The Not So DAILY BULLETIN 18 October 2021 No.431

The Not So DAILY BULLETIN 18 October 2021  No.431

Top Stories  

Monday, October 18 saw the market gain 19 points for the 3rd up day in a row. It closed at 7381 which makes it positive for the month of October. This is the highest point since 27/9 and keeps the market in the trading range of 7400 to 7150.

Richard Coppleson from Bell Potter – Coppo report (institutional trader) believes the lows for the September/October period may have been seen. The drop from the high was approx 6.6% and he was expecting somewhere between a drop of 5% to 10%. The US reporting season has started well and while there are headwinds, the economic outlook looks better over the next 12 months which Coppo believes the market is focused on rather than the US Tapering, but left-field things can hit the market at any time. 

Global Bond rates have started to move higher again which is likely to crip any market jump, but the US VIX Index (Fear indicator) has returned to more normal levels. In commodity markets, Oil is at 7-year highs and Copper has jumped 5% in a week to near All-Time Highs as inventories are reducing.  

We are still Optimistic, but volatility is likely to persist.   

Supply Chains and Inflation

There is a lot of talk about supply chain problems and the potential knock-on effect of rising inflation. 

Macquarie research 

There is a simple set of reasons why the world (and likely Australia) is facing cost pressures. Goods demand has recovered much faster than goods supply due to ongoing product and transportation bottlenecks because of shutdowns over the COVID-19 period. But, if manufacturers cannot quickly catch up to the demand, if there are no additional ships on planet earth to hasten the delivery of products if ports continue to sit on mountains of unloaded containers due to worker shortages and if energy and gas prices which have already doubled, tripled, or quadrupled begin to seep into prices, then higher inflation is a certainty.

David Bassanese (Beta shares) believes the so-called ‘supply chain bottleneck’ afflicting the U.S. economy is largely just a positive demand shock, fueled by the pandemic-related switch to goods over services and Biden’s huge and totally unnecessary fiscal boost earlier this year. The system couldn’t cope with the surge in demand, leading to shortages and pricing pressure. As supply belatedly responds, the fiscal sugar hit fades, and demand switches back to services, these bottlenecks should resolve themselves – without ongoing pricing pressure – especially given the continuing structural disinflation forces of globalisation and tech disruption. But we’ll see!

Macquarie doesn’t think we will see permanent higher inflation, but it will last a little longer than a temporary inflationary spike. They believe in the areas that do better in this environment.
Real Assets – commodities – ag and energy & infrastructure 
Defensive or Quality assets – companies that can hold their pricing power in the face of rising costs. 

It has been many decades since the investment market has had to deal with a rising inflation environment. Some of the impacts are to be determined given industries such as technology weren’t around the last time inflation was a problem. Neither were most of the services, which make up more than 50% of the economy.   

Market winds 

We have been discussing market winds in recent Not So. 

AMP’s Shane Oliver sums up the current view. 
Correction risks remain – but cyclical indicators are positive and shares are breaking up through technical resistance. The risk of a further correction remains – as issues around the debt ceiling, US fiscal policy and tax hikes, China’s slowdown, the energy crisis and supply constraints and inflation remain. However, we remain of the view that the issues will largely be resolved in a way that does not severely threaten global growth: a US default is most unlikely; China won’t bail out Evergrande but will restructure it to limit damage to the rest of the economy and will provide economic stimulus; and supply constraints will ultimately be resolved as the pandemic recedes, workers return and spending rotates back to services from goods. The relative resilience of cyclical plays like copper, financials and the $A through the recent correction are a positive sign that the world is not about to plunge back into recession and augur well for the rising trend in shares continuing over the next 6-12 months. And now share markets look to be shaking off the worries and heading higher again.  

IMF forecasts still upbeat. While the IMF expressed concerns about coronavirus, supply constraints and inflation it only revised its global growth forecast this year down to 5.9% and sees 4.9% growth next year. Which is similar to our own view.  

La Nina continues. Two years ago the world was into an El Nino weather phenomenon and for Australia that meant hot dry conditions down the east coast, severe bushfires and falling farm production. Fortunately, the Southern Oscillation Index which tracks surface air pressure across the Pacific tipped into La Nina last year and remains there and that suggests cooler wetter conditions down the east coast. While La Nina has recently copped a bit of flack as a driver of the surge in energy prices in Europe (as utilities stock up on gas ahead of a cold winter – although it could go the other way if La Nina drives more hydro and wind) for Australia its usually positive for farm production and helping keep bushfires mild. Getting coronavirus under control only to go straight back into a severe bushfire season would not have been nice!  

Macquarie Group (MQG)

MQG hit a new all-time high of $191 today. This was after Morgan Stanley (MS) updated their MQG research with a target price move to $240. This saw MQG increase 4% on Friday to $190 and was up slightly today.  

MS research said MQG started as an investment bank but has now become a vertically integrated private markets asset manager and developer, with potentially the world’s best green capabilities among financials. This will bring faster earnings growth vs. peers and MQG should command a green premium multiple.

MS thinks MQG’s combination of capabilities is unique among Australian financials and also global private markets peers because it can offer wholistic or turnkey renewables solutions, backed by an almost 20-year track record:

(1) Finance & Develop – can finance, develop, or build renewable assets around the world by deploying its balance sheet.
(2) Advise – MQG can structure equity, debt and power purchase agreements (PPAs), and can set up joint ventures to accelerate the renewables transition;
(3) Manage – can manage and operate infrastructure & real assets, including waste and green energy.
(4) Research – provides specialist ESG and clean energy research; and
(5) Trade –  can trade emission allowances & carbon offsets, plus manage inventory.

Over 10% earnings growth and 30% valuation upside: MQG becomes MS top pick among Australian financials.

The A$240 price target offers 31% upside and implies a ~23.5x FY23E P/E, which we think is justified by the green growth options. A bull case has a TP of A$388. MS thinks green revenues will increase from ~A$1.1bn or ~9% of the group in FY21, to ~A$2.5bn or ~15% in FY25E. Put differently, we forecast green revenues to grow ~20-25% p.a. from FY21 to FY25E, adding ~2ppt to group revenue growth.  

Other Stories   
– Aust vaccinated 32,653,925 (31,358,609)  7 day average 278.2k – highest (297.5k). The highest daily total vaccines is 389,182 (16 Sep). 84.8% (over age 16) have had one shot, 68.3.4% (over age 16) have had two shots. The figures in brackets are from the last Not So update. We’ve had as a % of the population, more first shots than the US & Germany and only 3% behind UK. 
– Chinese GDP was lower than expected at 4.9% in the 3rd quarter (expecting 5.2%. Retail sales were better than expected but Industrial Production only growing 3.1% (expected 4.5%). 
– US 3rd quarter earnings better than expected. 
– Hub24 acquired Class.
– Rio Tinto reduced iron ore production expectations from 325mt to 320mt  

Broker Target Price changes 

Goldman Sachs
Rio Tinto (RIO) decreased from $147.50 to $122.40

Ord Minnett/JP Morgan 
RIO decreased from $144 to $143

RIO decreased from $117 to $115
Transurban (TCL) increased from $13.99 to $14.82

Morgan Stanley
Macquarie Group (MQG) increased from $175 to $240
Westpac (WBC) decreased from $29.20 to $28.90

RIO decreased from $148 (highest broker) to $145 (still highest broker)
Woodside (WPL) decreased from $27.25 to $27.15 

Bell Potter/Citigroup
RIO decreased from $125 to $120  

Today’s Sector Movements

Best –   Materials +1%   
Worst –  IT -1.2%   

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 91.04% to 92.34%.

Brokers are continuing to raise their target prices. 
Overall Earnings Per Share (EPS) 
FY21 decreased from 34.69% to 33.3%
FY22 increased from 5.23% to 5.65% – flatter earning predicted for this financial year. 
Most expensive – CBA 112.7%   
Least expensive – BHP 74.5%     

The CORE Watchlist is still mixed with 5 (5) stocks trading above 100% while 6 (7) are trading below 85% (BHP BXB CWN GMG LLC 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). 13 out of the 30 CORE stocks are trading below the lowest broker target price. Good value to be found. 

AMC current price $16.09    Broker range $17.50 to $20
AMP current price $1.13       Broker range $1.15 to $1.35
BHP current price $39.19     Broker range $45.20 to $60
BXB current price $10.15     Broker range $11.04 to $13.84
CWN current price $9.74      Broker range $10.35 to $15
GMG current price $21.15    Broker range $24 to $26
LLC current price $10.79     Broker range $11.40 to $16.52
NEC current price $2.82      Broker range $2.80 to $3.50
NXT current price $12.07     Broker range $14 to $15.50
RIO current price $101.45     Broker range $110 to $145 
SHL currently price $38.89  Broker range $40.70 to $45.98
TLS current price $3.87       Broker range $4 to $4.50 
WBC current price $25.80   Broker range $26.50 to $30

ANZ removed  

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 97.4% to 98.4%. 

The table below shows the forecast dividends.

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 2.12% 140.8 4.99% 146.2 5.18% 153.3 5.43%
CBA 298.0 2.87% 350.0 3.37% 397.2 3.82% 418.2 4.02%
NAB 60.0 2.08% 123.2 4.28% 132.0 4.58% 137.2 4.76%
WBC 31.0 1.21% 117.0 4.57% 123.7 4.83% 134.3 5.25%
MQG  430.0 2.26% 470.0 2.47% 554.2 2.91% 577.4 3.03%  

After RIO’s quarterly update, the brokers have updated their dividend forecasts. For the calendar year 2022, the dividend forecast has decreased from $11.58 to $9.76. And referring to nice dividends. Below is the expectation from brokers regarding BHP & RIO. 
FY21 cps % FY22 cps % FY23 cps %
BHP 374.00 9.54% 466.83 11.91% 330.00 8.42%
RIO 1409.50 13.89% 976.67 9.63% 835.83 8.24%
Please note RIO is Calendar Year (CY). Cents per share (CPS) 
Plus franking.   

Other Indicators 
US VIX Index decreased from 19.85 to 16.30.  The index has returned to a normal level.  Normal range of 10-17.
Iron Ore decreased from $129 to $125.22 Brokers expecting an average in 2022 of $106 fallen from $122.  ALL-TIME HIGH of $237.57. Recent bottom $92 
Copper increased from $4.34 to $4.78. Reduced from ALL-TIME HIGH of $4.90  
Gold increased from $1762 to $1769. Record high $2063.  
AUD/USD increased from 73.34 to 74.02. Rising with commodities  
USD/CNY decreased from $6.45 to $6.44. Strongest in 3 years at $6.37. 
Asian markets – DOWN    
US 10 year Bonds increased from 1.58% to 1.61%. Bond yields starting to rise again. 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 remained at 2.07%. The highest level 2.47% for 18 months.  
German Bonds decreased from -0.09% to -0.16% Hit a low of -0.9%. 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 0.086% to 0.085%   
Aussie Bonds 10 year Bonds increased from 1.70% to 1.75%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.099% (this doubled in a week) 2 year 0.14% 4 year 1.07% 5 year 1.19%. 15 year Bonds 2.16%. Global interest rates continue to rise. 
Oil prices increased from $80.63 to $83.52. 7 year high.     
Tungsten remained at $310mtu.    

This week & next week 
Last “Not So” opened in 6 Aust states (excl NT & Tas) & US 3 states (California South Carolina & Virginia) & Singapore

This week – October review meetings  

Next week – As above
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125 End St Deniliquin NSW 2710
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