Posts by: Scott Mildren

The Not So DAILY BULLETIN 4 December 2023 No.600

 

The Not So DAILY BULLETIN 4 December 2023  No.600
Top Stories
600th Not So Daily Bulletin!

443 written under Provincial Wealth since 18/10/2018 when the ASX was at 5942.  

Monday, 4 December 2023, the ASX 200 gained 52 points or 0.7% to finish at 7125 (highest point since 21 Sept). 

The markets are feeling Central Banks are on pause and are even starting to price in rate cuts as early as next year. We aren’t on that page (rate cuts), and if Central Banks do cut in the first half of 2024, it’s because the economy is in recession, and that’s not a good thing. US Federal Reserve chair Powell said on Friday that any rate-cut discussion is “premature”. 

Our Investment committee is meeting in Deni on Thursday with chairman Brad Matthews visiting Deni, so that we will update the outcomes of that meeting on Friday. 

One market that keeps on defying logic is the Australian residential housing market. In the face of rising interest rates, prices have moved higher. This suggests that interest rate rises aren’t impacting the buyers. This has seen cash-only buyers (not borrowing money) as the most significant buying group. As we know, immigration is very strong this year, with 500k plus coming to Australia.

The chart below may explain why prices have maintained these heights. It shows the movement of global millionaires, with Australia having the highest number of millionaires migrants, 5,200 in 2023. We lost this title to the UAE in 2022, as we held this position from 2015-2019.   
 
Cash-up buyers are certainly supporting the market, especially when there is a shortage of accommodation. 

Other events this week
– RBA is expected to be on hold tomorrow. KEVIN is calling a HOLD.
– Australia’s GDP on Wednesday. Expecting a small positive.
– US employment on Friday, expecting 180,000 jobs created.

WE ARE STILL CAUTIOUS in the short term but are moving back to our favourite saying, BUY THE DIP.

We are happy for you to share our Not So Daily Bulletin with family and friends, and if we can help them, we are also happy to chat. 
November market review 
After three months of sliding markets, we finally saw a strong rebound in November. There were two main reasons.
1. Seasonal – November is historically a strong month, especially when coming off the back of a lower October &
2. Markets sensed Central Banks are finished raising interest rates and a falling Bond market assisted in this conclusion with 10 year Bond rates falling up to 0.5% during the month.

This saw a rally in all the major global markets apart from Hong Kong which had a slight fall. The best performers were the US markets and Japan, with the NASDAQ up 10.7% for the month. The NASDAQ holds the best performer title for all the time periods in the graph below 1 month, 6 months 1, 5 10, 15 and 20 years.  First time I can recall that happening in 600 bulletins.

Over 6 months and 12 months, most markets are positive with 12 better than 6, but the ASX has struggled and has we have been suggesting, has been trading sideways for a year. 
Global growth for 2024
I have summarised Citigroup’s updated view of the global economy for 2024.

2023 Global growth is 2.6%, which was better than expected. (expectations were sub-2% growth and “rolling recessions.”)

Inflation has fallen while employment remains tight. These surprises have increased the probability of a soft landing for the global economy. However, the journey isn’t over and the “last mile” of the global inflation fight is likely to be a tough slog. Citigroup expects the lag effect of interest rate rises will have an effect on the labour market, with unemployment rising and slower economic growth in 2024. Developed Markets (DM) economies are likely to see several falling into recession Figure 6 shows UK, Sweden, Canada and Euro Area -EA. Offsetting this is still strong growth from China 4.6% India 5.7% and Indonesia 4.9%.

Citigroup sees global growth in 2024 retreating to 1.9% before rebounding to 2.5% in 2025. The heart of the global economy’s resilience has been a self-reinforcing dynamic between strong consumer spending and tight labour markets. Coming out of the pandemic, global consumers had pent-up demand. The strong spending, in turn, increased demand for workers, with the unemployment rate falling and wages growing. The tight market and strong wage growth, in turn, have further fueled consumer spending.

Citigroup believes the path of services inflation in the year ahead is the key (we would agree) As shown in Figure 8, Goods inflation has dropped very quickly as this was probably the transitory inflation that the US Federal Reserve believed was the main driver of inflation, but it’s the course of services inflation (wages and rents) that will shape the economic views over the next year. The restrictive interest rates, coupled with an expected step down in global services spending, will allow services inflation to gradually cool. If not, central banks will be faced with the unpleasant prospect of maintaining tight policies for longer than expected or, perhaps, even hiking further.

Each major area (US, China & Europe) has unsynchronized from each other over the last year. A major question is the extent to which this desynchronization continues in 2024?—With the envisioned slowing in global growth—and a projected US downturn—cyclical performance is likely to become more similar.

Citigroup notes a raft of elections will have an impact on the global economy in 2024.—Elections will be held this year in countries including Taiwan (January), Russia (March), India (April-May), the United Kingdom (likely April or May), Mexico (June), the European Parliament (June), Venezuela (H2), and the United States (November). The outcome of these elections will influence the tone and trajectory of economic performance in these countries and frame major features of the geopolitical landscape.
What works after the RBA pauses? 
There is a growing view that either the RBA has finished or there is one more rate hike (February). 
Macquarie has penned a research piece discussing what companies benefit from a pause in rate hikes.  

Hikes all but done.  The US Fed’s last hike was in July, and except for Australia, the last hike in the developed world was in September. These pauses suggest central banks increasingly see the risks shifting from high inflation to slowing growth as they wait to see the lagged impact of past hikes. While there is still a risk of another RBA hike in February 2024, market movements last month suggest investors are positioning as if the RBA is done.

Pauses a short-term relief. In the current inflation-targeting regime, the RBA paused four times before a pivot to easing. This includes two cases for which a US recession (2000, 2008) and two soft landings (1995, 2010) followed. A pause often drives a relief rally in equities as cost of capital headwinds ease.

What works after a pause? Bond yields typically fall after a pause, which drives the outperformance of bonds over stocks. Whether a soft landing or a US recession, the slower growth that drives central banks to pause (and later ease) also tends to drive the expectation of earnings downgrades and the outperformance of defensives over cyclicals. Health, Staples and Gold outperformed after an RBA pause when there was a US recession, with earnings growth usually the key driver of their outperformance.

Past outperformers. There are some stocks that outperformed in all past RBA pauses (at least the ones while they were listed). This includes CSL, SHL, RHC, MTS, EVN, TCL, APA, DMP, and NHF. The Banks (BEN, ANZ, CBA, WBC, NAB) all outperformed after all four RBA pauses. The strong historical returns for Banks were driven by strong expected EPS growth (that was largely realised). Today, EPS for Banks is forecast to decline, suggesting they are less likely to outperform after the current RBA pause. In this cycle, we prefer Insurers over Banks given Insurers are the key positive driver of Australian market earnings growth in FY24E. 

• Buy ideas. Outperform-rated ASX 100 stocks in sectors that tend to outperform in the year after an RBA pause are RMD, CSL, COL, EDV, NST, NEM, ORA, NXT, TLS, TLC, and TCL. Of these stocks, TLS, COL, ORA, TLC, EDV, and RMD are the most oversold, 

• Sell ideas. REA, NEC, JBH, SCG, VCX, SGP, RGN, and LLC are Neutral- or Underperform-rated and in sectors that tend to underperform in the year after an RBA pause. 
Macquarie Interest rates 
Macquarie has increased the rates on their bank accounts
Cash Management Account (transaction account) increased to 3%
Accelerator Account increased to 4.75%.
Financial Planning Snippets
– Super Guarantee (SGC) for employees increases to 11% from 1/7/23
– Commonwealth Seniors Health Care card has seen the income limit increase to $152k(couple) $95.4k (single). If you are of Age Pension age and don’t have the card, please let us know. 
– Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020). 
Other Stories 
– Goldman Sachs doesn’t expect any further interest rate rises, while UBS says it is probably on hold, but there is a risk of a hike in Feb.
– Shane Oliver believes Wednesday’s GDP of 0.4% has some upside after stronger economic data released today. 
– Origin Energy takeover vote failed. 
 
Broker Target Price changes – 

Ord Minnett

Morgans
South 32 (S32) decreased from $5.15 (highest broker) to $4.80 (still highest broker)

Morgan Stanley
Nine Entertainment (NEC) decreased from $2.40 to $2.30

Macquarie


Bell Potter/Citigroup


UBS 


Tracking changes for 2023
Upgrades 318
Downgrades 340
Today’s ASX sector Movements
Best – IT +1.9%   
Worst – Utilities -2.5%      
Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index increased from 89.93% to 90.32%. Just above the buying signal, usually below 90%. 

Overall Earnings Per Share (EPS) 

We could see an uptick in overseas company earnings (BHP MQG CSL RIO STO WDS RMD AMC BXB) as they will benefit from a lower current assumption. We have been using 70c. Moved to 68c (still conservative).

FY23 increased from 3.39 to 3.44%   
FY24 decreased from 6.27% to 6.12%  

Most expensive – CBA 116.2%            
Least expensive –  Lend Lease 54.1%  

The CORE Watchlist has 6 (6) stocks trading above 100%; they are; BHP CBA JBH NAB RIO WES, lowest number ever is 0, highest 9. While 8 (8) are trading below 85% (highest 18), while the lowest is 5. CSL LLC NEC ORA RMD S32 SHL 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). 13 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $40.44    Broker range $43 to $46.50
AMC current price $14.29   Broker range $14.50 to $17.50 
CPU current price $23.36    Broker range $24.50 to $29
CSL current price $264.17  Broker range $321 to $340
LLC current price $6.72      Broker range $7.95 to $14.45
NEC current price $1.94     Broker range $1.95 to $2.80
ORA current price $2.57     Broker range $3.00 to $4.10
ORI current price $15.65    Broker range $16.23 to $19.50
RMD current price $24.29   Broker range $26 to $40
S32 current price $3.12       Broker range $3.40 to $480
SHL current price $28.91    Broker range $31.15 to $38
STO current price $6.82     Broker range $8.10 to $12.30
TLS current price $3.79      Broker range $4.15 to $4.75

Added 

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

The Banking index increased from 101.9% to 102.3%. Over 100% suggests the banks are fully priced. They have run up into the results.

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is slightly increased dividend payments and still very attractive yields. PLUS FRANKING.  

FY 23 % FY 24 % FY 25
ANZ 175.0 7.16% 162.2 6.63% 163.3 6.68%
CBA 450.0 4.28% 458.0 4.36% 469.8 4.47%
NAB 167.7 5.85% 162.8 5.68% 162.8 5.68%
WBC 142.0 6.64% 144.0 6.73% 174.2 8.14%
MQG  750.0 4.44% 683.2 4.04% 726.2 4.30%

Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year. I have added FY25. BHP and RIO results will see some changing forecasts with the likelihood of further reduction.   

FY23 cps % FY24 cps % FY25 cps %
BHP 255.00 5.41% 226.50 4.80% 261.2 5.54%
RIO 617.33 4.86% 668.17 5.26% 609.4 4.80%   
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).
Other Indicators (changes since last Not So)
US VIX Index decreased from 12.98 to 12.63. The VIX is near 12 month low. Showing calm.   
Iron Ore increased from $128.20 to $131.15.  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $113.9, while dropping to $102 for 2024.
Copper increased from $3.80 to $3.88. 
Gold increased from $2046 to $2105.  New RECORD HIGH SET TODAY $2152, previous high $2063. 
AUD/USD decreased from 66.44c to 66.57c. Recent low point 62.9c.  $A strengthening  
Asian markets – MIXED    
US 10 year Bonds decreased from 4.28% to 4.25%. recent high 5% (20/10 highest since 2006).  The FED looks like it’s on HOLD. US 30 year Bond decreased from 4.45% to 4.42%. Hit a 17-year high of 5.12%. The US 2 year rate has decreased from 4.65% to 4.60%  (5.37%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.35%. It was -0.37% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.3%. This is the most it has been inverted in 42 years.  The gap is narrowing as the long end of the yield curve increases (higher for longer). 
German Bonds decreased from 2.42% to 2.36%. Hit 3% in October highest since 2008.
Japanese Bonds increased from 0.68% to 0.69%. Highest in 10 years is 0.956%.  
Aussie Bonds 10 year Bonds increased from 4.40% to 4.47%.  Recent high 4.95% 
Other Aussie Bonds 1 year 4.36%  2 year 4.14% 4 year 4.07% 5 year 4.12% 15 year Bonds 4.69%.  
Oil prices decreased from $78.08 to $73.57.    
Tungsten – China remains at $305 to $315mtu. 
This week & next week 
Last “Not So” opened in 7 Aust states (excl NT ), US 3 states (California, Massachusetts, Ohio), Sweden & Israel

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 7 November 2023 No.595

 

The Not So DAILY BULLETIN 7 November 2023  No.595
Top Stories
Tuesday, 7 November 2023, the ASX 200 fell 20 points after rising 19 yesterday to finish at 6977. The market has tried to break above 7000 but couldn’t hold it. 

The Melbourne Cup winner – Without a fight was probably a signal for the RBA rate rise (only in hindsight does it look obvious). Hopefully, it was the last rate hike and brings the RBA in line with the ECB (Europe) and the Fed (US Federal Reserve) with talk of further rate hikes but no actions. 
  
As discussed over the last few weeks, we are still at a crossroads, as mixed signals are everywhere.
Bond rates are falling, Oil is down to $80, Gold is near $2000, Consumer is less confident & spending savings, China and Europe are sluggish, and Cash rates are high and elevated geopolitics issues. On the flip side, unemployment rates are historically low, company profits are okay, iron ore price remains elevated, US GDP was 4.9%, the fear index (VIX has retreated to a calm 14.89), retail sales are up, mortgage defaults are below 1%, and we are entering the best period of the year where US companies can undertake share buybacks to provide a Santa Claus rally. 
 
Bank results from NAB Nov 9 and ANZ Nov 13. 
 
WE ARE STILL CAUTIOUS in the short term but are moving back to our favour, saying BUY THE DIP.

We are happy for you to share our Not So Daily Bulletin with family and friends, and if we can help them, we are also happy to chat. 
RBA hikes, Without a fight!
The RBA meeting was held today, as Kevin Hanson and most economists predicted a rate rise occurred. Below are the important points from the RBA Governor Michele Bullock’s statement.
  
The Board decided to raise the cash rate target by 25 basis points to 4.35 per cent.
Inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago. The latest reading on CPI inflation indicates the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected. CPI inflation is now expected to be around 3½ per cent by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025.

The Board had indicated that it would be paying close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market. The weight of this information suggests that the risk of inflation remaining higher for longer has increased. While the economy is experiencing a period of below-trend growth, it has been stronger than expected over the first half of the year. Conditions in the labour market have eased but they remain tight. Housing prices are continuing to rise across the country.

At the same time, high inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Given that the economy is forecast to grow below trend, employment is expected to grow slower than the labour force and the unemployment rate is expected to rise gradually to around 4¼ per cent. 

Returning inflation to target within a reasonable timeframe remains the Board’s priority. High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality. And if high inflation were to become entrenched in people’s expectations, it would be much more costly to reduce later, involving even higher interest rates and a larger rise in unemployment. To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case.

Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market. The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.
Chart from AMP and RBA
Financial Planning Snippets
– Super Guarantee (SGC) for employees increases to 11% from 1/7/23
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $95k (single). If you are of Age Pension age and don’t have the card, please let us know. 
– Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020). 
Other Stories 
– Goodman Group (GMG) 4th quarter confirmed 9% profit growth for FY24. $127bn of developments in pipeline.
– South Korea bans short selling (good idea) market up 10% in the first 6 days of Nov. 
– Chinese exports fell 6.4% in USD terms but imports rose 3%.
 
Broker Target Price changes – 

Ord Minnett

Morgans
Amcor (AMC) increased from $14.25 (lowest broker) to $15.20
Macquarie Group (MQG) decreased from $194.40 to $182.80
Westpac (WBC) decreased from $21.61 to $21.58


Morgan Stanley
MQG decreased from $215 (highest broker) to $202 (still highest broker)
WBC increased from $20 (lowest broker) to $20.70 

Macquarie
AMC decreased from $14.83 to $14.80
BHP increased from $47 to $47.50
Woodside (WDS) decreased from $34 to $32 (equal lowest broker)

Bell Potter/Citigroup
BHP increased from $44 to $45
Goodman Group (GMG) increased from $24.50 to $25.50 (equal highest broker)

MQG decreased from $175 (equal lowest broker) to $161 (lowest broker)
WBC increased from $21.80 to $23.60

UBS 
Sonic Health (SHL) increased from $34 to $36.50
Wesfarmers (WES) decreased from $57 (equal highest broker) to $56

Tracking changes for 2023
Upgrades 307
Downgrades 309

(we have noticed the overall trend is down, but the CORE stocks are seeing upgrades. It probably reflects the quality of stocks in our 30 CORE stocks).
Today’s ASX sector Movements
Best – IT +1.4%  
Worst – Financials -1%      
Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index increased from 87.04% to 88.34%. This is usually a good BUYING signal when the CORE index is below 90%. Interestingly Bank Index is still above 100%, which suggests (not a good buying time). As mentioned before, this is the first time in 12 years these to indices have been providing opposite calls. It first happened on 21/9/23 when ASX was at 7065. We haven’t moved far. 

Overall Earnings Per Share (EPS) 

We could see an uptick in overseas company earnings (BHP MQG CSL RIO STO WDS RMD AMC BXB) as they will benefit from a lower current assumption. We have been using 70c. Moved to 68c (still conservative).

FY23 decreased from 3.23% to 3.11%   
FY24 decreased from 8.04% to 7.98%  

Most expensive – CBA 109.5%            
Least expensive –  Lend Lease 51.2%  

The CORE Watchlist has 6 (5) stocks trading above 100%; they are; BHP CBA JBH NAB RIO WES, lowest number ever is 0, highest 9. While 11 (12) are trading below 85% (highest 18), while the lowest is 5. CSL LLC NEC NXT ORA ORI RMD S32 SEK SHL 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). 13 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $39.74    Broker range $42.80 to $46.50
AMC current price $13.98   Broker range $14.50 to $17.50 
CPU current price $23.88   Broker range $24.50 to $29
CSL current price $248.12  Broker range $321 to $340
LLC current price $6.36      Broker range $7.95 to $14.45
MQG current price $159.29 Broker range $161 to $202
ORA current price $2.47     Broker range $3.00 to $4.10
ORI current price $14.90     Broker range $16.23 to $19.50
RMD current price $23.76   Broker range $26 to $40
S32 current price $3.25       Broker range $3.40 to $5.15
SHL current price $29.81    Broker range $32 to $38
STO current price $7.33      Broker range $8.10 to $12.30
TLS current price $3.87      Broker range $4.14 to $4.75

Added CPU

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

The Banking index increased from 98% to 100.9%. Over 100% suggests the banks are fully priced. They have run up into the results.
Westpac’s result was better than expected. Full-year $7.195bn Div 72c (up on same period last year) and a buyback of $1.5bn. Mortgage loans 90 days behind rose from 0.8% to 0.86% (still not a crisis).  

Macquarie’s profit was down 39% on last year which was below expectations. Dividends $2.55 was below last year, but announced a $2bn share buyback. 

ANZ cheapest at 94.9%

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is slightly increased dividend payments and still very attractive yields. PLUS FRANKING.  

FY 23 % FY 24 % FY 25
ANZ 162.8 6.39% 163.7 6.43% 163.7 6.43%
CBA 450.0 4.50% 457.7 4.58% 469.5 4.69%
NAB 167.7 5.77% 168.2 5.79% 168.8 5.81%
WBC 142.0 6.66% 142.7 6.69% 174.8 8.20%
MQG  750.0 4.71% 683.2 4.29% 726.2 4.56%

Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year. I have added FY25. BHP and RIO results will see some changing forecasts with the likelihood of further reduction.   

FY23 cps % FY24 cps % FY25 cps %
BHP 255.00 5.60% 226.50 4.97% 261.2 5.73%
RIO 617.33 5.07% 668.17 5.49% 609.4 5.00%   
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).
Other Indicators (changes since last Not So)
US VIX Index decreased from 18.14 to 14.89. The VIX is showing the market is reasonably calm.   
Iron Ore increased from $119.25 to $123.75.  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $114.1, while dropping to $99.4 for 2024.
Copper increased from $3.64 to $3.69. 
Gold decreased from $1983 to $1979.  Record high $2063. 
AUD/USD decreased from 63.27c to 64.38c. Recent low point 62.9c.  $A strengthening   
USD/CNY remains at $7.30  Lowest $6.31 Highest in recent years $7.35. 
Asian markets – DOWN    
US 10 year Bonds decreased from 4.97% to 4.64%. recent high 5% (20/10 highest since 2006).  The FED may or may not be on HOLD. US 30 year Bond decreased from 5.07% to 4.81%. Hit a 17 year high of 5.12%. US Federal Reserve on hold at 5.5% but maybe more to come in November. The US 2 year rate has increased from 5.07% to 4.92%  (5.37%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.28%. It was -0.10% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.3%. This is the most it has been inverted in 42 years.  The gap is narrowing as the long end of the yield curve increases (higher for longer). 
German Bonds decreased from 2.83% to 2.75%. Hit 3% in October highest since 2008.
Japanese Bonds decreased from 0.956% to 0.88%  highest in 10 years is 0.956%.  
Aussie Bonds 10 year Bonds decreased from 4.95% to 4.71%.  Recent high 4.95% 
Other Aussie Bonds 1 year 4.48%  2 year 4.31% 4 year 4.29% 5 year 4.35% 15 year Bonds 4.96%. Rates have decreased after the days RBA rate rise. Maybe on hold.      
Oil prices decreased from $81.05 to $80.43   
Tungsten – China remains at $305 to $315mtu. 
This week & next week 
Last “Not So” opened in 7 Aust states (excl NT ), US 5 states (California, Massachusetts, New York Colorado & South Carolina), Sweden, Israel & Malawi (45th country and 4th in Africa).   
   
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 October 2023 No.590

 

The Not So DAILY BULLETIN 17 October 2023  No.590

Top Stories
Tuesday, 17 October 2023, the ASX 200 gained 30 points to finish at 7056. Still at the lower end of the trading range of 7000 to 7500 that the market has been in for most of the year. 

I’ve read two different views saying we are still in the Bear Market rally (Morgan Stanley) and another one (Bell Potter Coppo report) saying last week is the one-year anniversary of the new bull market. Please take a look at the chart below. 

The truth probably lies somewhere in between; unfortunately, only hindsight confirms it. Shane Oliver is suggesting we may have seen the bottom, and while the US inflation figures were a little higher than expected, the market took them reasonably well. 

The Middle East continues to be a problem for markets, especially the energy market, but it’s probably sabre-rattling unless it spreads outside of Gaza. The US has bought some insurance by doing an oil deal with Venezuela regarding more oil supply.

The RBA minutes released today suggested the last meeting nearly raised rates. This has led to Bond rates increasing again and puts a high chance of a rate rise on Melbourne Cup day.

The start of US 3rd quarter profit season has started well, with the big banks delivering better than expected profits. This will indicate whether the interest rate increases have affected profit margins and slowed consumer demand. We expect to see a choppy market that will likely grind higher over the coming weeks and months. 

WE ARE STILL CAUTIOUS in the short term but markets likely see a pick-up towards the end of the year. Selective about the areas we like. 

We are happy for you to share our Not So Daily Bulletin with family and friends, and if we can help them, we are also happy to chat. AND

This week marks five years of PROVINCIAL WEALTH. Thank you for your continued support!  
 
Have we seen the bottom?
Over the weekend, AMP’s Shane Oliver penned the following 
Was that it? Have we seen the bottom in shares? The rebound in share markets from their recent lows after falls of around 8% is impressive given the wall of worries around Israel, US politics, recession risk, share market valuations, China, etc. However, it is consistent with several key positives:
– First, shares had become oversold technically and had fallen to levels of technical support (in particular, the 200 day moving average for the US S&P 500) that can attract buying interest.
– There are reports that China is considering expanding its budget deficit by issuing 1 trillion (or $A214bn) for infrastructure spending. This sounds over the top (as it would be 5.6% of GDP) and may not eventuate. But its possible something is on the way. Of course, fiscal stimulus is no panacea for China’s structural problems but it would provide a near term boost.
– The upcoming US profit reporting season may also provide a boost given the tendency for results to surprise on the upside. Fourth, and most importantly numerous US Fed speakers have moved to acknowledge the tightening in financial conditions from the rise in bond yields which are “going to do some of the work for us.” This suggests that as things stand now the Fed will leave rates on hold in November. While the “high for longer” rates message remains in place the Fed seems to have shifted from being happy to just let bond yields keep rising to now acknowledging the tightening they bring. This in turn removes some of the upside pressure on bond yields which reduces a key worry we had in terms of share market valuations.  

The risk of a further leg down or re-test of the lows in global and Australian shares remains high though.
– So far the rally has lacked the breadth often seen out of major bottoms and sentiment was not washed up at the low, the upside surprise in US inflation in September will keep the Fed on edge, share valuations remain stretched without a further fall in bond yields, the risk of recession remains high, uncertainty remains high around the China’s economy and property markets, the US remains at high risk of a shutdown next month and the risk of an escalation to involve Iran in the Israeli conflict which would directly threaten oil supplies is high. So, the ride for shares is likely to remain volatile.
…but several things should help shares by year end: seasonality will start to become positive from mid-October; inflation is likely to continue to fall which should take pressure of central banks allowing them to ease through next year; and any recession is likely to be mild. So, while near term uncertainties remain high our 12-month view on shares remains positive.  

US inflation 
US inflation on Friday night was slightly higher than expected at 0.4% monthly and +3.7% yearly.
The Core CPI gained +0.32%, translating into a +4.1% yearly gain.

The graph below shows the four areas of US inflation.
 
1. Services inflation (blue) remains consistently higher and stronger. This is a genuine concern for Central Banks.
2. Food inflation (gold) is starting to reduce.
3. Energy (red) has a deflationary effect, but this could change with the volatility in the oil price. 
4. Goods inflation has disappeared as the effects of COVID and supply chains have disappeared.  

Betashares chief economist David Bassanese suggests that if the market can absorb the current inflation rate and with the global backdrop of concerns from Israel and Ukraine, interest rates might have peaked on both the official rates and the Bond market. 

However, a peak in rates doesn’t indicate that rate cuts are on the agenda anytime soon, as Central Bankers are still concerned that inflation could have the ability to kick up again, as was seen in the 1970s, as illustrated in the 2nd graph below.
            
Financial Planning Snippets
– Super Guarantee (SGC) for employees increases to 11% from 1/7/23
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
– Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020).   

Other Stories 
– SEC announce 2.7c quarterly dividend. Trade ex-div 19/10. Dividend based on $2.14 NTA. SP $1.86. Yield 5.8% plus franking.  

Broker Target Price changes – 
Ord Minnett
BHP increased from $39.50 (lowest broker) to $41 (still lowest broker)
Rio Tinto (RIO) increased from $107 (lowest broker) to $111 (still lowest broker)

South 32 (S32) decreased from $4.10 to $3.90  

Morgans


Morgan Stanley
Rio Tinto (RIO) decreased from $135 (highest broker) to $134.50 (still highest broker)

Macquarie
Telstra (TLS) decreased from $4.39 to $4.14 (lowest broker)

Bell Potter/Citigroup


UBS 


Tracking changes for 2023
Upgrades 290
Downgrades 274

(we have noticed the overall trend is down, but the CORE stocks are seeing upgrades. It probably reflects the quality of stocks in our 30 CORE stocks).  

Today’s ASX sector Movements
Best – IT +1.3%         
Worst Healthcare -1.2%   

Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index decreased from 89.94% to 89.18%. This is usually a good BUYING signal when the CORE index is below 90%

Overall Earnings Per Share (EPS) 

We could see an uptick in overseas company earnings (BHP MQG CSL RIO STO WDS RMD AMC BXB) as they will benefit from a lower current assumption. We have been using 70c. Moved to 68c (still conservative).

FY23 increased from 3.32% to 3.36% mainly currency  
FY24 increased from 7.50% to 7.71% mainly currency   

Most expensive – CBA 111.2%            
Least expensive –  Lend Lease 54.5%  

The CORE Watchlist has 5 (5) stocks trading above 100%; they are; BHP CBA JBH NAB WES, lowest number ever is 0, highest 9. While 9 (7) are trading below 85% (highest 18), while the lowest is 5. CSL LLC NEC NXT ORA RMD S32 SHL 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). 10 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $39.64    Broker range $42.80 to $46.50
CSL current price $236.40  Broker range $325 to $340
LLC current price $6.76      Broker range $8.03 to $14.45
MQG current price $168.60 Broker range $175 to $209
ORA current price $2.60     Broker range $3.00 to $4.10
ORI current price $15.58     Broker range $16.23 to $19.50
RMD current price $22.16   Broker range $27.70 to $39
SHL current price $29.69    Broker range $32 to $38
STO current price $7.70      Broker range $8.10 to $12.30
TLS current price $3.88      Broker range $4.20 to $4.75

Added

Removed   

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

The Banking index decreased from 102.8% to 102.6%.  ANZ cheapest at 95.6%

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is slightly increased dividend payments and still very attractive yields. PLUS FRANKING.  

FY 23 % FY 24 % FY 25
ANZ 162.8 6.32% 163.7 6.35% 163.7 6.35%
CBA 450.0 4.45% 457.7 4.52% 469.5 4.64%
NAB 167.3 5.70% 167.5 5.70% 168.0 5.72%
WBC 141.3 6.58% 142.2 6.62% 143.2 6.67%
MQG  750.0 4.45% 677.0 4.02% 719.2 4.27%   

Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year. I have added FY25. BHP and RIO results will see some changing forecasts with the likelihood of further reduction.
 
    FY23 cps % FY24 cps % FY25 cps %
BHP 255.00 5.60% 223.17 4.90% 261.8 5.75%
RIO 603.17 5.15% 667.00 5.70% 609.0 5.20%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).  

Other Indicators (changes since last Not So)
US VIX Index increased from 16.09 to 17.21. The market fears is bouncing around.  
Iron Ore decreased from $112.55 to $117.25.  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $114.1, while dropping to $99.4 for 2024.
Copper decreased from $3.62 to $3.56. 
Gold increased from $1892 to $1928  Record high $2063. 
AUD/USD decreased from 64.14c to 63.54c. Recent low point 62.9c.    
USD/CNY remains at $7.30  Lowest $6.31 Highest in recent years $7.35. 
Asian markets – UP   
US 10 year Bonds increased from 4.57% to 4.75%. recent high 4.88% (4/10 highest since 2006).  The FED maybe on HOLD. US 30 year Bond increased from 4.70% to 4.91%. Hit a 17 year high of 5% last week. US Federal Reserve on hold at 5.5% but maybe more to come in November. The US 2 year rate has increased from 4.99% to 5.11%  (5.37%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.36%. It was -0.42% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.3%. This is the most it has been inverted in 42 years.  The gap is narrowing as the long end of the yield curve increases (higher for longer). 
German Bonds increased from 2.71% to 2.79%. Hit 3% last week highest since 2008.
Japanese Bonds increased from 0.76% to 0.78%   highest in 10 years is 0.804%.  
Aussie Bonds 10 year Bonds increased from 4.38% to 4.56%.  Recent high 4.67% 
Other Aussie Bonds 1 year 4.32%  2 year 4.17% 4 year 4.14% 5 year 4.21% 15 year Bonds 4.81%. Rates have reversed last weeks drop. Seem to be pricing in one more.     
Oil prices increased from $84.66 to $86.49. Rumours of US /Venezuela oil deal.   
Tungsten – China remains at $305 to $315mtu. EQR in a trading halt (material acquisition).   

This week & next week  Last “Not So” opened in 7 Aust states (excl NT ), US 6 states (California, Massachusetts, Virginia, New York Colorado & South Carolina) & Sweden     
   
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 19 September 2023 No.584

 

The Not So DAILY BULLETIN 19 September 2023  No.584
Top Stories
Tuesday,  19 September 2023, the ASX 200 dropped 34 points to finish at 7197. After finishing last week on a high, the first two days have dropped 83 points. 

As noted in a paragraph below, we are in the worst month of the year, and this week has been some of the weakest days over the last 20 years. 

Markets are focussed on a raft of Central Bank meetings with the US Federal Reserve, the main one on Thursday. The expectation is for a HOLD, but the commentary about the outlook will guide market sentiment. Other banks meeting include the Bank of England (BOE), Swiss National Bank (SNB), Bank of Japan (BOJ), Sweden’s Riksbank (SEK) and Norway’s Norges Bank (NOR). Rate hikes expected from BoE, SEK and NOR. 

In particular, market watchers will be looking for signs that rates have finished increasing as this was the takeaway message from the European Central Bank (ECB) last Thursday, hence the rally on Friday. 

Another interesting piece below is the observation that under-investment in commodities might lead to a new commodities BULL market.  
 
El Nino has finally been called today, so the season is warming and changing. The ASX is still trading within the 7000 to 7500 trading range. Will it break out, or will the rollercoaster continue?  

WE ARE LESS CAUTIOUS AND EVEN A LITTLE MORE OPTIMISTIC. Selective about the areas we like. 
September is the weakest month.
Historically, September is not a great month for markets. The chart below from Bell Potter’s Coppo shows the average movement over 20 years for the US S&P 500.
This week (4-5 days) has been statistically the weakest group of days for the year over the 20 years. Why is that?

It is a combination of factors over time. Still, it is the period just after reporting season, and many stocks are trading without their dividend, but investors haven’t received their money. It’s also towards the end of the 3rd quarter of the year when some pension/mutual funds are tidying up their books. Also, there is a change of season, and then it is just September, which starts to build a reputation for weakness. 

The 2nd chart below shows the average return for the different months over the last 20 years. While the average is a nice 0.47% per month or 5.64% plus income, September is the worst by some distance. 

However, we could look at this another way. The time to buy is when the market is unloved and down, and as can be seen in the chart, the next three months have been solid as the Santa Claus rally gets going in late October and November.  

So our old mantra still applies (BUY THE DIP). 
Commodity underinvestment – a new bull market?
Callum Thomas from Topdown Charts has provided an interesting observation regarding capital expenditure in commodities.
The chart below shows a significant under-investment (compared to the long-term average) in new commodity supply since the commodity bear market of 2015-16. But another way of looking at it, is a decade-long bear market in commodities from the peak in 2011 to the trough in 2020.

New supply has struggled in many sectors for various reasons, including regulatory changes and investor sentiment through climate change. The underlying demand for most commodities only continues to grow. At some point, the increased demand and limited supply due to low capital expenditure only has one implication. HIGHER PRICES. Thomas believes we may have seen commodities hit a price floor, and we may be building towards a new cyclical bull market in commodities as the highly forecast recession fails to materialise and demand increases.
Smart Beta ETFs Number 2 – we like them! 
Smart Beta combines the best of active and passive investing: having the potential for better investment outcomes while being rules-based, transparent and cost-efficient.

In our portfolio construction, we use several smart beta ETFs that have delivered results over the short, medium and long term. 

The second one in the series is the VanEck MSCI International Quality (QUAL) or (QHAL) – hedged version.

This fund gives access to the world’s highest-quality companies based on key fundamentals (filters).
(i) high return on equity (ROE),
(ii) earnings (profit growth) stability and
(iii) low financial leverage 


Morgan Stanley Capital Index (MSCI), the world’s largest index provider and the creator of the first international index, states, “Quality growth companies tend to have high return of equity (ROE), stable earnings that are uncorrelated with the broad business cycle and strong balance sheets with low financial leverage. Many active strategies emphasise Quality growth as an important factor in their security selection and portfolio construction.”

The top holdings are Apple, Nvidia, Microsoft, Meta, Eli Lilly, Visa Alphabet (Google), Visa Novo Nordisk United Health Group and Mastercard. 
 
The stock selection process starts with the top 1500 stocks in the world by market value. This is the MSCI index. The algorithm then applies the three filters above to reduce the stocks in QUAL to 300.

To illustrate
QUAL – return on equity is 35.96% on Price/Earning ratio of 24.7, whereas the MSCI World index of 1500 has a ROE of 21.10% on a PE of 18.7.

To compare, the ASX 200 ROE is 15.83%.    

These stocks are re-assessed every six months to ensure they continue delivering and providing solid returns. 

The table below shows the return over various time frames compared to the index. QUAL has beaten the index (MSCI) over every period apart from the 1-month result, and the returns are well above the ASX over the past five years. 

I have kept in the MVW from the last Not So. 
Orora (ORA) acquisition and capital raising 

Existing shareholders only
Orora (ORA) has acquired global premium glass maker Saverglass (France) for $2.1bn. They make high-end wine and spirit bottles for brands including Glenfiddich, Don Julio, Jose Cuervo, Grey Goose and Hennessy.

Existing shareholders can purchase one new share for every 2.55 existing shares for $2.70. The shares have started trading again and have fallen to near the issue price. Closed at $2.75.

The offer opens 12/9 and closes 25/9. Paperwork should be received next week. We will provide more information when we receive it from the brokers.  
Macquarie Bank Accounts 

Macquarie has advised they are making the following changes to the usage of their accounts.  
 
From January 2024 You won’t be able to:
– order a cheque book for a new cash management account.
From March 2024 You won’t be able to:
– make a payment using our automated telephone banking service.
From May 2024 You won’t be able to:
– deposit or withdraw cash or cheques over the counter at Macquarie branches
– order a cheque book on an existing account.

Clients can continue to withdraw cash from their transaction account via ATMs across Australia and overseas without fees. However, cash deposits and branch withdrawals will no longer be available.

From November 2024 You won’t be able to:
– write cheques or request bank cheques
– deposit or withdraw cash or cheques over the counter at NAB branches
– make a super contribution or payment via cheque.

Provincial Wealth summary
In our reviews, we will be discussing with your usage of the account and whether these will have any impacts and if required, provide guidance on work around. 
Financial Planning Snippets
– Super Guarantee (SGC) for employees increases to 11% from 1/7/23
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
– Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020). 
Other Stories 
– Spheria Emerging Companies (SEC) NTA $2.15 ($2.12) as at 15/9/23. Share Price $1.90 ($1.90). That’s a 11.6% (11.4%) discount. (brackets previous number). Gross yield 7.96% paid quarterly.  
– Japan’s stockmarket hit 30 year high yesterday.
– NSW Govt budget. Hitting property investors.
– BHP warns the Federal government’s new “same work, same pay” legislation could cost $1.3bn, which will mean less company profits, corporate taxes and impact dividends.  
Broker Target Price changes – 
Ord Minnett

Morgans

Morgan Stanley

Macquarie

Bell Potter/Citigroup

UBS 

Tracking changes for 2023
Upgrades 263
Downgrades 256

(we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks).
Today’s ASX sector Movements
Best – Energy +0.2%         
Worst Materials -0.8%
Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index decreased from 91.73% to 90.85%. 

Overall Earnings Per Share (EPS) 

FY23 decreased from 2.93% to 2.90% (new low)   
FY24 increased from 6.61% to 6.7%   

Most expensive – CBA 112.1%            
Least expensive –  Lend Lease 57.4%  

The CORE Watchlist has 7 (8) stocks trading above 100%; they are; BHP CBA JBH NAB RIO WDS WES, lowest number ever is 0, highest 9. While 9 (7) are trading below 85% (highest 18), while the lowest is 5. CSL LLC NEC NXT ORA RMD S32 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). 11 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $41.04    Broker range $42.80 to $46.50
CSL current price $263.60  Broker range $325 to $340
LLC current price $7.31      Broker range $8.03 to $14.45
MQG current price $172.92 Broker range $175 to $209
ORA current price $2.75     Broker range $3.00 to $4.10
ORI current price $15.88     Broker range $16.50 to $20.30
RMD current price $22.72   Broker range $27.70 to $39
S32 current price $3.40       Broker range $3.60 to $5.15
SHL current price $30.45    Broker range $32 to $38
STO current price $7.85      Broker range $8.10 to $12.30
TLS current price $3.87      Broker range $4.20 to $4.75

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 103.2% to 102.3%. Still fully priced! 

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is slightly increased dividend payments and still very attractive yields. PLUS FRANKING.  

FY 23 % FY 24 % FY 25
ANZ 162.5 6.37% 163.0 6.39% 163.0 6.39%
CBA 450.0 4.41% 457.7 4.48% 469.5 4.60%
NAB 167.3 5.70% 167.5 5.70% 168.0 5.72%
WBC 140.0 6.45% 141.0 6.50% 142.8 6.58%
MQG  750.0 4.34% 677.0 3.92% 719.2 4.16%  
 
Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year. I have added FY25. BHP and RIO results will see some changing forecasts with the likelihood of further reduction. 

    FY23 cps % FY24 cps % FY25 cps %
BHP 258.00 5.72% 226.33 5.02% 213.6 4.74%
RIO 569.17 4.80% 651.00 5.49% 547.8 4.62%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).
Other Indicators (changes since last Not So)
US VIX Index increased from 12.82 to 14. Bounced off 52 week low. Markets are pretty calm.  
Iron Ore increased from $121.60 to $121.75. Highest level in months.  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $113, while dropping to $94 for 2024.
Copper decreased from $3.84 to $3.77. 
Gold increased from $1941 to $1952.  Record high $2063. 
AUD/USD decreased from 64.67c to 64.32c. Has the AUD bottomed, mid 63.5c?     
USD/CNY increased from $7.27 to $7.30  Lowest $6.31 Highest in recent years $7.35. 
Asian markets – DOWN   
US 10 year Bonds increased from 4.29% to 4.32%, hit 4.35% (13 year high) Rate moving higher on the issuance of BONDS. US 30 year Bond increased from 4.38% to 4.40% The highest level was 4.47%. US Federal Reserve raised rates to 5.5% but maybe on hold in September. The US 2 year rate has increased from 5.02% to 5.06%  (5.37%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.77%. It was -0.73% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.3%. This is the most it has been inverted in 42 years. 
German Bonds increased from 2.61% to 2.71%. 2.94% highest since 2008 as the ECB increased rates last week.
Japanese Bonds increased from 0.712% to 0.72.1%   highest in 10 years.  
Aussie Bonds 10 year Bonds increased from 4.11% to 4.18%.  Recent high 4.32% 
Other Aussie Bonds 1 year 4.10%  2 year 3.92% 4 year 3.91% 5 year 3.94% 15 year Bonds 4.42%. Rates flattening. Given the cash rate is 4.10%, there is not a lot of suggestion that rates are falling over the next couple of years.    
Oil prices increased from $90.84 to $92.86. Will the rally in oil put pressure on inflation again? 
Tungsten – China remained at $305 to $315mtu. 
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 August 2023 No.578

 

The Not So DAILY BULLETIN 28 August 2023  No.578

Top Stories  

Monday, 28 August 2023, the ASX 200 gained 45 points or 0.6% to finish at 7160.

Over that period, the ASX 200 has increased 12 points and is at the lower end of the trading range of 7000 to 7500. This financial year (nearly two months), we have traded between 7004 and 7456 is down -0.6%. Over 2023, we have traded between 6899 and 7558 as the market seems to need help to digest the impacts of higher inflation and interest rates and is only up 1.72% for the year to date. 

August has been weaker by 3% after a good July. We are seeing companies trade without dividends, which usually sees the market lower (generally also in September). 

Reporting season has nearly finished in Australia, and it’s been OK. There are not too many disasters, but some concerns about interest rates and inflation (especially wages) remain. See below.

The US Federal Reserve Jackson Hole meeting suggested interest rates may have further to rise IF inflation doesn’t continue to fall and emphasised that rates would remain elevated for longer. (This has been Provincial Wealth’s view as well).  

Economic data continues to be mixed with global PMI (purchasing manager indexes) showing slowing economies, but retail sales in Australia were up 0.5% in July (maybe FIFA World Cup).
 
We are still waiting for a meaningful stimulus from China, which is causing domestic weakness, especially in commodities. Today, China announced a reduction in the stamp duty on share trade. This boosted Chinese markets, up 1.5% and should hold the AUD, Copper and iron ore. 

It probably accounted for some of the gains in our biggest stocks today, with BHP up 1.2%, CBA up 1.2%, CSL up 1.7%, NAB 1.3% and WES 2.1%.    

Watching this week for;
Wednesday Aust monthly inflation figures 
Friday US payroll figures 

WE ARE LESS CAUTIOUS AND EVEN A LITTLE MORE OPTIMISTIC. But what will be the catalyst to take markets higher and out of the trading range? 

Australia Profit Season Part 1
This is the last week of profit results for most of the ASX.

I’ve tried to summarise Macquarie’s view from the table below. It shows the ASX results and whether their research was beaten (dark blue) by the profit results, inline (light blue) or missed expectations (orange).

For the Jun 2023 period (Jun half), it shows 31% of companies beat their expectations by more than 5%. 42% were in line with expectations, and 27% missed expectations by more than 5%. So overall, they are happy that the beats are more than the misses. 

However, the profit outlook in the next six months (December half), FY24 and FY25 are causing a little concern as the analysts are revising their forecasts lower, with only 10% in Dec half beating expectations while 45% were misses. While FY24 and FY25 weren’t as bad, they still had misses exceeding beats. 

Some of the downgrades have come from company guidance, and even in the CORE watchlist of 30 stocks, we have seen profit expectation of FY24 number reduce by 2% in the last two weeks. Macquarie says this is due to companies being a little conservative as the full effect of interest rates and wages is yet to play out.

     

Profit Season Part 2
UBS has also summaries their view of the profit season.

Company profit results through August saw earnings (profits) beats outnumber misses by a ratio of 5:3, which illustrates the underlying strength the domestic economy. Amongst sectors, Materials (ex-mining) and Communication Services saw the strongest beat rate, while the Consumer Staples & Information Technology saw the biggest skew towards earnings misses.

Soft guidance from companies, saw analysts revise down FY24 earnings at a ratio of 2 downgrades for each upgrade

Persistent and broad-based domestic cost pressures. The most prevalent headache for companies this profits season has been on cost management. Across sectors, management teams are pointing to the cost growth they are seeing from labour, rent, energy, transport and technology spend. The broad-based stickiness in cost inflation that we saw in company results, maps with recent business survey data, and suggests that input costs pressures will likely remain elevated.

Profit margins are still holding up.
The cost pressures that companies continue to face are still being largely passed onto customers, which is allowing companies to defend their profit margins. As was the case in the February results period, Telcos and Insurers were again able to push through price increases to their customers without damaging sales. This outcome again illustrates how ultra tight labour markets have diluted the impact of the interest rate hikes we have seen over the last 12 months.

In the 3/8/23 Not So, we noted UBS wanted to know the answer to 4 key questions for the reporting season. This is what they found. 

1. Is the consumer crunch now happening?
August results showed that recent activity levels from the consumer have not proved as bad as feared. That said, stocks where a consumer or economic slowdown was noted include: Adairs, Amcor, Centuria, Dominos Pizza, G8 Education, HomeCo Daily Needs, JB Hi-Fi, Pinnacle Investment, Region Group, Super Retail, Seven West Media, Telstra, Vicinity Centres and Woolworths.

2. Are labour costs beginning to break out?
Versus what has been seen in most other advanced economies, wage inflation in Australia over the past 12 months has proved relatively contained. But recent data points show wage restraint may now be starting to wane, with various labour cost surveys having surged since the minimum wage decision on 2 June. Stocks where labour costs (or shortages) are proving a headwind to profitability included: Boral, Coles, G8 Education, JB Hi-Fi, Netwealth, Sims, Sonic Healthcare, Super Retail, Seven West Media, Telstra and Woolworths.

3. Can profit margins be maintained? The fact that most Australian companies have had little trouble passing on high input costs over the past year has actually not surprised us, and reflected an end customer that has been able (although reluctant) to digest higher prices. Results through August show this dynamic is mostly continuing. Stocks where profit margin compression was observed included: ASX, Bapcor, Bendigo Bank, Carsales, Commonwealth Bank, Corporate Travel, GPT Group, Insignia Financial, JB Hi-Fi, Mirvac Group, National Australia Bank, Pinnacle Investment, Resmed, Steadfast, Sims, Stockland and Seven West Media.

4. Are interest expenses manageable?  Stocks that showed an uncomfortable growth in interest expenses included: Autosports Group, Aurizon, Bapcor, Carsales, Charter Hall Long Wale REIT, Endeavour Group, IVE Group, Mirvac, Sims, Seven West Media and Vicinity.  

Jackson Hole
The global Central Bankers met at the annual Jackson Hole, Wyoming meeting last week. This annual meeting provides an opportunity for global Central Bankers to discuss the global outlook and policy setting. A speech from US Federal Reserve chair Powell usually dominates it.   

Betashares chief economist David Bassenese made the following comments.

Powell’s speech suggested that while the US Federal Reserve retains a tightening bias (more rate rises), it’s in no hurry to raise rates again. Instead, it’s prepared to “proceed carefully” and assess incoming inflation and activity data for the time being. This likely rules out a September rate rise, though keeps in play a potential hike at the next meeting in November – if either inflation surprises on the upside and/or there are further signs of a rebound in economic activity, especially consumer spending.

Thankfully, markets took Powell’s speech well, and there was little volatility, which hasn’t been the case in the past.   

China lack of growth and lack of stimulus
Over recent weeks, the economic news hasn’t been great coming out of China. The economic re-opening miracle hasn’t happened, and the property sector has seen a slowdown with increasing stories of Chinese property developers in trouble. GDP is still likely to grow at 3-4% without stimulus and probably 5% with, but this is lower than we have seen in the past 20 years (shown in the graph below).  

While we’ve heard slow-down and property collapse stories before, they are usually followed by a strong economic stimulus package from the Chinese Government which has continued to see the Chinese economy be the world’s growth engine for the last 30-plus years. 

AMP’s Shane Oliver has written a piece about the Chinese slowdown, structural challenges and implications for Australia

In summary, he says
– China’s economy is slowing not helped by a property collapse and longer-term structural constraints around poor demographics and threats to productivity growth.
– China needs to save less and spend more, and this requires significant fiscal stimulus. So far policy stimulus has been tepid, but a more forceful response is likely. While China has a high level of debt, it also has a high level of savings, and most of the debt is funded domestically. This means the debt problems are very different to the previous debt crisis.  
– Chinese shares are cheap trading on a PE of 7.7 and are likely to bounce, should a stimulus package be announced, but short-term risks are high.
– The risks around China’s outlook mean Australia can’t rely on the China/commodity boom indefinitely. Australia still exports 30% to China (was 42% before trade dispute). A sharp downturn to the China (worse case) would be a double whammy as Australia also deals with higher interest rates. This highlights the need to do more to boost our longer-term growth potential.  

 

Core Watchlist profit season 
During the last profit season, 24 of the 30 CORE watchlist stocks increased their dividend. It will be interesting to see whether this can be maintained. So far, 13 have increased, 4 stayed level and 6 decreased out of 23 ( 6 have profit announcements in November). 

Below are CORE watchlist stock and when they are reporting. Not all companies report as at end of June. For example, ANZ MQG NAB and WBC report end of Sept. 

Jul 26 – RIO – profit was $US 51bn down 43% while dividend was also down. This was expected as coming from high levels. 
Aug 4 – Resmed (RMD) – profit up 8% and quarterly dividend up 9%. But didn’t appease investors, have sold off the stock. Looking like a buying opportunity as now the cheapest stock in the CORE WATCHLIST.
Aug 9 – CBA – profit up 5%. Record dividend. Increased on market buyback by $1bn. Brokers raised dividend expectations. 
Aug 14 – JB Hi Fi (JBH) – profit $524m. Dividend down but from high level. 
Lend Lease (LLC) – statutory loss but an operating profit of $257m. 7% lower property valuations. The pipeline of work $126bn. Dividend slightly higher
Aug 15 – CSL
full year profit $2.61bn up 10%. Dividend Full year $A3.59 which is also higher.
Seek.com (SEK) full year profit $202m down 16% Dividend 23c for half year, which is higher than one year ago. 
Aug 16 – Transurban (TCL) traffic up 20% Distribution for FY 24 up 6.8%
Computershare (CPU) profit $258m Dividend 40c up 33%
Aug 17 – Amcor (AMC) full year profit $1,048m with dividend slightly higher. 
Goodman (GMG) profit $1,783m up 17% Forecast to grow 9% in FY24. Dividend the same. Reinvesting in growth
Orora (ORA) profit $203m up 8.5% Dividend 9c up 5.9%. Consistent performance. 
Sonic Health (SHL)
profit $685m down 53% due to drop in COVID testing. Up 19% compared to pre-pandemic. Dividend increased 3% to 62c.
Telstra (TLS) Full year Profit $2.1bn up 13%. Dividend 8.5c remaining the same. Not spinning out the infrastructure assets into separate company.  
Aug 22 – BHP profit was $US12.9bn a drop of 58% from record profit last year. The dividend of US80c or $1.25 was 55% lower than the record last year. Yield is still 5.9% plus franking.
Coles (COL) full year net profit of $1.042bn. 30c dividend was the same as last year. 
Woodside (WDS) profit $1.896bn. up 4%. Dividend US 80c is down 26% from record last year but still equivalent to 6.9%.
Aug 23 – STO Profit of $790m down 37%. Dividend 8.7c which is up 14% from last year. 
WOW profit of $1.618bn for full year which is up 4.6%. The dividend was 58c which is 9% on the same time last year. 
Aug 24 – Nine Entertainment (NEC) $262m down 25%. Dividend 5c down 21%
South 32 (S32) core profit $916m. Dividend 5c, well down on last year due to fall in commodity prices.
Aug 25 – Wesfarmers (WES) profit $2.4bn up 4.8%. Dividend $1.03 up 6.1%. 
Aug 29 – NextDC (NXT) reported a EBITDA of $193m up 15% on last year. No dividend (reinvesting profits for future growth in data centres). 
Aug 30 – BXB

   
NAB Capital Notes (Hybrid) 
NAB is raising approximately $1bn via a capital note (debt). This is similar to the CBA and ANZ raising over the last few months. 

The details are;

The code will be NABPJ and likely to have a yield of 6.90%-7.10%, which is a floating rate. The capital price is $100 per security. The first income payment date is 17/12/2023, and the first optional call date is 17/9/2030, with a mandatory conversion or maturity date of 17/6/2033.

While they have a 10-year maturity date, they can be traded on the market anytime.  

At the beginning of 2023, we only expected ANZ to issue a new note as they had one maturing. Based on CBA and NAB issues, new hybrids. Westpac is likely to be considered a note as well.     

Financial Planning Snippets
– Super Guarantee (SGC) for employees increases to 11% from 1/7/23
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
– Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020).   

Other Stories 
– Australian retail sales up 0.5%. 
– Spheria Emerging Companies (SEC) NTA $2.19 as at 24/8/23. Share Price $1.88
– Orora (ORA) in trading halt. Expecting to purchase a French bottle maker and a $1bn cap raise. 
   
Broker Target Price changes – 
Ord Minnett
Coles (COL) increased from $14 (lowest broker) to $14.50 (still lowest broker)
Goodman Group (GMG) increased from $18.60 (lowest broker) to $19.40 (still lowest broker)
Woolworths (WOW) increased from $27 (lowest broker) to $27.50 (still lowest broker)


Morgans
COL decreased from $19.85 to $16.90
GMG increased from $24 to $24.50
Santos (STO) decreased from $8.45 (lowest broker) to $8.10 (still lowest broker)
Westpac (WBC) decreased from $24.22 to $23.02
Wesfarmers (WES) decreased from $55.50 (equal highest broker) to $55.15
Woodside (WDS) decreased from $38.60 to $38.50

WOW increased from $38.30 to $41.30

Morgan Stanley
ANZ increased from $25.20 to $26.20 
South 32 (S32) increased from $3.90 to $4.15 

WBC decreased from $21 (lowest broker) to $20.60 (still lowest broker)
Woodside (WDS) increased from $40 (highest broker) to $41 (still highest broker)
WOW increased from $30.50 to $33



Macquarie
COL decreased from $20 to $18.50
Nine Entertainment (NEC) decreased from $2.14 (lowest broker) to $1.96 (still lowest broker)
STO increased from $9.45 to $9.90
S32 decreased from $4.40 to $3.60 (lowest broker)
WBC decreased from $21.50 to $21

WES increased from $52 to $54
WDS decreased from $35 to $34

Bell Potter/Citigroup
BHP decreased from 445 to $44
COL decreased from $20.20 to $18.30

STO increased from $8.50 to $9
S32 decreased from $4.05 (lowest broker) to $3.80 (still lowest broker)
WES increased from $40 (lowest broker) to $44

UBS 
Amcor (AMC) decreased from $16.30 to $15.50
BHP decreased from $37 (lowest broker) to $36 (still lowest broker)

NAB increased from 425 to $26
NEC decreased from $2.50 to $2.28 
Orora (ORA) increased from $3.50 to $3.75
S32 decreased from $4.60 to $4.30
Telstra (TLS) decreased from $4.75 (equal highest broker) to $4.65

WES increased from $55.50 (equal highest broker) to $57 (highest broker)

Tracking changes for 2023
Upgrades 248
Downgrades 248

(we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks).  

Today’s ASX sector Movements
Best – Healthcare +1.5%     
Worst IT -0.7%   

Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index decreased from 92.64% to 92.49%. 

Overall Earnings Per Share (EPS) 

FY23 increased from 3.11% to 3.16%   
FY24 decreased from 7.35% to 6.56% (this has dropped 2% in 2 weeks)  

Most expensive – CBA 110.6%            
Least expensive –  Resmed (RMD) 68.6%. 

The CORE Watchlist has 6 (6) stocks trading above 100%; they are; CBA JBH NAB WDS WES WOW, lowest number ever is 0, highest 9. While 7 (6) are trading below 85% (highest 18) this is the lowest for a while. CSL LLC NEC ORI RMD S32 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). 9 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $40.52    Broker range $42.80 to $46.50
CSL current price $267.95  Broker range $325 to $340
LLC current price $7.57      Broker range $8.03 to $9.75
ORA current price $3.52     Broker range $3.75 to $4.10
ORI current price $15.03     Broker range $16.50 to $20.30
RMD current price $25.30   Broker range $31.40 to $39
S32 current price $3.43       Broker range $3.60 to $5.15
STO current price $7.63      Broker range $8.10 to $12.30
TLS current price $4.01      Broker range $4.20 to $4.75

Added ORA

Removed NEC SHL  

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 98.9% to 99.7%. Nearly fully priced. 

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is slightly increased dividend payments and still very attractive yields. PLUS FRANKING.  

FY 23 % FY 24 % FY 25
ANZ 162.5 6.61% 163.0 6.63% 163.0 6.63%
CBA 450.0 4.47% 457.7 4.54% 469.5 4.66%
NAB 167.3 5.92% 167.5 5.93% 168.0 5.94%
WBC 140.0 6.55% 141.0 6.59% 142.8 6.68%
MQG  750.0 4.35% 677.0 3.93% 719.2 4.17%   

Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year. I have added FY25. BHP and RIO results will see some changing forecasts with the likelihood of further reduction.
 
    FY23 cps % FY24 cps % FY25 cps %
BHP 258.00 5.92% 226.33 5.20% 213.6 4.90%
RIO 569.17 5.24% 651.00 5.99% 547.8 5.04%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).  

Other Indicators (changes since last Not So)
US VIX Index decreased from 17.89 to 15.68. Jackson Hole meeting settled the cattle (market)   
Iron Ore increased from $105.25 to $111.75.  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $113, while dropping to $94 for 2024.
Copper increased from $3.69 to $3.76. 
Gold increased from $1922 to $1945.  Record high $2063. 
AUD/USD increased from 64.10c to 64.30c. Is this the bottom?     
USD/CNY decreased from $7.30 to $7.28  Lowest $6.31 Highest in recent years $7.35. 
Asian markets – UP on Chinese small stimulus.   
US 10 year Bonds increased from 4.20% to 4.22%, hit 4.29% last night (13 year high) Rate moving higher on issuance of BONDS. US 30 year Bond decreased from 4.34% to 4.27% The highest level was 4.34%. US Federal Reserve raised rates to 5.5% but maybe on hold in September. The US 2 year rate has increased from 4.90% to 5.08%  (5.37%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.86%. It was -0.68% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.3%. This is the most it has been inverted in 42 years. 
German Bonds decreased from 2.60% to 2.56%. 2.94% highest since 2008 as the ECB increased rates last week.
Japanese Bonds increased from 0.63% to 0.663%   0.663% highest in many years.  
Aussie Bonds 10 year Bonds decreased from 4.24% to 4.16%.  Recent high 4.28% 
Other Aussie Bonds 1 year 4.09%  2 year 3.92% 4 year 3.89% 5 year 3.93% 15 year Bonds 4.40%. Rates moving lowers as market thinks RBA on HOLD are .    
Oil prices decreased from $80.66 to $79.99.  
Tungsten – China remained at $305 to $315mtu.   

   
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 26 July 2023 No.571

 

The Not So DAILY BULLETIN 26 July 2023  No.571

Top Stories  
Wednesday, 26 July 2023, the ASX 200 gained 62 points to close at 7402.  This is the highest point since 16/2/23, as the inflation figures came in better than expected. As the chart below shows, we have been in a trading range between 7000 and 7500 all year. I’m not sure we are ready to break out of it yet. 

At 11.29 am, the ASX was up 11 points. When the 6% inflation figures came in at 11.30 am (down from 7%), the market jumped 50 points, and it was mainly the Banks as Resource stocks were already higher on the Chinese stimulus talk.

There is growing noise from China that a stimulus package may be coming after last week’s lower-than-expected Chinese GDP figures.  

US profit season is in full swing, and Alphabet (Google) and Microsoft were the two main releases. They had profits for the quarter of $18.4bn US and $20bn US. Compare this to RIO, who released their half-yearly result after the market closed with a profit of $5.1bn US for the six months (not a quarter). 

The US results are better than expected, even though they are likely to fall 7% (could have been worse). This has seen the Dow Jones rise for 12 straight days. The longest streak is 13, which occurred in 2018. 

That might come to an end with the US Federal Reserve announcing their interest rate decision in the morning (5 am Aussie time). There is a 98% expectation of a rate rise to 5.50%, but it will be the commentary from US Federal Reserve chair Powell, that will be the driver of the markets over the next few weeks. 

WE ARE BECOMING LESS CAUTIOUS and EVEN A LITTLE MORE OPTIMISTIC     


Aussie inflation falling 
Today’s better-than-expected quarterly inflation result was 0.8% for the quarter and 6% for the entire year. 

As the first chart (source Shane Oliver) below shows (headline inflation is all groups, while CORE inflation is trimmed mean), inflation is coming down quite quickly, as in the last quarter, it was 7%. The monthly inflation figures were released simultaneously, showing an annual rate of 5.4%. The market certainly took this as a positive as it was up just 11 points before 11.30 am, and then by noon, it was up by 60 points.

However, looking at the numbers in more detail shows two stories. The 2nd chart (Source Shane Oliver) shows goods inflation is falling, but services inflation is still rising, which would be a slight concern to the RBA.

The early updates from economists show they are reducing their peak interest rate by one rate. So a few think there might be only one more rate rise. Kevin H’s view at this stage is they will HOLD at the next meeting.
      

US Profits
Before Australian companies provide half-yearly profits, the US is in full swing regarding profits. The graphic below shows the companies due over the next few weeks. So far, only about 20% of the US companies have reported, and generally, they have come in better than expected, but expectations are for a 7% drop for the quarter. This is hopefully the bottom of the profit cycle. For those, we’ve had recent review meetings. If this is the low in profits and the next quarter is positive (which we won’t know until Oct-Nov), then this may confirm the market theory that the market bottoms nine months before profits bottom. If this is the case, then the bottom of the market was September 2022.   Only time will tell!  

   

Financial Planning Snippets
– Super Guarantee (SGC) for employees increases to 11% from 1/7/23
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
– Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020).   

Other Stories 
– RIO profit was $5.1bn US (down 43% on last year). The dividend $1.77 US, down 34%, but lower profit and dividend was expected. 
– Interest rate decisions also coming from European Central Bank (ECB) and Bank of Japan this week.
– Macquarie Group AGM – Thursday.  
   
Broker Target Price changes – 
Ord Minnett
Santos (STO) increased from $12 (highest broker) to $12.30 (still highest broker)
South 32 (S32) decreased from $4.40 to $4.10

Morgans
BHP decreased from $51.70 (highest broker) to $51.30 (still highest broker)
S32 decreased from $5.60 (highest broker) to $5.15 (still highest broker)
STO decreased from $8.75 to $8.45 (lowest broker)


Morgan Stanley
BHP decreased from $45 to $44.15
Coles (COL) increased from $14 (equal lowest broker) to $14.75
NAB increased from $25.30 to $25.50
STO increased from $8.66 to $8.88
Woolworth (WOW) increased from $29.70 to $30.50


Macquarie
BHP decreased from $48 to $47
Goodman Group (GMG) decreased from $23.18 to $22.66

Lend Lease (LLC) increased from $8.03 (lowest broker) to $8.10 (still lowest broker)
Sonic Health (SHL) increased from $31.50 to $33.50

STO decreased from $10 to $9.70


Bell Potter/Citigroup
STO increased from $8 (lowest broker) to $8.50
SHL increased from $40 (highest broker) to $40.50 (still highest broker)

 
UBS 
S32 decreased from $4.90 to $4.50
STO increased from $8.20 to $8.70 
Woodside (WDS) decreased from $35.90 to $34.90 

Tracking changes for 2023
Upgrades 197
Downgrades 193

(we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks).

Today’s ASX sector Movements
Best – Materials +1.8%    
Worst REITs -0.5%  

Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index increased from 93.90% to 95.01%. 

Overall Earnings Per Share (EPS) 

Y23 decreased from 3.84% to 3.43% (forecasts still falling 
FY24 decreased from 8.33% to 7.71% 

Most expensive – CBA 117.5%           
Least expensive –  CSL and Lend Lease 80.1%     

The CORE Watchlist has 9 equal highest (8) stocks trading above 100%, they are BHP CBA COL JBH NAB RIO WDS WES WOW, lowest number ever is 0, highest 9. While 4 (6) are trading below 85% (highest 18) lowest for a while is 3. CSL LLC NEC 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). 8 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $38.86    Broker range $41.20 to $46
CSL current price $262.86  Broker range $315 to $340
ORA current price $3.49     Broker range $3.50 to $3.80
ORI current price $15.70     Broker range $16.50 to $20.30
RMD current price $32.71   Broker range $34.70 to $40.50
S32 current price $3.93       Broker range $4.05 to $5.15
STO current price $7.97      Broker range $8 to $12
TLS current price $4.25      Broker range $4.50 to $4.75

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 remained at 103%. Today’s inflation rate may give some the banks some support. We will see what the analysts think, but they are above FULL price. ANZ 96% NAB 104% CBA 117% and WBC 94.5%.  Macquarie (MQG) is probably the pick of them at 94%.

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is for increased dividend payments and still very attractive yields. PLUS FRANKING.  

FY 23 % FY 24 % FY 25
ANZ 162.5 6.38% 163.0 6.40% 163.3 6.42%
CBA 436.7 4.16% 445.5 4.24% 447.2 4.26%
NAB 169.3 6.04% 170.0 6.06% 171.5 6.12%
WBC 141.7 6.41% 143.5 6.50% 145.6 6.59%
MQG  738.0 4.03% 696.6 3.81% 742.2 4.06%
  
Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year. I have added FY25. BHP and RIO results will see some changing forecasts with the likelihood of further reduction. 
   
FY23 cps % FY24 cps % FY25 cps %
BHP 264.33 5.64% 226.17 4.82% 202.2 4.31%
RIO 602.17 4.98% 675.00 5.59% 626.0 5.18%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).  

Other Indicators (changes since last Not So)
US VIX Index increased from 13.76 to 13.86. Suggesting US markets are still very calm.  
Iron Ore increased from $110.70 to $114.65. Still some talk of Chinese stimulus  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $104.20
Copper decreased from $3.83 to $3.90 Chinese stimulus
Gold decreased from $1983 to $1971.  Record high $2063. 
AUD/USD decreased from 68.19c to 67.69c. $A as interest peak maybe lower than thought.      
USD/CNY increased from $7.18 to $7.15  Lowest $6.31 Highest in recent years $7.35. Chinese currency being lowered by Chinese Govt. 
Asian markets – DOWN.   
US 10 year Bonds increased from 3.77% to 3.89%. 4.23% (8 year high). US 30 year Bond increased from 3.86% to 3.94% The highest level was 4.27%. US Federal Reserve may raise to 5.5% tomorrow morning. The US 2 year rate has increased from 4.78% to 4.88%  (5.37%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.99%. It was -1.01% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.3%. This is the most it has been inverted in 42 years. 
German Bonds increased from 2.39% to 2.42%. 2.74% highest since 2008 
Japanese Bonds decreased from 0.46% to 0.45%   0.508% highest in many years. 
Aussie Bonds 10 year Bonds increased from 3.95% to 4.01%.  Recent high 4.28% 
Other Aussie Bonds 1 year 4.11%  2 year 4.05% 4 year 3.89% 5 year 3.86% 15 year Bonds 4.16%. The yield moved lower on peak rates soon.     
Oil prices decreased from $75.4 to $79.27. Better outlook on Chinese stimulus  
Tungsten – China remained at $305 to $315mtu.    

This week & next week  Last “Not So” opened in 7 Aust states (excl NT ), US 6 states (California, Massachusetts Colorado South Carolina, New York & Minnesota)  Sweden, 

The Not So DAILY BULLETIN 27 June 2023 No.566

 

Top Stories  

Tuesday, 27 June 2023, saw the ASX 200 gain 40 points to close at 7118. This is the first rise in 5 days and continues market trading in a range of 7000 to 7400, which started in March. We are back in positive territory for the month.

At this stage, we are looking at a positive financial year as 30/6/22 finished at 6568; however, this was a dip as the market had spent most of FY22 above 7000.  

The Russian mutiny could have been an interesting event for markets, but it was over in 36 hours (not sure Belarus is a safe haven from the KGB). Hopefully, it provides Ukraine with an advantage, which will see the war over sooner than later. If that were to occur, it would undoubtedly be a positive for markets and the world economy as the rebuild will be significant. 

More economic data is coming this week, with tomorrow’s Aust monthly inflation number and Thursday’s US GDP. 

We are seeing a slowing economy, but inflation is still higher than desired, and wage growth is partly fuelling this, so more rate hikes are likely. Citigroup and Morgan Stanley are predicting 0.5% higher, with the end rate being 4.6%.  

We (the Provincial Wealth investment committee) believe a cautious approach has been and still is required until Central Banks stop raising rates as they haven’t controlled inflation YET.  

So crosswinds persist with some caution.     

Importance of diversification
“Spreading your eggs into different baskets” is a term we learn early in life. In financial planning, we call it asset allocation or risk profile. It’s essential to have a range of investments, as no asset always performs well. 

The chart below shows the main asset classes;
– Cash 
– Fixed Interest – Australian and International 
– Property – Australian Listed Property (REITS)
– Shares – Australian and International  & Smaller companies 


The chart shows the performance of the different assets over the last ten years. You can see it always changes.

The best performers over that period have been Small companies, International Shares & Australian Listed Property (three times each). Interestingly Australian Shares haven’t been the best in any one year, and Global shares have been better in eight out of 10 years.

On the other end, Cash is the worst performer in 5 years.

So, having a range of assets is essential as this provides a better return over time, as predicting the future is difficult at the best of times.        
Home town bias 
To continue with the diversification theme. The chart below shows the percentage of the portfolio invested in the home country. For example, Canadians invest 59% of their shares in Canadian shares, representing only 3.1% of the Global Index.

It’s even worse in Australia as we have 66.5% of our shares in Australian shares, compared to 1.9% of the global index. 

There are certainly some advantages to investing in your own country’s market. 
1. Knowledge of the company.
2. Tax-advantaged dividend (Aust only)
3. Certainty dividends (knowing when they are paid).
4. Understanding political risk.
5. Avoiding currency risk
6. Perceived nationalism  

However, investing to increase return and better manage risk is not just a noble idea by supporting your domestic economy. It’s about balancing the risk and return outlooks globally, mainly where higher growth opportunities exist in other markets. 
Over the last 5, 10 and 20 years
The US NASDAQ has gained 73% over the last five years, 274% in the previous ten years and 711% over the last 20 years.
The Global Index (MSCI) has gained 34%, 87% and 226% over the same periods.
The Aussie (ASX200) has gained 18%, 44% and 136% over the same periods.       

Artificial Intelligence (AI)
In recent months AI excitement has flowed into the share market in particular the US Nasdaq (NDQ). As we have discussed before we like to invest in future investment themes which includes Cybersecurity (HACK) and Robotics and AI (RBTZ).

Below is some commentary from Betashares regarding the performance of HACK, RBTZ & NDQ for May. 

HACK: up 13% in May 
With all the excitement about what might be possible with AI, naturally there is also concern. Experts predict the technology will lead to a new arms race in the cybersecurity industry, with both hackers and those trying to stop them benefiting from its use. Either way, investors are betting that it will lead to a surge in demand for the cybersecurity industry, allowing valuations to surge over the month for the companies best-taking advantage of the trend. Broadcom Inc (+31.69%) was the biggest contributor after it announced a new multi-billion dollar deal with Apple to develop 5G radio frequency components in the US. Cloudflare Inc (+50.10%) soared after announcing a ChatGPT plugin to assist developers on its platform, while Palo Alto Networks (+19.43%) touted plans to deploy its own large language models (LLMs) within a year.

RBTZ: up 12% in May
Unsurprisingly, Betashares’ very own Robotics and Artificial Intelligence Fund also rode the AI wave in May, leading it to a 6-month gain of 33.95%. Nvidia (+39.23%) led the gains in the fund and has turned into the poster child for the AI craze. The company shot up 25% in a day after announcing quarter revenue forecasts that were more than 50% higher than investors had expected, and one day later its market cap crept above US$1tn, becoming the first chipmaker and only the 9th company ever to reach the milestone. The company produces Graphical Processing Units (GPUs), used in computing to perform intensive tasks. For much of the company’s life their main use was in computer gaming, then more recently to mine crypto, and now investors are realising their capabilities to perform the complex calculations required in AI. For example, UBS estimated that it took 10,000 Nvidia chips to produce ChatGPT6. The other top contributors for the month were C3.ai (+129.28%) and Dynatrace Inc (+23.15%). C3.ai develops artificial intelligence platforms for businesses, and Dynatrace uses the technology to monitor companies’ software infrastructure to find bugs and improve efficiency.

NDQ/HNDQ: up 10% in May
While AI wasn’t the only growth driver for the Nasdaq 100 in May, it certainly played a part. The majority of gains came from the big tech names, who are making up an increasingly concentrated part of the index and the US stock market as a whole. Nvidia was the biggest contributor, followed by Microsoft (+9.38%) and Alphabet (Class A +16.89%, Class C +16.41%). While those certainly aren’t pure-play AI names, the big tech companies have been making big investments in the space with Microsoft’s ChatGPT and Google’s Bard competing fiercely to take early market share in the space. Both companies have announced their chatbots will be integrated into their respective search engines, a space that Microsoft has traditionally struggled in. Outside of AI, the Nasdaq 100 was supported by the macro developments that continued to unfold. US recession fears and the associated hopes that the Federal Reserve would soon be forced to cut rates (or at least stop hiking) encouraged investors back into growth, while they continued to find security in large cap tech amongst continued banking stress and fears over the US debt ceiling. NDQ slightly outperformed HNDQ over the month, as the Aussie Dollar edged lower due to soft data coming out of China.  

Bank Interest rates

Macquarie has lifted their At Call Accelerator account to 4.1%. The transactional CMA is still at 2.5% 

Below is an updated check of term deposit rates. 

3 mths 6 mths 12 mths 24 mths
ANZ 3.00% 3.45% 4.60% 3.95%
CBA 3.00% 3.50% 4.00% 4.00%
NAB 3.00% 3.55% 4.60% 4.00%
WBC 3.00% 3.30% 3.95% 4.00%
St G 3.05% 3.35% 4.00% 4.05%
Bendigo 3.00% 4.05% 4.75% 3.35%
AMP 4.60% 4.75% 5.00% 4.95%
MQG 4.75% 4.90% 5.00% 3.90%

Term deposit rates are probably not far from reaching a plateau as the 2 year rates are below the 1 year rate. This suggests cash rates will be lower in 1- 2 years.   

Financial Planning Snippets
– The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate).
– Super Guarantee (SGC) for employees increases to 11% from 1/7/23
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
– Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020).   

Other Stories 
– Citigroup suggests a US recession is still likely, and the end of 23 target is 4000 (currently 4329). However, then expect a rebound to 4400 by June 24. 
– Sunrice (SGLLV) announced an increased dividend of 40c, giving a total of 50c of the year or 7.58% plus franking.    

Broker Target Price changes 
–  Ord Minnett
Sonic Health (SHL) increased from $32 to $34

Morgans


Morgan Stanley


Macquarie
BHP decreased from $52 (highest broker) to $49
JB Hi-Fi (JBH) decreased from $42.40 to $41.60
Rio Tinto (RIO) decreased from $122 to $115
Wesfarmers (WES) decreased from $52.80 to $52

Woolworths (WOW) increased from $39.50 to $40 

Bell Potter/Citigroup
BHP increased from $43 to $44

UBS 




Tracking changes for 2023
Upgrades 174
Downgrades 165

(we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks).  

Today’s ASX sector Movements
Best – REITs +2% (Listed property)   
Worst Communications -0.6%  

Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index increased from 91.05% to 91.30%. It was 90.92% yesterday. Historically, if the index is below 90% then it usually a good entry point.     

Overall Earnings Per Share (EPS) 

FY23 decreased from 4.59% to 4.21% 
FY24 increased from 8.27% to 8.71% 

Most expensive – CBA 109.9%           
Least expensive –  Lend Lease 68.2%.    

The CORE Watchlist has 5 (3) stocks trading above 100%, they are BHP CBA COL SHL WOW, lowest number ever is 0, highest 9. While 7 (6) are trading below 85% (highest 18) lowest for a while is 3. ALL LLC NEC ORI RMD SEKSTO (Figures in brackets is last Not So).   
Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 11 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $37.42    Broker range $41.20 to $46
ANZ current price $23.12   Broker range $24 to $31
CSL current price $279.05  Broker range $315 to $340
LLC current price $7.13      Broker range $8.03 to $14.45
MQG current price $174     Broker range $175 to $215
ORA current price $3.23     Broker range $3.50 to $3.80
ORI current price $14.81     Broker range $16.50 to $20.30
RMD current price $31.92   Broker range $34.70 to $40.50
SEK current price $21.51    Broker range $22.80 to $33.30
STO current price $7.32      Broker range $8 to $12
TLS current price $4.29      Broker range $4.50 to $4.75

Added  

Removed WBC  

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

The Banking index increased from 94.8% to 95.3%. ANZ is the cheapest at 87.3% and WBC 89.6%    

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is for increased dividend payments and still very attractive yields. PLUS FRANKING.  
FY 22 % FY 23 % FY 24
ANZ 146.0 6.31% 162.5 7.03% 163.0 7.05%
CBA 385.0 3.91% 436.7 4.44% 445.5 4.53%
NAB 151.0 5.86% 169.3 6.58% 170.0 6.60%
WBC 125.0 5.95% 141.7 6.74% 143.7 6.84%
MQG  622.0 3.57% 738.0 4.24% 696.6 4.00%   

Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year.

    FY22 cps % FY23 cps % FY24 cps %
BHP 451.00 10.00% 284.60 6.31% 272.6 6.04%
RIO 702.00 6.12% 685.67 5.98% 709.0 6.18%  

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

Other Indicators (changes since last Not So)
US VIX Index increased from 12.91 to 14.25. Bounced off 52 week low. Suggesting US markets are calm.  
Iron Ore increased from $111.305 to $108.85. Still some talk of Chinese stimulus  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $104.20
Copper decreased from $3.87 to $3.81 
Gold increased from $1926 to $1936.  Losing lustre Record high $2063. 
AUD/USD increased from 66.95c to 67.12c.       
USD/CNY increased from $7.18 to $7.21  Lowest $6.31 Highest in recent years $7.35    
Asian markets – MIXED, but China up strongly.   
US 10 year Bonds decreased from 3.78% to 3.74%. Rates moving higher as more rate hikes may be coming, if inflation remains sticky. 4.23% (8 year high). US 30 year Bond decreased from 3.86% to 3.83% The highest level was 4.27%. US Federal Reserve maybe raising rates above 5.25%. The US 2 year rate has decreased from 4.79% to 4.69%  (5.08%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.95%. It was -1.01% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.1%. This is the most it has been inverted in 42 years. 
German Bonds decreased from 2.39% to 2.33%. 2.74% highest since 2008 
Japanese Bonds decreased from 0.42% to 0.37%   0.508% highest in many years. 
Aussie Bonds 10 year Bonds remain at 3.94%.  Recent high is 4.21% 
Other Aussie Bonds 1 year 4.32%  2 year 4.12% 4 year 3.88% 5 year 3.85% 15 year Bonds 4.08%. The yield moved higher on expectations of more rises coming.     
Oil prices increased from $67.48 to $69.87. expecting lower demand 
Tungsten – Baltimore & Rotterdam remained at $340 – $345 mtu. China $325 to $340mtu. EQ Resources (EQR) first blast of mining ore. Starting to process hard rock (waited a long time for this).    


   
Contact details  PO BOX 149 Deniliquin NSW 2710
125 End St Deniliquin NSW 2710
Ph. 03 58950100
Fax 03 58950101
Mobile 0412113524
scottm@provincialwealth.com.au
kevinh@provincialwealth.com.au
chrisp@provincialwealth.com.au
maddyl@provincialwealth.com.au

The Not So DAILY BULLETIN 8 May 2023 No.556

 

The Not So DAILY BULLETIN 8 May 2023  No.556
Top Stories
Monday, 8 May 2023, saw the ASX 200 gain 57 points to finish at 7277. We are in a trading range again between 7000 and 7400.  

Today, Westpac results were better than expected, up 22% and a nice dividend increase. Like the other banks, there is uncertainty in the outlook. So the results from the banks can be summed up by saying better than fear, worse than hoped!

Last week, the US and European Central Banks increased interest rates as inflation remains high and the jobs market is yet to be impacted by rising rates. On Friday, another 235,000 jobs were created in the US last month, which was more than expected. US unemployment fell to a recent record of 3.4% (difficult to have a recession with this level of unemployment). This led to a jump in the US markets on Friday, providing a strong lead for our market today. 

US regional Banks are under pressure from hedge funds short selling (selling shares you don’t own). This creates uncertainty, and we risk other banking collapses (deposits are ok). At best, this will force banks to undertake stricter lending (likely); at worst, it could cause another credit crunch (unlikely), but we are likely to see more volatility in the coming weeks. 

Important announcements this week.

Budget – tomorrow night, maybe expecting a surplus. 
Wednesday night- US inflation data. 
Thursday – Bank of England – rate decision. We are expecting another rate rise.

We are still cautious at this point.
Australian Equity Market 

Macquarie held a conference last week with 100 companies presenting. 

Some observations made were provided by Macquarie research today.

• Australian consumer is slowing. Despite the lowest unemployment in decades and high immigration, there are ongoing signs the consumer is slowing, especially in the areas that benefited most from COVID and where demand is impacted more by interest rates. Multiple companies talked to consumers trading down as household budgets come under pressure. As more fixed-rate mortgages roll-off, and past rate hikes bite the pressures on consumer spending will likely increase. Travel remains a bright spot as pent-up demand supports sales.

• Inflation is easing. Last year labour cost pressures were a theme of the conference, but this appears to be normalising. Industrial and Mining companies in particular appear to be seeing improving labour availability. Health Services appear to be one area where labour cost pressures are still more acute, but from a contrarian view, Health Services are one of the last areas impacted by COVID that can still see an earnings recovery.

• Was this the downgrade conference some feared? Probably not. There were downgrades, and all four media stocks posted disappointing earnings updates. On the positive side, there were a few upgrades

• RBA + Australian housing. Residential REITs called out the improvement in operating trends they were seeing when the RBA did not hike in April. It remains to be seen how much the surprise RBA hike impacts the nascent housing recovery in the short term. Longer term, there was a bullish view on residential property given Australia’s strong immigration and the housing shortage.

Actions from Macquarie 
• Remain defensive. We believe the results of the 25th Australian conference are consistent with our cautious view on the cycle. We continue to think the US is headed for a recession later this year and that this will drive more volatility. Australia may avoid recession thanks to high immigration, but a US recession is still likely to impact Australian equities. 
Bank Profits 

Over the last week, 4 of the five major banks (excl CBA) have provided profit results. All saw increases and importantly for investors, increases in dividends. However, the outlook statements suggested a tightening of the economy due to inflation and interest rates. 

In the table below, I have provided some information regarding their results.

Macquarie has produced a profit for the 54th consecutive year. 
Federal Budget 

Treasurer Chalmers will deliver his first budget tomorrow night. Expectations are for new taxes, including petroleum tax and cost of living hand-outs for electricity and delayed or dumped infrastructure.

While lots of talk over the last year about how bad the budget is, and we were likely to see a $1tr debt. There has been a significant turnaround to the point where FY23 could provide a surplus. The October budget update suggested the budget deficit for FY23 would be -$36.9bn and FY24 -$44bn.

There are suggestions the actual result for FY23 could be a small surplus. Either way a vast improvement from a year ago. 

The likely reasons for the improvements.
– rising wages (more income tax & GST)
– lower unemployment (fewer benefits paid)
– higher commodity prices (more tax)

The chart below from UBS shows the price of iron ore, coal and gas compared to the expectation in the budget. 

I will provide a more detailed update on the budget issues in the next Not So Daily.  
Investment Committee meeting (left in from last Not So)

Yesterday we conducted our investment committee meeting with Brad Matthew, Kevin and myself. We noted the number of crosswinds that were buffering markets
a) inflation remaining higher for longer,
b) interest rates hadn’t peaked yet
c) continuing issues with regional US banks, which is likely to tighten lending standards. 
d) China’s re-opening slower than expected
e) US debt ceiling is still to be resolved.
f) Jobs growth delaying recession or avoiding recession?
g) Consumer spending holding up.
h) Company profits are better than expected.
i) Expectations of higher minimum wages and increasing immigration 

These issues make it difficult to predict market direction and asset values. Many institutions believe we are still in a BEAR market. In recent Not So’s, we’ve discussed the likelihood of a HARD LANDING (major recession), SOFT LANDING (mild recession or slowdown) or NO RECESSION. 
 
In yesterday’s meeting, Brad presented the matrix below, which helped us understand these events’ chances.

To explain, the three scenarios of NO, SOFT and HARD landing are across the top. Down the left side, two variations of inflation.
The first is if inflation meets current expectations, which is seen as falling and will retreat to normal levels of 2% within a year or so. In that scenario, company earnings (profits) remain reasonable; markets will likely rally strongly. Unfortunately, this is only given a 5% chance.
 
Brad suggested the market consensus is for a SOFT LANDING and inflation within current expectations. This would justify the recent rally and may see a further rally—a probability of 20%. 

However, there is growing evidence that inflation may remain HIGHER FOR LONGER, given that services inflation is falling slowly. This is the second variation. Each probability is provided with the highest chance of going to a HIGHER FOR LONGER INFLATION and a SOFT LANDING. Higher interest rates and the share market may give up some of the recent rallies. 

Unfortunately, there is NOT ONE clear direction or landing point. That’s why we are still cautious but happy to buy and dip. 
Exchange Traded Funds (ETF) – series 

We prefer using ETFs with an intelligent beta system (where available). A smart beta ETF has rules (criteria) regarding the selection of investments.   
The 11th ETF profiled is an existing option focused on Australian Banks.

11. VanEck Australian Banks (MVB) gives investors exposure to Australian Banks

 At 25th April 2023 the fund holds 7 stocks, the Price to Earnings (PE) is 13.2 times, and the Dividend Yield is 4.98%. Return on Equity 12.09%.

Summary
Australian Banks have been the cornerstone of many portfolios with health tax-effective income. Instead of owning each bank, this option provides access to the five major banks, which account for over 97% of this ETF. It also pays 3 dividends per year. 
  

Previously reviewed 
1. Global Value (VLUE)
2. International Quality (QUAL) &  hedged currency (QHAL) 
3. International Small Company Quality ETF (QSML)
4. Global Health (IXJ)
5. China New Economy (CNEW)
6. Europe (IEU)
7. Asia (IAA)
8. Global Infrastructure (IFRA)
9. Australia Property (MVA) 

10. Cybersecurity (HACK)

Financial Planning Snippets
The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate). Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
Other Stories 
– US may reach the debt ceiling by early June. No resolution yet. 
– US unemployment 3.4%  
  
Broker Target Price changes –

Ord Minnett

Morgans
Amcor (AMC) decreased from $16.20 to $15.20
ANZ decreased from $26.24 to $25.74

JB Hi Fi (JBH) increased from $48 to $50
Macquarie Group (MQG) decreased from $214.50 to $201.80
National Aust Bank (NAB) decreased from $28.78 to $28.02


Morgan Stanley
AMC decreased from $15.50 to $14 (lowest broker)
ANZ decreased from $26.24 to $25.74

BHP increased from $41.35 to $41.75
MQG decreased from $231 (highest broker) to $215 (still highest broker)
NAB decreased from $30 (equal highest broker) to $27.70


Macquarie
AMC decreased from $17.38 to $15.70
ANZ decreased from $26 to $24 (lowest broker)
Computershare (CPU) decreased from $26 to $25
NAB decreased from $30 to $28


Bell Potter/Citigroup
ANZ decreased from 27.25 to $26.50
BHP increased from $43 to $45.50 
MQG decreased from $190 to $175
NAB decreased from $29.50 to $27.50


UBS 
AMC decreased from $18 (highest broker) to $16.30 (still highest broker)
ANZ increased from $25 (lowest broker) to $26
JBH increased from $46 to $47.50

MQG decreased from $211 to $200

Tracking changes for 2023
Upgrades 135
Downgrades 131

(we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks).
Today’s ASX sector Movements
Best –  Energy +2.5%   
Worst Consumer Staples -0.9%
Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index increased from 92.36% to 93.64%.    

Overall Earnings Per Share (EPS) 

FY23 decreased from 5.15% to 5.08% 
FY24 decreased from 8.9% to 8.45% 

Most expensive – CBA 107.9% WOW 107.6%          
Least expensive –  Lend Lease 74.5%.    

The CORE Watchlist has 7 (6) stocks trading above 100%, they are BHP CBA COL JBH SHL WES WOW, lowest number ever is 0, highest 9. While 4 (6) are trading below 85% (highest 18) lowest for a while is 3. LLC NEC 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). 8 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $37.78    Broker range $41.20 to $43
ANZ current price $23.83    Broker range $24.00 to $31
CPU current price $21.99    Broker range $22.60 to $28
CSL current price $301.27  Broker range $315 to $350
LLC current price $7.79      Broker range $8.32 to $14.45
ORA current price $3.34     Broker range $3.50 to $3.80
STO current price $7.30      Broker range $7.75 to $12
WBC current price $21.74   Broker range $22.50 to $29

Added   

Removed    AMC
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 98.6% to 95.6% The Bank reporting season was OK(ish) but outlook statements were mute. Based on the target price changes ANZ 90% CBA 107.9% NAB 97.8% & WBC 97.8%.  

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is for increased dividend payments and still very attractive yields. PLUS FRANKING.  
FY 22 % FY 23 % FY 24
ANZ 146.0 6.13% 162.5 6.82% 163.0 6.84%
CBA 385.0 3.96% 440.0 4.53% 451.3 4.65%
NAB 151.0 5.57% 169.2 6.24% 169.3 6.25%
WBC 125.0 5.75% 143.8 6.62% 148.3 6.82%
MQG  622.0 3.59% 738.0 4.25% 696.6 4.01%

Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year.
FY22 cps % FY23 cps % FY24 cps %
BHP 451.00 10.08% 295.40 6.61% 290.0 6.48%
RIO 702.00 6.27% 718.67 6.42% 700.7 6.26%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).
Other Indicators (changes since last Not So)

US VIX Index decreased from 17.78 to 17.74  Bounced off the lowest level Oct 2021.  Trading range is likely to be 17-28. 
Iron Ore decreased from $102.05 to $98.70  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $104.20
Copper increased from $3.85 to $3.93 China re-opening and shortage expected in 2023. It hit an ALL-TIME HIGH $5.03 at the start of the Russian invasion. 
Gold increased from $2026 to $2030.  near 1 year high. Record high $2063. 
AUD/USD increased from 66.65c to 67.87c.      
USD/CNY increased from $6.91 to $6.92  Lowest $6.31 Highest in recent years $7.35    
Asian markets – UP except Japan.
US 10 year Bonds increased from 3.43% to 3.44%. Rates have reduced on an expectation of a slowing economy & potential rate cuts. 4.23% (8 year high). US 30 year Bond increased from 3.71% to 3.74% The highest level was 4.27%. US Federal Reserve peak maybe lower than 5.4% to 5.50%, currently 5%. The US 2 year rate has decreased from 3.97% to 3.94%  (5.08%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.5%. It was -0.64% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.1%. This is the most it has been inverted in 42 years. 
German Bonds increased from 2.26% to 2.30%. 2.74% highest since 2008 
Japanese Bonds decreased from 0.42% to 0.41%   0.508% highest in many years. Widening the range to 0.5% Japan had the highest inflation read for 40 years. The Bank of Japan chair is changing. Will this change their low-interest rate policy?  
Aussie Bonds 10 year Bonds decreased from 3.42% to 3.41%.  Recent high is 4.21% 
Other Aussie Bonds 1 year 3.62%  2 year 3.19% 4 year 3.11% 5 year 3.14% 15 year Bonds 3.67%. The yields moved higher, but are still below the cash rate.    
Oil prices increased from $71.74 to $72.12. Fell below $70 over the weekend.  
Tungsten – Baltimore & Rotterdam remained at $340 – $345 mtu. China $325 to $340mtu.  
This week & next week  Last “Not So” opened in 5 Aust states (excl NT Tas ACT), US 4 states (California, Massachusetts Colorado & New York)  Sweden, Israel and UK 
   
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 13 April 2023 No.551

 

The Not So DAILY BULLETIN 13 April 2023  No.551
Top Stories
Thursday, 13 April 2023, saw the ASX 200 fall 20 points to close at 7324. The market has continued to rally after the RBA paused rates earlier this month (up 2%). But will rate stay at this level.

A critical marker for the RBA is the unemployment rate and job creation. Today, the March figures showed 53,000 new jobs created, leaving the unemployment rate at 3.5%. This may see the RBA increase rate again in May (coupled with other factors such as rising property prices). 

Overnight, the US headline inflation result showed a drop in inflation from 6% to 5%, BUT the Core inflation rose from 5.5% to 5.6%. This suggests that inflation is coming down, but it will be a slow process that could take some time. If this is the case, interest rates (while close to peaking) may be held higher for longer and rate cuts may be pushed into mid-24.

Over the last year, we have been concerned that a rising inflation and interest rate environment could cause markets to have a major sell-off. The chart below shows that we end with a crisis when the US Federal Reserve has increased interest rates every time since 1968. Let’s hope this crisis was the short-lived collapse of the Silicon Valley Bank.
Kevin and I have been discussing the different market scenarios and have concluded we are looking at three main scenarios.

1. HARD LANDING 
This is where there is a global recession, increasing unemployment and inflation remaining high. Likely to see more corporate failures and problems in the banking and property markets as profits fall sharply. This usually sees a major market collapse (capitulation). 

2. SOFT LANDING 
This is where there is an economic slowdown from rising rates and a slight increase in the unemployment rate, but due to strong job demand, it has little impact on the economy. The economy may or may not have a recession, but it’s mild, and profits dip briefly.

3. NO LANDING
This is not usually an option in a rising interest rate environment; however, this time, it is an option as the demand for employees is still robust. In a slowing economy, workers’ demand is usually falling. Currently, in the US, there are 1.8 jobs available for every worker, and in Australia, it’s  0.95 jobs available. I’m wary of saying it’s “different time”, but the graph below suggests the jobs market remains strong. And while it remains strong, people have jobs and incomes and will continue to spend as the consumer is 70% of the economy.     
Our best guess is a soft or no landing scenario, but at this point, we can’t rule out the hard landing. To date, the risk of a hard landing has kept us cautious. 

The US quarterly profit season starts this week with the major banks, and the expectation is lower profits from tightening credit after last month’s banking crisis (hopefully short-lived). This should provide greater insight into which scenario is possible. 

IF the hard landing option can be removed, there is growing evidence that the worst of the market may be behind us.

The chart below from the Coppo report shows the share market usually bottoms 6 to 9 months before the profits (earnings) bottom. This means that companies report falling profits and the market is increasing. This happens because the share market is forward-looking and is looking towards the future. Currently, the market is seeing inflation moving lower, and the Central Banks are generally either on hold or one to two rate rises from peaking. This increases the view that the Central Banks will drive the economy into a deep recession, and a mild recession could be the worst result.   
The chart below is also from Coppo report and shows the current market expectation of US profits. We are about to have the 1st Quarter profits (1Q) which show an expected 7% drop. This may be followed up with a 6% drop in 2nd Quarter (2Q), but we will know these numbers in July/August.

If the 3rd quarter is a gain (July to September), then the low in profits would be April to June 2023, and the low in the stocks market would be September 2022 (markets have rallied since then) or 6 to 9 months earlier which corresponds with the graph above.   
While there is still a reasonable amount of uncertainty about the economic & market outlook, which sees institutional bearishness at near 20-year highs, there continues to be record levels of cash on the sidelines, waiting for an investment opportunity, as shown by the graph below (also from Coppo report).

This probably explains why any market dips have been short and shallow, as investors have been quick to buy any dips.    

This is our mantra, given there is still a reasonable amount of uncertainty in the global economic slowdown that Central Banks are trying to achieve while they reduce inflation back to a target of 2%.
Bank Profits peaking

As a sign of profits falling both Citigroup and Macquarie updated their views on the Australian banks today. Below are extracts from their research. 

Citigroup research
 A peak cash rate (Citi forecasting 3.6%) means that peak bank net interest margin (NIM) or bank profitability has likely arrived. A substantial pause at 3.6% by the RBA will mean that a dramatic fall-away is unlikely. 

The peak cash rate signals an end to the material benefit from low-rate deposits as depositors are wanting higher interest rates on their accounts.

Profit/Earnings revisions — On average across our coverage, we have adjusted our FY23/25E earnings downwards by 5-10%, reflecting a lower peak cash rate and lower long-term bond rates. 

Stock views — We maintain our positive view on the sector as it appears stronger in a relative sense, to other ASX sectors suffer both financial and operating deleverage. ANZ and WBC remain our key Buy calls. 

Macquarie research
Banks are set to deliver record results in 1H23, underpinned by ~10-20bps of margin expansion. We expect the market to focus on the outlook for margins, expenses, and credit quality. While banks have successfully managed to optimise deposit margins until earlier this year, competition has recently stepped up, and coupled with mortgage pricing headwinds, we expect banks to guide to lower margins in 2H23 (we are ~5-10% below consensus in FY24).

We see potential upside risk to share prices in the upcoming reporting season (May for ANZ NAB and WBC). However, on a medium-term view, we continue to see risks from margin headwinds and potential credit quality concerns, which forms the basis for our Underweight sector view. Our order of preference is ANZ, NAB, WBC, CBA.
Origin Energy takeover 
Update on takeover
   
Origin Energy (ORG) has signed a Scheme of Implementation to progress the Brookfield takeover offer, which values the business at about $8.90. Directors intend to recommend the offer subject to a favourable report from the independent expert or no superior offer. Any dividends paid by Origin before implementation will reduce the consideration payable, including the 16.5 cents fully franked paid on 24/03/2023.

The Scheme is subject to conditions including regulatory approval. Origin has undertaken to assist in the preparatory steps to break into two businesses, Integrated Gas and Energy markets. They are targeting implementation in early 2024. At this stage, shareholders do not need to take any action.
Exchange Traded Funds (ETF) – series 

We prefer using ETFs with an intelligent beta system (where available). A smart beta ETF has rules (criteria) regarding the selection of investments.   
The ninth ETF profiled is an existing option focused on Australian Listed Property or REITs.

9. Van Eck Australian Property ETF (MVA) gives investors exposure to a selection of Australian Real Estate Investment Trusts (A-REITS)
On 28th February 2023, the Fund held 17 stocks, the Price to Earnings (PE) was 12.73 times, and the Dividend Yield was 4.99%. Return on Equity 15.28%. 

Summary
Australian Property trusts are facing higher interest rates and vacancies from COVID (work from home), especially for offices and workspaces. On the flip side, continued demand for warehousing and other forms of property sees solid rental growth and the opportunity for capital growth. This area needs to determine whether the interest rate storm will benefit from falling rates next year.

Previously reviewed 
1. Global Value (VLUE)
2. International Quality (QUAL) &  hedged currency (QHAL) 
3. International Small Company Quality ETF (QSML)
4. Global Health (IXJ)
5. China New Economy (CNEW)
6. Europe (IEU)
7. Asia (IAA)
8. Global Infrastructure (IFRA)

Macquarie Virtual Adviser Network (VAN)
We have decided to join Macquarie’s VAN program, which runs for 18 months. It’s a program designed to improve financial planning businesses. As part of the improvement process, we are surveying clients via a questionnaire. The questionnaire is being sent out by KPMG this week. Should you receive an email from KPMG, it’s not a scam. Please complete the survey if you can. We appreciate any help you can provide. 
Financial Planning Snippets
– The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate).
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
Other Stories 
– RBA has revealed 16% of mortgages are unable to move their mortgages as they do not meet the tougher serviceability assessment rules. 
– Wesfarmers sold final $688m of Coles.
Broker Target Price changes – 

Ord Minnett
Computershare (CPU) increased from $24 to $25

Morgans
NextDC (NXT) increased from $13 (highest broker) to $13.50

Morgan Stanley


Macquarie
CBA decreased from $94 to $90
NAB decreased from $31 to $30
Westpac (WBC) decreased from $23.50 to $23


Bell Potter/Citigroup
ANZ decreased from $29.25 to $27.25
CBA decreased from $83 (lowest broker)to $80 (still lowest broker)
NAB decreased from $32.75 (highest broker) to $29.50

NXT increased from $12.60 to $14.45
Westpac (WBC) decreased from $30 (highest broker) to $26.25

UBS 
NXT increased from $12.90 to $14.15 (highest broker)

Tracking changes for 2023
Upgrades 101
Downgrades 96

(we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks).
Today’s ASX sector Movements Best –  IT +1%   
Worst Consumer Staples -1.2% 
Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index increased from 93.30% to 94.85%.    

Overall Earnings Per Share (EPS) 

FY23 increased from 4.79% to 4.82% 
FY24 decreased from 10.3% to 10.04% 

Most expensive – Woolworths (WOW) 109.6% CBA 109.5%          
Least expensive –  Lend Lease 77.6% (currently up 11% this month).    

The CORE Watchlist has 9 (8) stocks trading above 100%, they are BHP CBA COL JBH RIO SHL TCL WES WOW, lowest number ever is 0, highest 9. While 3 (6) are trading below 85% (highest 18) lowest for a while is 3. LLC NEC 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). 7 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 7.

ALL current price $37.05    Broker range $41.20 to $43
ANZ current price $23.77    Broker range $25.00 to $31
CSL current price $302.18  Broker range $315 to $350
LLC current price $8.11      Broker range $8.32 to $14.45
ORA current price $3.47     Broker range $3.50 to $3.80
STO current price $7.25      Broker range $8.30 to $12
WBC current price $22.09   Broker range $22.50 to 30

Added   

Removed  CPU NXT
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 93.4% to 95.8%, mainly due to the decreased target prices noted above.

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.
Other Indicators (changes since last Not So)
US VIX Index increased from 19.08 to 19.09  Trading range is likely to be 17-28. Over the last 25 years, market bottoms have seen VIX reach a minimum of 48. Seems the market is settled with the outlook.
Iron Ore increased from $117.80 to $119.60  Was below $80 in November, but the reopening of CHINA has seen a strong rally.  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $104.20
Copper increased from $4.00 to $4.06 China re-opening and shortage expected in 2023. It hit an ALL-TIME HIGH $5.03 at the start of the Russian invasion. 
Gold decreased from $2031 to $2030.  near 1 year high. Record high $2063. 
AUD/USD decreased from 67c to 66.96c.      
USD/CNY decreased from $6.89 to $6.88  Lowest $6.31 Highest in recent years $7.35    
Asian markets – DOWN.
US 10 year Bonds increased from 3.28% to 3.41%. Rates are reducing on an expectation of slowing economy & potential rate cuts. 4.23% (8 year high). US 30 year Bond increased from 3.56% to 3.64% The highest level was 4.27%. US Federal Reserve peak maybe lower than 5.4% to 5.50%, currently 5%. The US 2 year rate has decreased from 3.74% to 3.98%  (5.08%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.57%. It was -0.46% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.1%. This is the most it has been inverted in 42 years. 
German Bonds increased from 2.19% to 2.37%. 2.74% highest since 2008 
Japanese Bonds remained at 0.47%   0.508% highest in many years. Widening the range to 0.5% Japan had the highest inflation read for 40 years. The Bank of Japan chair is changing. Will this change their low-interest rate policy?  
Aussie Bonds 10 year Bonds increased from 3.19% to 3.28%.  Recent high is 4.21% 
Other Aussie Bonds 1 year 3.24%  2 year 2.97% 4 year 3% 5 year 3.04% 15 year Bonds 3.54%. The yields have reduced after the RBA pause.  
Oil prices increased from $80.16 to $82.94. OPEC announced production cuts of 1.2m barrels. This spooked the market, that energy inflation may return. At this levels not really an issue, but if it moves to $95 then it could cause more issues
Tungsten – Baltimore & Rotterdam remained at $340 – $345 mtu. China $325 to $340mtu. 
This week & next week 
Last “Not So” opened in 5 Aust states (excl NT Tas ACT), US 6 states (California, Massachusetts Colorado New York South Carolina & Arkansas)  and Sweden 

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 13 March 2023 No.543

 

The Not So DAILY BULLETIN 13 March 2023  No.543
Top Stories
Thursday, 16 March 2023, saw the ASX 200 sell off 103 points to close at 6966. The market hit a low of 6914 in the morning but recovered.

The rollercoaster is back. 

Markets sold off today after pressure was put on Credit Suisse’s viability (Swiss Bank). As mentioned yesterday, the market will try to find weak stories in this environment as Warren Buffett said. “It’s only when the tide goes out, do you find who is swimming naked”. There have been rumours about Credit Suisse (CS) for months, so there was no surprise they were today’s target. But, I would like to point out that CS issues are unrelated to Silicon Bank.

Are the traders looking for shorting targets, or are they trying to send a message to Central Banks to stop raising rates? 

That will be tested tonight when the European Central Bank meets. They were expected to raise interest rates by 0.5%, and many still expect a rise given their lagging US rates. The Swiss National Bank has provided CS with a liquidity facility of $A81bn. Let’s see if that settles the horses!    

The chart below from AMP’s Shane Oliver shows that over the last 55 years, when the US Federal Reserve (global Central Bank) raises interest rates, it usually ends in a crisis. 

It’s, for this reason, we have been cautious over the last year, as it’s difficult for markets to increase and sustain the increase while interest rates are rising. Hence the view that we are still in a BEAR MARKET and bear markets usually end with a crisis or a capitulation event. 

Is this the crisis? Maybe, but at this point, it’s more based on sentiment than economics. The real risk facing the economy is still inflation and not a lack of confidence in the bank system or a couple of banks with isolated events. 

Nobody knows how things unfold, but some value is appearing in quality investments. We still prefer to nibble the dips. 
      
Important data coming
– Europe Central Bank (ECB) meeting tonight.
– US Fed meeting Mar 21-22
Australia’s unemployment falls to 3.5%
Australia created 64,600 jobs in February with 74,900 full-time. This was higher than the market expectation of 50,000. 
BetaShares economist David Bassanese says the surprise drop in the jobless level to 3.5 per cent in February ups the chances of a rate increase in April.
“Today’s evidence of a strong bounce back in employment over February renews pressure on the Reserve Bank of Australia to raise interest rates at the April policy meeting. What’s more, such was the strength in the labour market report, there’s also now a risk the RBA won’t be able to signal a pause in the rate hike campaign at the next policy meeting,” Mr Bassanese said. “In terms of the interest rate outlook, the strong labour market report is one strike against the hope that the RBA will pause in April. Domestically, two other key reports before the next policy meeting are retail trade on March 28 and the monthly consumer price index report (CPI) for February on March 29. If both reports remain on the strong side, it could be a case of “three strikes and your out” for rate pause hopes.”
Investment Strategy (left in from yesterday)
AMP’s Shane Oliver – summed up the strategy for investors rather than traders. 

We see shares being stronger on a one-year view as inflation falls taking pressure of central banks hopefully enabling economies to avoid a deep recession. However, right now shares are at risk of more downside until some of the issues around the US financial system, inflation, recession and short-term interest rates are resolved. There are several implications for investors:

• Unlike last year, investment in government bonds should provide more protection for investors as bond yields are now higher and have potential to fall if worries of recession rise as we saw in the last week.
• Non-US shares are likely to outperform US shares as they are trading on lower price to earnings multiples and have a lower exposure to the tech sector. This includes the Australian share market.
• For short term investors it’s a time to be cautious.
• However, while times like these can be stressful, for superannuation members and most investors the best approach is to stick to basic investment principles. These things are worth keeping in mind:
1. share market pullbacks are healthy and normal – their volatility is the price we pay for the higher returns they provide over the long term;
2. it’s very hard to time market moves so the key is to stick to an appropriate long-term investment strategy;
3. selling shares after a fall locks in a loss;
4. share pullbacks provide opportunities for investors to invest cheaply;
5. shares invariably bottom with maximum bearishness;
6. Australian shares still offer attractive income versus bank deposits; &
7. to avoid getting thrown off a long-term strategy – it’s best to turn down the noise around all the negative news flow
Electricity Pricing
Lots of media scare stories again about electricity prices going through the roof. I have looked into this in more detail and found that while prices will likely rise over the next couple of months, they will fall sharply. 

The main factors that drive electricity prices are the price of energy – natural gas, coal and, to a lesser extent, oil.

Natural Gas has fallen on global markets from the start of the year from $7 to $2.50 (hit a high of $9.70 in Oct)  as pressure has reduced after Europe’s winter was milder, and they were able to source enough non-Russian gas.

Thermal coal prices have reduced by 50% since the end of the year; again, the mild European winter helped, and oil prices are at their lowest point since Dec 2021.

According to AMP’s Shane Oliver, retail electricity prices lag wholesale prices by a few quarters, as shown in the graph below. 

This suggests retail prices have yet to peak, but wholesale prices have been falling sharply due to the dramatic fall in energy, which should see prices fall rapidly toward the 2nd half of the year. This suggests that any future fall isn’t due to the Government’s pricing cap.   
Exchange Traded Funds (ETF) – series 
Our preference is to use ETFs with a smart beta system (where available). A smart beta ETF has rules (criteria) regarding the selection of investments.   
The seventh ETF profiled is an existing option that is focused on the Asian markets.
7. iShares Europe Asia (IAA) gives investors exposure to the 50 leading companies listed in China, Hong Kong, Macau, Singapore, South Korea and Taiwan

At 28th February 2023 the fund holds 64 stocks, the Price to Earnings (PE) is 11.4 times, and the Dividend Yield is 2.58%. Return on Equity 17.1%.
Current top 10 holdings

By Industry %                                  By Region
Info Tech                             33.8       China                                     40.3
Banking/Financials           23.6         Taiwan                                  22.2
Consumer Discretionary 17.2           South Korea                       21.2
Communication                 17.0         Hong Kong                          10.9
                                                          Singapore                            5.1
                                                                                                   
Summary

The Asian economies are still the quickest growing in the world with the largest populations. They are likely to provide some of the largest companies in the future years to come. This fund gives exposure to those growing companies by investing in the top 50 Asian companies.  Currently trading at very attractive levels with PE 11 and a Dividend Yield of 2.58%. 
Previously reviewed 
1. Global Value (VLUE)
2. International Quality (QUAL) &  hedged currency (QHAL) 
3. International Small Company Quality ETF (QSML)
4. Global Health (IXJ)
5. China New Economy (CNEW)
6. Europe (IEU)

Financial Planning Snippets
PHONE financial fraud. We are aware of a number of examples of fraud being committed by people ringing. PLEASE DO NOT GIVE YOUR BANK DETAILS OR CREDIT CARD NUMBER to a person who has RUNG YOU.  
– The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate).
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
Other Stories (research since last Not So)
– Credit Suisse is borrowing $A81bn from the Swiss National Bank for liquidity purposes.  
 
Broker Target Price changes –  Ord Minnett


Morgans


Morgan Stanley


Macquarie


Bell Potter/Citigroup


UBS 


Tracking changes for 2023
Upgrades 84
Downgrades 76

(we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks).
Today’s ASX sector Movements Best –  Healthcare +1.5%  
Worst Energy -4.8% Materials -3.2% Financials -1.4%
Core Watchlist Index (changes since last Not So)
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE BHP price $38.56   Av. Target Price $39.73= 97.1% (meaning 2.9% upside over next 12 months) + income 7.11% (including franking).

To get the CORE Index we take the average across the 30 stocks. This provides us with a market average as there are up to 80 teams of analysts providing the research and target prices. The CORE Watchlist stocks represent more than 55% of the ASX 200 and so provide us with a good indicator of the market value. When it’s at 100% then the market is fully priced. We have seen that when the index is below 90%, then it’s good buying, but that doesn’t happen very often. Should you have any questions, please let me know.  

The Core index decreased from 90.48% to 89.54%. Usually below 90% is a good buy signal.    

Overall Earnings Per Share (EPS) 

FY23 decreased from 3.96% to 3.87% 
FY24 increased from 11.36% to 11.41% 

Most expensive – CBA 104.7% takes the title back from Rio Tinto who dropped 4% today.       
Least expensive –  Lend Lease 69.4%. An interesting article by Chanticleer in the Financial review suggesting the market is mispricing this stock.    

The CORE Watchlist has 5 (5) stocks trading above 100%, they are BHP CBA ORG RIO WOW, lowest number ever is 0, highest 9. While 10 (8) are trading below 85% (highest 18). ALL ANZ CPU CSL GMG LLC NEC NXT 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). 9 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 8.

ALL current price $34.30    Broker range $40.50 to $43
ANZ current price $22.72    Broker range $25.91 to $31
CPU current price $20.81   Broker range $24 to $29.78
CSL current price $289.28  Broker range $315 to $350
LLC current price $7.25      Broker range $8.32 to $14.45
NAB current price $27.82   Broker range $30 to $33
NXT current price $10.17    Broker range $11 to $12.90
ORA current price $3.24     Broker range $3.50 to $3.80
STO current price $6.82      Broker range $8.30 to $12
TLS current price $4.10      Broker range $4.20 to $4.75
WBC current price $21.19   Broker range $23.50 to 30

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 90.2% to 88.8%. Uncertainty regarding global banks. Under 90% is usually a good buy signal.   

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is for increased dividend payments and still very attractive yields. PLUS FRANKING.  
FY 22 % FY 23 % FY 24
ANZ 146.0 6.43% 157.8 6.95% 163.2 7.18%
CBA 385.0 4.04% 442.2 4.64% 453.3 4.76%
NAB 150.2 5.40% 173.3 6.23% 178.2 6.40%
WBC 125.0 5.90% 144.8 6.83% 150.0 7.08%
MQG  622.0 3.55% 675.6 3.86% 674.0 3.85%

Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year.  
FY22 cps % FY23 cps % FY24 cps %
BHP 451.00 10.39% 296.20 6.83% 304.4 7.02%
RIO 717.67 6.26% 680.33 5.93% 665.2 5.80%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).
Other Indicators (changes since last Not So)
US VIX Index increased from 23.73 to 26.14  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!  It reached 30.1 when Silicon Valley collapsed. 
Iron Ore decreased from $132 to $130.2  Was below $80 in November, but the reopening of CHINA has seen a strong rally.  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $104.20
Copper decreased from $4.00 to $3.85 China re-opening and shortage expected in 2023. It hit an ALL-TIME HIGH $5.03 at the start of the Russian invasion. 
Gold increased from $1905 to $1921. Climbed above $2000 at the start of the Russian invasion. Record high $2063. 
AUD/USD decreased from 66.82c to 66.36c.      
USD/CNY increased from $6.86 to $6.90.  Lowest $6.31 Highest in recent years $7.35    
Asian markets – MIXED (surprisingly)
US 10 year Bonds decreased from 3.67% to 3.50%. Rates are bouncing around after the depositor bailout of Silicon Valley bank.  4.23% (8 year high). US 30 year Bond decreased from 3.78% to 3.67% The highest level was 4.27%. US Federal Reserve peak maybe lower than 5.4% to 5.50%, currently 4.75% Next weeks meeting will be VERY IMPORTANT. The US 2 year rate has decreased from 4.32% to 3.97%  (5.08%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.47%. It was -0.65% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.1%. This is the most it has been inverted in 42 years.  It has narrowed from 0.93% to 0.47% in 3 days. 
German Bonds decreased from 2.45% to 2.25%. 2.74% highest since 2008 
Japanese Bonds decreased from 0.327% to 0.289%   0.508% highest in many years. Widening the range to 0.5% Japan had the highest inflation read for 40 years. The Bank of Japan chair is changing. Will this change their low-interest rate policy?  
Aussie Bonds 10 year Bonds decreased from 3.44% to 3.36%.  Recent high is 4.21% 
Other Aussie Bonds 1 year 3.11%  2 year 3% 4 year 2.93% 5 year 3% 15 year Bonds 3.67%. The yields down again
Oil prices decreased from $72.09 to $68. Lowest point since Dec 2021 
Tungsten – Baltimore & Rotterdam remained at $340 – $345 mtu. China $325 to $340mtu. 
This week & next week  Last “Not So” opened in 5 Aust states (excl NT Tas ACT), US 4 states (California, Massachusetts Colorado and South Carolina) Sweden 

This week  – March reviews
Next week – March reviews

Contact details  PO BOX 149 Deniliquin NSW 2710
125 End St Deniliquin NSW 2710
Ph. 03 58950100
Fax 03 58950101
Mobile 0412113524
scottm@provincialwealth.com.au
kevinh@provincialwealth.com.au
chrisp@provincialwealth.com.au
maddyl@provincialwealth.com.au

Not just Deni, we will travel

Regardless of where you are in Australia, we offer you the best financial planning and advisory services. Feel free to call us today with any question you may have.

Our Values

People, Big Picture Framework, Quality Services and Value for Money!

We are strong believers in integrity, honesty, professionalism and respect! Our aim is to foster healthy relationships with our clients that last a lifetime.

Subscribe to our ‘Not So Daily Bulletin’

Stay social with Provincial Wealth