher.      
USD/CNY remained at $6.37. $6.31 lowest since 20014. USD stronger 
Asian markets – MIXED. 
US 10 year Bonds increased from 2.41% to 2.53%. Higher inflation pushing rates up. The recent high was 2.53%. The lowest point in a number of months was 1.12%. The US 30 year Bond remained 2.63% The highest level was 2.63%. US Federal Reserve increasing rates and may increase by 0.5% at the next meeting. The yield curve is flattening which means the shorter-term rates (1 to 5 years) have been increasing more than the longer rates (10-15 years). The US 2 year rate has increased from 2.17% to 2.37%  The gap between the 2 yr and 10 year was 0.24% now 0.16%. 
German Bonds increased from 0.50% to 0.59%. The highest point in several years.  1yr to 2yr Bonds are still negative. Higher spending, higher inflation.  
Japanese Bonds increased from 0.22% to 0.25%        0.25% highest in some time.   
Aussie Bonds 10 year Bonds increased from 2.77% to 2.89%. Lowest point 0.68%  Recent high is 2.89% 
Other Aussie Bonds 1 year 1.06%  2year 1.79% 4 year 2.57% 5 year 2.67. 15 year Bonds 3.08%.   Rates have moved higher. 
Oil prices decreased from $110.79 to $110.52.  It reached $125. If sanctions are placed on Russian oil and gas, prices might move higher.   
Tungsten – China remained at $335-$347. Europe remains at $345-$352 mtu  

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

This week – Working on licensee change over & March reviews.  

Next week New licensee 

    
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 Not So DAILY BULLETIN 17 January 2022 No.452

 

The Not So DAILY BULLETIN 17 January 2022  No.452


 
Top Stories
Today, Monday, January 17, the ASX started the week with a gain of 23 points to finish at 7417. This is 27 points higher than the last Not So and continues the trading range the ASX seems to be in over the last couple of months as the market tries to deal with the headwinds of inflation, omicron, interest rates and supply chain issues. 

While Chinese GDP grew 8.1% in 2021 (better than expected), we are likely to see a continuation of supply chain issues coming from China in the coming weeks as they still have a ZERO COVID policy with millions in lockdowns. Additionally, we are coming up to Chinese New Year (end of January), which is a slow time of the year, followed by the Winter Olympics in Beijing. If the Summer Olympics is any guide, China shut down thousands of manufacturing and industrial factories and mines to reduce pollution. This is likely again, which will flow onto ports, cargo and shipping.

The US will be starting their quarterly profit results. This may indicate what we may expect in February when Australian companies report their half-yearly results. 

We are still cautiously OPTIMISTIC but selective. 
Market outlook 1 
AMP’s Shane Oliver updated his weekly market outlook.  
– Global shares are expected to return around 8% this year but expect to see the long-awaited rotation away from growth & tech heavy US shares to more cyclical markets in Europe, Japan & emerging countries.
– Inflation, the start of US Federal Reserve rate hikes, the US mid-term elections & China/Russia/Iran tensions are likely to result in a more volatile ride than 2021. Mid-term election years normally see below average returns in US shares and since 1950, have seen an average top-to-bottom drawdown of 17%, usually followed by a stronger rebound.
– Australian shares are likely to outperform (at last) helped by stronger economic growth than in other developed countries, leverage to the global cyclical recovery and as investors continue to search for yield in the face of near zero deposit rates but a grossed-up dividend yield of around 5%. Expect the ASX 200 to end 2022 at around 7,800. Australian market more value style than growth style.
– Still very low yields & a capital loss from a rise in yields are likely to again result in negative returns from bonds.
– Unlisted commercial property may see some weakness in retail and office returns, but industrial is likely to be strong. Infrastructure is expected to see solid returns.
– Australian home price gains are likely to slow with prices falling later in the year as poor affordability, rising fixed rates, higher interest rate serviceability buffers, reduced home buyer incentives and rising listings impact.
– Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
– Aussie $ probably taking it to around $US0.80 but likely to be choppy.
Market Outlook 2 
Macquarie provided its first update for the year.

•    Investor sentiment has soured noticeably as we have entered the new calendar year. Record high omicron case numbers and decade high inflation readings driving fears of more aggressive rate hikes have dented confidence and driven many investors to rush for the exits in 2021 high flying winners. 

•    At the epicentre of the sell-off has been technology stocks particularly those trading on extreme valuations, meme stocks, cryptocurrencies, SPAC’s (Special Purpose Acquisition Companies) and anything else which is rate sensitive such as real estate and to a lesser extent high multiple healthcare stocks.

•    The correction in parts of the equity market is concerning, but the sell-off remains isolated and we doubt it is a harbinger of weakness for the broader market for several reasons:

1.    Performance within equity markets has been bifurcated with weakness confined to areas that are sensitive to rising rates such as those on elevated valuations and/or which have received large speculative inflows through 2021

2.    Many “cyclicals” and “back to work” stocks that are leveraged to stronger economies (reopening) and demand normalization have looked through recent weakness to trade higher including energy, financials and materials

3.    Surging inflation has not driven a spike in long term inflation expectations or bond yields. Bond yields are still well below pre-pandemic levels despite inflation reaching multi-decade highs. This reflects a view that inflation is a short-term problem; and 

4.    We doubt the current “spec-tech wreck” will spill over into the broader market. The sector is dominated by industry titans that are profitable and do not trade on extreme multiples. In addition, the sector remains exposed to many structural growth themes and is now relatively diversified in its earnings base. If bond yields remain well behaved, then the froth needs to be removed, but that should remain isolated, not universal. 

•    We don’t think the rotation that is taking place in some areas of the market is over yet, but we think it is close. Some caution is needed for stocks exposed to higher rates, but Macquarie forecast US 10-year yields to end 2022 at just 1.9% – only 10 basis points above the current level – and this is unlikely to undermine the economic recovery. We don’t see price action as a concern for our equity overweight, or for our call that recent inflation prints undermine the reopening trade. We stay invested.
Investment Meeting 
Kevin Hanson and I held our first investment meeting for the year.

We noted that markets had recovered from a short sell-off before Christmas. Still, markets seem to be range-bound due to new headwinds of inflation, Omicron, rising rates, supply chain issues and reduced liquidity from QE tapering.

The unknown factors at this stage, will these be powerful headwinds (gale) or light headwinds (zephyr)? 

The updates from AMP Shane Oliver and Macquarie above probably some up our current thinking. 

We reviewed and made the following changes to our ETF and Direct Shares ratings.

The rating between 0% &o 100% is our current view on the value of purchasing the investment NOW. 100% happy to do so. 50% have a nibble and 0% no. 

No rating changes were made to the ETF’s. 

Direct Shares

Goodman Group (GMG)
up to 66% from 50%. After a strong run in recent months, the price has dropped back in January. The target price (TP) is 88%. Broker research 4 BUY 1 HOLD 0 SELL (4-1-0)

JB Hi-Fi (JBH) 
up to 100% from 75%. The price has dropped back, but TP 84.5%, Price to Earnings Ratio (PE) 12.9 with a dividend of 4.74% plus franking (based on last year). 
Morgan Stanley today upgraded to BUY. Broker research 4-1-0.

Macquarie Group (MQG) 
up to 66% from 50%. Price drifting a little after hitting record highs. The target price is 93% (it doesn’t seem to drop below 90%). PE 21 times with a strong earnings outlook. Broker research 4-0-0.  

Resmed (RMD)
up to 66% from 50%. Price drifted back. Target price 91%. Sleep apnea is a global issue. Broker research 2-3-0.

Seek.com (SEK) 
up to 50% from 25%. Price drifted back. Target price 88%. Strong profit pipeline. Broker research 2-3-0

Wesfarmers (WES) 
up to 50% from 25%. It has been trading well above the target price for some time but is currently at 92%. Like MQG, it never looks cheap but continues to deliver. Broker research 2-3-1.
Other Stories 
– Chinese GDP grew 8.1% in 2021. They reduced a key interest rate to provide further stimulus. 
– BHP re-unification on the ASX to be voted on Jan 20. This is unwinding the dual listing on UK market. If this occurs BHP will be the largest stock on the ASX. The big Australian returns. BHP market capitalisation $233bn CBA $172bn CSL $133bn. Rio Tinto which has a dual listing still has a combined market cap (ASX and UK ) of $178bn.
Broker Target Price changes 

Ord Minnett/JP Morgan 
Telstra (TLS) increased from $4.60 (highest broker) to $4.85 (still highest broker)
Computershare (CPU) increased from $15 (lowest broker) to $17.24 

Morgans


Morgan Stanley
Rio Tinto (RIO) decreased from $110.50 to $109 

Macquarie

Bell Potter/Citigroup
CBA increased from $106 (highest broker) to $108 (still highest broker)

UBS 

 
Today’s Sector Movements
Best –  Consumer Discretionary +2.2%
Worst –  Materials -1%
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.  

Each year we review the stocks in the CORE. We have made the following changes

OUT – AMP – Insurance and Crown (Consumer Services) 

IN – Aristocrat Leisure (ALL) – Consumer Services and Santos (STO) Energy – recently merged between Santos and Oil Search 

The Core index increased from 91.28% to 91.51%.

Brokers are continuing to raise their target prices. 
Overall Earnings Per Share (EPS) 

FY22 increased from 8.47% to 8.64%   

Most expensive – CBA at 113.8% 
Least expensive – NextDC (NXT) cheapest at 73.7%. It stores cloud computing. Sold off in the tech sell off. 

The CORE Watchlist is still mixed with 4 (3) stocks trading above 100% while 3 (5) are trading below 85% LLC NEC NXT  (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 14 out of the 30 CORE stocks are trading below the lowest broker target price. Good value to be found. 

ALL current price $44.49     Broker range $51 to $52
AMC current price $17.07    Broker range $17.50 to $20
BXB current price $10.44     Broker range $11.04 to $13.35
COL current price $16.39     Broker range $17.60 to $19.90
CSL current price $278.10    Broker range $280 to $340
GMG current price $22.94    Broker range $24 to $27.50
JBH curre price $46.64         Broker range $52.50 to $54
LLC current price $10.61      Broker range $11.40 to $16.52
NEC current price $2.73       Broker range $2.90 to $3.75
NXT current price $11.15      Broker range $14 to $16.10
SHL current price $40.27      Broker range $42.25 to $50.72
TLS current price $4.25        Broker range $4.50 to $4.60
WBC current price $21.47    Broker range $22 to $29.50
WOW current price $35.45   Broker range $36.65 to $41 
 
Added GMG SHL 

Removed ANZ BHP STO 
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 97.7% to 98.4%
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.   

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.09% 142.0 4.94% 145.8 5.08% 154.4 5.38%
CBA 298.0 2.95% 350.0 3.46% 380.2 3.76% 404.4 4.00%
NAB 60.0 2.00% 127.0 4.24% 137.4 4.59% 147.2 4.91%
WBC 31.0 1.44% 118.0 5.50% 121.0 5.64% 132.2 6.16%
MQG  430.0 2.07% 470.0 2.26% 576.3 2.78% 581.5 2.80%  

BHP & RIO’s share prices dropped back today.   

FY21 cps % FY22 cps % FY23 cps %
BHP 401.00 8.69% 355.75 7.71% 293.80 6.37%
RIO 1405.80 12.78% 913.20 8.30% 763.20 6.94%

Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS) 
Other Indicators 
US VIX Index decreased from 19.40 to 19.19 Normal range of 10-17. 
Iron Ore increased from $125.45 to $126.75. The lowest point for 18 months was $88.  Brokers expect an average in 2022 $108.40.  ALL-TIME HIGH of $237.57. 
Copper increased from $4.38 to $4.43. Reduced from ALL-TIME HIGH of $4.90  
Gold increased from $1805 to $1819. Record high $2063.  
AUD/USD increased from 71.85 to 72.04.    
USD/CNY decreased from $6.37 to $6.35. New 3 years low  
Asian markets – MIXED    
US 10 year Bonds increased from 1.76% to 1.79%. The lowest point in a number of months was 1.12% but has rebounded. we have reached the recent high of 1.79% The US 30 year Bond increased from 2.09% to 2.13%. The highest level was 2.47% for 18 months.  
German Bonds decreased from –0.033% to -0.037%. The recent high was -0.033% (but still negative). Hit a low of -0.9%. This is the highest for some time. The negative European rates are likely to be a headwind for higher US rates.  
Japanese Bonds increased from 0.144% to 0.15% (highest in some time).   
Aussie Bonds 10 year Bonds increased from 1.89% to 1.91%. Lowest point 0.68%  Recent high is 2.10% 
Other Aussie Bonds 1 year 0.57% (this rate actually went negative in the 6 months)  2 year 0.79% 4 year 1.42% 5 year 1.58%. 15 year Bonds 2.22%.   Rates are starting to move higher.
Oil prices increased from $78.75 to $84.19. This has helped energy stocks     
Tungsten – China remained at $315mtu. Europe increases to $326-$330mtu
This week & next week  Last “Not So” opened in 5 Aust states (excl NT, Tas & ACT) & US 3 states (California Massachusetts South Carolina & Virginia) Singapore & UK.

This week – Catching up 

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 Not So DAILY BULLETIN 17 December 2021 No.446

 

The Not So DAILY BULLETIN 17 December 2021  No.446

Top Stories  

On Friday, December 17, the market gained 8 points to finish at 7304, lower than the Not So of 7379.

Part of the drop related to CSL’s significant capital raise of $6bn to purchase a Swiss company. CSL dropped 8% yesterday, back to the issue price, which was surprising given several brokers increased their target price (see below). 

The US Federal Reserve meeting brought forward several decisions (quicken the reduction in Bond Buying) and potentially three interest rate rises in 2022 to try and slow inflation down. In previous periods this would have spooked the market, but it has reacted quite rationally (at this point). There seems to be an unlying trend, and investors are starting to favour companies with real profits and earnings growth (Value or Quality). As opposed to some of the more hyped investment areas such as Buy Now Pay Later (Afterpay down 49% from year high) or Unprofitable Technology stocks or Electic car companies (Tesla down 27% Lucid -39% and Rivain -41%). 

The Australian Government MYEFO update showed an improvement in the deficit, but an expected tailwind for the economy from election spending.   

The markets are a little undecided on what to focus on. Omicron, US Federal Reserve, Inflation, robust economic data, Russia/Ukraine or the traditional Santa Claus rally. 

We are still Optimistic, but volatility is likely to persist.   

Central Bank meetings

A raft of Central Bank meetings was held over the last few days.

Summary provided by AMP’s Shane Oliver

The US Federal Reserve (US Fed) sped up the taper (reduced Bond buying program) and is now flagging three interest rate hikes next year, with US Fed Chair Powell sounding more hawkish (bullish). Quantitative easing (QE) Bond Buying in the US is now set to end in March, clearing the way for the first interest rate hike in the June quarter.

The European Central Bank (ECB) confirmed it will end its pandemic emergency QE program as scheduled in March but will increase its regular bond purchases to smooth the adjustment. The ECB remains relatively dovish, and rate hikes look unlikely until 2023. The Bank of England (BoE) raised its cash rate for the first time to 0.25%, with inflation concerns dominating Omicron uncertainty.

The Bank of Japan (BoJ) largely left its monetary stimulus unchanged, although it will pare back its holdings of corporate debt. In Australia, Governor Lowe flagged a likely end to QE in May but continued to push back against expectations for rate hikes in 2022. The upshot is that key central banks are moving towards monetary tightening, but at different speeds. However, monetary policy at major central banks looks like it will be very easy into next year – just less so.

The US Fed has a chart or dot plot of US Fed officials’ interest rate expectations (see below). It does not see rates getting above its perceived neutral or long-run level out to 2024. This may pose risks for inflation – but it’s also important for the economic cycle. While the first-rate hikes in tightening cycles can cause corrections it’s usually only when monetary policy becomes tight after numerous rate hikes (17 by the US Fed prior to the GFC, 9 prior to the 2018 US share market slump) that it becomes a problem for the economy and share markets.

But tight monetary policy still looks to be a long way off. It’s the same in Australia – our expectation for two rate hikes next year taking the cash rate to 0.5% by year-end will still leave Australian monetary policy ultra-easy.  



Commodities 
Morgans chief economist Michael Knox updated his view on commodities. 

In July 2020, we suggested that the expansion of the US budget stimulus would generate the beginning of a new resources boom as historically, US deficits are positive for commodity price. 

The question is, what is going to happen to commodity prices from now on? In Figure 3 (chart below), Morgans model of Australian export commodity prices in $US terms, driven by the level of the US budget deficit. The model assumes that the US budget deficit leads the Australian export prices by about two years. The model appears to work well enough. And allows Morgans to calculate an estimate for future values of the RBA index out to December 2027.

The model suggests that the RBA index, which stood at 142.70 in November 2021, will peak for this cycle at around 189.6 sometime in 2022. This means there is still significant upside in the Australian export commodity prices in the year ahead, and it is likely that the best is still to come.

This view is somewhat reinforced by UK Broker SP Angel when looking at China.

Omicron disruption to mine supply to cut metal availability and cause prices to spike
– China is ramping up power supplies and may disregard climate change targets to ensure economic growth.
– Expect further stimulus in China to ensure economic stability and ongoing job creation.
– Shenzhen is acting as a testing ground for new infrastructure investment for urban re-modernisation.
– Quotas for >$300bn of debt have recently been released to provincial authorities indicating greater debt issuance through 2022.
– Next year, two new cities are planned to require massive investment and >150 development projects.
– So far, China has controlled Covid though it may find Omicron a more challenging foe, not that they will openly admit any failings in containing the virus.
– Western manufacturing is also likely to slow as Omicron disrupts factories and services.
– Already tight commodity supply chains combined with low inventory levels could easily lead to shortages of critical raw materials, mainly tin, copper and nickel.
– If China continues to grow and mines are disrupted, metals can only go one way.
 
 
Other Stories 
– Supply chain – LA and Long Beach ports in the US have been the log jammed with containers and ships. The backlog is down to 101 ships (170 at the worst), suggesting supply chain issues may be starting to ease.   
– US Regulators investigating the Buy Now Pay Later sector. 
– UBS updated their ASX 200 index target to 7800 for end of 2022.
– Sunrice (SGLLV) has announced a half-yearly dividend of 10c and a 1/2 yearly profit of $16.7m up 38.1% . They traditionally only have an annual dividend. 
– Australia’s unemployment rate fell to 4.6% after adding a huge 366,000 jobs in November.
– ACCC stated they won’t oppose the BHP/Woodside energy deal. 
– CSL taking over Swiss company. Launched Australia’s largest cap raise $6.3bn at $273 per share.
– US Senate and Congress have agreed to raise the Debt ceiling again. This was seen as a potential to create market volatility if they didn’t agree.
– Sonic Health (SHL) acquired Texas pathology firm with $110m of revenue.   

Broker Target Price changes 
Goldman Sachs


Ord Minnett/JP Morgan 
CSL increased from $285 to $315
JB Hi Fi (JBH) decreased from $55 (highest broker) to $54 (equal highest broker)
Wesfarmers (WES) increased from $54 to $64 (highest broker)
Woolworths decreased from $43 (highest broker) to $41 (still highest broker)

Morgans
CSL increased from $324.40 to $334.70
WOW decreased from $37.45 to $36.65

Morgan Stanley


Macquarie
BHP increased from $51 to $52
Orica (ORI) decreased from $15.32 to $14.92
WOW decreased from $41.50 to $40

Bell Potter/Citigroup
CSL increased from $325 to $340 (highest broker)
WOW decreased from $40.40 to $39

Today’s Sector Movements

Best –   Materials +1.2% 
Worst –  IT -3.9%   

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 92.25 to 91.44%.

Brokers are continuing to raise their target prices. 
Overall Earnings Per Share (EPS) 
FY21 decreased from 31.79% to 30.6%
FY22 increased from 8.42% to 9.36%   
Most expensive – CBA back to being the most expensive at 113.4% 
Least expensive – Lend Lease is now the cheapest at 78.5%      

The CORE Watchlist is still mixed with 5 (6) stocks trading above 100% while 7 (8) are trading below 85% (AMP BHP LLC NEC NXT  WBC WPL). (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 13 out of the 30 CORE stocks are trading below the lowest broker target price. Good value to be found. 

AMC current price $16.73    Broker range $17.50 to $20
AMP current price $0.90      Broker range $0.95 to $1.25
ANZ current price $27.63     Broker range $28.30 to $31.82
BHP current price $41.40     Broker range $45.70 to $51
BXB current price $10.71     Broker range $11.04 to $13.84
LLC current price $10.53     Broker range $11.40 to $16.52
NEC current price $2.76       Broker range $3 to $3.75
NXT current price $12.25     Broker range $14 to $16.10
ORG current price $5.10      Broker range $5.25 to $6.10
RIO current price $98.00      Broker range $101 to $133
TLS current price $4.09       Broker range $4.40 to $4.60
WBC current price $21.03   Broker range $22 to $29.50
WPL current price $21.90   Broker range $22.82 to $33.50  

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 increased from 95% to 96%
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. 
   
FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.17% 142.0 5.14% 146.5 5.30% 154.3 5.59%
CBA 298.0 3.01% 350.0 3.53% 382.3 3.86% 401.5 4.05%
NAB 60.0 2.08% 127.0 4.41% 138.3 4.80% 146.8 5.09%
WBC 31.0 1.47% 118.0 5.61% 121.2 5.76% 131.2 6.24%
MQG  430.0 2.09% 470.0 2.29% 568.4 2.77% 566.2 2.76%  

BHP & RIO’s share prices continue to rally.  

FY21 cps % FY22 cps % FY23 cps %
BHP 401.00 9.69% 364.80 8.81% 296.67 7.17%
RIO 1400.33 14.29% 941.00 9.60% 804.83 8.21%
Please note RIO is Calendar Year (CY). Cents per share (CPS)  Plus franking.   

Other Indicators 
US VIX Index increased from 20.31 to 20.57 Normal range of 10-17. 
Iron Ore increased from $114.20 to $116.06. Australian MYFEO report had $55. The lowest point for 18 months was $88.  Brokers expect an average in 2022 increase from $106 to $108.70.  ALL-TIME HIGH of $237.57. 
Copper increased from $4.27 to $4.30. Reduced from ALL-TIME HIGH of $4.90  
Gold increased from $1786 to $1803. Record high $2063.  
AUD/USD increased from 71.03 to 71.66.    
USD/CNY increased from $6.36 to $6.37. Strongest in 3 years at $6.36. 
Asian markets – DOWN    
US 10 year Bonds decreased from 1.42% to 1.41%. Bond yields safe haven due to Omicron. The lowest point in a number of months was 1.12% but has rebounded. The recent high of 1.79% The US 30 year Bond increased from 1.81% to 1.85%. The highest level was 2.47% for 18 months.  
German Bonds increased from –0.38% to -0.35%. Hit a low of -0.9%. The highest for some time is -0.088%. The negative European rates are likely to be a headwind for higher US rates.  
Japanese Bonds decreased from 0.042% to 0.04%   
Aussie Bonds 10 year Bonds increased from 1.55% to 1.61%. Lowest point 0.68%  Recent high is 2.10% 
– Other rates 1 year 0.29% 2 year 0.41% 4 year 1.30% 5 year 1.38%. 15 year Bonds 1.95%.     
Oil prices increased from $70.99 to $71.63.   
Tungsten – China increased from $310mtu to $314 mtu. EQR Bankable Feasibility Study (BFS) was released yesterday.  NPV $131m (representing 15% of known reserves). IRR 151% Mine life based on 15% of known reserves is 12 years and Capex is $19m.        

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

This week – Finishing November reviews and CPD points 

Next week – finishing jobs before Christmas.

Our office will be closed from COB Thursday, December 23 and reopening Tuesday, January 4
    

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 Not So DAILY BULLETIN 30 November 2021 No.442

 

The Not So DAILY BULLETIN 30 November 2021  No.442

Top Stories  

Tuesday, November 30, saw the market rebound 16 points to finish at 7256 or down 0.93% for November. 

It looked better through the day as the market hit a high of 7333, but the market was sold off late in the afternoon, with the banks, utilities and consumer staples dragging the market back. 

Late this afternoon, the Moderna CEO said the existing vaccines would be less effective against Omicron, which caused the US future to fall and may explain some of the late drop in our market.

Additionally, fund managers had some end-of-month portfolio rebalancing and the sizeable transitional portfolio mentioned in the Bell Potter Coppo report.

It looks like volatility will remain for a while until this variant is understood.

We are still Optimistic, but volatility is likely to persist.   

Omicron? 
A new COVID variant has emerged from Southern Africa, where there are low vaccinations rates. Unfortunately, COVID will continue to be an issue until we get the WHOLE world vaccinated. Currently, there have been 7.94bn doses administered (more than any other vaccine in history) at a rate of 30m doses a day, which means 54.2% of the world’s population have had one dose, but only 5.8% of low-income countries have had one dose. So if we don’t help the rest, we are unlikely to reach the POST COVID world. 

China has just announced they are donating 1 billion doses to African countries. The West will need to do something similar or more significant to win the diplomatic war.   

The early reports about Omicron suggest it may be milder, and the vaccine makers (Pfizer, AstraZeneca, Moderna) can have a variation made within 100 days. Markets initially sold off on the new variant news but have calmed at the beginning of the week.  It would also suggest that interest rates aren’t rising soon and probably more attuned with the Central Banks rather than the market, especially for the US Federal Reserve and the RBA (see table below).  

Morgan Stanley believes we are well into the middle of this current economic cycle; Nineteen months have passed since the end of the Covid-19 recession, the shortest US recession ever, which lasted just two months from February to April 2020. Moving forward, Morgan Stanley has six key views regarding the global outlook:

1) Inflation is transitory.
2) Global growth will remain above trend.
3) Central banks will raise interest rates much slower than current market pricing.
4) The new Covid variant Omicron, at least for now, is expected to have a limited impact on Morgan Stanley’s global growth forecasts.
5) Australia is doing well.
6) They continue to prefer Equities over Fixed Income.

After markets closed – Moderna CEO said the vaccines are likely to be less effective against OMICRON. The DOW futures dropped. 
   

When the FEAR index (VIX) jumps quickly

Bell Potter’s Coppo report yesterday provided some interesting data. 

It showed that when the VIX index (fear gauge) spikes more than 40% in one day as it did on Friday, the US markets tend to be higher in the coming months. As shown in the table below, the last 19 times it has occurred (since 1990), the S&P 500 has been higher (on average)  by … 
1 week later    +0.67%
1 month later  +0.16%
3 month later  +4.71%
6 month later  +10.86%
9 month later  +16.25%
1 year later      +20.22%

In fact, over the nine months, it’s been higher EVERY TIME. The one year is also looking good, but it’s waiting on the 27/1/22 to confirm the trend, but it’s well on track at this stage.

This would suggest this is a good entry point, especially with the potential of a Santa Rally in December.  
 
November review CORE and ETF’s
The ASX 200 finished November lower by 0.93%, which is similar to most markets around the world (assuming a reasonably flat finish for Europe and the US tonight).

Overall the CORE Watchlist outperformed the ASX this month by 1.39%. The figures below do not include income.

The best-performing stocks in the CORE Watchlist this month were Goodman Group up 12.74% (Industrial warehouses), Crown 10.84% (new takeover offer) and BHP 7.64% (recovery from last month). While the domestic banks of WBC -20% and CBA -10.49% dragged the market down. 

Over the calendar year (11 months) and financial year (5 months), Macquarie continued to perform over both periods while Telstra has been a surprise up 36% this year.   

On the flip side, AMP, Lend Lease, Iron ore producers and Domestic banks have lagged. 

The stable of Exchange Traded Funds has seen mixed results. 
One of the significant moves was the AUD versus the USD, which saw it fall 5% for the month from 75c to 71c. This will assist the unhedged International options and our exporters. 

The month best was China New Economic (CNEW), up 14.5% as the domestic consumer strengthens in China and the health and technology sectors improve. The Nasdaq (NDQ) continues to deliver overall periods with a gain of 10.78% for the month and one of my favourites, Global Quality (QUAL), up 7.95%

While the Banks ETF (MVB) was down 7%. 

Over the calendar year and financial year. The US markets have performed the best along with Spheria (SEC), a specialised smaller companies fund up 34.73%. The global investment themes continue to perform with Cybersecurity (HACK) up 14% for the five months.   

On the flip side, we see a common theme of weakness in Asian markets, partly due to China’s slowdown and supply chain issues.  
Other Stories   
–  Macquarie Group (MQG) finalised their share purchase plan by ACCEPTING ALL APPLICATIONS. A total of $1.3bn at a price of $191.28. The new shares start trading on 6 December. MQG closed today at $196.74.
– Australia’s current account hit another record surplus in October of $23.9bn. Exports increased $8.6bn while Imports only increased $1.6bn. This was driven by high coal and LNG prices as well as increased farming output. 
– China PMI (Purchasing Managers Index) figures were released today at 52.2 up from 50.8 (over 50 and the economy is expanding). This was higher than expected. China seems to be recovering from a soft lockdown patch. 
– Walmart CEO told a video conference with President Biden that they had seen container improvement of 26% in the last 6 weeks and the two LA ports had improved by 51% since they went 24/7. This suggests the supply chain issues may be easing.  
– Brazilian Iron Ore producer Vale downgraded supply expectations which have provided support to BHP and RIO.    

Broker Target Price changes 
Goldman Sachs


Ord Minnett/JP Morgan 


Morgans
Rio Tinto (RIO decreased from $112 to $104

Morgan Stanley


Macquarie


Bell Potter/Citigroup
   
Today’s Sector Movements
Best –   Communications +1.8%
Worst –  Utilities -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 decreased from 91.27% to 91.11%.

Brokers are continuing to raise their target prices. 
Overall Earnings Per Share (EPS) 
FY21 remained at 31.57%
FY22 increased from 8.41% to 8.42%   
Most expensive – Computershare at 107.3%
Least expensive – Westpac is now the cheapest at 76.9%      

The CORE Watchlist is still mixed with 6 (7) stocks trading above 100% while 8 (8) are trading below 85% (AMP BHP BXB LLC NXT RIO WBC WPL). (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 13 out of the 30 CORE stocks are trading below the lowest broker target price. Good value to be found. 

AMC current price $16.22    Broker range $17.50 to $20
AMP current price $1.03      Broker range $1.12 to $1.25
ANZ current price $26.70     Broker range $28.30 to $31.82
BHP current price $39.37     Broker range $46.05 to $54
BXB current price $10.01     Broker range $11.04 to $13.84
LLC current price $10.68     Broker range $11.40 to $16.52
NEC current price $2.94       Broker range $3 to $3.75
NXT current price $12.10     Broker range $14 to $16.10
ORG current price $4.80      Broker range $5.25 to $6.10
RIO current price $93.50      Broker range $101 to $133 
TLS current price $4.07       Broker range $4.40 to $4.60
WBC current price $20.52   Broker range $24.50 to $30
WPL current price $21.43   Broker range $22.82 to $33.50  

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 91.7% to 90.1%.

The new variant and the transitional portfolio switch may delay the bank rally, but value starting to appear at these levels for those underweight the banks. 

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. CBA’s dividend has been reduced.   

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.25% 142.0 5.32% 146.5 5.49% 154.3 5.78%
CBA 298.0 3.20% 350.0 3.76% 382.3 4.10% 401.5 4.31%
NAB 60.0 2.20% 127.0 4.65% 138.3 5.07% 146.8 5.38%
WBC 31.0 1.51% 117.7 5.73% 120.8 5.89% 132.0 6.43%
MQG  430.0 2.19% 470.0 2.39% 568.4 2.89% 566.2 2.88%

Both BHP & RIO’s share price has rallied over the last week. 
    FY21 cps % FY22 cps % FY23 cps %
BHP 401.00 10.19% 364.80 9.27% 296.67 7.54%
RIO 1400.33 14.98% 941.00 10.06% 788.83 8.44%

Please note RIO is Calendar Year (CY). Cents per share (CPS) 
Plus franking.   

Other Indicators 
US VIX Index increased from 18.58 to 22.76. It did spike above 28 on Friday. Normal range of 10-17. 
Iron Ore increased from $102.35 to $103.27. The lowest point for 18 months was $88.  Brokers expect an average in 2022 of $106.  ALL-TIME HIGH of $237.57. 
Copper decreased from $4.39 to $4.34. Reduced from ALL-TIME HIGH of $4.90  
Gold decreased from $1798 to $1790. Record high $2063.  
AUD/USD increased from 71.39 to 71.42.   
USD/CNY decreased from $6.39 to $6.37. Strongest in 3 years at $6.37. 
Asian markets – UP    
US 10 year Bonds decreased from 1.56% to 1.50%. Bond yields jumped on inflation. The lowest point in a number of months was 1.12% but has rebounded. The recent high of 1.79% The US 30 year Bond decreased from 1.89% to 1.85%. The highest level was 2.47% for 18 months.  
German Bonds remained at -0.31%. Hit a low of -0.9%. The highest for some time is -0.088%. The negative European rates are likely to be a headwind for higher US rates.  
Japanese Bonds increased from 0.065% to 0.069%   
Aussie Bonds 10 year Bonds decreased from 1.79% to 1.72%. Lowest point 0.68%  Recent high is 2.10% 
– Other rates 1 year 0.22% 2 year 0.36% 4 year 1.27% 5 year 1.33%. 15 year Bonds 2.12%. Aussie rates moved lower today.    
Oil prices decreased from $76.17 to $70.61. Oil fell 13% last Friday. Regained half this week.  
Tungsten – China remained at $313mtu. Europe remained at $325 mtu.      

This week & next week 
Last “Not So” opened in 6 Aust states (excl NT & Tas) & US 3 states (California Massachusetts & South Carolina).

This week – November reviews. 

Next week – software data transfer
    
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 Not So DAILY BULLETIN 18 October 2021 No.431

 

The Not So DAILY BULLETIN 18 October 2021  No.431

Top Stories  

Monday, October 18 saw the market gain 19 points for the 3rd up day in a row. It closed at 7381 which makes it positive for the month of October. This is the highest point since 27/9 and keeps the market in the trading range of 7400 to 7150.

Richard Coppleson from Bell Potter – Coppo report (institutional trader) believes the lows for the September/October period may have been seen. The drop from the high was approx 6.6% and he was expecting somewhere between a drop of 5% to 10%. The US reporting season has started well and while there are headwinds, the economic outlook looks better over the next 12 months which Coppo believes the market is focused on rather than the US Tapering, but left-field things can hit the market at any time. 

Global Bond rates have started to move higher again which is likely to crip any market jump, but the US VIX Index (Fear indicator) has returned to more normal levels. In commodity markets, Oil is at 7-year highs and Copper has jumped 5% in a week to near All-Time Highs as inventories are reducing.  

We are still Optimistic, but volatility is likely to persist.   

Supply Chains and Inflation

There is a lot of talk about supply chain problems and the potential knock-on effect of rising inflation. 

Macquarie research 

There is a simple set of reasons why the world (and likely Australia) is facing cost pressures. Goods demand has recovered much faster than goods supply due to ongoing product and transportation bottlenecks because of shutdowns over the COVID-19 period. But, if manufacturers cannot quickly catch up to the demand, if there are no additional ships on planet earth to hasten the delivery of products if ports continue to sit on mountains of unloaded containers due to worker shortages and if energy and gas prices which have already doubled, tripled, or quadrupled begin to seep into prices, then higher inflation is a certainty.

David Bassanese (Beta shares) believes the so-called ‘supply chain bottleneck’ afflicting the U.S. economy is largely just a positive demand shock, fueled by the pandemic-related switch to goods over services and Biden’s huge and totally unnecessary fiscal boost earlier this year. The system couldn’t cope with the surge in demand, leading to shortages and pricing pressure. As supply belatedly responds, the fiscal sugar hit fades, and demand switches back to services, these bottlenecks should resolve themselves – without ongoing pricing pressure – especially given the continuing structural disinflation forces of globalisation and tech disruption. But we’ll see!

Macquarie doesn’t think we will see permanent higher inflation, but it will last a little longer than a temporary inflationary spike. They believe in the areas that do better in this environment.
Real Assets – commodities – ag and energy & infrastructure 
Defensive or Quality assets – companies that can hold their pricing power in the face of rising costs. 

It has been many decades since the investment market has had to deal with a rising inflation environment. Some of the impacts are to be determined given industries such as technology weren’t around the last time inflation was a problem. Neither were most of the services, which make up more than 50% of the economy.   

Market winds 

We have been discussing market winds in recent Not So. 

AMP’s Shane Oliver sums up the current view. 
Correction risks remain – but cyclical indicators are positive and shares are breaking up through technical resistance. The risk of a further correction remains – as issues around the debt ceiling, US fiscal policy and tax hikes, China’s slowdown, the energy crisis and supply constraints and inflation remain. However, we remain of the view that the issues will largely be resolved in a way that does not severely threaten global growth: a US default is most unlikely; China won’t bail out Evergrande but will restructure it to limit damage to the rest of the economy and will provide economic stimulus; and supply constraints will ultimately be resolved as the pandemic recedes, workers return and spending rotates back to services from goods. The relative resilience of cyclical plays like copper, financials and the $A through the recent correction are a positive sign that the world is not about to plunge back into recession and augur well for the rising trend in shares continuing over the next 6-12 months. And now share markets look to be shaking off the worries and heading higher again.  

IMF forecasts still upbeat. While the IMF expressed concerns about coronavirus, supply constraints and inflation it only revised its global growth forecast this year down to 5.9% and sees 4.9% growth next year. Which is similar to our own view.  

La Nina continues. Two years ago the world was into an El Nino weather phenomenon and for Australia that meant hot dry conditions down the east coast, severe bushfires and falling farm production. Fortunately, the Southern Oscillation Index which tracks surface air pressure across the Pacific tipped into La Nina last year and remains there and that suggests cooler wetter conditions down the east coast. While La Nina has recently copped a bit of flack as a driver of the surge in energy prices in Europe (as utilities stock up on gas ahead of a cold winter – although it could go the other way if La Nina drives more hydro and wind) for Australia its usually positive for farm production and helping keep bushfires mild. Getting coronavirus under control only to go straight back into a severe bushfire season would not have been nice!  

Macquarie Group (MQG)

MQG hit a new all-time high of $191 today. This was after Morgan Stanley (MS) updated their MQG research with a target price move to $240. This saw MQG increase 4% on Friday to $190 and was up slightly today.  

MS research said MQG started as an investment bank but has now become a vertically integrated private markets asset manager and developer, with potentially the world’s best green capabilities among financials. This will bring faster earnings growth vs. peers and MQG should command a green premium multiple.

MS thinks MQG’s combination of capabilities is unique among Australian financials and also global private markets peers because it can offer wholistic or turnkey renewables solutions, backed by an almost 20-year track record:

(1) Finance & Develop – can finance, develop, or build renewable assets around the world by deploying its balance sheet.
(2) Advise – MQG can structure equity, debt and power purchase agreements (PPAs), and can set up joint ventures to accelerate the renewables transition;
(3) Manage – can manage and operate infrastructure & real assets, including waste and green energy.
(4) Research – provides specialist ESG and clean energy research; and
(5) Trade –  can trade emission allowances & carbon offsets, plus manage inventory.

Over 10% earnings growth and 30% valuation upside: MQG becomes MS top pick among Australian financials.

The A$240 price target offers 31% upside and implies a ~23.5x FY23E P/E, which we think is justified by the green growth options. A bull case has a TP of A$388. MS thinks green revenues will increase from ~A$1.1bn or ~9% of the group in FY21, to ~A$2.5bn or ~15% in FY25E. Put differently, we forecast green revenues to grow ~20-25% p.a. from FY21 to FY25E, adding ~2ppt to group revenue growth.  

Other Stories   
– Aust vaccinated 32,653,925 (31,358,609)  7 day average 278.2k – highest (297.5k). The highest daily total vaccines is 389,182 (16 Sep). 84.8% (over age 16) have had one shot, 68.3.4% (over age 16) have had two shots. The figures in brackets are from the last Not So update. We’ve had as a % of the population, more first shots than the US & Germany and only 3% behind UK. 
– Chinese GDP was lower than expected at 4.9% in the 3rd quarter (expecting 5.2%. Retail sales were better than expected but Industrial Production only growing 3.1% (expected 4.5%). 
– US 3rd quarter earnings better than expected. 
– Hub24 acquired Class.
– Rio Tinto reduced iron ore production expectations from 325mt to 320mt  

Broker Target Price changes 

Goldman Sachs
Rio Tinto (RIO) decreased from $147.50 to $122.40

Ord Minnett/JP Morgan 
RIO decreased from $144 to $143

Morgans
RIO decreased from $117 to $115
Transurban (TCL) increased from $13.99 to $14.82

Morgan Stanley
Macquarie Group (MQG) increased from $175 to $240
Westpac (WBC) decreased from $29.20 to $28.90

Macquarie
RIO decreased from $148 (highest broker) to $145 (still highest broker)
Woodside (WPL) decreased from $27.25 to $27.15 

Bell Potter/Citigroup
RIO decreased from $125 to $120  

Today’s Sector Movements

Best –   Materials +1%   
Worst –  IT -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 91.04% to 92.34%.

Brokers are continuing to raise their target prices. 
Overall Earnings Per Share (EPS) 
FY21 decreased from 34.69% to 33.3%
FY22 increased from 5.23% to 5.65% – flatter earning predicted for this financial year. 
Most expensive – CBA 112.7%   
Least expensive – BHP 74.5%     

The CORE Watchlist is still mixed with 5 (5) stocks trading above 100% while 6 (7) are trading below 85% (BHP BXB CWN GMG LLC NXT ). (Figures in brackets is last Not So).   

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 13 out of the 30 CORE stocks are trading below the lowest broker target price. Good value to be found. 

AMC current price $16.09    Broker range $17.50 to $20
AMP current price $1.13       Broker range $1.15 to $1.35
BHP current price $39.19     Broker range $45.20 to $60
BXB current price $10.15     Broker range $11.04 to $13.84
CWN current price $9.74      Broker range $10.35 to $15
GMG current price $21.15    Broker range $24 to $26
LLC current price $10.79     Broker range $11.40 to $16.52
NEC current price $2.82      Broker range $2.80 to $3.50
NXT current price $12.07     Broker range $14 to $15.50
RIO current price $101.45     Broker range $110 to $145 
SHL currently price $38.89  Broker range $40.70 to $45.98
TLS current price $3.87       Broker range $4 to $4.50 
WBC current price $25.80   Broker range $26.50 to $30

ANZ 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 97.4% to 98.4%. 

The table below shows the forecast dividends.

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.  

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.12% 140.8 4.99% 146.2 5.18% 153.3 5.43%
CBA 298.0 2.87% 350.0 3.37% 397.2 3.82% 418.2 4.02%
NAB 60.0 2.08% 123.2 4.28% 132.0 4.58% 137.2 4.76%
WBC 31.0 1.21% 117.0 4.57% 123.7 4.83% 134.3 5.25%
MQG  430.0 2.26% 470.0 2.47% 554.2 2.91% 577.4 3.03%  

After RIO’s quarterly update, the brokers have updated their dividend forecasts. For the calendar year 2022, the dividend forecast has decreased from $11.58 to $9.76. And referring to nice dividends. Below is the expectation from brokers regarding BHP & RIO. 
   
FY21 cps % FY22 cps % FY23 cps %
BHP 374.00 9.54% 466.83 11.91% 330.00 8.42%
RIO 1409.50 13.89% 976.67 9.63% 835.83 8.24%
Please note RIO is Calendar Year (CY). Cents per share (CPS) 
Plus franking.   

Other Indicators 
US VIX Index decreased from 19.85 to 16.30.  The index has returned to a normal level.  Normal range of 10-17.
Iron Ore decreased from $129 to $125.22 Brokers expecting an average in 2022 of $106 fallen from $122.  ALL-TIME HIGH of $237.57. Recent bottom $92 
Copper increased from $4.34 to $4.78. Reduced from ALL-TIME HIGH of $4.90  
Gold increased from $1762 to $1769. Record high $2063.  
AUD/USD increased from 73.34 to 74.02. Rising with commodities  
USD/CNY decreased from $6.45 to $6.44. Strongest in 3 years at $6.37. 
Asian markets – DOWN    
US 10 year Bonds increased from 1.58% to 1.61%. Bond yields starting to rise again. The lowest point in a number of months was 1.12% but has rebounded. The recent high of 1.79% The US 30 year Bond remained at 2.07%. The highest level 2.47% for 18 months.  
German Bonds decreased from -0.09% to -0.16% Hit a low of -0.9%. Highest for some time is -0.088%. The negative European rates are likely to be a headwind for higher US rates.  
Japanese Bonds decreased from 0.086% to 0.085%   
Aussie Bonds 10 year Bonds increased from 1.70% to 1.75%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.099% (this doubled in a week) 2 year 0.14% 4 year 1.07% 5 year 1.19%. 15 year Bonds 2.16%. Global interest rates continue to rise. 
Oil prices increased from $80.63 to $83.52. 7 year high.     
Tungsten remained at $310mtu.    

This week & next week 
Last “Not So” opened in 6 Aust states (excl NT & Tas) & US 3 states (California South Carolina & Virginia) & Singapore

This week – October review meetings  

Next week – As above
    
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 Not So DAILY BULLETIN 30 August 2021 No.419

 

The Not So DAILY BULLETIN 30 August 2021  No.419
 
Unfortunately, we are in NSW statewide lockdown. This means we will be working from home until September 10. We’ve had to cancel face to face meetings but can have phone or zoom review meetings. Otherwise, they will be delayed until after lockdown finishes. We appreciate your understanding. 
Top Stories
Monday saw the ASX 200 finish 16 points higher at 7505. A positive lead after the US Federal Reserve held their annual Jackson Hole meeting where chairman Powell indicated they wouldn’t;t reduce any bond-buying program yet (probably towards the end of the year) and no interest rate rise until 2023.

Additionally, iron ore price closed above $150, which saw BHP and RIO re-capture a few $ from the recent sell-off. BHP still trading with its dividend.

The profit season has virtually finished, which has been reasonable. An increase in profits and dividends has been overshadowed by short term delta uncertainty as many companies haven’t provided future guidance. In saying that, the medium-term picture still looks positive, but it’s the very short term with COVID and lockdowns in place, causing some reluctance for the market to go higher. That coupled with companies trading without their dividends makes it harder for the index to push higher. 

We are still Optimistic, but volatility is likely to persist. 
Market views 
Chief Economist – David Bassanese from Betashares updated his market views. 

Global equities bounced back last week, reflecting a relatively dovish speech by US Fed chair Powell at Jackson Hole on Friday. The key takeaway from the speech was that the condition of “substantial further progress” towards maximum employment has not quite been achieved, meaning the US Fed might still hold off on making its tapering announcement as early as the September 21-22 meeting. 

Powell also stressed that there remained “much ground to cover” before he’d even contemplate raising interest rates. While he’s watching carefully, he still suspects the recent lift in inflation won’t be sustained as more workers return to the labour force and supply-side production bottlenecks are resolved.

The Fed’s dovish signal supported equities and saw bond yields drop, though U.S. 10-year bond yields still ended the week up 5 basis points to 1.31%. The $US eased after showing some strength in recent weeks, which in turn tended to support commodity prices and the $A. I suspect the recent rally in long-term bond yields has ended, with more range-bound performance now likely over the coming months.

Given this backdrop, Friday’s the U.S. August payrolls report looms large. The market is anticipating another solid employment gain of around 730k, with the unemployment rate dropping to 5.2% from 5.4%  – despite still surging COVID cases in some States over recent weeks. One factor to watch remains wages, with annual growth in average hourly earnings expected to hold at a still relatively elevated 4%, though potentially still being distorted by heavier employment losses among low wage service sector workers over the past year.

In his speech, Powell argued, “we still see little evidence of wage increases that might threaten excessive inflation”, though he did concede wage growth had picked up of late (even allowing for compositional shifts) and now “appeared consistent with our long-term inflation objective”. So far, so good, but that does not leave much margin for wages to move up further before this inflation objective might presumably be threatened. What will be key over the coming months is whether labour force participation recovers (as it usually does with a lag after recessions) and so checks any further untoward rise in wages as the economy continues to re-open for business.

Somewhat reassuringly, Powell also noted that U.S. unemployment ran below 4% for two years prior to the pandemic and, while wage growth did move higher, “not by enough to lift inflation consistently to 2%”. As was the case pre-pandemic, we’re now on U.S. wage inflation watch!

Australian markets
The S&P/ASX 200 Index lifted only 0.4% last week, though it should benefit somewhat today from Wall Street’s Friday rally. We did receive a few encouraging GDP building blocks last week in the form of reasonably solid business spending, though flat housing construction. While we’ll learn more from corporate profits, inventories and net exports over the next two days, June quarter GDP growth due out on Wednesday is likely to remain comfortably above zero, thereby reducing the risk of a double-dip technical recession (given we know Q3 GDP will be deeply negative).

More broadly, Australia’s two major states remain mired in lockdown, which seems likely to remain the case for several more weeks – until vaccination rates have moved up to at least 70% of the adult population.

David thinks we will have a positive GDP number on Wednesday. This view was also stated by Morgan Stanley today. However, this is different from Friday’s Not So, when Shane Oliver and Citigroup thought we would see a negative -0.1%. 
All-Time Highs (ATH)
US markets keep setting new all-time highs while the ASX 200 has pulled back from the highs reached earlier this month. 

The chart below of the US S&P 500 shows the number of all-time highs reached each year. Since 2013, the US has reached new levels 328 times over the last 9 years. 

Over the same period, the ASX 200 reached the feat 34 times (4 in 2019, 10 in 2020 and 20 in 2021).

There are always concerns about market valuations when markets are high. There are parts of the markets that are very high and above fundamental valuation, such as BuyNowPay Later, Cryptocurrencies & Technology companies with no profits. However, one underlying feature that provides valuation support to mainstream investments is the level of interest rates. Interest rates are at HISTORIC lows, and after the US Federal Reserve meeting and the RBA meeting this month, they both reconfirmed that rates are unlikely to rise in the next couple of years. 

This suggests that relative asset values (comparing one to another) are attractive for shares due to the Price to Earnings ratio.

As a comparison 

An Australian 10-year Govt Bond is yielding 1.17%. That equates to a Price to Earnings ratio of 100/1.17 = 85.47 or paying $85.47 to receive a $1 of earnings. 

In comparison, the CORE watchlist PE is 20.72 or paying $20.72 to receive $1 of earnings. 

Another real comparison is a Term Deposit of 0.4% compared to a current yield of the CORE watchlist of 4%. 

10 years of interest from TD equates to one year of dividends. 

As mentioned previously, there is a large amount of cash on the sidelines and a record level to be paid in the coming months from dividends, buybacks and takeovers. This level of cash will provide support to the market as the return from alternative areas is unattractive. It’s important to note that you should maintain a level of cash that suits your risk profile, but unless we see a new major risk (black swan), markets are likely to be supported and any dips purchased.  
Iron ore demand 
Macquarie’s Commodity Strategy Team’s latest survey showed divergent views from industry participants on steel and iron ore.

While steel mills’ sentiment improved on the back of increased profitability, steel and iron ore trader’s sentiment weakened further month on month. They note iron ore prices have bounced back to US$149.5/t ($157 today), from the recent low point of US$130.0/t. One view is that the prices were low enough last week to encourage some mills to restock ahead of an anticipated seasonal increase in production into September, indicating a floor over the near term.

Iron-ore exposure preferred: Buoyant iron ore prices and positive leading indicators (such as relatively low port stocks and positive steel margins) underpin our bullish stance on iron-ore exposure.

BHP trades ex-div Sep 2 with a healthy dividend and an option into Woodside. 
Reporting season 
Australian companies have nearly finished reporting profits. Below are the dates of when we are expecting the announcements for the CORE stocks. 

28/7 RIO – record profit and dividend but in line with expectations. 
6/8  Resmed (RMD) – good profit result but again in line. Broker TP upgrades. 
9/8  Transurban (TCL) – missed expectations and ongoing issues with Westgate tunnel. 
10/8 Computershare (CPU) – inline with expectations 
11/8 CBA – inline with expectations and increased dividend and an OFF Market share buyback of $6bn. More details coming over the next few weeks.   
 12/8 Telstra (TLS) – inline and same dividend. Outlook is more positive. $1.35bn ON market buyback
AMP – missed expectations  
Goodman Group (GMG) – inline with expectations which saw profit up 15% 
16/8 JB Hi-Fi (JBH) inline with expectations
Lend Lease (LLC) missed expectations but profit up from last year. 
17/8 BHP beat expectations but the removal of dual listing in UK surprised the market.
Brambles (BXB) beat expectations
Woodside (WPL) inline with expectations, but the BHP deal has caused questions. 
18/8 Coles (COL) inline with expectations
CSL   inline with expectations, record dividend.
Amcor  (AMC) beat expectations 
19/8 Orora (ORA) inline with expectations
Origin Energy (ORG) inline with expectations. 
23/8 Sonic Health (SHL) missed expectation but profit up 149%.
24/8 Seek.com (SEK) inline with expectations
25/8 Nine Entertainment (NEC) missed expectations
26/8 Woolworths (WOW) inline with expectations
27/8 Wesfarmers (WES) inline with expectations
NextDC (NXT)  inline with expectations
30/8 Crown (CWN) inline with expectations

Those that beat expectations should be rewarded over time.
Financial Planning News

Employer Super Guarantee Contributions  (SGC)  
From 1/7/21. The SGC compulsory super payment is increasing from 9.5% to 10%.

Minimum Pension payment kept at half normal for FY22
The Federal Govt has extended the temporary halving of minimum pension payment to 30/6/22. Minimum pension payments from Account-Based Pensions were expected to return to normal from 1/7/21, but the PM announced the extension due to ongoing COVID issues. 
Super Concessional Contributions  
The maximum contribution is increasing from $25,000 to $27,500 from 1/7/21. This includes the employer SGC, salary sacrifice or personal tax-deductible contributions. 

Super Non-Concessional Contributions 
The maximum contribution is increasing from $100,000 to $110,000 from 1/7/21. These are only contributions made where you aren’t receiving a tax benefit. 
Other Stories 
– Aust vaccinated 19,085,741 (18,390,297)  7 day average 276.4k – highest (276.4k). The highest daily total vaccines is 335,420 (26 Aug). 57.5% (over age 16) have had one shot, 34.2% (over age 16) have had two shots. The figures in brackets are from the last Not So update. 
– US Hurricane – likely major damage. Might fast track US infrastructure bill. 
– US drone attack on ISIS suicide bombers car. 5 Rocket hit Kabul airport. 
Broker Target Price changes 

Goldman Sachs
NextDC (NXT) decreased from $14.80 (highest broker) to $14.40

Ord Minnett/JP Morgan 
NXT decreased from $14.50 to $14 (lowest broker)

Morgans
Wesfarmers (WES) increased from $56.08 to $59

Morgan Stanley
NXT increased from $14.60 to $15.50 (highest broker)

Macquarie
NXT increased from $13.95 (lowest broker) to $14.05
WES decreased from $63.45 (highest broker) to $61.35 (still highest broker)

Bell Potter/Citigroup
WES increased from $47 (lowest broker) to $49 (still lowest broker) 
Today’s Sector Movements
Best –   Industrials +1.1%       
Worst –  Consumer Discretionary -1.6%  
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 93.59% to 93.23%.

The ASX 200 has climbed 2.6% since end of June, but the Core index has reduced by 1.71%.

This means the brokers have increased the target prices of the stocks through the reporting season by 4.2% which is a good signal. 

Additionally, the gross dividend yield is 4% (include franking) across the CORE for the first time since 5 Nov 2020 (US election) when the ASX 200 was at 6100. Now 7505 or 23% higher.  

Brokers are continuing to raise their target prices. 
Overall Earnings Per Share (EPS) 
FY21 decreased from 34.63% to 34.56% 
FY22 decreased from 7.54% to 6.39% 

Most expensive – Wesfarmers 112.3%  
Least expensive – Woodside 72.5%   

The CORE Watchlist is still mixed with 7 (7) stocks trading above 100% while 5 (5) are trading below 85% (BHP CWN NEC RIO WPL ). (Figures in brackets is last Not So).   

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


AMP current price $1.11       Broker range $1.15 to $1.35
CWN current price $9.31      Broker range $10.50 to $15
NEC current price $2.75       Broker range $2.80 to $3.75
NXT current price $12.75     Broker range $14.05 to $15.50
ORG current price $4.51      Broker range $4.60 to $6.10
TLS current price $3.36       Broker range $4 to $4.50 
WBC current price $25.80   Broker range $26.50 to $30
WPL current price $20.02    Broker range $21.55 to $33.50
 
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 increased from 96.9% to 97.6%. The banks are still only trading on 14-15 earnings apart from CBA. However, the lockdowns could be putting a little pressure on some borrowers. 

The table below shows the forecast dividends have also had massive increases. 

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.  
FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.14% 140.8 5.03% 146.2 5.22% 153.3 5.48%
CBA 298.0 2.97% 350.0 3.49% 397.2 3.96% 418.2 4.16%
NAB 60.0 2.18% 123.2 4.47% 132.0 4.79% 139.7 5.07%
WBC 31.0 1.20% 117.0 4.53% 123.7 4.79% 134.3 5.21%
MQG  430.0 2.60% 470.0 2.84% 537.2 3.25% 577.0 3.49%  
And referring to nice dividends.

Below is the expectation from brokers regarding BHP & RIO. BHP ex-dividend 2/9/21  
FY21 cps % FY22 cps % FY23 cps %
BHP 371.67 8.11% 486.83 10.62% 359.67 7.85%
RIO 1681.00 14.86% 1285.50 11.36% 952.33 8.42%  

Please note RIO is Calendar Year (CY). Cents per share (CPS) 

Plus franking. 
Other Indicators 
US VIX Index increased from 18.84 to 16.39  The index is reasonably settled by the US Fed meeting at Jacksons Hole. Normal range of 10-17.
Iron Ore increased from $152.92 to $157.552. Has dropped from ATH but has established a floor in recent days. Still very profitable at these levels.  Most forecasts are for lower iron ore.    ALL-TIME HIGH of $237.57. 
Copper increased from $4.23 to $4.34. Reduced from ALL-TIME HIGH of $4.90  
Gold increased from $1805 to $1818. Record high $2063.
AUD/USD increased from 72.46 to 72.95.  
USD/CNY decreased from $6.48 to $6.47. Strongest in 3 years at $6.37. 
Asian markets – UP     
US 10 year Bonds decreased from 1.34% to 1.30%. Decreased after Fed meeting. The lowest point in a number of months was 1.12% but has rebounded. The recent high of 1.79% The US 30 year Bond decreased from 1.94% to 1.91%. The highest level 2.47% for 18 months.  
German Bonds decreased from -0.41 to -0.42% Hit a low of -0.9%. Highest for some time -0.11%. The negative European rates are likely to be a headwind for higher US rates.  
Japanese Bonds decreased from 0.016% to 0.009%  Close to negative. 
Aussie Bonds 10 year Bonds decreased from 1.2% to 1.17%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.008% 2 year 0.031% 4 year 0.47% 5 year 0.61%. 15 year Bonds 1.61%. Global interest rates look to have bottomed.
Oil prices increased from $68.37 to $68.47 Rebounding on pending US storm.   
Tungsten remained at $305mtu. Mid June the price was $265. 
This week & next week 
Last “Not So” opened in 7 Aust states (excl NT & Tas), US 5 states (California South Carolina Virginia Connecticut, & Georgia).

This week – Working in lockdown. 

Next week – Probably doing the same.
    
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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