The Not So DAILY BULLETIN 2 February 2024 No.609

Top Stories  
Friday, 2 February 2024, the ASX gained 111.20 points to finish at 7699—a new ALL-TIME CLOSING HIGH. A new high was reached on Wednesday, but after US Federal Reserve Governor Powell said no rate cut in March (which is what we had been saying), the market fell back yesterday. 

However, this morning’s strong profit results from Meta (Facebook) and Amazon have buoyed the market to bounce higher, and this fed into the Australian market. Meta is up 15% in the US aftermarket, and Amazon is up 8% (these gains will be reflected in the US market overnight). 

Before today’s US profit results, AMP’s Shane Oliver said 50% of US companies had reported an average profit growth of 6.2%. This has been a good signal for the market as it experiences falling inflation and expectations of lower interest rates. The NO LANDING economic picture is now the favourite. 

Let’s hope the upcoming Australian reporting season delivers similar numbers, which may mean the brokers can catch up to the market. There are now 11 stocks (the highest ever) trading above their target price (see below). The Core Watchlist, at 97.37, hasn’t been this high since President Biden was elected. Only two stocks are trading below the lowest broker (CSL and LLC). 

The ASX reached a new INTRA DAY ATH of 7703.6 as Goodman Group (GMG) was up 6% and NextDC (NXT) was up 3%, increasing the prospect of more cloud data being stored from the growing world of AI.

Of the five major US companies to report this week. Microsoft, Meta and Amazon delivered better than expected, while Alphabet (Google) and Apple were below expectations. 
 

Additionally, other economic information may impact markets this week. 
Friday – US jobs.   

The market is likely to climb a WALL OF WORRY, with bouts of volatility. 

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.   

January Market review 
The Santa rally continues into January for most global markets, with only China and the UK being negative. Japan stood out and continued its recent strength with an 8% gain after hitting 34-year highs. Hitting new monthly closing all-time highs included US (Dow Jones & S&P500), German DAX, French CAC and ASX200. 

A positive sign for 2024 is the January effect. The saying is that the market’s direction for January is usually the direction for the year. Since 1980, positive Januarys have seen a positive return in that year 85% of the time. 

The 6-month returns are in single digits, with China being the main laggard, while the 12-month returns are double digits in the US, Germany, Japan and the World Index (MSCI). The ASX is only up 2.73% over this period (plus income). 

The Nasdaq has retained its lead for 5, 10, 15 and 20 years. The World Index (MSCI) holds a strong lead over the ASX over these timeframes, again re-emphasising the need for diversification and investing offshore.     
Core & ETF Watchlists in January 
The Core Watchlist of 30 ASX stocks gained 2.68% for the month compared to the ASX 1.19%. The best performers were Resmed (RMD), up 14% after their quarterly results were better than expected and saw little impact from the weight loss drug. JB Hi-Fi (JBH) was up 7% after retail sales were up for Christmas, and they saw several broker upgrades. Other notable mentions were NAB, up 6%, WBC, up 5.5%, CBA and ANZ, up 5%, as was CSL.

BHP dropped 6% at the other end, mainly due to the Brazillian court case and coming off a record high in December. Maybe the Woolworths (WOW) Australia Day protest had some impact as the share fell 3% for the month.

Over the financial year (7 months), the best performer was JBH, up 30%, which has recovered from a sell-off as the assumption was higher interest rates would impact retail sales. JBH has shown a quality business model and faithful buyers who like the latest technology. Goodman Group (GMG), up 27%, has branched out into building data centres with increased global expansion plans. Even today, they were up another 6%. NAB is up 23%.

The worst over the seven months is Orora (ORA), down 15% as the market doesn’t like the French bottle acquisition. The market will get this one wrong and is paying an excellent yield of 6.5%. Coles (COL) is down 13% as pressure on supermarkets from populist positions looking for government enquiries into profits. Resmed (RMD) was sold off last year based on the threat from the weight loss drugs but is now rebounding solidly.  
 
Exchange Traded Funds (ETF) and one Listed Investment Co (LIC)
Over the month, the best performances were from the technology areas, particularly AI with Global Cybersecurity (HACK), up 10.7%, and Global Robotics and AI (RBTZ), up 8.6%. The 3rd place went to the LIC – Spheria Emerging (SEC) companies that gained 7.5%, plus it traded without a 2.9c fully franked dividend (about 10% for the month).  

The Chinese funds IZZ and CNEW are at the other end, as the foreign money exit outweighs the local buying. This is overdone; at some stage, it will turn, as noted in the last Not So. The other laggard was Australian Resources (MVR) -5.7% as other non-iron ore minerals suffered, again as pointed out in the previous Not So.

Over the seven months, the technology areas have still been dominant. HACK is up 27%, Nasdaq (NDQ) is up 14%, and Global Quality (QUAL) is up 13.5%.

No surprises at the other end, China and Asia. The question is, for how long?     
Aussie market outlook 
Most major markets have run hard since November 2023 and hitting new ATH today. While the market is assuming all is good with the world. There is a need to give contrarian views. UBS has updated their view of the market for 2024 from earlier in the week with the follow research piece titled. 

Share price ascent shows excitement that all is now good… we’re sceptical.

Since touching its 2023 low point on 30 October, the ASX200 has jumped 11.6%. This rebound has meant that our year-end 2024 target of 7660 is already within striking distance (written earlier this week). We believed that rate cut optimism justified an equity re-rate through 2024. But the speed at which this is now playing out is giving us concern that equity market pricing has become overly optimistic, given the challenging environment companies still face as a result of:1) a slowing top line, and 2) broadening cost pressures.

1. The recent equity rally has been almost entirely bond driven The recent run-up in stock prices has not been driven by either earnings upgrades or better macro data. Instead it has been almost entirely driven by the strong rally in bond yields. Right now the correlation between daily moves in the ASX200 and daily moves in the local bond yield is at its strongest since pre-GFC times.

2. Prices ‘looking through’ the cycle… but where are the earnings? Sectors such as Banks and Retail have seen prices run up hard over recent months, even as as both FY24 and FY25 earnings estimates have remained relatively static.

3. Recent stock winners look most vulnerable on valuation. Recent positive sentiment towards James Hardie, JB Hi-fi, CBA, Cochlear, and REA Group has seen their share prices potentially move ahead of earnings. Right now, these stocks look rather stretched versus outer-year earnings growth.

4. The compensation for taking on equity risk has fallen over recent months, we have seen the eERP in Australia fall to a decade low. Finding marginal buyers of equities may be a challenge until a higher ERP is on offer.

5. Aussie stocks look expensive vs global.  A common pushback against Aussie stocks accused of being overvalued is that US stocks look even worse. However, if US sector weights are applied to Aussie stock valuations, the Australian equity market would sit at a 20% PE premium to the S&P500.

6. Covid distortions still linger, where are trend sales? The Australian economy is still experiencing retail sales sitting above trend. By contrast, arrivals of international tourists into Australia still sit well below the pre-Covid trend.

7. Aussie equities have typically bottomed after the RBA starts cutting On average, the Australian equity market haven’t bottomed until after the RBA has resumed its rate-cutting cycle. Interestingly, the Banks, Consumer Discretionary and REIT sectors staged rallies in the 3 to 5-month period after the last rate hike, only to subsequently give these gains back over the subsequent 6 to 12 months.

8. Foreigners have been sellers over last year… can they return? Global investors have stepped away from the Australian equity market over the last 12 months. We have reason to believe they may be coming back in 2024…

PW view – the upcoming profit season will be important for these valuations.     

Banks 
The banks have also run hard in the last couple of months, with CBA hitting new ATH. However, according to the brokers it trading well above its fair value. As noted below the Banking index is trading above 111%. 

Morgan Stanley has updated their view of the Banks.

Major banks had a mixed year in 2023, but rallied into year-end as investors anticipated the benefits of rate cuts and a more rational competitive environment in 2024. We believe trading multiples are now pricing in upgrades to consensus forecasts for earnings, dividends and buybacks. We are less optimistic about the outlook, and we think trading multiples are too high given earnings and returns will likely decline this year and material consensus upgrades are unlikely.

We believe key issues for 2024 include:
1) the potential for RBA rate cuts and a ‘soft’ landing;
2) the expectation of more rational competitive behaviour in retail banking and the opportunity for ‘back book’ mortgage re-pricing;
3) retail bank strategies and performance at each of the banks;
4) the growing need for new productivity initiatives to offset persistent inflation;
5) underlying loan loss rates and the size and timing of provision releases (bad debts) and 
6) the potential for new buybacks and a further increase in dividends.

Order of preference 
ANZ
Given our views on the outlook for the Australian economy and industry competition, ANZ is our preferred major bank and we are Overweight. This reflects its supportive trading multiples, recent underperformance, benefits of diversification, positive franchise momentum, cost discipline, material improvement in its risk profile, a strong proforma capital position and the pending regulatory decision on the proposed acquisition of SUN’s bank.

NAB
NAB offers sound retail and business bank franchise performance, consistent cost management, excess provision levels and strong capital. With downside economic risks moderating, we think its recent track record and improving return on equity (ROE) will provide support for current trading multiples, so we are Equal-weight. At current prices, NAB would also be the cleanest way to play a ‘soft’ landing scenario for the Australian economy and banks industry in 2024.

WBC
WBC’s performance met relatively low investor expectations in 2H24, helping to drive a strong share price recovery and outperformance relative to the ASX and the major bank average since the start of November. However, we believe the path to a lower CTI and a double-digit ROE still looks difficult, with execution risks relating to franchise performance, margin management, and the outlook for cost growth. With the P/E multiple having re-rated back to the pre and post COVID average, and material ROE improvement unlikely before FY26, we are Underweight.

CBA
CBA’s ROE and capital generation are better than the other major banks. However, we believe retail bank profitability has re-set at a lower level, while its balance sheet settings and risk profile are broadly similar to peers. At the same time, its share price and P/E multiple are near record highs in response to its message of mortgage pricing discipline in the 1Q24 trading update and investor perception that it would be the biggest beneficiary of potential rates cuts and a ‘soft’ landing in 2024. Against this backdrop, we believe current multiples remain hard to justify based on financial metrics and the premium for ‘quality’ is too high. We are Underweight.   Australian reporting season The December 2023 reporting season is nearly here. Before that we are in confession season where companies provide the market with any updates that are likely to disappoint. So far we’ve only had a few. Woolworth had a $1.7bn writedown of it’s NZ operation. Domino’s reduced profit expectations and IGO said lithium sales were below expectations. 

I have listed when the CORE Watchlist shares are due to report.
25/1 Resmed (RMD) revenue up 12%. Dividend up
6/2 Amcor (AMC)
8/2 Transurban (TCL)
12/2 JB Hi-Fi (JBH)
13/2 CSL Seek.com (SEK)
14/2 CBA
15/2 Goodman Group (GMG) Telstra (TLS) Wesfarmers (WES)
19/2 Lend Lease (LLC) Orora (ORA)
20/2 BHP Next DC (NXT) Sonic Health (SHL)
21/2 Rio Tinto (RIO) Woolworths (WOW) 
22/2 Nine Entertainment (NEC)
23/2 Brambles (BXB)
27/2 Coles (COL) Woodside (WDS)

These profit results should provide some direction to the market over the coming months.   

Interest rates
In a sign that interest rates have peaked. Macquarie has reduced its Accelerator interest rate from 4.75% to 4.65. The CMA remains at 3%.   

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 
Spheria Emerging Companies (SEC) previously announced that it would convert to an ETF if the share price doesn’t narrow the margin to the net tangible assets (NTA) to less than 5%. NTA as at 30 Jan was $2.30. Share Price closed at $2.13. That’s a discount of 7.4%. SEC is up 7.5% in January plus a 2.9c full franked dividend.  
– Tesla has also suffered over the last month, dropping 24% as Chinese EV makers passed Tesla’s sales. On a personal note, Elon had a US judge say his US$56bn payment as the CEO was “unfathomable”. It may mean he drops to number 3 on the richest list.  

Broker Target Price changes 
Ord Minnett

Morgans

Morgan Stanley

Macquarie

Bell Potter/Citigroup

UBS 

Tracking changes for 2024
Upgrades 37
Downgrades 26
 

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 96.16% to 97.37%  That’s the highest level since 17 Dec 2020 when Biden was President-elect.  Iron ore was $160 per ton 

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 decreased from 3.62% to 3.57%    
FY24 increased from 6.29% to 6.38%  


Most expensive – CBA 126.1% (there must be some changes to TP’s or the share price).             
Least expensive –  Lend Lease 58.7% (hopefully a good profit result will narrow this gap).  

The CORE Watchlist has 11 (10) stocks trading above 100%; they are; ANZ BHP CBA GMG JBH MQG NAB RIO SEK WBC WES, lowest number ever is 0, highest is now 11. While 3 (3) are trading below 85% (highest 18), while the lowest is 3. LLC NEC 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). 4 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest is NOW 2.

CSL current price $299.79  Broker range $321 to $340
LLC current price $7.33      Broker range $8.25 to $14.45

Added 

Removed AMC ORI  

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 111.1% to 111.8%, with all banks above 100%.  Over 100% suggests the banks are fully priced. The analysts think bad debts will appear, but there are no signs. 

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 6.42% 160.8 5.90% 162.2 5.95%
CBA 450.0 3.89% 457.3 3.95% 468.5 4.05%
NAB 167.7 5.20% 165.2 5.12% 162.8 5.05%
WBC 142.0 5.90% 143.7 5.97% 171.6 7.14%
MQG  750.0 3.99% 619.2 3.29% 658.2 3.50%
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 5.36% 232.17 4.88% 270.0 5.67%
RIO 598.17 4.53% 785.50 5.95% 710.7 5.38%
  Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).  

Other Indicators (changes since last Not So)
US VIX (Fear) Index increased from 13.60 to 13.88. The VIX is within the normal levels (10 to 17).   
Iron Ore decreased from $135.60 to $131.20  ALL-TIME HIGH of $237.57.  Av expected for 2024 is $112. 
Copper decreased from $3.86 to $3.84. Expecting an increase over 2024.
Gold increased from $2031 to $2072.  Had a new record in December of $2152. Couldn’t hold it.  AUD/USD decreased from 66.06c to 65.91c. Recent low point 62.9c.  $A strengthened to 68c but has fallen back. Maybe low 70c in 2024 
Asian markets – UP        
US 10 year Bonds decreased from 4.05% to 3.90%. 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 4.29% to 4.13%. Hit a 17-year high of 5.12%.
The US 2 year rate has decreased from 4.32% to 4.23%  (5.37%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.33%. It was -0.27% but still inverted, historically suggesting 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 2.23% to 2.16%. Hit 3% in October highest since 2008
Japanese Bonds decreased from 0.716% to 0.676%. Highest in 10 years is 0.956%.  
Aussie Bonds 10 year Bonds decreased from 4.15% to 3.99%.  Recent high 4.95%
Other Aussie Bonds 1 year 4.02%  2 year 3.67% 4 year 3.56% 5 year 3.60% 15 year Bonds 4.23%. 
Oil prices decreased from $77.06 to $74.15.    
Tungsten – China increased from $305 to 315mtu. The European midpoint is $312.50. EQR announced Spanish resources which increased overall resources by 45%.  

This week & next week  Last “Not So” opened in 7 Aust states (excl NT), US 5 states (California, Massachusetts, South Carolina, Indiana and Virginia) & Sweden.

This week  – In Melbourne Wednesday afternoon and Thursday morning.
Next week – Preparing for February reviews

 
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