The Not So DAILY BULLETIN 1 November 2022 No.516

The Not So DAILY BULLETIN 1 November 2022  No.516

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Tuesday, November 1 (Melbourne Cup). The market had a GOLD TRIP today, increasing by 113 points or 1.7% to close at 6977. This is the highest close since mid-September, just before the rise in US inflation.

While I’m happy to see the market move higher, I’m tempering my enthusiasm a little for the following reasons.

1) Market volumes are generally light on Melb Cup day as many market players are focussed on the Race. 
2) The best-performing sectors were interest rate sensitive – Utilities and Property Trusts. The RBA increased rates again today and didn’t indicate they were stopping yet, so the gains in these sectors were maybe pre-mature.
3) BHP and RIO gained over 2.8% when iron ore prices dropped below $80 to their lowest point since 2020. 
4) US Federal Reserve is likely to increase rates again by 0.75% this week. If they increase by only 0.5%, will that be a pivot? 
5) US jobs report out Friday. Will that provide the US Fed to slow rates down,     
6) US Mid Term elections next week. Republicans are favoured to take back both houses, which is generally positive for markets. But it probably depends on how many Retrumplicans are elected. If not many, then a better sign; if too many, we could have more US government dysfunction. 
7) Bear market rallies are frequent during declining bear markets. Apart from inflation and interest rates not topping yet, neither has the other headwinds of Russia’s uncertainty and China’s zero COVID policy stalling the world’s growth engine. 

I’ve retained the dates below, as these events could significantly affect the market’s direction in the coming weeks.  

November 1 – Aust RBA raised by 0.25%.
November 2- US Federal Reserve interest rate decision. expecting 0.75%
November 4- Jobs Report
November 8- Midterms elections
November 10- US inflation
December 2- Jobs Report
December 13- US inflation
December 14- US Federal Reserve interest rate decision. expecting 0.5% 

If some of these data events are softer, it may give the markets a sense that the bottom is here. 

We are still trapped in a global bear market. How long and how low are the questions? Hopefully, the answers are not long and far, but only time will tell. 

Rivers have peaked here and at Echuca. But recent rain in the upper catchments means more flooding likely in the coming weeks. Please stay safe!
Reserve Bank up 0.25% 

The RBA increased by 0.25% to 2.85% as most expected, making it the 7th rate rise in a row. The RBA statement allowed lots of interpretation of future moves. 

They indicated they would be data-dependent but bringing down inflation is their aim which they see peaking at 8% and not dropping below 4.75% in 2023. The RBA is conscious of the 7 rate rises, but stated household savings are higher than pre-pandemic levels and the labour market is still very tight. 

This suggests more rate rises coming until they see softening jobs data. The range of predictions I have seen are from 3.1% to 4.5%.

The chart below from Shane Oliver AMP shows the average mortgage rates. Shane still thinks only one more to come.
October market review

October saw markets bounce off their September lows with gains across all, but Chinese markets, led by the US Dow Jones with an increase of 13.95%, was the best gain since 1976. Non-technology blue chips led the recovery, Caterpillar up 32%, Chevron up 26% and JP Morgan up 20%. Most other markets were up single digits except for the Chinese markets, which continue to be sold down. 

Over the last six months, only Japan has been positive as the headwinds continue to blow, while the ASX is down 7% and is in midfield.

Over the last year, the Nasdaq has suffered 29% as high-flying technology valuations have been reduced and interest rates have risen. The real test for technology is whether it can continue to deliver in a higher inflation environment.  

The AUD finished flat for the month but is still down 9% for six months and 14% for the year. Given the AUD is below 65c, we are considering hedging the currency in any sustainable recovery.

An observation from the figures below shows the need for diversity in a portfolio. Since Oct 2007 (just before GFC), the ASX has increased by 2% over 15 years (plus dividends). This indicates the need to be exposed to a range of markets, as it’s difficult to predict the future.

In the chart below, it shows the movement of the S&P 500 during Bull and Bear markets during mid-term elections (election Nov 8). The rally in October occurs in all examples, but the Santa Claus rally to year-end seems to run out of puff in Bear Markets. Will this happen again?  
Core and Exchange Traded Funds  (ETF) watchlists

The 30 CORE stocks we follow represent 55% of the ASX. Over the last month the best performers, have been the Banks that have dominated, with Westpac up 16% for the month, followed by CBA 15% and energy producer Woodside up another 13%. Woodside has gained 64% this year as energy, banking and health are the only sectors providing reasonable returns in 2022. 

On the downside, resources (BHP -3% and RIO -5.5%) were the worst as the iron ore price continues to soften. Over the year it’s been some of the previous high flyers Goodman Group -38% & Cloud computer storer NextDC that have been sold off. 

Looking at the stable of Exchange Traded Funds we track. The best over the month was Australian Banks (MVB) up 14% while too-recent laggards had a nice bounce Robotics (RBTZ) up 10.5% and Europe (IEU) up 10.3%. Europe was trading on a very cheap PE of 10.   

Over the last year, the best performers have been Australian Resources (MVR), Australian Banks (MVB) and Global Health (IXJ). 

While at the other end of the spectrum Chinese orientated markets are feeling the selling with global traders moving out of the Chinese market. On fundamentals, this provides very cheap prices but with political risk and COVID zero still occurring. 
Market strategy

The market continues to be buffered by the headwinds of inflation, interest rates, energy insecurity, Russia, China covid and Quantitive tightening. However, the markets bucked that trend by bouncing off the September lows. 

Have we seen the bottom? Is this the real rally?  

Morgan Stanley, whose research has been the most accurate this year, updated their views this morning. 
The recent stock market rally, driven by technical factors, is likely to prove premature. Bear-market bottoms in a policy-driven rate cycle require a peak in inflation which, in turn, signals a peak in policy rates, and thus, a bottom in valuation multiples. The Global Investment Committee believes that we are close to achieving this necessary condition. However, while a rate peak may ignite a bull market in bonds, equity investors want to see actual rate cuts. History shows an average five months between the last hike and the first cut. During this delay, investors make a sober assessment of the depth and breadth of the economic slowdown on earnings power. The reset of 2023 and 2024 earnings forecasts has only just begun. We don’t anticipate a full-blown recession in 2023, but monetary policy operates with a six-to-nine-month lag and new order data already supports material slowing in growth. Falling inflation is also likely to undermine corporate pricing power. While markets are anticipatory, we have some miles to travel. Consider focusing on companies with sustainable fundamentals and realistic discounted expectations. We see opportunities in health care, financials, energy, industrials and defense that are supported by above-average dividend and buyback yields. The equal-weighted index is the preferred choice for passive investors.
Bank results 

The two results below helped the Banking sector to be the best-performing in October. In short, rising interest rates allow banks to increase their profit margins. While they see softer housing prices, bad debts and mortgage stress remain subdued. 

ANZ delivered a $3.47bn profit up 16%. Macquarie said it was one of its best results ANZ had delivered in recent years, underpinned by favourable margin trends & expecting revenue growth of ~15% in FY23. Has the ability to absorb rising costs and allowing for increased bad debts. Increased target price from $25.50 to $26. Increased dividend to 74c ex div on Nov 7.

Macquarie Group 
MQG’s half year profit $2.3bn up 13%. Citigroup (lowest broker at $172) described the result as a solid, clean performance, with the company again finding a way to better market expectations, highlighting the strength of the business. They slightly lifted forward profit expectations for 23 and 24. Dividend increase to $3 plus 40% franking. Ex div on Nov 7

Westpac – November 7
NAB – November 9

CBA has already released its profit results (end of June).
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).
Director registration is required by November.

Any questions, please let us know.
Other Stories (research since last Not So)

– US GDP was 2.6% better than expected.
– ECB raised rates by 0.75%. But a slight pivot by Bank of Canada with 0.5%.
– Citigroup base case is for Australia to avoid a recession in 2023 with GDP 2.2%, unemployment rising to 4.3% Interest rates to 3.35% and ASX 200 at 7000.
– Chinese PMI 49.2 which suggests a contraction. 
– Australian retail sales up 0.6% for month. 
– Grain prices jumping on Russia pulling out of Ukraine supply agreement. 
– US technology stocks have been hit since their 3rd quarter profit result. Mostly below expectations. 
– Elon Musk has privatised Twitter.   
Broker Target Price changes 

Ord Minnett/JP Morgan 
ANZ Bank (ANZ) increased from $26.20 to $27.10
JB Hi Fi (JBH) increased from $45 to $46
Macquarie Group (MQG) decreased from $202 to $198
Resmed (RMD) increased from $36.50 to $37.50 

ANZ decreased from $26.45 to $25.91
Coles (COL) decreased from $20 (highest broker) to $19.50 (still highest broker)
MQG decreased from $215 to $214.30
RMD decreased from $37.08 to $37

Morgan Stanley
ANZ decreased from $26.90 to $25.50 (lowest broker)
MQG decreased $231 (highest broker) to $215 (still highest broker)

ANZ increased from $25.50 (lowest broker) to $26

Bell Potter/Citigroup
ANZ increased from $29 to $29.25

COL decreased from $17.25 to $16.75
Today’s ASX sector Movements

Best –   Materials +2.6%
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 Core index increased from 86.66% to 88.34%. Below 90% is generally a good buying opportunity, but rising inflation and interest rates still make us cautious. 

Overall Earnings Per Share (EPS) 

FY22 increased from 21.01% to 21.10%. Energy upgrades for CY22. 
FY23 increased from 5.82% to 6.02% 

Profit forecasts aren’t falling as expected. Is this still to come? 

Most expensive – CBA 114.7%   
Least expensive –  NextDC  (NXT) 66.2% 

The CORE Watchlist has 2 (2) stocks trading above 100% lowest (0) while 7 (13) are trading below 85% (highest 18). GMG LLC NEC NXT ORA 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). 12 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 8.

ALL current price $37.72    Broker range $40.20 to $46
BXB current price $11.56    Broker range $11.80 to $14.50
CPU current price $25.50    Broker range $27 to $38.75
CSL current price $283.26  Broker range $312.20 to $340
GMG current price $17.65   Broker range $20.60 to $24.10
LLC current price $8.71      Broker range $11.20 to $13.40
NXT current price $8.77      Broker range $11.75 to $14.00
ORA current price $3.10      Broker range $3.40 to $3.95
ORI current price $14.21     Broker range $14.55 to $19.70
STO current price $7.85      Broker range $9 to $10.70
TCL current price $13.46     Broker range $13.73 to $15.80
TLS current price $3.93       Broker range $4 to $4.62 


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 99.5% to 101.6%. They have rallied strongly over the last six weeks and ANZ and Macquarie results kept the train rolling. The index above 100% would suggest the banks are now FULLY PRICED. So either target prices are likely to be lifted or we could see some profit taking as one broker suggested today.  

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.  

FY21 % FY 22 % FY 23 % FY 24
ANZ 142.0 5.47% 146.0 5.62% 158.5 6.11% 163.5 6.30%
CBA 350.0 3.30% 384.0 3.62% 422.8 3.99% 439.8 4.15%
NAB 127.0 3.88% 148.8 4.55% 168.8 5.16% 174.0 5.32%
WBC 118.0 4.85% 119.7 4.92% 142.5 5.86% 158.3 6.51%
MQG  470.0 2.73% 622.0 3.62% 636.4 3.70% 664.6 3.86%

Updated to include 2024 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 11.74% 316.00 8.22% 284.0 7.39%
RIO 724.17 8.00% 675.67 7.47% 615.5 6.80%

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

US VIX Index decreased from 28.46 to 25.88  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! 
Iron Ore decreased from $89.50 to $79.50. This is the lowest level since 2020.  ALL-TIME HIGH of $237.57. 
Copper increased from $3.42 to $3.45 It hit an ALL-TIME HIGH $5.03 at the start of the Russian invasion. 
Gold decreased from $1661 to $1645. Climbed above $2000 at the start of the Russian invasion. Record high $2063. Has fallen for 7 months in a row.  
AUD/USD increased from 64.06c to 64.27c. Rallied     
USD/CNY decreased from $7.29 to $7.26.  Lowest $6.31 Highest in recent years $7.35 USD stronger. China may be protecting the Yuan.  
USD/Euro decreased from $0.9955 to $0.9923 ECB raised rates by 0.75% last week. 
Asian markets – UP strongly. 
US 10 year Bonds decreased from 4.09% to 4.04%. Higher inflation is pushing rates up, Rates moving back up again. The recent high is 4.23% (8 year high). US 30 year Bond decreased from 4.23% to 4.16% The highest level was 4.23%. US Federal Reserve meetings in Nov expect another 0.75%. Plus BOND selling of $95bn per month (QT).  The US 2 year rate has remained at 4.46% (4.62%, highest since 2007).  The gap between the 2 yr and 10 years an inverse -0.42%. It was -0.37% but still inverted, which historically has suggested a recession. Widest inverse gap is -0.51%   
German Bonds decreased from 2.18% to 2.15%. 2.43% highest in eight years 
Japanese Bonds increased from 0.244% to 0.25%     0.256% highest in some time. Yen/USD is at 148.  32 year low at 150.
Aussie Bonds 10 year Bonds decreased from 3.96%to 3.77%.  Recent high is 4.21% 
Other Aussie Bonds 1 year 3.16%  2 year 3.21% 4 year 3.36% 5 year 3.43% 15 year Bonds 4.02%. The yields have drifted lower over the last week.  
Oil prices increased from $84.91 to $87.52 
Tungsten – Baltimore & Rotterdam $345-$350 mtu. China $325-$335mtu.   
This week & next week 

Last “Not So” opened in 6 Aust states (excl NT Tas), US 4 states (California, Massachusetts, South Carolina and Colorado ) & Sweden 

This week  – Away Friday  
Next week – Plan for November reviews. 

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