The Not So DAILY BULLETIN 30 August 2021 No.419

The Not So DAILY BULLETIN 30 August 2021  No.419
Unfortunately, we are in NSW statewide lockdown. This means we will be working from home until September 10. We’ve had to cancel face to face meetings but can have phone or zoom review meetings. Otherwise, they will be delayed until after lockdown finishes. We appreciate your understanding. 
Top Stories
Monday saw the ASX 200 finish 16 points higher at 7505. A positive lead after the US Federal Reserve held their annual Jackson Hole meeting where chairman Powell indicated they wouldn’t;t reduce any bond-buying program yet (probably towards the end of the year) and no interest rate rise until 2023.

Additionally, iron ore price closed above $150, which saw BHP and RIO re-capture a few $ from the recent sell-off. BHP still trading with its dividend.

The profit season has virtually finished, which has been reasonable. An increase in profits and dividends has been overshadowed by short term delta uncertainty as many companies haven’t provided future guidance. In saying that, the medium-term picture still looks positive, but it’s the very short term with COVID and lockdowns in place, causing some reluctance for the market to go higher. That coupled with companies trading without their dividends makes it harder for the index to push higher. 

We are still Optimistic, but volatility is likely to persist. 
Market views 
Chief Economist – David Bassanese from Betashares updated his market views. 

Global equities bounced back last week, reflecting a relatively dovish speech by US Fed chair Powell at Jackson Hole on Friday. The key takeaway from the speech was that the condition of “substantial further progress” towards maximum employment has not quite been achieved, meaning the US Fed might still hold off on making its tapering announcement as early as the September 21-22 meeting. 

Powell also stressed that there remained “much ground to cover” before he’d even contemplate raising interest rates. While he’s watching carefully, he still suspects the recent lift in inflation won’t be sustained as more workers return to the labour force and supply-side production bottlenecks are resolved.

The Fed’s dovish signal supported equities and saw bond yields drop, though U.S. 10-year bond yields still ended the week up 5 basis points to 1.31%. The $US eased after showing some strength in recent weeks, which in turn tended to support commodity prices and the $A. I suspect the recent rally in long-term bond yields has ended, with more range-bound performance now likely over the coming months.

Given this backdrop, Friday’s the U.S. August payrolls report looms large. The market is anticipating another solid employment gain of around 730k, with the unemployment rate dropping to 5.2% from 5.4%  – despite still surging COVID cases in some States over recent weeks. One factor to watch remains wages, with annual growth in average hourly earnings expected to hold at a still relatively elevated 4%, though potentially still being distorted by heavier employment losses among low wage service sector workers over the past year.

In his speech, Powell argued, “we still see little evidence of wage increases that might threaten excessive inflation”, though he did concede wage growth had picked up of late (even allowing for compositional shifts) and now “appeared consistent with our long-term inflation objective”. So far, so good, but that does not leave much margin for wages to move up further before this inflation objective might presumably be threatened. What will be key over the coming months is whether labour force participation recovers (as it usually does with a lag after recessions) and so checks any further untoward rise in wages as the economy continues to re-open for business.

Somewhat reassuringly, Powell also noted that U.S. unemployment ran below 4% for two years prior to the pandemic and, while wage growth did move higher, “not by enough to lift inflation consistently to 2%”. As was the case pre-pandemic, we’re now on U.S. wage inflation watch!

Australian markets
The S&P/ASX 200 Index lifted only 0.4% last week, though it should benefit somewhat today from Wall Street’s Friday rally. We did receive a few encouraging GDP building blocks last week in the form of reasonably solid business spending, though flat housing construction. While we’ll learn more from corporate profits, inventories and net exports over the next two days, June quarter GDP growth due out on Wednesday is likely to remain comfortably above zero, thereby reducing the risk of a double-dip technical recession (given we know Q3 GDP will be deeply negative).

More broadly, Australia’s two major states remain mired in lockdown, which seems likely to remain the case for several more weeks – until vaccination rates have moved up to at least 70% of the adult population.

David thinks we will have a positive GDP number on Wednesday. This view was also stated by Morgan Stanley today. However, this is different from Friday’s Not So, when Shane Oliver and Citigroup thought we would see a negative -0.1%. 
All-Time Highs (ATH)
US markets keep setting new all-time highs while the ASX 200 has pulled back from the highs reached earlier this month. 

The chart below of the US S&P 500 shows the number of all-time highs reached each year. Since 2013, the US has reached new levels 328 times over the last 9 years. 

Over the same period, the ASX 200 reached the feat 34 times (4 in 2019, 10 in 2020 and 20 in 2021).

There are always concerns about market valuations when markets are high. There are parts of the markets that are very high and above fundamental valuation, such as BuyNowPay Later, Cryptocurrencies & Technology companies with no profits. However, one underlying feature that provides valuation support to mainstream investments is the level of interest rates. Interest rates are at HISTORIC lows, and after the US Federal Reserve meeting and the RBA meeting this month, they both reconfirmed that rates are unlikely to rise in the next couple of years. 

This suggests that relative asset values (comparing one to another) are attractive for shares due to the Price to Earnings ratio.

As a comparison 

An Australian 10-year Govt Bond is yielding 1.17%. That equates to a Price to Earnings ratio of 100/1.17 = 85.47 or paying $85.47 to receive a $1 of earnings. 

In comparison, the CORE watchlist PE is 20.72 or paying $20.72 to receive $1 of earnings. 

Another real comparison is a Term Deposit of 0.4% compared to a current yield of the CORE watchlist of 4%. 

10 years of interest from TD equates to one year of dividends. 

As mentioned previously, there is a large amount of cash on the sidelines and a record level to be paid in the coming months from dividends, buybacks and takeovers. This level of cash will provide support to the market as the return from alternative areas is unattractive. It’s important to note that you should maintain a level of cash that suits your risk profile, but unless we see a new major risk (black swan), markets are likely to be supported and any dips purchased.  
Iron ore demand 
Macquarie’s Commodity Strategy Team’s latest survey showed divergent views from industry participants on steel and iron ore.

While steel mills’ sentiment improved on the back of increased profitability, steel and iron ore trader’s sentiment weakened further month on month. They note iron ore prices have bounced back to US$149.5/t ($157 today), from the recent low point of US$130.0/t. One view is that the prices were low enough last week to encourage some mills to restock ahead of an anticipated seasonal increase in production into September, indicating a floor over the near term.

Iron-ore exposure preferred: Buoyant iron ore prices and positive leading indicators (such as relatively low port stocks and positive steel margins) underpin our bullish stance on iron-ore exposure.

BHP trades ex-div Sep 2 with a healthy dividend and an option into Woodside. 
Reporting season 
Australian companies have nearly finished reporting profits. Below are the dates of when we are expecting the announcements for the CORE stocks. 

28/7 RIO – record profit and dividend but in line with expectations. 
6/8  Resmed (RMD) – good profit result but again in line. Broker TP upgrades. 
9/8  Transurban (TCL) – missed expectations and ongoing issues with Westgate tunnel. 
10/8 Computershare (CPU) – inline with expectations 
11/8 CBA – inline with expectations and increased dividend and an OFF Market share buyback of $6bn. More details coming over the next few weeks.   
 12/8 Telstra (TLS) – inline and same dividend. Outlook is more positive. $1.35bn ON market buyback
AMP – missed expectations  
Goodman Group (GMG) – inline with expectations which saw profit up 15% 
16/8 JB Hi-Fi (JBH) inline with expectations
Lend Lease (LLC) missed expectations but profit up from last year. 
17/8 BHP beat expectations but the removal of dual listing in UK surprised the market.
Brambles (BXB) beat expectations
Woodside (WPL) inline with expectations, but the BHP deal has caused questions. 
18/8 Coles (COL) inline with expectations
CSL   inline with expectations, record dividend.
Amcor  (AMC) beat expectations 
19/8 Orora (ORA) inline with expectations
Origin Energy (ORG) inline with expectations. 
23/8 Sonic Health (SHL) missed expectation but profit up 149%.
24/8 (SEK) inline with expectations
25/8 Nine Entertainment (NEC) missed expectations
26/8 Woolworths (WOW) inline with expectations
27/8 Wesfarmers (WES) inline with expectations
NextDC (NXT)  inline with expectations
30/8 Crown (CWN) inline with expectations

Those that beat expectations should be rewarded over time.
Financial Planning News

Employer Super Guarantee Contributions  (SGC)  
From 1/7/21. The SGC compulsory super payment is increasing from 9.5% to 10%.

Minimum Pension payment kept at half normal for FY22
The Federal Govt has extended the temporary halving of minimum pension payment to 30/6/22. Minimum pension payments from Account-Based Pensions were expected to return to normal from 1/7/21, but the PM announced the extension due to ongoing COVID issues. 
Super Concessional Contributions  
The maximum contribution is increasing from $25,000 to $27,500 from 1/7/21. This includes the employer SGC, salary sacrifice or personal tax-deductible contributions. 

Super Non-Concessional Contributions 
The maximum contribution is increasing from $100,000 to $110,000 from 1/7/21. These are only contributions made where you aren’t receiving a tax benefit. 
Other Stories 
– Aust vaccinated 19,085,741 (18,390,297)  7 day average 276.4k – highest (276.4k). The highest daily total vaccines is 335,420 (26 Aug). 57.5% (over age 16) have had one shot, 34.2% (over age 16) have had two shots. The figures in brackets are from the last Not So update. 
– US Hurricane – likely major damage. Might fast track US infrastructure bill. 
– US drone attack on ISIS suicide bombers car. 5 Rocket hit Kabul airport. 
Broker Target Price changes 

Goldman Sachs
NextDC (NXT) decreased from $14.80 (highest broker) to $14.40

Ord Minnett/JP Morgan 
NXT decreased from $14.50 to $14 (lowest broker)

Wesfarmers (WES) increased from $56.08 to $59

Morgan Stanley
NXT increased from $14.60 to $15.50 (highest broker)

NXT increased from $13.95 (lowest broker) to $14.05
WES decreased from $63.45 (highest broker) to $61.35 (still highest broker)

Bell Potter/Citigroup
WES increased from $47 (lowest broker) to $49 (still lowest broker) 
Today’s Sector Movements
Best –   Industrials +1.1%       
Worst –  Consumer Discretionary -1.6%  
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 decreased from 93.59% to 93.23%.

The ASX 200 has climbed 2.6% since end of June, but the Core index has reduced by 1.71%.

This means the brokers have increased the target prices of the stocks through the reporting season by 4.2% which is a good signal. 

Additionally, the gross dividend yield is 4% (include franking) across the CORE for the first time since 5 Nov 2020 (US election) when the ASX 200 was at 6100. Now 7505 or 23% higher.  

Brokers are continuing to raise their target prices. 
Overall Earnings Per Share (EPS) 
FY21 decreased from 34.63% to 34.56% 
FY22 decreased from 7.54% to 6.39% 

Most expensive – Wesfarmers 112.3%  
Least expensive – Woodside 72.5%   

The CORE Watchlist is still mixed with 7 (7) stocks trading above 100% while 5 (5) are trading below 85% (BHP CWN NEC RIO WPL ). (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).

AMP current price $1.11       Broker range $1.15 to $1.35
CWN current price $9.31      Broker range $10.50 to $15
NEC current price $2.75       Broker range $2.80 to $3.75
NXT current price $12.75     Broker range $14.05 to $15.50
ORG current price $4.51      Broker range $4.60 to $6.10
TLS current price $3.36       Broker range $4 to $4.50 
WBC current price $25.80   Broker range $26.50 to $30
WPL current price $20.02    Broker range $21.55 to $33.50
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 increased from 96.9% to 97.6%. The banks are still only trading on 14-15 earnings apart from CBA. However, the lockdowns could be putting a little pressure on some borrowers. 

The table below shows the forecast dividends have also had massive increases. 

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 2.14% 140.8 5.03% 146.2 5.22% 153.3 5.48%
CBA 298.0 2.97% 350.0 3.49% 397.2 3.96% 418.2 4.16%
NAB 60.0 2.18% 123.2 4.47% 132.0 4.79% 139.7 5.07%
WBC 31.0 1.20% 117.0 4.53% 123.7 4.79% 134.3 5.21%
MQG  430.0 2.60% 470.0 2.84% 537.2 3.25% 577.0 3.49%  
And referring to nice dividends.

Below is the expectation from brokers regarding BHP & RIO. BHP ex-dividend 2/9/21  
FY21 cps % FY22 cps % FY23 cps %
BHP 371.67 8.11% 486.83 10.62% 359.67 7.85%
RIO 1681.00 14.86% 1285.50 11.36% 952.33 8.42%  

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

Plus franking. 
Other Indicators 
US VIX Index increased from 18.84 to 16.39  The index is reasonably settled by the US Fed meeting at Jacksons Hole. Normal range of 10-17.
Iron Ore increased from $152.92 to $157.552. Has dropped from ATH but has established a floor in recent days. Still very profitable at these levels.  Most forecasts are for lower iron ore.    ALL-TIME HIGH of $237.57. 
Copper increased from $4.23 to $4.34. Reduced from ALL-TIME HIGH of $4.90  
Gold increased from $1805 to $1818. Record high $2063.
AUD/USD increased from 72.46 to 72.95.  
USD/CNY decreased from $6.48 to $6.47. Strongest in 3 years at $6.37. 
Asian markets – UP     
US 10 year Bonds decreased from 1.34% to 1.30%. Decreased after Fed meeting. 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 decreased from 1.94% to 1.91%. The highest level 2.47% for 18 months.  
German Bonds decreased from -0.41 to -0.42% Hit a low of -0.9%. Highest for some time -0.11%. The negative European rates are likely to be a headwind for higher US rates.  
Japanese Bonds decreased from 0.016% to 0.009%  Close to negative. 
Aussie Bonds 10 year Bonds decreased from 1.2% to 1.17%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.008% 2 year 0.031% 4 year 0.47% 5 year 0.61%. 15 year Bonds 1.61%. Global interest rates look to have bottomed.
Oil prices increased from $68.37 to $68.47 Rebounding on pending US storm.   
Tungsten remained at $305mtu. Mid June the price was $265. 
This week & next week 
Last “Not So” opened in 7 Aust states (excl NT & Tas), US 5 states (California South Carolina Virginia Connecticut, & Georgia).

This week – Working in lockdown. 

Next week – Probably doing the same.
Contact details  PO BOX 149 Deniliquin NSW 2710
125 End St Deniliquin NSW 2710
Ph. 03 58950100
Fax 03 58950101
Mobile 0412113524

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