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Today, August 28, the ASX 200 fell 53 points to finish at 6074. The US Federal Reserve Chairman Powell made a change to the inflation policy and this impacted our market with Banks and Property trusts rising while all other sectors fell as the expectation that interest rates in the LONG TERM will eventually arise, it won’t happen for a number of years.
We continue to live in the AUSTRALIAN SEPARATED STATES (A.S.S) and the longer we continue to live like this, the worse the economic toll will be on small business, unemployment, property prices and eventually the Federal deficit.
US Federal Reserve – inflation game change
US Federal Reserve Chairman Powell announced a major change in policy (major for an economist, minor for others) as part of his annual Jackson Hole speech.
Macquarie provided a research piece on the change of policy.
Last night, the Federal Reserve Chair Jerome Powell up-ended the old book by announcing their willingness to target an “average” inflation rate above 2% (potentially ~2.25-2.50%) as well as tweaking the language around their full employment target where instead of targeting an unemployment rate, they would allow conditions to dictate what it considers to be full employment.
This removes downside risks from a premature tightening in policy and/or a potential policy mistake by effectively giving the Fed a larger cushion before it begins to reverse course. Macquarie thinks last night’s policy shift has the following 4 broad implications:
Early monetary policy unwind unlikely: Reduces the risk of an early monetary policy unwind and potentially raises confidence in the ability to reflate the US/global economy on a sustainable basis. In essence, this likely reduces downside growth risks rather than raising upside risk to a meaningful degree. The Fed has simply formalized (stated) what the market was already expecting in terms of allowing inflation to run above target.
Lower for longer, but not lower: The path for interest rates may now look even flatter but we doubt short rates are going lower. Similarly, expectations around stronger growth and higher inflation (should it eventuate) should help steepen the yield curve which will provide some relief for financials (banks) which are being squeezed via a flat yield curve.
Value stocks and financials receive an additional tailwind: Commitment to economic growth will help value stocks vis-à-vis growth stocks.
Medium-term equity outlook is solid: Finally, this is not a green light for markets given much of this was implied but it is certainly another positive support particularly if it drives a sustained steepening in the yield curve and a further compression in volatility which still remains higher than pre-COVID-19 levels. Equities have run hard, have pockets of overvaluation and remain vulnerable to technical reversals. However, fears of inflation and higher rates, as well as an early reversal of policy stimulus, have been lessened. Trade tensions between US-China appear to be background noise and while US election risk looms large, the willingness to let inflation run hot might actually play into a more fiscally lenient Democratic government should they win the White House.
Macquarie is increasingly confident that downside risks will be met with more of the same and while the near term outlook remains vulnerable to ongoing uncertainties, they think the medium-term outlook remains solid for equity markets.
The chart below shows inflation (US Core) & US interest rates.
Information released by Domo.com in the chart below shows an increasingly digital world intensified by the outbreak of COVID-19, 2020. Technology and data have taken more significant roles in our daily lives. New products are being produced, such as ZOOM. Twelve months ago, virtually unheard of, now 208,333 meetings every minute take place. This shows the amount of data being created every minute of every day in the various platforms.
As we move forward into a COVID world, there will be investment opportunities.
Coronavirus or COVID 19 news
The global Coronavirus cases seem to be plateauing. There doesn’t seem to a uniform way of dealing with the outbreaks as all options have unforeseen consequences.
Yesterday saw the number of new infections worldwide grow by 273k (last update 248k). Highest daily is 290k (previous update highest was 290k)
The latest figures on the virus are, figures in bracket are from the last “Not So” dated Aug 26. 24,615,938 (24051170) infected. The deaths have increased to 822,728 (822,728) Thankfully the numbers recovered have increased to 16,600,925 (16600925). This includes 20,366 (19814) of 25,322 (25053) Australian cases. Unfortunately, there have been 572 (525) deaths.
Thirty-four countries have now passed China’s total. Latest being Panama. The US still has plenty of cases increasing to 6,046,634 (5955728) cases or 24.56% (24.76%) of all cases. Brazil, India & Russia are seeing a rapid rise in numbers and together with the US, they account for 57.57% (57.49%) of all cases.
There are 10 (10) small countries that are corona free. The biggest case count that has fully recovered is The Isle of Man who had 336 cases but none active. The virus is difficult to eradicate. NZ has 126 (124) active cases.
The reverse Olympics where you want to be lower down the pecking order
The number of cases Australia ranked 69. Last Not So we were 69. Our best 73
The number of death Australia ranked 66. Last No So 63. Our best 85
The number of active cases Australia ranked 66 Last Not So 64. Our best 111
There is increasing talk of a vaccine. While there has never been a vaccine for a coronavirus before, there are high hopes of one being created.
This means instead of living in a POST COVID world, we might be in a “living with COVID world”. This is likely to have major implications to businesses, social interaction, investments and live in general.
PLEASE STAY SAFE.
– Sports Bet -US Election Biden $1.85 ($1.80) Trump $2.05 ($2.25).
– Japanese PM likely to resign due to illness.
– NZ stock market cyber attack for 4th day.
– Citigroup says Q2 GDP like to be better than forecast as recent data hasn’t been horrible. Just bad with building works (maintenance) and private capex better. Now expecting -6.5% GDP instead of -7%
Broker Target Price changes
Nine Entertainment (NEC) increased from $1.85 to $2
Woolworths (WOW) increased $36.80 to $38.80
Ord Minnett/JP Morgan
NEC decreased from $2.10 (highest broker) to $2
NEC increased from $1.87 to $2
WOW increased from $35.86 (lowest broker) to $38.60 (still lowest broker)
NEC increased from $1.95 to $2.10 (highest broker)
Sonic Health decreased from $36 to $35
WOW increased from $40.50 to $42 (equal highest broker)
BHP increased from $42 to $44 (equal highest broker)
NEC increased from $1.65 (lowest broker) to $1.90 (still lowest broker)
Rio Tinto (RIO) increased from $110 to $114
WOW decreased from $41.50 to $41.20
Today’s Sector Movements
Best – REITs +0.9%
Worst – IT -2%
Core Watchlist Index
The CORE Watchlist is a collection of 24 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 Current 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 24 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 40% 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 94.21% to 92.84% on a reducing market and increased target prices.
Overall Earnings Per Share (EPS)
FY 20 decreased from -20.64% to -20.85% (near new low). Looks like the bottom hasn’t been reached.
FY21 decreased from 21.52% to 21.32% forecasts of some companies to have a large rebound.
In the medium term, markets need profit growth to see the indices increase in value.
Most expensive – Wesfarmers is the most expensive at 107.2%
Least expensive – Lend Lease (LLC) at 76.1%. Woodside very close at 77.5%
Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
COL current price $18.26 Broker range $18.90 to $21
LLC current price $11.19 Broker range $13.25 to $16.32
NEC current price $1.68 Broker range $1.90 to $2.10
ORA current price $2.28 Broker range $2.37 to $3.20
ORG current price $5.56 Broker range $5.93 to $7.80
TLS current price $2.90 Broker range $3 to $3.90
WPL current price $19..14 Broker range $20 to $33.70
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 94.1% to 95.5%.
I have a number of analysts changing their dividend forecasts. Once upon a time, the banks would all move in the same direction. Maybe this is slowly changing.
The US Federal Reserve meeting provided a boost to the banks today.
– US VIX Index decreased from 22.03 to 24.47. The index is still above normal levels (10 to 17), however, this is the lowest since March 2020.
– Iron Ore decreased from $122.99 to $122.22. A six-year high of $128
– Copper increased from $2.94 to $3 .Bottom $2.06 Recent high $3
– Gold increased from $1924 to $1947. Record high $2063.
– AUD/USD increased from 71.92 to 73c Fell to a low of 55c. The future direction is more about the USD rather than the AUD. Moving higher after the fed decision.
– USD/CNY decreased from $6.90 to $6.87. The lowest point for many months. China becoming more comfortable with their recovery.
– Asian markets – MIXED
– US 10 year Bonds increased from 0.71% to 0.76% Hit a low of 0.31%. Jackson Hole meeting this week.
– German Bonds increased from -0.42% to -0.39%. Hit a low of -0.9%
– Japanese Bonds increased from +0.037% to +0.059%
– Aussie Bonds 10 year Bonds increased from 0.95% to 1.03% Lowest point 0.68%
– Other rates have slightly risen 1 year 0.2% 2 year 0.27% 4 year 0.32% 5 year 0.43%. The RBA is trying to maintain the short term rates at 0.25%
– Oil price decreased from $43.31 to $43.04. Increased due to the 2 hurricanes hitting the US Gulf of Mexico.
– Tungsten increased from $208-$218mt to $210-$218 mtu
This week & next week
Last “Not So” opened in 6 Aust states (missing Tas and ACT, US 3 states (California, South Carolina, Virginia) & Singapore
This week – Preparing for August reviews and assessing our investment process.
Next week – As above
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