The Not So DAILY BULLETIN 12 January 2024 No.603

  Top Stories   Hello, 2024!

I was planning the first “Not So” to be on Monday, but after a lovely holiday, I tested positive for COVID-19, which has delayed my return. Back on deck on Monday, 15th.
 
The team has suggested I stay on holiday as the markets have rallied strongly over the period. The last Not So on December 12 saw the ASX 200 close at 7235. Today, it closed at 7498—a gain of 3.6% for the previous month. 
  
On the 2nd of January, the ASX pushed within 0.1 of the ALL-TIME HIGH of 7628. However, since then the market has drifted back as the expectations of 4 to 6 interest rate cuts in 2024 are being damped down by consistent inflation and economic growth. 
 
The rally was very nice, but not much has changed from our fundamental views. I have outlined our expectations for 2024, which we expect to be similar to 2023. There will be good and bad periods throughout the year, but we don’t see a recession in Australia or the US (but things can change). 

The ASX may break out of the 7000 to 7500 trading range, but at this point, we have some of the largest companies trading above 100%. BHP CBA NAB WBC WES RIO and MQG. It will be difficult for the market to push higher when the large caps are already fully priced. We will need to see some target price and profit upgrades to break the ceiling and move towards 8000. We are likely to climb a  WALL OF WORRY.

WE ARE STILL CAUTIOUS in the short term but are moving back to our favourite saying, BUY THE DIP.
We are happy for you to share our Not So Daily Bulletin with family and friends, and if we can help them, we are also happy to chat.   

December & 2023 review 
The Santa Claus rally finally turned up and continued the strong gains made in November. The full-year numbers below show that 2023 was a good year, but that masks the real story as most of the year was a struggle for most markets apart from 7 significant stocks in the US, which drove most of their return. For example, ASX was up 7.1% in December (best market) but only gained 7.8% for the year. Based on Nov 22 to Nov 23 numbers, the ASX was -2.4%, so there was a significant turnaround for the ASX in one month (that’s why it’s best to be mainly invested, as you can never time the market).

US DOW and S&P, Germany, France and the ASX have reached new monthly closing ALL-TIME HIGHS. The previous closing monthly high for ASX was Aug 21 at 7535.

For December, all markets except China were positive. While the Chinese economy is recovering, an investment strike is going on with Western money being removed from Chinese markets.

It has been pretty rough over the last six months, with the middle three months (Aug, Sept and Oct) negative and November and December strongly positive, with the US Dow Jones the best but still in single digits. 

Over the 12 months, it’s back to the regular leading market of the NASDAQ, up 43% for the year, with Japan at 28% and nearing a 34-year high. The Chinese markets were negative for the year. The World Index (MSCI) finished up 21%.

This is a good result given that the outlook from many forecasters at the beginning of the year was for a recession and the continuation of the BEAR MARKET due to inflation and interest rates. 

The 2nd table below shows the total return (capital growth and income in USD) for 48 global markets; only 6 were negative. Australia finished 29 from 48, showing the importance of having a spread of investment from an asset class perspective and geographically. 

The AUD/USD only fell 0.1% over the year.

The NASDAQ continues to shine over the longer time frames of 5,10, 15 and 20 years. It also shows that all markets are positive over 15 and 20 years, and only Hong Kong is negative over 5 and 10 years. This also reinforces our view that risk is reduced over time. IE Investing in shares is a long-term proposition.          Core Watchlist and ETF’s review  The Core Watchlist stocks gained 6.4% for the month, slightly below the ASX. The best performers were Property Stocks LLC, up 12.6%, and GMG, up 11.21% while Amcor was the only negative.

Over the last year NextDC -NXT (data centres) was up 50% and GMG up 45% (who have allocated 30% of their new projects into data centres – cloud computing). Other notables for the year JB Hi Fi (JBH) up 26%, Wesfarmers (WES) is up 24%, Rio Tinto (RIO) 16% and Brambles (BXB) up 12%. 

On the negative side, the worst CORE stocks for the year were Amcor (AMC) -19% Resmed (RMD) -17% and South32 (S32) -16%.  

Exchange Traded Funds (ETF)
The best ETFs for December were Aust Property (VAP), up 11.5% (LLC and GMG) and Spheria Emerging Companies (SEC) up 10.3%, still trading at a 10% discount to NTA (hit a new 52-week high today).  
 
Over the year the International markets and technology themes dominated. Nasdaq (NDQ) is up 49%, Cybersecurity (HACK) is up 37%, and Robotics & AI is up 33%. Other notables Global Quality (QUAL) up 30.5%, Global Quality Small (QSML) is up 26%, Global 100 (IOO) up 25% &  US S&P500 (IVV) up 24%.

At the other end were the Chinese markets IZZ, CNEW and IAA (Asia) for reasons noted earlier.     Provincial Wealth Asset Class Outlook  The Australian and global economies continue to grow but at a slower pace. Inflation has reduced with the global supply chain normalising, meaning energy and good inflation has returned to zero; however, services (sticky) remain problematic for Central Banks as it’s reducing but at a slower pace and still risks rising; that’s why the CB’s are unlikely to cut rates too aggressively this year (unless a major downturn in the economy). Demand for jobs and skills is STILL STRONG, which means consumer spending is supporting the economy and, at this point, looks like it will assist in avoiding a recession. This is the main difference from previous slowing economic cycles, where rising interest rates usually end in a recession.
 
So, our base case on the asset classes is as follows;
 
Cash – The US, UK and Euro CB have finished raising rates, and the next move is likely down (but not until mid to late this year). The RBA is also likely to be finished at 4.35%, but will be reluctant to cut for fear of restoking inflation. They may cut rates in the 2nd half of the year. If looking for a defensive position, cash is still preferred as the income is similar to Bonds and term deposits, but you retain liquidity and have no capital volatility. 
 
Fixed Interest – Bond rates look to have peaked in October, with US and Australia 10-year rates reaching 5%. They have dropped back to around 4%, and the likelihood of being lower (closer to 3%) by the end of 2024. This will provide positive capital returns for Bonds. Others in the Fixed-interest space.
Term Deposit – rates have likely reached their highest point. Either lock in for 1 to 2 years or move to other fixed interest areas.
Hybrids – these are float rate bank notes. They performed very well when rates were rising. Their capital growth will be limited as rates drift lower; however, yields with franking are well above Bonds & Term Deposits.
 
Property (ex-residential) – has lagged other markets over the last year or two due to work from home and rising interest rates. Good quality assets will retain value and be sorted by renters; however, lower grade property (shopping, commercial & industrial) will struggle as the full change in interest rates hasn’t flowed through to valuations yet, and the vacancies may rise as the economy slows.
 
Listed Property – still selective about the areas. Goodman Group (GMG) continues to deliver based on higher quality site warehouses and has moved into data storage. Lend Lease (LLC) cheapest on the CORE. Needs to deliver for the market to believe, but will jump if they do.
 
Resi–cashed–up buyers and immigration are keeping property prices buoyant. Interest rates and a slowing economy haven’t impacted and are unlikely to see a sell-off due to the strong overall debt position of homeowners; however, banks have tightened credit, which means borrowers will be able to borrow less based on the same income, which eventually has an impact on prices. By then increased supply from loosening of local and state govt regulation might help (but that might be wishful thinking). 
 
Australian Shares – traded within a range of 7000 to 7500 for most of 2023, with the market nearing an all-time high in early 2024 of 7628 as the market hoped for early interest rate cuts. We think this is too soon for cuts. However corporate earnings have held up well in the face of rising interest rates as the economy and consumer backed by strong employment continue to allow a soft or no landing scenario.
 
However, we think, we are likely to see more volatility this year as the economy continues to slow and the impact of previous rate rises impacts different parts of the economy. Unemployment (u/e) is the key. If job demand remains strong, then the economy will keep rolling, and so will the market; however, if u/e starts to rise meaningfully, it could provide a market drop.

The Core Watchlist index (30 stocks representing over 50% of the ASX) was below 90% (meaning at least an average of 10% from the current price to the target price. Under 90% has traditionally been a good entry point) in October. However, it has risen with the Santa Rally to start 2024 around 95%, its highest point since Aug 2021 (when the ASX was at 7583). There are currently 10 of the 30 stocks trading above 100% of their target price, which makes us a little cautious about the market pushing higher from here. Most researchers have been on holiday for the past six weeks, so it will be interesting to see whether we see upgrades or downgrades to target prices and earnings over the next few weeks/months.  We still think the small company space is undervalued.  
 
The banking index (4 major banks) is trading well above 100% at 109%, which is an indication of overpricing and suggests some caution should be warranted across the market. Highest ever point 116%. We are selective about the stocks and sectors we like at this point based on valuations and are more likely to look to buy any dips.
 
International Shares – international markets outperformed the ASX by a reasonable margin in 2023, mainly based on a strong US, but also a reasonable Europe and Japan. The only real lagging area was China and some parts of Asia. The weak AUD also helped over the year, but it actually finished only down 0.1% against the USD in 2023.
 
We are again being selective regarding our international choices, but we think some International markets will continue to outpace the ASX, as was the case in 2023.

We are still trying to use our fundamentals to assess value. This shows reasonable relative value in Global Quality (large and small), Europe, Asia and emerging Markets, and we are still strong on the long-term themes of cybersecurity, health and robotics/AI. We probably would look to buy the dips, and should the Chinese economy recover, then the AUD may continue to strengthen, so are looking to hedge some of the International exposure.

Summary
We think markets will provide a positive return in 2024 as the economy transitions into a higher interest rate world (albeit with some cuts) and a slowing inflation which only returns to target by 2025. This means a slowing economy, which will affect companies and sectors differently and provide a reasonable amount of volatility and dips as buying opportunities. This year’s theme is probably – patience is a virtue!!    

Financial Planning Snippets Super Guarantee (SGC) for employees increases to 11% from 1/7/23 Commonwealth Seniors Health Care card has seen the income limit increase to $152k(couple) $95.4k (single). If you are of Age Pension age and don’t have the card, please let us know.  Account Based Pension minimum pension payments will revert back to normal from July 2023 (from half normal, which were put in place due to COVID in 2020).   

Other Stories  – US inflation last night was a little stronger than expected at 0.3%.  
– US/UK bombed the Houtis. 
   
Broker Target Price changes since Dec 12  Ord Minnett

Morgans
Computershare (CPU) decreased from $28.28 to $27.21
JB Hi Fi (JBH) increased from $49 (highest broker) to $51
Orora (ORA) decreased from $3 (lowest broker) to $2.70 (still lowest broker)

Morgan Stanley
ANZ increased from $26.30 to $26.80
CBA increased from $86 to $86.50
Lend Lease (LLC) increased from $7.95 (lowest broker) to $8.25 (still lowest broker)
Resmed (RMD) increased from $26 (lowest broker) to $28.60 (still lowest broker) 
Rio Tinto (RIO) decreased from $146 (highest broker) to $145 (still highest broker)
Westpac (WBC) increased from $20.70 to $20.90

Macquarie
JBH increased from $45 to $55 (highest broker)
ORA decreased from $3.40 to $3.30


Bell Potter/Citigroup


UBS 
ORA decreased from $3.75 (highest broker) to $2.84 

Tracking changes for 2024
Upgrades 7
Downgrades 5
 

Core Watchlist Index (changes since last Not So)
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 Macquarie price $176.95   Av. Target Price $205.96= 85.9% (meaning 14.1% upside over next 12 months) + income 4.35% (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 91.94% to 95.83% on the strong Santa rally. Can it hold this level?  

Overall Earnings Per Share (EPS) 

We could see an uptick in overseas company earnings (BHP MQG CSL RIO STO WDS RMD AMC BXB) as they will benefit from a lower current assumption. We have been using 70c. Moved to 68c (still conservative).

CY23 remained at 3.57%    
FY24 increased from 6.65% to 6.77%  


Most expensive – CBA 125.5% (there have to be some changes to TP’s or the share price).             
Least expensive –  Lend Lease 59.1%  

The CORE Watchlist has 9 (6) stocks trading above 100%; they are; BHP CBA GMG JBH MQG NAB RIO WBC WES, lowest number ever is 0, highest 9. While 4 (6) are trading below 85% (highest 18), while the lowest is 4. LLC ORA RMD 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). 8 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $40.48    Broker range $43 to $46.50
CSL current price $290.40  Broker range $321 to $340
LLC current price $7.39      Broker range $8.25 to $14.45
ORA current price $2.62     Broker range $2.70 to $3.80
ORI current price $15.96    Broker range $16.23 to $19.50
RMD current price $26.45   Broker range $28.60 to $40
STO current price $7.55     Broker range $8.10 to $12.30
TLS current price $3.91      Broker range $4 to $4.75

Added 

Removed BXB CPU S32   Banking Index (changes since last Not So) 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 104.7% to 110.20%. Over 100% suggests the banks are fully priced. The analysts think that bad debts will appear, but there are no signs at this stage. 

Based on today’s bank prices, the table below shows the estimated dividends (c) and yield. The expectation is slightly increased dividend payments and still very attractive yields. PLUS FRANKING.  
FY 23 % FY 24 % FY 25
ANZ 175.0 6.76% 162.2 6.26% 163.3 6.31%
CBA 450.0 3.96% 458.0 4.03% 469.8 4.13%
NAB 167.7 5.42% 162.8 5.27% 162.8 5.27%
WBC 142.0 6.12% 144.0 6.21% 174.2 7.51%
MQG  750.0 4.11% 619.2 3.39% 658.2 3.60%
Dividend expectations have been cut for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year. I have added FY25. BHP and RIO results will see some changing forecasts with the likelihood of further reduction.   
FY23 cps % FY24 cps % FY25 cps %
BHP 255.00 5.34% 241.17 5.05% 275.2 5.77%
RIO 648.33 5.02% 730.67 5.66% 648.6 5.02%   
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).  

Other Indicators (changes since last Not So)
US VIX Index decreased from 13.06 to 12.44. The VIX is near 12 month low. Showing calm.   
Iron Ore increased from $133.75 to $134.35.  ALL-TIME HIGH of $237.57.  Av expected for 2023  was $116.9.Defined all expectations of reducing. Will it happen in 2024. The average expected price is $110.80. Copper decreased from $3.81 to $3.80. Expecting an increase over 2024.
Gold decreased from $2047 to $2038.  Had a new record in December of $2152. Couldn’t hold it.  AUD/USD increased from 66.16c to 67.02c. Recent low point 62.9c.  $A strengthening over the year. Maybe low 70c in 2024 

Asian markets – UP. Japan 34 year highs.     

US 10 year Bonds decreased from 4.16% to 3.98%. recent high 5% (20/10 highest since 2006).  The FED looks like it’s on HOLD. Expecting 2024 to finish 3ish  US 30 year Bond decreased from 4.26% to 4.18%. Hit a 17-year high of 5.12%.
The US 2 year rate has decreased from 4.61% to 4.27%  (5.37%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.29%. It was -0.45% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.3%. This is the most it has been inverted in 42 years.  The gap is narrowing (higher for longer). 
German Bonds decreased from 2.20% to 2.19%. Hit 3% in October highest since 2008
Japanese Bonds decreased from 0.77% to 0.39%. Highest in 10 years is 0.956%.  
Aussie Bonds 10 year Bonds decreased from 4.31% to 4.08%.  Recent high 4.95%
Other Aussie Bonds 1 year 4.11%  2 year 3.82% 4 year 3.69% 5 year 3.74% 15 year Bonds 4.31%. Rates have moved lower as market is expecting cuts in 2024. Maybe 2?  
Oil prices increased from $70.34 to $73.31. Gained 2% after US attack on Houthis.  
Tungsten – China reduced from $305 to $315mtu to $300 to 305mtu.     This week & next week  Last “Not So” opened in 7 Aust states (excl NT), US 4 states (California, Massachusetts, Colorado & South Carolina), Sweden & Israel

This week  – COVID
Next week – Back in office.

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

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