The Not So DAILY BULLETIN 3 January 2023 No.529

The Not So DAILY BULLETIN 3 January 2023  No.529

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Welcome to 2023!
Another year didn’t start too well from a market perspective, with the ASX200 dropping 93 points or 1.3% to close at 6946. This is the first time below 7000 since 10 November 2022.

The ASX opened up but quickly dropped due to the realisation that the first few months of 2023 will be challenging as the well-stated HEADWINDS persist. Inflation, interest rates, CHINA COVID, slowing global growth, expectations of company profit drop, Recession fear and Russia. 

So, what are we expecting from 2023? The short answer is DEPENDS.

It depends on the persistence of the headwinds.
1. If Central Banks can reduce inflation and minimise interest rate rises from here without sending the global economy into a hard recession with millions of job losses and a reasonable drop in company profits, then the likelihood is the market will finish 2023 higher than it started (some near term volatility). 

2. If Central Banks cannot control inflation, then interest rates will rise substantially further and cause a hard-landing recession with job losses and a sizeable drop in company profits. Additionally, if China’s COVID causes further global supply chain issues, then markets may finish 2023 lower than they started.
 1. is the favourite at the moment, but I can’t rule 2 out. 

As mentioned in the last Not So, whatever the scenario, market valuations have changed, and in simple terms, the RISK-FREE (Government Bonds) rate is now at least 3%, not 0%. This means the price of ALL ASSETS (not just the stock market) will be re-adjusted and compared to the RISK-FREE rate. In short, if an asset can’t deliver 3% or better earnings (over the medium term), then the price of the asset is going to fall. Please take a look at the NEW REGIME below. 
December 2022 Markets 
The Santa Claus rally failed to materialise in December, as is the usual case when a BEAR MARKET is in control. This saw all major markets negative apart from Hong Kong, which was positive after the previous selloff and the increased likelihood of a China re-opening. 

The NASDAQ was again the worst as “growth” stocks and technology continued to be sold off. However, this market continues to stand out over 5 to 20 years. This is likely to continue while the headwinds persist, but when the turn occurs, this is likely to be one area that rallies hard (not the gimmick stocks, but ones with actual earnings). The ASX was mid-field and similar to European markets. 

Over the last six months, most markets have been slightly positive, which suggests June 2022 might be the market’s low point (assuming scenario one above, scenario 2, then the June lows may be retested or even lowered). 

Over 12 months, it shows 2022 was a challenging year. A Bell Potter Coppo report stat says the US S&P 500 traded up 100 days out of 250 days. That is the lowest for 46 years. 
CORE & ETF December 2022
The performance of the CORE Watchlist 30 stocks and the similar number of ETFs for December varied as usual. 

In the table below, I have listed the best and worst 3 (excluding income) for the month, the calendar year (CY) 11 months and the financial year (FY). 

The rally in resource stocks continued with RIO the best performer. A little gain for the unloved Lend Lease during the month, with most brokers still having target prices 30% above the current value. 

Energy and Banks still dominate the other timeframe (calendar year CY and financial year FY). 

In the ETF, the CHINA reopening story continued from the strong November with China (IZZ) and Asia (IAA) being the best two again.

Over the CY and FY, Australian Resources ETF (MVR) is the best. 

On the flip side, Aust Banks (MVB) was the worst, but it did trade ex-dividend during the month. The Nasdaq was also poor as outlined in the earlier section. 

Over the calendar and financial year – Resources has been the best

The high growth areas continue to lag – Nasdaq, technology and the China lockdown.
Changing Investment Regime
The Future Fund believes a number of tail-wind trends have helped investment returns in recent years, but these can’t be relied upon in the future. Those tailwinds were 30 years of globalisation after the fall of the Berlin Wall and the opening of China. 40 years of interest rate declines leading to zero and negative interest rates and 13 years of extraordinary monetary policy (QE) after the Global Financial Crisis (GFC).

In the chart below, T Rowe Price (Global fund manager) has outlined some of the changing factors that influence investment returns.

On Tuesday, the Bank of Japan surprised markets by moving their 10-year Government Bond rate to 0.5% and it’s unlikely to be the last. As one prominent commentator on Bloomberg said. “The era of free money is over”. Japan was the first one to start zero or negative interest rates, and they look like it will be the last to finish it.
This means there is a cost of money when making investment decisions (the risk-free rate has increased).
This is one example of why several researchers (including AMP, Morgan Stanley & the Future Fund) are suggesting we are entering a NEW REGIME of investing which means a different way of thinking about investments and returns or, as Brad Matthews – (PW chair Investment committee) put it, a return to what we knew before emergency zero interest rates.
Morgan Stanley also said it was important not to suffer from Cognitive Inertia, which means sticking with prior investment beliefs (recent performance) about how the markets work. Just because an area has performed well in recent years, doesn’t mean it will continue. 
I have provided an explanation for each point from the below chart.   


Interest Rates – minimum
cut to zero globally, with many turning negative.
Govt Bonds are a risk-free rate. Effectively free money when rates are 0%. 

Interest Rates – normalisation
Increasing globally. Central Banks (CB) focussed on reducing inflation will keep rates higher for longer. Unlikely to return to zero.
Govt Bonds 2%-5%. Risk-free rate. Investment decisions now have an opportunity cost.

Inflation – benign
effectively dormant for over two decades due to a range of factors. CB policy, technology & China     

Inflation – a higher trend
It has popped in most places. It has started to roll over, but it will be difficult to return to a target range of 2-3%, which means interest rates higher for longer.

Globalisation – maximum
Supply chain efficiency meant next-day delivery and profit optimisation. Offshoring & Outsourcing.  

Globalisation – deglobalisation
COVID and supply chain breakdowns have changed from profit optimisation to security and consistency of supply. Having multiple suppliers in different locations. This will create inflation.  

Volatility -minimum
Markets had volatility, but as seen during COVID, a short sell-off (2 months) and the market bounced back as no alternative as little return from cash (risk-free).

Volatility – elevated
2022 has been one of the most volatile in the last 50 years. If cash provides a return, there is somewhere to hide if needed. Likely to continue while uncertainty exists.

Liquidity – maximum
Cash injections from Government (fiscal) during COVID and CB’s (monetary) – low interest rates and Quantitative Easing (QE) after GFC in 2008 have continued to support the financial system.

Banks lending more. 

Liquidity – withdrawal
Governments are trying to repair budgets, and CB’s have decided to withdraw liquidity via Quantitative Tightening (QT). This will have an effect on demand.  

Bank lending standards are tighter. Lending less for the same security. 

Central Banks – support
CB’s have provided trillions in support since the GFC with lowering interest rates and extra liquidity via QE. The market has relied on the CB’s to kick start the economy.

Central Banks – don’t count on them.
CB’s are now focussed on reducing inflation which means they may not support when the economy slows (recession). Tough love in the short term.

Valuations – Largesse
Zero interest rates have increased asset values (crypto, blue sky tech, property) as risk-free returns were minimal.  

Valuations – Recession
Higher risk-free return means assets need to yield higher than risk-free. If they can’t, asset values are coming down. A recession is likely to quicken that pace. Crypto and blue sky tech have already started, but more likely. 
Tesla has fallen 69% this year but still has a PE of 38. Meanwhile, General Motors has a PE of 6.   

Our conclusion is that things are probably returning to normal from the “new normal”.
– Interest rates will be 2-5%
– Inflation will be 2-4%
– Company profits will be harder to earn (profit growth essential)
– Valuations matter, so focusing on Price to Earnings (PE) & dividend yields.
– After many years in the wilderness Value investment style is back. 

Active investment management or Smart Beta is more likely as opposed to passive index investing. More to come on this in 2023. 
Financial Planning Snippets
PHONE financial fraud. We are aware of a number of examples of fraud being committed by people ringing. PLEASE DO NOT GIVE YOUR BANK DETAILS OR CREDIT CARD NUMBER to a person who has RUNG YOU.  
– The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate).
– Commonwealth Seniors Health Care card has seen the income limit increase to $144k(couple) $90k (single). If you are of Age Pension age and don’t have the card, please let us know. 
Other Stories (research since last Not So)
–  EU has offered China free COVID vaccines. 
– IMF predicting a global slowdown
Broker Target Price changes 

Ord Minnett/JP Morgan 


Morgan Stanley


Bell Potter/Citigroup

Today’s ASX sector Movements
Best – 
Worst  Financial -1.9%
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 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 87.81% to 88.94%. Back under 90%. Usually good buying.  

Overall Earnings Per Share (EPS) 

FY22 remained at 21.34% (this includes some stocks using CY21).  
FY23 remained at 5.93%  

Profit forecasts aren’t falling as expected. Is this still to come when the researchers return for the new year? 

Most expensive – CBA 108%     
Least expensive –  Nine Entertainment (NEC) 68.6% replacing Lend Lease (LLC) after a positive month. 

The CORE Watchlist has 3 (4) stocks trading above 100%, they are BHP CBA RIO, lowest number ever is 0. While 13 (10) are trading below 85% (highest 18). ALL ANZ CPU CSL GMG LLC MQG NEC NXT ORA RMD EK 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). 18 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 8.

ALL current price $30.62    Broker range $40.50 to $43
ANZ current price $23.01    Broker range $25.50 to $30
CPU current price $25.75    Broker range $28 to $40.25
CSL current price $281.75  Broker range $312.20 to $340
GMG current price $17.31  Broker range $20 to $24.10
LLC current price $7.87      Broker range $8.74 to $13.40
MQG current price $164.67 Broker range $172 to $215
NAB current price $29.42    Broker range $30 to $33.80
NEC current price $1.82      Broker range $1.91 to $3.20
NXT current price $9           Broker range $11.75 to $14.00
ORA current price $2.84      Broker range $3.40 to $3.95
ORG current price $7.59     Broker range $7.83 to $9
RMD current price $30.45   Broker range $32.50 to $38.50
SEK current price $20.43    Broker range $20.70 to $34 
SHL current price $29.61    Broker range $31.30 to $38.60 
STO current price $7.08      Broker range $8.60 to $10
TLS current price $3.95       Broker range $4 to $4.75
WBC current price $23.50   Broker range $23.60 to $30 


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 96.6% to 93.1% (lowest since 3 October 2022).

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.  
FY 22 % FY 23 % FY 24
ANZ 146.0 6.35% 157.5 6.84% 162.8 7.08%
CBA 385.0 3.81% 435.3 4.31% 453.2 4.48%
NAB 150.2 5.10% 171.3 5.82% 174.2 5.92%
WBC 125.0 5.50% 144.8 6.37% 150.0 6.60%
MQG  622.0 3.78% 636.4 3.86% 664.6 4.04%
Updated to include 2024 for BHP and RIO. Yields are still expected to be very strong. The forecasts below are for the full year.  

FY22 cps % FY23 cps % FY24 cps %
BHP 451.00 9.95% 318.40 7.02% 297.6 6.57%
RIO 727.17 6.30% 724.33 6.28% 698.8 6.05%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS).
Other Indicators (changes since last Not So)
US VIX Index decreased from 21.97 to 21.67  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 increased from $111.65 to $117.50. Was below $80 in November.  ALL-TIME HIGH of $237.57.  Av expected for 2023  has increased to $102.50
Copper increased from $3.78 to $3.87  Shortage is expected next year. It hit an ALL-TIME HIGH $5.03 at the start of the Russian invasion. 
Gold increased from $1801 to $1846. Six month high. Climbed above $2000 at the start of the Russian invasion. Record high $2063. 
AUD/USD increased from 66.9c to 67.91c.      
USD/CNY decreased from $6.99 to $6.88.  Lowest $6.31 Highest in recent years $7.35 China gaining on re-opening talk.   
Asian markets – MIXED
US 10 year Bonds increased from 3.69% to 3.85%. Rates increasing again. The recent high is 4.23% (8 year high). US 30 year Bond increased from 3.75% to 3.85% The highest level was 4.27%. US Federal Reserve likely to peak at 5.1%, currently 4.5%. Plus BOND selling of $95bn per month (QT).  The US 2 year rate has increased from 4.28% to 4.46%  (4.88%, highest since 2007).  The gap between the 2 yr and 10 years an inverse -0.61%. It was -0.59% but still inverted, which historically has suggested a recession. Widest inverse gap is -0.83%. This is the most it has been inverted in 42 years.   
German Bonds increased from 2.37% to 2.44%. 2.44% highest in eight years 
Japanese Bonds increased from 0.4% to 0.41%     0.499% highest in many years. Widening the range to 0.5% Japan had highest inflation read for 40 years. 
Aussie Bonds 10 year Bonds increased from 3.84%to 4.01%.  Recent high is 4.21% 
Other Aussie Bonds 1 year 3.34%  2 year 3.39% 4 year 3.57% 5 year 3.66% 15 year Bonds 4.24%. The yields have all moved up with the expectation of more rates rises to come.    
Oil prices increased from $78.55 to $80.09. Russia expecting to cut 500k -700k barrels a day. 
Tungsten – Baltimore & Rotterdam $345-$350 mtu. China $325-$335mtu. 
This week & next week  Last “Not So” opened in 6 Aust states (excl NT ACT), US 4 states (California, Massachusetts Colorado South Carolina) & Sweden. 

This week  – Back on deck. Chris and Kevin away
Next week – Maddy away

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