The Not So Daily Bulletin No. 328

The Not So DAILY BULLETIN 3 September 2020  No. 328

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Top Stories

Today, September 3, the ASX 200 built on yesterday’s gain to increase by 49 points to finish at 6113. This is near the top of the recent trading range, which is 6167. The newspaper headlines screamed RECESSION, but the market is focussed on the recovery and the spike in the household savings rate, which will hopefully be spent once the economy and borders re-opened.
The US markets continue to surge with new records reached on the S&P500 and Nasdaq. Additionally, the DOW JONES broke above 29000 for the first time since Feb and is now only 460 points from it’s ALL-TIME HIGH. Unfortunately, the ASX is still more than 1000 points from that mark. 

Summary of reporting season:

Morgan’s provided an update on the recently completed Australian profit season. They concluded the following;
The market is happy to look through the dip… for now.

Earnings generally tracked ahead of some very depressing expectations so it would appear equity markets may not be as dislocated from reality as the market had been anticipating.

Consensus forecasts market earnings to fall ~20-25% in CY20 before rebounding toward 2019 levels by 2022. Call it an extended V-shaped recovery. The current 2022 PE multiple of ~17.1x looks passable provided investors are happy to look through the two-year earnings dip and wear associated risks to the economic recovery.

Reporting Season Scorecard
Domestic cyclicals surprised (Retailers, Travel), while larger defensives underwhelmed prior expectations (Utilities, Telcos). Smaller stocks also recorded their highest rate of surprise (28%) and lowest rate of disappointment (18%) for several seasons. Expectations here were clearly more fearful than for larger-cap peers due partially to questions over short term liquidity.

The surprise positive impact of fiscal stimulus also had a larger proportional benefit in this segment.

Income well down but not out
Income was challenging to come by with a little over a quarter (26.8%) of reported companies that paid a dividend in FY19 maintaining or increasing their final dividend. However, many have committed to resuming dividends in FY21. While dividends were well down in some sectors, it was not all bad news for income investors with CBA, AZJ, AMP, CCL, WPL, NCM, FMG surprising on the upside. Morgan’s think companies that were able to maintain their FY19 level of income in FY20 are better placed to weather the risks. Key names include AZJ, APA, CIP, IRE, IPH and WPR.

Improved operating leverage to fuel earnings surprises in FY21 Companies that cut costs aggressively during the downturn has had to do more with less and could see a significant increase in the bottom line as conditions improve.

Meanwhile, the government has extended many of the generous benefits well into FY21 which could further support the recovery. Earnings surprises will be greatest from the parts of the market with the most leverage to the economic recovery. While Morgans think the market has it right directionally, they think the best opportunities from here are likely to be those stocks that have higher operational linkages to economic activity and low expectations (Travel, Gaming, Energy, Commercial Services).  

Market questions

AMP’s Shane Oliver had a Q&A session during the week. Here are a few relevant questions and answers. 

1. Have markets disconnected from the real economy?
Not necessarily. Share markets invariably lead the economic cycle. Shares led the coronavirus hit to the global economy when they plunged 35% into March. The rebound since then reflects the combination of government measures to minimise the economic damage, ultra-low interest rates which have made shares cheap, some slowing in new cases, positive signs for coronavirus treatments and vaccines and a rebound in a range of economic indicators (eg US GDP looks on track to rebound by around 7% this quarter). So, share markets are anticipating better conditions ahead and that economies will be able to withstand an eventual tapering of government support. 

2. US shares are at all-time highs, what is the probability of a big move down versus a continuing rising trend?
Our base case with around 70% probability allows for a short term pullback in the next month or so then rotation away from US shares and relatively expensive technology and health care stocks into non-US shares and cyclical stocks and a continuing rising trend in shares on a 6-12 month view. This note provides our reasoning as to why the trend in shares likely remains up. Our risk case with 30% probability is that share markets have another sharp leg down in the next few months with possible triggers being bad news regarding coronavirus, a renewed economic downturn, the US election, tensions with China or an unexpected rise in inflation/sharp rise in bond yields. Relatively expensive tech stocks could be at the centre of this.  Markets are often at all-time highs (as shares rise over time) so record levels do not necessarily mean a sharp fall is imminent

3. How close is a vaccine? What is the market pricing in?
We have seen positive news regarding vaccines (that they are safe at least initially and generate immune responses) and various treatments (eg, antivirals like Remdesivir and therapies like Dexamethasone which is a low-cost steroid). The University of Oxford/ AstraZeneca vaccine to be most advanced and some are already in production ahead of the of 3 tests. However, mass deployment of a vaccine is unlikely until next year and they may not provide complete protection (more like a flu vaccine than a measles vaccine) and so may have to be combined with other treatments. The deployment of vaccines is partly but not fully factored into shares (eg, travel stocks are yet to recover much). 

4. Are investors blind to massive levels of public debt?
Investors are well aware of the surge in public debt flowing from fiscal stimulus, but this is not necessarily as bad as it looks. First, it headed off a bigger hit to the economy and hence an even bigger blow out in public debt. Second, it makes sense for the public sector to borrow from the private sector to support the economy when the latter has cut spending. Third, public sector borrowing costs are ultra-low and often negative. Japan is an example where gross public debt in excess of 200% of GDP has not caused a major problem. It’s also conceivable that if a problem did arise, governments could simply cancel the bonds that their central banks now own (which would mean a loss for the investment in their central bank which is offset by a reduction in their debt liability – and so would have no major impact). Finally, in Australia public debt is relatively low. The real constraint to deficit financing is inflation, but its low.   

5. What does a falling $US mean for other assets?
A falling $US is a sign that global reflation is working and the global outlook is on the mend. This is positive for: commodity prices because they benefit from stronger global growth and are priced in US dollars; non-US share markets including Australian shares because they are more cyclical; and currencies like the $A. We expect the trend to remain up in the $A towards $US0.80 on a 6-12 month view helped by rising commodities and a return to a positive interest rate differential versus the US.

Global trade changing models

I found an interesting piece from ICBC International. They believe global trade is like to change from the current flat model that has countries competing for the US demand (1st chart). 
To a regional model (2nd chart) where there are three major economic zones of similar size. Europe, Nth America and Asia. Each of these models has the major consumer at the centre such as France/Germany (Europe) US (North America) China (Asia).
The second model is likely to see more regionalised companies rather than dominate global players that have grown in the last 30 years. 
While time will tell if this occurs, COVID and the recent trade spates with the US, China and Europe are making this more likely and the current US agenda of retreating from the global stage.     

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 286k (last update 260k). 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. 26,170,375 (25892091) infected. The deaths have increased to 866,614 (860,223) Thankfully the numbers recovered have increased to 18,435,707 (18186486). This includes 21,690 (21503) of 25,923 (25819) Australian cases. Unfortunately, there have been 663 (657) deaths. 

Thirty-seven have now passed China’s total. Latest being Oman & Belgium. The US still has plenty of cases increasing to 6,290,737 (6257571) cases or 24.04% (24.17%) of all cases. Brazil India (hit 82k) are seeing a rapid rise in numbers and together with the US, they account for 57.86% (57.84%) of all cases.  

There are 14 (13) 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 129 (132) 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 70. Our best 73.
The number of death Australia ranked 59. Last No So 59. Our best 85.
The number of active cases Australia ranked 73 Last Not So 73.  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 Trump $1.90 ($1.90). Biden $1.95 ($1.95)    

Broker Target Price changes

Goldman Sachs

Ord Minnett/JP Morgan 


Morgan Stanley
Rio Tinto (RIO) decreased from $93 (lowest broker) to $92.50 (still lowest broker)


Bell Potter/Citigroup

Today’s Sector Movements

Best –  REITs +1.6%    
Worst Materials -0.5% BHP traded ex-dividend

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 92.96% to 93.78%. 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 -20.7% to -20.7% (near new low). Looks like the bottom hasn’t been reached.
FY21 decreased from 16.7% to 16.68% 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 107.8% 
Least expensive – Woodside (WPL) is now the cheapest at 77.6%. 
One broker suggested Woodside is likely to gain after demand for oil increases on the back of a stronger recover 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 $17.71    Broker range $18.90 to $21
LLC current price $12.50    Broker range $13.25 to $16.37
NEC current price $1.67       Broker range $1.90 to $2.10
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 $19.25     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.

*not including Franking Credits.

Other Indicators 

  • US VIX Index increased from 24.47 to 26.12. The index is still above the 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.
  • AUS/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 deceased 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%. Hot 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 tring 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 Mexico.
  • Tungsten increased from $208 – $218 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 

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125 End St Deniliquin NSW 2710
Ph. 03 58950100
Fax 03 58950101
Mobile 0412113524

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