The Not So Daily Bulletin No. 327

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Today, September 2, the ASX 200 gained 110 points to finish at 6063. This is down 11 points from the last Not So update which suggest the market is back on the rollercoaster and struggling to break out of the trading range it’s been in for the last couple of months. However, today was a fair result given the official announcement of the recession.  Markets seem to believe the worst is behind us with all the major sectors up for the day.

Yesterday, the Reserve Bank confirmed its intention of supporting the economy and jobs in any way they can. This may mean another interest rate cut to 0.1% in the coming months.  This, coupled with other global Central Banks, is likely to make sure there is enough liquidity in the financial system to avoid a credit crunch as we saw during the GFC.

August Market summary

The investment markets had a positive month in August as the half glass full recovery continued with the global economy slowly re-opening. The general international consensus seems to be that a complete lockdown is only likely in an extreme outbreak with most countries preferring to “live with the virus”. 

The best performing market continues to be the US, led again by the NASDAQ. The NASDAQ and the S&P 500 hit all-time highs, and the DOW is positive for the calendar year. However, this masks the reality as the market is being driven or pulled up by a select few technology companies (Microsoft, Apple, Alphabet, Amazon & Facebook).  To illustrate how big these global US-based companies have become, the chart below compares the top 8 global companies from 2005 to 2020.   

Over the last six month (Feb to August) or the period of the pandemic, markets are mixed with the US strongly positive as are Japan China and Germany, while Australia, UK, France and HK are negative. Again the difference seems to be whether your market has global tech firms or not. Also important to note the AUD had risen 13% from February when it reached 65c.  

The one-year returns are similar in the sense of positive or negative to the six-month numbers. 

Over the last five years, the NASDAQ continues to lead with the UK being the only negative market. Thankfully the UK is positive over ten years, but like Australia, the return hasn’t been great as the ASX has increased only 37% in that time. This doesn’t include dividend. 

This table highlights the need to diversify globally across different countries and industries.

In a POST COVID world, we are likely to see change occur at even a quicker pace than we are used too. 

US Federal Reserve – inflation game change
Following the Last “Not So”, Macquarie has updated their view on the US Federal Reserve policy change. 
They made the following comments

What does it mean for investors?

An aggressive use of monetary levers leads to toxic outcomes (i.e. disinflation, narrow growth corridors, rising inequalities). Alas, the way forward is not a restoration of free markets, but the likelihood of an even greater state role via fusion of monetary & fiscal levers (MMT).

This will be more reflationary and inflationary, although we view it as reducing the degree of disinflation rather than causing a sustained inflationary pulse. The disinflation-inflation pendulum will be the key, driving investment choices. If our answer regarding inflation is right, then this should be a reasonable world for risk assets and not a disaster for bonds.

Short term, lower for longer message from the US Federal Reserve should preclude any robust USD appreciation and give the world (especially Emerging Markets) some breathing room.

Long-term, the ability to embrace MMT policies while growing intangible capital will be the key to success. Despite a myriad of uncertainties, Macquarie still views China as the best positioned Emerging Market.     

Australian Recession 
Today the Australian recession was officially called as the GDP figures showed the economy dropped 7% in the June quarter (the worst quarter on record) after falling 0.3% in the March quarter. While -7% is pretty bad, the chart below shows that there were many other countries which fared worse.  

This breaks the world record of any country with the longest span of economic expansion in modern history as Australia had 29 years as the last recession “we had to have” in 1991.

Let’s hope; this is one of the shortest recessions in history with the September quarter being positive. However, economists are currently predicting a small negative because Victoria has continued locked down. In contrast, the rest of the country has been relative free (apart from closed borders and social distancing). 

The share markets reaction to the first official recession in 29 years was a healthy gain. While this seems strange at first, it re-enforces the view that the share market looks forward, not back.

A couple of positives were a substantial current account surplus of $17bn for the June quarter, and dwelling approvals rise in July.   

The RBA left interest rates on hold yesterday, but they noted the recovery was underway, albeit uneven and bumpy. They left rates on HOLD but increased the funding for banks (liquidity) which is aimed at supporting the economy and jobs.

The bumpy recovery is shown in the Australian economic tracker below, which shows readings of consumer confidence, retail foot traffic, hotel bookings etc. 

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 260k (last update 273k). 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 28. 25,892,091 (24615938) infected. The deaths have increased to 860,323 (822,728) Thankfully the numbers recovered have increased to

18,186,486 (16600925). This includes 21,503 (20366) of 25,819 (25053) Australian cases. Unfortunately, there have been 657 (572) deaths. 

Thirty-seven have now passed China’s total. Latest being Oman & Belgium. The US still has plenty of cases increasing to 6,257,571 (6046634) cases or 24.17% (24.56%) of all cases. Brazil India & Russia are seeing a rapid rise in numbers and together with the US, they account for 57.84% (57.57%) of all cases.  

There are 13 (10) small countries that are corona free. The biggest case count that has fully recovered is Djibouti who had 5387 cases but none active. The virus is difficult to eradicate. NZ has 132 (126) active cases. 

The reverse Olympics where you want to be lower down the pecking order
The number of cases Australia ranked 70. Last Not So we were 69. Our best 73
The number of death Australia ranked 59. Last No So 66. Our best 85
The number of active cases Australia ranked 73 Last Not So 66.  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. We are currently reviewing our investment strategy to take into consideration the potential changes. 

Other Stories 
– Sports Bet – US Election Biden $1.95 ($1.85) Trump $1.90 ($2.05). 
– The Buy Now Pay later gang (Afterpay Zip & Sizzle) have been hit by Paypal entering the market. Paypal has 190m customers. 
– Apple has grown in value to more than $2trillion. This is more than all the companies on the ASX. 
– NAB sold MLC to IOOF.

Broker Target Price changes

Goldman Sachs
Lend Lease (LLC) increased from $16.32 (highest broker) to $16.37 (still highest broker) 

Ord Minnett/JP Morgan 


Morgan Stanley
– BHP increased from $36.85 (lowest broker) to $37.05 (still lowest broker)
– NAB decreased from $17.70 from $17.50 (equal lowest broker)
– Woodside (WPL) increased from $20 (lowest broker) to $20.60 (still lowest broker)  
– Lend Lease (LLC) increased from $13.94 to $13.98
Bell Potter/Citigroup

Today’s Sector Movements
Best –  Consumer Discretionary +2.5%     
Worst – No negative 

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 increased from 92.84% to 92.96%. It’s getting closer to buying territory but the market seems to not have two bad days in a row. 

Overall Earnings Per Share (EPS)
FY 20 increased from -20.85% to -20.7% (near new low). Looks like the bottom hasn’t been reached.FY21 decreased from 21.32% to 16.7% 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% 
Least expensive – Woodside (WPL) is now the cheapest at 76.9%. Lend Lease (LLC) has increased to 82% after providing a positive strategy update on Monday.
One broker suggested Woodside is like to gain after the demand for oil increases on the back of a stronger recovery and lack of new supply. 
Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).

COL current price $17.68    Broker range $18.90 to $21
LLC current price $12.12    Broker range $13.25 to $16.37
NEC current price $1.68       Broker range $1.90 to $2.10
ORA current price $2.34       Broker range $2.37 to $3.20
ORG current price $5.58     Broker range $5.93 to $7.80
TLS current price $2.90       Broker range $3 to $3.90
WBC current price $17.32   Broker range $17.40 to $22.50
WPL current price $19.14     Broker range $20 to $33.70

We are reassessing the stocks in the CORE Watchlist to make sure the businesses are coping with a POST-COVID world.

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 95.5% to 93.8%. 

After the recent profit updates. The analysts have changed their bank dividend forecasts. While the dividends are likely to improve from here. They aren’t returning to their previous levels. 

The figures are an average of six brokers over the next 2 years.


Other Indicators 
US VIX Index increased from 24.47 to 26.12.  The index is still above normal levels (10 to 17), however, this is the lowest since March 2020.
Iron Ore increased from $122.22 to $124.66. A six-year high of $128
Copper increased from $3 to $3.03 . Bottom $2.06 Recent high $3
Gold increased from $1947 to $1969. Record high $2063.
AUD/USD increased from 73c to 73.56c 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 $6.87 to $6.83. The lowest point for many months. China becoming more comfortable with their recovery.

Asian markets – MIXED  
US 10 year Bonds decreased from 0.76% to 0.68% Hit a low of 0.31%. Jackson Hole meeting this week.
German Bonds increased from -0.39% to -0.43%. Hit a low of -0.9%

 – Japanese Bonds decreased from+0.059% to +0.034%   
Aussie Bonds 10 year Bonds decreased from 1.03% to 0.95%  Lowest point 0.68%   
Other rates have slightly risen 1 year 0.2% 2 year 0.26% 4 year 0.3% 5 year 0.42%. The RBA is trying to maintain the short term rates at 0.25%
Oil price increased from $43.04 to $43.17. Increased due to the 2 hurricanes hitting the US Gulf of Mexica.
Tungsten increased from $208-$218mt to $210-$218 mtu

This week & next week 
Last “Not So” opened in all Aust states &  US 3 states (California, South Carolina, Virginia) 
This week – Finishing August reviews and assessing our investment process in a POST COVID world.   
Next week – As above
Contact details 
PO BOX 149 Deniliquin NSW 2710
125 End St Deniliquin NSW 2710
Ph. 03 58950100
Fax 03 58950101
Mobile 0412113524

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