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The NotSo Daily Bulletin No. 340

 

Top Stories  

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

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

Commodities rising 

Morgans updated their commodity prices and research. 

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

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

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

5G wireless technology is coming

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

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

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

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

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

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

Broker Target Price changes  

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

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

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

Macquarie
RIO decreased from $112 to $111

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

Core Watchlist Index 
The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE BHP price $38.56   Av. Target Price $39.73= 97.1% (meaning 2.9% upside over next 12 months) + income 7.11% (including franking).

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

Should you have any questions, please let me know.  
    
The new stocks include in the CORE WATCHLIST 
Amcor (AMC) Brambles (BXB) JB Hi-Fi (JBH) NextDC (NXT) ResMed (RMD) and Trasurban (TCL).  

The Core index decreased from 94.97% to 94.27 

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

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

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

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

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

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

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

The Banking Index decreased from 99.8% to 98.6%.

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

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

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

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

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

This week –  Starting October reviews 

Next week – October reviews 


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

The NotSo Daily Bulletin No. 338

 

Top Stories  

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

Other Stories   

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


Broker Target Price changes  

Goldman Sachs


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


CIMB/Morgan


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

Macquarie


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


Today’s Sector Movements

Best –  Communications +2.2% 
Worst Materials -0.3%  

Core Watchlist Index 

The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE BHP price $38.56   Av. Target Price $39.73= 97.1% (meaning 2.9% upside over next 12 months) + income 7.11% (including franking).

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

Should you have any questions, please let me know.  
    
The new stocks include in the CORE WATCHLIST 
Amcor (AMC) Brambles (BXB) JB Hi-Fi (JBH) NextDC (NXT) ResMed (RMD) and Trasurban (TCL).  

The Core index increased from 93.1% to 94.47 

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

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

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

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

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

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

MQG moved out due to rising price.    

Banking Index 

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

The Banking Index increased from 97.2% to 100.4%.

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

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

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

Other Indicators 

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


This week & next week 

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

This week –   Starting October reviews

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

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

The NotSo Daily Bulletin No. 337

 

Top Stories
Today, October 9 the ASX 200 was flat after four positive days moved the market to 6102 and closer to the top end of the four-month trading range 5750 to 6150. The “kitchen sink” budget and the RBA are providing the necessary financial support for the economy to get to the other side of this pandemic hopefully.

Global markets were buoyant for the last couple of days but are still showing signs of unease as COVID numbers hit a new daily high figure of 345,000 cases yesterday.

The list of uncertainties hasn’t reduced, and we are likely to see two steps forward and then two steps back as we bounce from one news story to the next in the US pre-election melodrama.

The betting odds and polls have Biden well in front. The main question now is, have markets factored in a “clean sweep” by the Democrats. If not, we may see some more volatility. 

The one thing markets WILL NOT LIKE an unresolved election (no result for a while).   
The search for income 

According to new Vanguard analysis, investor portfolios built on a dividend-focused strategy will need to be 100 per cent allocated to equities and greatly elevate their portfolio risk, to meet most income needs in the current low yield environment.

An enduring solution for low yields found that investors using the rule of thumb 4% withdrawal rate as a target for income from their investment returns could have relied on a diversified portfolio of 50% equities and 50% bonds back in 2013.

However, to obtain the same result today, investors will need to shift to 100% equities and almost double their risk. “Many retirees who have experienced the recent reduction in dividends across the Australian share market are understandably worried given their reliance on these payouts to fund their retirement,” said Inna Zorina, Senior Investment Strategist, Vanguard Australia.

“This scenario which requires a retired investor, arguably at the most conservative phase of their investment journey, to take on immense risk. It certainly presents a real challenge to the most impacted group in today’s low yield and high volatility investing environment, and is probably not in their longer-term best interest,” she said.

The research also debunked the popular rationale that investing in higher dividend-paying equities would generate greater overall returns relative to other equities. Data from the previous 25 years found that total returns are generally not affected by actual payout, as capital not used for dividends could be reinvested in projects that increased shareholder value instead.

The research further warned of the risk of tilting a portfolio towards value stocks, finding that the higher yield an equity portfolio delivers, the more substantial the amount of concentration risk the portfolio holds. “Previously proposed changes to dividend imputation rules highlighted the potential risks that a high yield, concentrated portfolio may be exposed to. The current high volatility, low yield environment further affirms these risks,” said Ms Zorina. “The alternative to an income-oriented strategy is the total returns approach, where a portfolio’s asset allocation is set at a level that can sustainably support the spending required to meet those goals and encourages the use of capital returns when necessary,” said Ms Zorina. The approach allows for the capital value of the portfolio to be spent during periods where the income yield of a portfolio falls below an investor’s spending needs. It utilises both income and capital growth elements of the portfolio during the volatile periods for markets which inevitably occur, as long as the total amount drawn from the portfolio doesn’t exceed the sustainable spending rate over the long term.

“While this approach requires the discipline to reinvest a portion of the income yield during periods where the income generated by the portfolio is higher than what is required for living expenses, it provides many advantages over the income-focused method,” said Ms Zorina. “In addition to helping address unintended factor and credit exposures, this approach also addresses the main concerns that many retirees have around portfolio longevity,” said Ms Zorina. “Ultimately ensuring your portfolio includes an appropriate level of diversification matters for all ages and stages, and certainly even more in retirement. The total returns approach aims to provide for income needs without the risk trade-off,” said Ms Zorina.
Bank rebound? 

An article from fund manager & journalist Christopher Joyce in today’s AFR suggested the banks may have turned the corner as some well-known “bank bears” are starting to change their tune. 

As noted in the “Banking Index section” below, the banks are still down 15%-20% for the year, however, the pessimistic view on the housing market may not be as gloomy as expected. Some of the banks own forecasts were suggesting housing prices were to fall 10% to15% and the unemployment rate to jump to 9%. However, so far the national average price is only down 2.8% and unemployment is 6.8%.  

After this week’s “kitchen sink” budget, the Government may have provided enough support for the economy to bottom. Joyce thinks property prices will actually rise from here which will reduce the bad debt provisions the banks have already made in the May profit results. 

He also notes in 2015, the banks were trading on a price to book value of 2 to 3 times and they should have been between 1 to 1.5 times.  ANZ is now at 0.86 times, NAB’s at 0.99 times, Westpac is at 0.97 times and CBA at 1.67 times.

We only have a few weeks (early November) to see ANZ NAB and WBC release their full-year results. Hopefully, they are a little less gloomy than they were in May. 
Why we still like Global Themes?

Macquarie provided an interesting piece on global investment themes (technology, health, AI, etc). These are the themes we have been investing in via the exchange-traded funds (ETF).  

Macquarie made the following observations. 

Whenever there are deep dislocations, caused by economic, technological, military or pandemic reasons, the balance of power changes and needs to be readjusted.

Over the past two centuries, the industrial revolutions have already spawned waves of communism, fascism, tyrannies and rules of the mob.

Today, the dawn of the Information Age is causing an even deeper disruption. Our modern age can be best described as one of declining returns on humans and conventional capital and rising returns on digital capital, with most commentators concluding that this disruption is hundreds of times greater than that caused by the industrial revolutions. It is both broader and much faster. Financialization and the pandemic are aggravating the deep fissures of slowing productivity, rising inequality and a growing irrelevancy of traditional inputs. Nations are also moving in different directions and at different speeds, amplifying geopolitical tensions. The announcement of Trump’s COVID infection added another layer of risk to an already highly fraught and partisan environment.

How should one protect one’s wealth or portfolio against such unquantifiable uncertainties? The best course is to join disruption rather than resist it. In different ages, such protection was offered by land, factories or gold. Today, it is Thematic Portfolios that we believe offer the best chance.


The chart below illustrates the outperformance of these themes compared to the world index. 


Other Stories 
Sports Bet – US Election Trump $2.80 ($2.75). Biden $1.40 ($1.40). Trump needs a hail mary from here based on these odds. 
Broker Target Price changes 

  Goldman Sachs
BHP increased from $40.70 to $42.10
Rio Tinto decreased from $99.70 (lowest broker) to $98.10 (still lowest broker)

Ord Minnett/JP Morgan 
BHP decreased from $45 (highest broker) to $44
Origin Energy (ORG) decreased from  $7.60 to $7.45
Sonic Health (SHL) decreased from $35.40 to $35
Woodside (WPL) decreased from $25 to $23.55

CIMB/Morgan
BHP increased from $37.60 (lowest broker) to $37.80 (still lowest broker)
Transurban (TCL) increased from $13.71 to $14.11

Morgan Stanley


Macquarie
BHP increased from $44 to $45 (highest broker)
Resmed (RMD) decreased from $24.67 to $20 (equal lowest broker)
TCL increased from $14.45 to $14.49
Wesfarmers (WES) increased from $49.10 (highest broker) to $51 (still highest broker)

Bell Potter/Citigroup

 
Today’s Sector Movements
Best –  Energy +0.7% 
Worst Healthcare -0.9%
Core Watchlist Index 

The CORE Watchlist is a collection of 30 Australian shares, predominantly “Blue Chip”. We obtain research from up to 6 brokers on each share. Each broker provides a Target Price (value in 12 months) which then provides us with an average for each stock. We then compare that average to the current price as a percentage. IE BHP price $38.56   Av. Target Price $39.73= 97.1% (meaning 2.9% upside over next 12 months) + income 7.11% (including franking).

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

Should you have any questions, please let me know.  
    
The new stocks include in the CORE WATCHLIST 
Amcor (AMC) Brambles (BXB) JB Hi-Fi (JBH) NextDC (NXT) ResMed (RMD) and Trasurban (TCL).  

The Core index increased from 91.95% to 93.1 which is just above the BUYING TERRITORY signal

Overall Earnings Per Share (EPS) (including new stocks) 
FY21 increased from 19.52% to 19.75% forecasts of some companies to have a large rebound after the 15% drop in FY20 profits.   

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

Most expensive – Seek.com (SEK) 118.7% (buoyed by jobs growth)  

Least expensive – Origin Energy (ORG) is the cheapest at 67.2%. 

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

AMC current price $15.82   Broker range $17 to $18

BHP current price $36.58    Broker range $37.80 to $45
BXB current price $10.60    Broker range $12.05 to $13.67
COL current price $17.52    Broker range $18.90 to $21
LLC current price $11.98    Broker range $13.25 to $16.74
MQG current price $129.77 Broker range $130 to $135 
ORG current price $4.44      Broker range $5.35 to $7.80
RIO current price $97.50     Broker range $98.10 to $122
TLS current price $2.77       Broker range $3 to $3.60
WPL current price $18.38    Broker range $20.60 to $33.70

ANZ moved out due to rising price.  
Banking Index 

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

The Banking Index increased from 94.3% to 97.2%.

The budget stimulus should provide the following benefits for the banks.

1. Employment increases which should lower bad debts and increase loan repayments.
2. Business investment should increase due to the tax credits and depreciation allowances which increases the need for credit.
3. Infrastructure spending will have a positive indirect benefit. 
4. Tax cuts should increase consumer spending which assists households and consumer business and inturn banks.
5. Housing market regains some confidence and easing of lending criteria (avoiding a credit squeeze).   

The banks are up 6% this month but still off 15% to 25% for the year. ANZ, NAB and WBC have their half-yearly results in early November. 

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

The graph below shows the fall in banking dividends but we are likely to see an improvement next year, however not to the levels since before the Royal Commission.   

Other Indicators 

US VIX Index increased from 29.48 to  29.48. This is elevated above normal levels (10 to 17)  More volatility expected.
Iron Ore – closed for Chinese holiday $123.47. . A six year high was $130.17
Copper increased from $2.94 to $3.07. Recent high $3.10.  Gold increased from $1888 to $1915. Record high $2063. AUD/USD increased from 71.3c to 71.8c Fell to a low of 55c.  The future direction is more about the USD rather than the AUD.  USD/CNY decreased from $6.79 to $6.71 The lowest point in many months China becoming more comfortable with its recovery and controlling COVID.
Asian markets – UP  
US 10 year Bonds increased from 0.76% to 0.77% Hit a low of 0.31%. I’m adding the US 30 year Bond which increased from 1.56% to 1.57% (if this one start to rise, then it could provide inflation and volatility sign). Near the highest level for the year.  
German Bonds decreased from -0.51% to -0.53. Hit a low of -0.9% Japanese Bonds  increased from +0.022% to +0.029%  
Aussie Bonds 10 year Bonds increased from 0.85% to 0.85%  Lowest point 0.68%   
Other rates have slightly fallen 1 year 0.11% 2 year  0.16% 4 year 0.22% 5 year 0.33% . The market is starting to price in a November rate cut to 0.10% or 0.15%. However, we need to watch the long end of the yield curve. Aust 15 year Bonds 1.16%. 
Oil price increased from $39.95 to $41.13. 
Tungsten remained at $215-$220 mtu. 
This week & next week  Last “Not So” opened in 5 Aust states (missing SA NT & Tas) US 4 states (California, South Carolina Virginia & Georgia)   

This week – Finishing Investment process.  

Next week – Starting October reviews.


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

Make the move towards Financial Independence

 

Courtesy of the Pastoral Times, Deniliquin.

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