| The Not So DAILY BULLETIN 17 January 2022 No.452 |
| Top Stories |
| Today, Monday, January 17, the ASX started the week with a gain of 23 points to finish at 7417. This is 27 points higher than the last Not So and continues the trading range the ASX seems to be in over the last couple of months as the market tries to deal with the headwinds of inflation, omicron, interest rates and supply chain issues. While Chinese GDP grew 8.1% in 2021 (better than expected), we are likely to see a continuation of supply chain issues coming from China in the coming weeks as they still have a ZERO COVID policy with millions in lockdowns. Additionally, we are coming up to Chinese New Year (end of January), which is a slow time of the year, followed by the Winter Olympics in Beijing. If the Summer Olympics is any guide, China shut down thousands of manufacturing and industrial factories and mines to reduce pollution. This is likely again, which will flow onto ports, cargo and shipping. The US will be starting their quarterly profit results. This may indicate what we may expect in February when Australian companies report their half-yearly results. We are still cautiously OPTIMISTIC but selective. |
| Market outlook 1 AMP’s Shane Oliver updated his weekly market outlook. – Global shares are expected to return around 8% this year but expect to see the long-awaited rotation away from growth & tech heavy US shares to more cyclical markets in Europe, Japan & emerging countries. – Inflation, the start of US Federal Reserve rate hikes, the US mid-term elections & China/Russia/Iran tensions are likely to result in a more volatile ride than 2021. Mid-term election years normally see below average returns in US shares and since 1950, have seen an average top-to-bottom drawdown of 17%, usually followed by a stronger rebound. – Australian shares are likely to outperform (at last) helped by stronger economic growth than in other developed countries, leverage to the global cyclical recovery and as investors continue to search for yield in the face of near zero deposit rates but a grossed-up dividend yield of around 5%. Expect the ASX 200 to end 2022 at around 7,800. Australian market more value style than growth style. – Still very low yields & a capital loss from a rise in yields are likely to again result in negative returns from bonds. – Unlisted commercial property may see some weakness in retail and office returns, but industrial is likely to be strong. Infrastructure is expected to see solid returns. – Australian home price gains are likely to slow with prices falling later in the year as poor affordability, rising fixed rates, higher interest rate serviceability buffers, reduced home buyer incentives and rising listings impact. – Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%. – Aussie $ probably taking it to around $US0.80 but likely to be choppy. |
| Market Outlook 2 Macquarie provided its first update for the year. • Investor sentiment has soured noticeably as we have entered the new calendar year. Record high omicron case numbers and decade high inflation readings driving fears of more aggressive rate hikes have dented confidence and driven many investors to rush for the exits in 2021 high flying winners. • At the epicentre of the sell-off has been technology stocks particularly those trading on extreme valuations, meme stocks, cryptocurrencies, SPAC’s (Special Purpose Acquisition Companies) and anything else which is rate sensitive such as real estate and to a lesser extent high multiple healthcare stocks. • The correction in parts of the equity market is concerning, but the sell-off remains isolated and we doubt it is a harbinger of weakness for the broader market for several reasons: 1. Performance within equity markets has been bifurcated with weakness confined to areas that are sensitive to rising rates such as those on elevated valuations and/or which have received large speculative inflows through 2021 2. Many “cyclicals” and “back to work” stocks that are leveraged to stronger economies (reopening) and demand normalization have looked through recent weakness to trade higher including energy, financials and materials 3. Surging inflation has not driven a spike in long term inflation expectations or bond yields. Bond yields are still well below pre-pandemic levels despite inflation reaching multi-decade highs. This reflects a view that inflation is a short-term problem; and 4. We doubt the current “spec-tech wreck” will spill over into the broader market. The sector is dominated by industry titans that are profitable and do not trade on extreme multiples. In addition, the sector remains exposed to many structural growth themes and is now relatively diversified in its earnings base. If bond yields remain well behaved, then the froth needs to be removed, but that should remain isolated, not universal. • We don’t think the rotation that is taking place in some areas of the market is over yet, but we think it is close. Some caution is needed for stocks exposed to higher rates, but Macquarie forecast US 10-year yields to end 2022 at just 1.9% – only 10 basis points above the current level – and this is unlikely to undermine the economic recovery. We don’t see price action as a concern for our equity overweight, or for our call that recent inflation prints undermine the reopening trade. We stay invested. |
| Investment Meeting Kevin Hanson and I held our first investment meeting for the year. We noted that markets had recovered from a short sell-off before Christmas. Still, markets seem to be range-bound due to new headwinds of inflation, Omicron, rising rates, supply chain issues and reduced liquidity from QE tapering. The unknown factors at this stage, will these be powerful headwinds (gale) or light headwinds (zephyr)? The updates from AMP Shane Oliver and Macquarie above probably some up our current thinking. We reviewed and made the following changes to our ETF and Direct Shares ratings. The rating between 0% &o 100% is our current view on the value of purchasing the investment NOW. 100% happy to do so. 50% have a nibble and 0% no. No rating changes were made to the ETF’s. Direct Shares Goodman Group (GMG) up to 66% from 50%. After a strong run in recent months, the price has dropped back in January. The target price (TP) is 88%. Broker research 4 BUY 1 HOLD 0 SELL (4-1-0) JB Hi-Fi (JBH) up to 100% from 75%. The price has dropped back, but TP 84.5%, Price to Earnings Ratio (PE) 12.9 with a dividend of 4.74% plus franking (based on last year). Morgan Stanley today upgraded to BUY. Broker research 4-1-0. Macquarie Group (MQG) up to 66% from 50%. Price drifting a little after hitting record highs. The target price is 93% (it doesn’t seem to drop below 90%). PE 21 times with a strong earnings outlook. Broker research 4-0-0. Resmed (RMD) up to 66% from 50%. Price drifted back. Target price 91%. Sleep apnea is a global issue. Broker research 2-3-0. Seek.com (SEK) up to 50% from 25%. Price drifted back. Target price 88%. Strong profit pipeline. Broker research 2-3-0 Wesfarmers (WES) up to 50% from 25%. It has been trading well above the target price for some time but is currently at 92%. Like MQG, it never looks cheap but continues to deliver. Broker research 2-3-1. |
| Other Stories – Chinese GDP grew 8.1% in 2021. They reduced a key interest rate to provide further stimulus. – BHP re-unification on the ASX to be voted on Jan 20. This is unwinding the dual listing on UK market. If this occurs BHP will be the largest stock on the ASX. The big Australian returns. BHP market capitalisation $233bn CBA $172bn CSL $133bn. Rio Tinto which has a dual listing still has a combined market cap (ASX and UK ) of $178bn. |
| Broker Target Price changes Ord Minnett/JP Morgan Telstra (TLS) increased from $4.60 (highest broker) to $4.85 (still highest broker) Computershare (CPU) increased from $15 (lowest broker) to $17.24 Morgans Morgan Stanley Rio Tinto (RIO) decreased from $110.50 to $109 Macquarie Bell Potter/Citigroup CBA increased from $106 (highest broker) to $108 (still highest broker) UBS |
| Today’s Sector Movements Best – Consumer Discretionary +2.2% Worst – Materials -1% |
| 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. Each year we review the stocks in the CORE. We have made the following changes OUT – AMP – Insurance and Crown (Consumer Services) IN – Aristocrat Leisure (ALL) – Consumer Services and Santos (STO) Energy – recently merged between Santos and Oil Search The Core index increased from 91.28% to 91.51%. Brokers are continuing to raise their target prices. Overall Earnings Per Share (EPS) FY22 increased from 8.47% to 8.64% Most expensive – CBA at 113.8% Least expensive – NextDC (NXT) cheapest at 73.7%. It stores cloud computing. Sold off in the tech sell off. The CORE Watchlist is still mixed with 4 (3) stocks trading above 100% while 3 (5) are trading below 85% LLC NEC NXT (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). 14 out of the 30 CORE stocks are trading below the lowest broker target price. Good value to be found. ALL current price $44.49 Broker range $51 to $52 AMC current price $17.07 Broker range $17.50 to $20 BXB current price $10.44 Broker range $11.04 to $13.35 COL current price $16.39 Broker range $17.60 to $19.90 CSL current price $278.10 Broker range $280 to $340 GMG current price $22.94 Broker range $24 to $27.50 JBH curre price $46.64 Broker range $52.50 to $54 LLC current price $10.61 Broker range $11.40 to $16.52 NEC current price $2.73 Broker range $2.90 to $3.75 NXT current price $11.15 Broker range $14 to $16.10 SHL current price $40.27 Broker range $42.25 to $50.72 TLS current price $4.25 Broker range $4.50 to $4.60 WBC current price $21.47 Broker range $22 to $29.50 WOW current price $35.45 Broker range $36.65 to $41 Added GMG SHL Removed ANZ BHP STO |
| 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 decreased from 97.7% to 98.4% 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 2.09% 142.0 4.94% 145.8 5.08% 154.4 5.38% CBA 298.0 2.95% 350.0 3.46% 380.2 3.76% 404.4 4.00% NAB 60.0 2.00% 127.0 4.24% 137.4 4.59% 147.2 4.91% WBC 31.0 1.44% 118.0 5.50% 121.0 5.64% 132.2 6.16% MQG 430.0 2.07% 470.0 2.26% 576.3 2.78% 581.5 2.80% BHP & RIO’s share prices dropped back today. FY21 cps % FY22 cps % FY23 cps % BHP 401.00 8.69% 355.75 7.71% 293.80 6.37% RIO 1405.80 12.78% 913.20 8.30% 763.20 6.94% Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS) |
| Other Indicators – US VIX Index decreased from 19.40 to 19.19 Normal range of 10-17. – Iron Ore increased from $125.45 to $126.75. The lowest point for 18 months was $88. Brokers expect an average in 2022 $108.40. ALL-TIME HIGH of $237.57. – Copper increased from $4.38 to $4.43. Reduced from ALL-TIME HIGH of $4.90 – Gold increased from $1805 to $1819. Record high $2063. – AUD/USD increased from 71.85 to 72.04. – USD/CNY decreased from $6.37 to $6.35. New 3 years low – Asian markets – MIXED – US 10 year Bonds increased from 1.76% to 1.79%. The lowest point in a number of months was 1.12% but has rebounded. we have reached the recent high of 1.79% The US 30 year Bond increased from 2.09% to 2.13%. The highest level was 2.47% for 18 months. – German Bonds decreased from –0.033% to -0.037%. The recent high was -0.033% (but still negative). Hit a low of -0.9%. This is the highest for some time. The negative European rates are likely to be a headwind for higher US rates. – Japanese Bonds increased from 0.144% to 0.15% (highest in some time). – Aussie Bonds 10 year Bonds increased from 1.89% to 1.91%. Lowest point 0.68% Recent high is 2.10% – Other Aussie Bonds 1 year 0.57% (this rate actually went negative in the 6 months) 2 year 0.79% 4 year 1.42% 5 year 1.58%. 15 year Bonds 2.22%. Rates are starting to move higher. – Oil prices increased from $78.75 to $84.19. This has helped energy stocks – Tungsten – China remained at $315mtu. Europe increases to $326-$330mtu |
| This week & next week Last “Not So” opened in 5 Aust states (excl NT, Tas & ACT) & US 3 states (California Massachusetts South Carolina & Virginia) Singapore & UK. This week – Catching up Next week – Catching up 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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