| The Not So DAILY BULLETIN 17 December 2021 No.446 Top Stories On Friday, December 17, the market gained 8 points to finish at 7304, lower than the Not So of 7379. Part of the drop related to CSL’s significant capital raise of $6bn to purchase a Swiss company. CSL dropped 8% yesterday, back to the issue price, which was surprising given several brokers increased their target price (see below). The US Federal Reserve meeting brought forward several decisions (quicken the reduction in Bond Buying) and potentially three interest rate rises in 2022 to try and slow inflation down. In previous periods this would have spooked the market, but it has reacted quite rationally (at this point). There seems to be an unlying trend, and investors are starting to favour companies with real profits and earnings growth (Value or Quality). As opposed to some of the more hyped investment areas such as Buy Now Pay Later (Afterpay down 49% from year high) or Unprofitable Technology stocks or Electic car companies (Tesla down 27% Lucid -39% and Rivain -41%). The Australian Government MYEFO update showed an improvement in the deficit, but an expected tailwind for the economy from election spending. The markets are a little undecided on what to focus on. Omicron, US Federal Reserve, Inflation, robust economic data, Russia/Ukraine or the traditional Santa Claus rally. We are still Optimistic, but volatility is likely to persist. Central Bank meetings A raft of Central Bank meetings was held over the last few days. Summary provided by AMP’s Shane Oliver The US Federal Reserve (US Fed) sped up the taper (reduced Bond buying program) and is now flagging three interest rate hikes next year, with US Fed Chair Powell sounding more hawkish (bullish). Quantitative easing (QE) Bond Buying in the US is now set to end in March, clearing the way for the first interest rate hike in the June quarter. The European Central Bank (ECB) confirmed it will end its pandemic emergency QE program as scheduled in March but will increase its regular bond purchases to smooth the adjustment. The ECB remains relatively dovish, and rate hikes look unlikely until 2023. The Bank of England (BoE) raised its cash rate for the first time to 0.25%, with inflation concerns dominating Omicron uncertainty. The Bank of Japan (BoJ) largely left its monetary stimulus unchanged, although it will pare back its holdings of corporate debt. In Australia, Governor Lowe flagged a likely end to QE in May but continued to push back against expectations for rate hikes in 2022. The upshot is that key central banks are moving towards monetary tightening, but at different speeds. However, monetary policy at major central banks looks like it will be very easy into next year – just less so. The US Fed has a chart or dot plot of US Fed officials’ interest rate expectations (see below). It does not see rates getting above its perceived neutral or long-run level out to 2024. This may pose risks for inflation – but it’s also important for the economic cycle. While the first-rate hikes in tightening cycles can cause corrections it’s usually only when monetary policy becomes tight after numerous rate hikes (17 by the US Fed prior to the GFC, 9 prior to the 2018 US share market slump) that it becomes a problem for the economy and share markets. But tight monetary policy still looks to be a long way off. It’s the same in Australia – our expectation for two rate hikes next year taking the cash rate to 0.5% by year-end will still leave Australian monetary policy ultra-easy.  Commodities Morgans chief economist Michael Knox updated his view on commodities. In July 2020, we suggested that the expansion of the US budget stimulus would generate the beginning of a new resources boom as historically, US deficits are positive for commodity price. The question is, what is going to happen to commodity prices from now on? In Figure 3 (chart below), Morgans model of Australian export commodity prices in $US terms, driven by the level of the US budget deficit. The model assumes that the US budget deficit leads the Australian export prices by about two years. The model appears to work well enough. And allows Morgans to calculate an estimate for future values of the RBA index out to December 2027. The model suggests that the RBA index, which stood at 142.70 in November 2021, will peak for this cycle at around 189.6 sometime in 2022. This means there is still significant upside in the Australian export commodity prices in the year ahead, and it is likely that the best is still to come. This view is somewhat reinforced by UK Broker SP Angel when looking at China. Omicron disruption to mine supply to cut metal availability and cause prices to spike – China is ramping up power supplies and may disregard climate change targets to ensure economic growth. – Expect further stimulus in China to ensure economic stability and ongoing job creation. – Shenzhen is acting as a testing ground for new infrastructure investment for urban re-modernisation. – Quotas for >$300bn of debt have recently been released to provincial authorities indicating greater debt issuance through 2022. – Next year, two new cities are planned to require massive investment and >150 development projects. – So far, China has controlled Covid though it may find Omicron a more challenging foe, not that they will openly admit any failings in containing the virus. – Western manufacturing is also likely to slow as Omicron disrupts factories and services. – Already tight commodity supply chains combined with low inventory levels could easily lead to shortages of critical raw materials, mainly tin, copper and nickel. – If China continues to grow and mines are disrupted, metals can only go one way.  Other Stories – Supply chain – LA and Long Beach ports in the US have been the log jammed with containers and ships. The backlog is down to 101 ships (170 at the worst), suggesting supply chain issues may be starting to ease. – US Regulators investigating the Buy Now Pay Later sector. – UBS updated their ASX 200 index target to 7800 for end of 2022. – Sunrice (SGLLV) has announced a half-yearly dividend of 10c and a 1/2 yearly profit of $16.7m up 38.1% . They traditionally only have an annual dividend. – Australia’s unemployment rate fell to 4.6% after adding a huge 366,000 jobs in November. – ACCC stated they won’t oppose the BHP/Woodside energy deal. – CSL taking over Swiss company. Launched Australia’s largest cap raise $6.3bn at $273 per share. – US Senate and Congress have agreed to raise the Debt ceiling again. This was seen as a potential to create market volatility if they didn’t agree. – Sonic Health (SHL) acquired Texas pathology firm with $110m of revenue. Broker Target Price changes Goldman Sachs Ord Minnett/JP Morgan CSL increased from $285 to $315 JB Hi Fi (JBH) decreased from $55 (highest broker) to $54 (equal highest broker) Wesfarmers (WES) increased from $54 to $64 (highest broker) Woolworths decreased from $43 (highest broker) to $41 (still highest broker) Morgans CSL increased from $324.40 to $334.70 WOW decreased from $37.45 to $36.65 Morgan Stanley Macquarie BHP increased from $51 to $52 Orica (ORI) decreased from $15.32 to $14.92 WOW decreased from $41.50 to $40 Bell Potter/Citigroup CSL increased from $325 to $340 (highest broker) WOW decreased from $40.40 to $39 Today’s Sector Movements Best – Materials +1.2% Worst – IT -3.9% 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 decreased from 92.25 to 91.44%. Brokers are continuing to raise their target prices. Overall Earnings Per Share (EPS) FY21 decreased from 31.79% to 30.6% FY22 increased from 8.42% to 9.36% Most expensive – CBA back to being the most expensive at 113.4% Least expensive – Lend Lease is now the cheapest at 78.5% The CORE Watchlist is still mixed with 5 (6) stocks trading above 100% while 7 (8) are trading below 85% (AMP BHP LLC NEC NXT WBC WPL). (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). 13 out of the 30 CORE stocks are trading below the lowest broker target price. Good value to be found. AMC current price $16.73 Broker range $17.50 to $20 AMP current price $0.90 Broker range $0.95 to $1.25 ANZ current price $27.63 Broker range $28.30 to $31.82 BHP current price $41.40 Broker range $45.70 to $51 BXB current price $10.71 Broker range $11.04 to $13.84 LLC current price $10.53 Broker range $11.40 to $16.52 NEC current price $2.76 Broker range $3 to $3.75 NXT current price $12.25 Broker range $14 to $16.10 ORG current price $5.10 Broker range $5.25 to $6.10 RIO current price $98.00 Broker range $101 to $133 TLS current price $4.09 Broker range $4.40 to $4.60 WBC current price $21.03 Broker range $22 to $29.50 WPL current price $21.90 Broker range $22.82 to $33.50 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 is indicating the Banks are fully priced. The Banking Index increased from 95% to 96% 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. FY20 % FY21 % FY 22 % FY 23 % ANZ 60.0 2.17% 142.0 5.14% 146.5 5.30% 154.3 5.59% CBA 298.0 3.01% 350.0 3.53% 382.3 3.86% 401.5 4.05% NAB 60.0 2.08% 127.0 4.41% 138.3 4.80% 146.8 5.09% WBC 31.0 1.47% 118.0 5.61% 121.2 5.76% 131.2 6.24% MQG 430.0 2.09% 470.0 2.29% 568.4 2.77% 566.2 2.76% BHP & RIO’s share prices continue to rally. FY21 cps % FY22 cps % FY23 cps % BHP 401.00 9.69% 364.80 8.81% 296.67 7.17% RIO 1400.33 14.29% 941.00 9.60% 804.83 8.21% Please note RIO is Calendar Year (CY). Cents per share (CPS) Plus franking. Other Indicators – US VIX Index increased from 20.31 to 20.57 Normal range of 10-17. – Iron Ore increased from $114.20 to $116.06. Australian MYFEO report had $55. The lowest point for 18 months was $88. Brokers expect an average in 2022 increase from $106 to $108.70. ALL-TIME HIGH of $237.57. – Copper increased from $4.27 to $4.30. Reduced from ALL-TIME HIGH of $4.90 – Gold increased from $1786 to $1803. Record high $2063. – AUD/USD increased from 71.03 to 71.66. – USD/CNY increased from $6.36 to $6.37. Strongest in 3 years at $6.36. – Asian markets – DOWN – US 10 year Bonds decreased from 1.42% to 1.41%. Bond yields safe haven due to Omicron. The lowest point in a number of months was 1.12% but has rebounded. The recent high of 1.79% The US 30 year Bond increased from 1.81% to 1.85%. The highest level was 2.47% for 18 months. – German Bonds increased from –0.38% to -0.35%. Hit a low of -0.9%. The highest for some time is -0.088%. The negative European rates are likely to be a headwind for higher US rates. – Japanese Bonds decreased from 0.042% to 0.04% – Aussie Bonds 10 year Bonds increased from 1.55% to 1.61%. Lowest point 0.68% Recent high is 2.10% – Other rates 1 year 0.29% 2 year 0.41% 4 year 1.30% 5 year 1.38%. 15 year Bonds 1.95%. – Oil prices increased from $70.99 to $71.63. – Tungsten – China increased from $310mtu to $314 mtu. EQR Bankable Feasibility Study (BFS) was released yesterday. NPV $131m (representing 15% of known reserves). IRR 151% Mine life based on 15% of known reserves is 12 years and Capex is $19m. This week & next week Last “Not So” opened in 5 Aust states (excl NT Tas & ACT) & US 4 states (California Massachusetts, South Carolina & Virginia) This week – Finishing November reviews and CPD points Next week – finishing jobs before Christmas. Our office will be closed from COB Thursday, December 23 and reopening Tuesday, January 4 Contact details PO BOX 149 Deniliquin NSW 2710 125 End St Deniliquin NSW 2710 Ph. 03 58950100 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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