The Not So DAILY BULLETIN 19 August 2022 No.500

The Not So DAILY BULLETIN 19 August 2022  No.500

Top Stories  

Welcome to Number 500 of the Not So Daily. The world of finance continually changes, and it’s essential to keep up to date. This is our way of communicating the changes we see in local and global markets. 

Friday, August 19, saw the ASX 200 gain 2 points to close at 7115. This is the highest point since June 8 and the 4th positive day this week. However, the ASX would have fallen if it hadn’t been for Energy, up 4%.

Profit season continues to deliver good results, which is better than feared in a rising inflation and interest rate world. However, these effects haven’t been fully factored in yet and are likely still to come. 

I have updated the headwinds we see as holding the markets back from a full recovery. Some of them are dissipating, but the winds from slowing the Chinese economy seem to be gathering. If they change course to the management of COVID, it may assist, but no signs of that yet. 

On a positive note of the 30 CORE Watchlist stocks, 16 have announced profits, with 13 increasing their dividend (compared to last year), two remained the same, and one reduced, and that was Rio, who previously paid out a record dividend. They still have a yield of  8%. This is a good sign that markets and the economy may see a softer landing. 

But as noted previously, still concerned that we are in a BEAR MARKET RALLY. Signs of higher Bond rates and a strong USD may see markets roll over again, especially in September when many companies trade without dividends. 

Happier but still cautious.   

Market Headwinds
We’ve previously identified at least 12 headwinds causing weak market sentiment (Bear Market). The last update was 29 July, and at the time, we noted some of the winds were reducing. This has seen the market rally 2.5%. Below are the latest thoughts on the headwinds.   

1. INFLATION – US fell from 9.1% to 8.5% (a good sign); however UK overnight increased to 10.4%. Hoping this is the PEAK but not confirmed yet. Supply constraints are easing, but it will take time (1 to 2 years) for inflation to return to 2-3%. If inflation is sticky, around 4-6% markets are unlikely to bottom until inflation has peaked.  
2. INTEREST RATES – Central Banks are continuing to increase interest rates. Markets are expecting rates to peak below previous forecasts hence the recent rally, but again this hasn’t been seen yet, so no one really knows where they will peak. In the US likely to be 3%(ish), currently 2.5% and in Australia 2%-3%(ish), currently 1.85%. The market is unlikely to bottom until peak rates have been seen. One pleasing aspect 10 year Bond rates may have peaked with US peak at 3.48%, now 2.9% and Australia peaking at 4.2%, now 3.4%. 
This may mean Central Banks don’t force various economies into recessions. 
3. RECESSION RISK – US is technically in a recession (2 negative GDP quarters). If interest rates are pushed too high, this increases the risk of a longer recession. Central Banks may pause before doing too much damage to the economy. 
4. GLOBAL SUPPLY CHAINS – some signs supply chains are improving. Computer chips still have a 26 week delays.    
5. RUSSIA/UKRAINE – a ceasefire would be a major catalyst for a rally. While a long, drawn-out war is increasingly likely. Grain shipments have been re-started from Odessa with 25 ships exporting much-needed food. 
6. COMMODITIES prices are continuing to fall in hard and soft commodities. Many have their own bear market (20% drop from recent high). This will take pressure off inflation and interest rates. Again the energy is the key. Oil has reduced from $109 to $90 since the end of June.   
7. CHINA. This is one headwind that has become stronger in recent weeks. The continued ZERO COVID policy is stalling the Chinese economy, and the China/Taiwan/US cold war is causing economic angst in the region, which isn’t helping markets. China has been the world’s & Australia’s growth engine for the last thirty years. A China slowdown is not good for markets looking for recovery and a new BULL MARKET. If the ZERO COVID policy was removed and/or a major stimulus, then this would provide the market with a boost.   
8. CENTRAL BANKS (CB) – can’t stimulate the economy like they have been doing over the last 15 years; however, if they pause quantitative tightening (QT) or slow interest rate rises, markets will take that as a very positive sign. Looking for a Central Bank PIVOT or PAUSE and not to cause the recession we had to have.  
9. WEAK US DOLLAR – if the US dollar starts to weaken, then this would be a positive catalyst for the market as this could mean several things. Interest rates and inflation have peaked, the global economy is improving, energy prices are reducing, and investors aren’t seeking a safe haven. USD/EURO reached parity. It has stalled and strengthened EUR/US again at $1.0075. AUD now $0.69.07c bottomed at $0.678c   
10. COMPANY PROFITS – company profits results have been reasonably positive (so far). However, the market is looking to the next quarter and half year results to see if the rising interest rates and other headwinds are knocking company profits lower. Analyst expectations are being lowered but not at 10% to 20% that some of the bear proponents had been expecting.  
11. CONSUMER SPENDING If consumer spending has remained strong despite the weak consumer sentiment survey. Unemployment is the key, and in recent months both US and Australia’s rate has fallen. Household savings and balance sheets have improved during the pandemic and so are not as leverage as during the GFC. There are plenty of part-time jobs available for those who have problems with rising mortgage rates.
12. And finally, if FEAR is reducing, then the recovery can take place and provide a further catalyst that things are on the up. BUT not there yet. 

We look forward to whatever catalyst(s) turns the markets higher. It’s likely to be choppy and uncertain (as the future always is). Please note that this is our current best guess!     

Australian Reporting Season

Profit results from Australian companies start in earnest over the next week. Below is a list of the CORE stocks (not all stocks have profit results out at this time of year). 

UBS believes there are three key themes that will likely dominate company profit result discussions
1. Are we seeing an easing of the supply chain constraints and labour shortages which have been such a headache for businesses over the last year?
2. How are companies dealing with input cost pressures, and to what extent can they pass these on and maintain profit margins?
3. Are corporates seeing end demand soften as their customers are being impacted by cost-of-living pressures, higher interest rates, and falling house prices

27/7 Rio Tinto (RIO) – profit lower after last year’s record. Dividend was lower due to the lower payout ratio. The dividend is still equivalent to 5% (incl franking) ex-dividend 11 August.
10/8 CBA – profit up 11% Dividend increased 10c.
11/8 Telstra (TLS) profit dropped 5% but increased the dividend by 0.5c 
15/8 JB Hi Fi (JBH)
increased profit to $544m and increased dividend. Yield now 9%
16/8 BHP Profit of $21bn up 26%. Div $1.75US. Approx  div yield 12%  Goodman (GMG) Profit $1.5bn up 25% Dividend the same. 
17/8 CSL profit dropped 5% to 2.2bn Santos (STO) Amcor (AMC)
18/8 Orora (ORA) Origin Energy (ORG) Transurban (TCL)
22/8 Lend Lease (LLC), Sonic Health (SHL)
23/8 Brambles (BXB)
24/8 Coles (COL)
25/8 Woolworths (WOW) Nine Entertainment (NEC)
26/8 Wesfarmers (WES), NextDC (NXT)
30/8 Woodside (WDS)
Financial Planning Snippets
– SGC is increasing to 10.5% from July 1
– 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) – 
– ABS will release monthly inflation data for Australia from October. It’s usually quarterly.
Broker Target Price changes 

Ord Minnett/JP Morgan 
Amcor (AMC) $18.60 to $18.95
Brambles (BXB) increased from $13.50 to $13.80
CSL increased from $315 to $330
Goodman Group (GMG) increased from $21 to $22
Origin Energy (ORG) decreased from $6.45 to $6.15 
Santos (STO) increased from $9.55 to $9.90 (SEK) decreased from $35 to $31
Transurban (TCL) decreased from $15.85 (highest broker) to $15.80 (still highest broker)
Westpac (WBC) increased from $22 (lowest broker) to $22.80

Amcor (AMC) $18.50 to $18.75
BHP decreased from $48.50 (highest broker) to $48 (equal highest broker)
BXB increased from $10.07 (lowest broker) to $12.60 
CSL decreased from $327.60 to $321.30 (lowest broker)
Origin Energy (ORG) increased from $5.39 (lowest broker) to $5.68 (still lowest broker) 
SEK decreased from $32.33 to $29.40
Transurban (TCL) decreased from $13.90 (lowest broker) to $13.85 (still lowest broker)

Morgan Stanley
BHP increased from $36.55 to $37.15
BXB increased from $10.20 to $11.80 (equal lowest broker)
CSL increased from $312 (equal lowest broker) to $323
GMG increased from $23.90 (highest broker) to $24.10 (still highest broker)
Orora (ORA) decreased from $3.80 to $3.40 (lowest broker)
ORG increased from $6.06 to $6.22
Rio Tinto (RIO) decreased from $115.50 to $113.50
SEK decreased from $36 to $34

BXB increased from $10.75 to $11.80 (equal lowest broker)
CSL increased from $312 (equal lowest broker) to $329.50
GMG increased from $23.31 to $23.93
ORA decreased from $4.06 to $3.93
ORG increased from $6.87 to $7.42 (highest broker)
Rio Tinto (RIO) decreased from $120 (equal highest broker) to $116
STO increased from $10 to $10.40
SEK increased from $19 (lowest broker) to $22 (still lowest broker)
Transurban (TCL) decreased from $15.01 to $14.97

Bell Potter/Citigroup
BXB increased from $12.29 to $14.16
CSL decreased from $345 (highest broker) to $340 (still highest broker)
GMG increased from $22 to $23.50
ORA decreased from $4.07 to $3.95
STO decreased from $8.60 (lowest broker) to $8.30 (still lowest broker)
Transurban (TCL) increased from $14.10 to $14.52

BXB increased from $13.70 (highest broker) to $14.10 (still highest broker)
GMG increased from $19.40 (lowest broker) to $20.60 (still lowest broker)
ORA decreased from $3.80 to $3.70
ORG decreased from $7.90 (highest broker) to $7.35
SEK decreased from $32 to $27.80
STO decreased from $9.65 to $9.45  

Today’s ASX sector Movements
Best –   Energy +4%  
Worst REITs  (Property Trusts) -1.5%   

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 91.47% to 91.74%. 

Overall Earnings Per Share (EPS) 

FY22 decreased from 20.56% to 19.45%. 
FY23 decreased from 8.14% to 7.85% No real signs of profit cuts.   

Most expensive – CBA 115.9%   
Least expensive – Nine Entertainment (NEC) cheapest at 61.7% 

The CORE Watchlist has 4 (4) stocks trading above 100% lowest (0) while 7 (7) are trading below 85% (highest 18). ALL CPU LLC NEC NXT 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). 9 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 8.

ALL current price $36.35     Broker range $41 to $46
CPU current price $24.39    Broker range $26 to $36
CSL current price $294.67   Broker range $321.30 to $340
GMG current price $20.49    Broker range $20.60 to $24.10
LLC current price $10.40       Broker range $11.40 to $14.37
NEC current price $2.06       Broker range $2.10 to $3.80
NXT current price $11.37     Broker range $13.01 to $15.00
ORI current price $15.61     Broker range $16.20 to $19.70
STO current price $7.52      Broker range $8.30 to $11


Removed ORA  

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 decreased from 99.8% to 98.3%. This suggests the market may be fully priced, and we could be in a bear market rally. However, it distorted a little as CBA is 115.9% 

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 2.72% 142.0 6.45% 142.0 6.45% 152.6 6.93%
CBA 298.0 3.30% 350.0 3.87% 376.0 4.16% 404.4 4.47%
NAB 60.0 2.19% 127.0 4.64% 148.0 5.40% 162.2 5.92%
WBC 31.0 1.59% 118.0 6.05% 119.4 6.12% 130.6 6.70%
MQG  430.0 2.61% 470.0 2.86% 627.2 3.81% 617.2 3.75%

BHP and RIO still looking good from a cash flow perspective. The forecasts below are for the full year.  

FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 8.04% 447.80 10.78% 375.40 9.03%
RIO 1444.00 14.66% 817.40 8.30% 885.80 8.99%

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

Other Indicators (change since the last Not So)
US VIX Index decreased from 19.95 to 19.56  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 $104.40 to $100.60 Brokers expect an average in 2022 to be $135 but fall to $118 in 2023.  ALL-TIME HIGH of $237.57. 
Copper decreased from $3.62 to $3.61 It hit an ALL-TIME HIGH $5.03 at the start of the Russian invasion. Turnaround in the last few days. 
Gold decreased from $1796 to $1769. Climbed above $2000 at the start of the Russian invasion. Record high $2063.  
AUD/USD decreased from 70.29c to 69.10c. USD strengthening again.   
USD/CNY increased from $6.79 to $6.81.  Lowest $6.31 Highest $6.81 USD stronger. Chinese weakening currency to assist the economy.
USD/Euro decreased from $1.0163 to $1.0085 Reached parity last month. First time in 20 years. 
Asian markets – DOWN
US 10 year Bonds increased from 2.78% to 2.93%. Higher inflation is pushing rates up, but we are starting to see rates drifting lower as growth expectations fall. The recent high is 3.48% (8 year high). US 30 year Bond increased from 3.09% to 3.26% The highest level was 3.50%. US Federal Reserve increased rates by 0.75%. Plus BOND selling of $95bn per month (QT).  The US 2 year rate has increased from 3.18% to 3.26%  The gap between the 2 yr and 10 years an inverse -0.33%. It was -0.40% but still inverted, which historically has suggested a recession. Widest inverse gap is -0.51%   
German Bonds increased from 0.91% to 1.16%. The highest point in eight years 1.71% as the ECB raised rates 0.5% to 0% (was previously negative). Higher spending, higher inflation.  All German rates are now positive.
Japanese Bonds increased from 0.162% to 0.19%     0.44% highest in some time. 
Aussie Bonds 10 year Bonds increased from 3.25% to 3.43%.  Recent high is 4.20% 
Other Aussie Bonds 1 year 2.77%  2 year 3% 4 year 3.19% 5 year 3.23% 15 year Bonds 3.43%.  Australian rates have increased in recent days.  
Oil prices increased from $88.53 to $89.80.  It reached $125 at the start of the invasion. Now dropped 28.6% into bear territory. Will help settle inflation 
Tungsten – Baltimore & Rotterdam $345-$350 mtu. China $325-$335mtu   

This week & next week 
Last “Not So” opened in 4 Aust states (excl NT Tas ACT & Qld), US 6 states (California, Massachusetts, South Carolina, Colorado, Connecticut & Delaware) England, Italy, Sweden, France and Canada. 

For the record, the Not So has been opened in 42 different countries plus various areas within countries such as Italy – 6 regions, France – 4 regions, Brazil – 4 states, Canada 10 provinces and USA  – 29 states,   

The most unusual places visited so far. – Armenia and Zambia

Good to see people are travelling again. 

This week – July/August review meetings.
Next week July/August review meetings.   

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