|The Not So DAILY BULLETIN 30 June 2022 No.487|
Thursday, June 30, saw a sharp sell-off at the end of the day with a fall of 132 points to finish at 6568. The lowest monthly close since Nov 2020 and a drop of 10.2% for the financial year.
There were reports that pension fund re-balancing would occur late in the day, which would lead to a market rally. However, it wasn’t to be, and the market fell 30 points in the last 10 mins.
As noted in the last Not So, the overall theme is for lower expectations as Central Banks have only just started raising rates. The RBA is expected to increase rates by 0.5% on Tuesday. CBA jumped the gun by raising fixed rates by a massive 1.4% today.
As mentioned last time, most of the inflation is from supply issues, not demand; therefore, rates may not move as high as expected. History is not very kind to Central Bank governors and PMs that force a recession onto the population, as Bernie Fraser & Paul Keatings found out.
The upcoming reporting season will provide further insight into whether the rising inflation and interest rates will likely affect various companies and sectors. It will have significant impacts on some and not on others. The overall market is expected to bottom when some of this clarity is provided.
Caution is still warranted, but nibbling may be around the corner.
The chart below shows the ASX 200 (purple) left-hand scale. It traded between 7000 and 7500 for most of the year and only broke out of the trading range in the last six weeks.
The Core Index (Brown) and Banking index (Blue) right-hand scale remain below the 90% level. Over the years, a number below 90 suggested the market was likely to bounce. However, the big question at this point. WILL THE ANALYSTS CUT THEIR TARGET PRICES FURTHER? The research over the last couple of weeks would suggest YES, which means the index will increase without the market moving higher.
June Markets – CORE and ETFs
Unfortunately, June was the worst month since March 2020. The ASX fell 8.9%, and International markets (MSCI) were little better falling 8.5%.
The only consolidation apart from holding most recommendations back in cash is the CORE watchlist was 2.2% better for the month. This has been a common theme over the year, with the CORE Watchlist as a group outperforming the ASX by 4.87% over the last six months and 5.63% over the previous year.
The table below shows the best and worst from our stable of investment options. There are some common themes over the last month, calendar year (6 months) and financial year (12 months).
Energy has been the stand-out sector with Woodside, Santos and Origin Energy. Computershare has done well as it makes more money when interest rates are higher.
The worst performers have been Consumer Discretionary – Nine Entertainment, Seek.com, JB HiFi and Wesfarmers, with expectations for consumers to reduce spending. Interestingly, retail sales increased by 0.9% for the 5th month in a row.
There were mixed results in the Exchange Traded Funds (ETF). International markets have underperformed the ASX over the calendar and financial year by a reasonable amount. 8.6% and 4.6%, respectively.
The best ETF from the stable for the month and the only positive one was China New Economy (CNEW), up 13.9% as the Chinese economy started to reopen. At the same time, the Australian Banks (MVB) & Australian Resources (MVR) were the worst. They have been good performers over the previous months.
Supply chains and high growth valuations have hit Robotics (RBTZ) and Nasdaq (NDQ & HNDQ).
Hoping the new financial year brings a better result.
Market weakness but!
UBS research provides the following information
Global Financial Crisis (GFC) style collapse in profits is unlikely for numerous reasons.
Previous economic ‘hard landings’ have seen ASX market-wide earnings estimates cut by >30%. We don’t however see such a sharp profit correction playing out in this cycle given:
1) Our economists are not forecasting a recession,
2) Return on Equity (ROE’s) are not stretched,
3) Earnings do not look out of line with long-term trends and,
4) Balance sheets are sound.
Reduce year-end S&P/ASX 200 market target to 7000.
Top-down, markets have already largely adjusted to a more downbeat macro story: stocks have de-rated, in some cases considerably, whilst bonds now seem to be near their ceiling. But with the baton now being passed onto earnings downgrades, equity prices will be forced to fight against a more negative bottom-up story.
UBS, therefore, cut our year-end 2022 market target for the S&P/ASX 200 to 7000 (was 7700) previously. This would imply a 5% return and a -6% drop for the calendar year.
Staying OverWeight Resource equities: Consumer Discretionary moved to UnderWeight.
Tightness is still endemic through commodity markets, and although inflation may be near a peak, the elevated bands at which it will stay should ensure that Resource equities maintain leadership within equity markets. Consumer Staples join as an Overweight recommendation, due to the visibility and stability of their earnings streams. By contrast, we switch Consumer Discretionary to Underweight given we are not inclined to fight what looks like a vicious earnings downgrade cycle hitting the sector.
Financial Planning Snippets
– End of Year tax planning. If you need to plan tax deductions, please make contact with your accountant.
– Super – Concessional contributions (tax deduction) increased to $27.500 this year (this includes the compulsory 10% SGC).
– SGC is increasing to 10.5% from July 1
– Super – Non concessional contributions (no tax deduction, but no contributions tax). Up to $110,000 per year. if thinking of this please ask first because there are penalties if you contribute too much (especially if you have made large contributions in the past using the bring forward rule).
– The work test for those over 67 is removed from July 1. Meaning you can be retired and make further super contributions (if appropriate).
– Account Based Pensions from the super fund. The minimum is half the normal. Please make sure you have taken the minimum pension, otherwise, the super fund could revert back to accumulation and be taxed at 15% as opposed to being tax-free.
Any questions, please let us know.
– Chinese economic data showing signs of improvement.
– Retail sales better than expected up 0.9% (expecting 0.5%) for the 5th consecutive month.
– CBA lifts fixed rate loans by 1.4%.
Broker Target Price changes
Ord Minnett/JP Morgan
Goodman Group (GMG) decreased from $25.80 to $23.70
Lend Lease (LLC) decreased from $11.40 to $11.20
Coles (COL) decreased from $19.60 to $19.30
JB Hi Fi (JBH) decreased from $55 to $53
Today’s ASX sector Movements
Worst – Utilities -2.9%
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 86.49% to 84.73%. Trading well below 90%. Will the market rebound? or will the analysts cut their target prices? Maybe a little of both
Overall Earnings Per Share (EPS)
FY22 decreased from 19.76% to 19.66%. Started 30/6/21 with a profit forecast of 33% for FY22, so expectations have reduced over the year.
FY23 decreased from 7.48% to 7.09%. Started 30/6/21 with a profit forecast of 8.04%, so expectations have only slightly dropped. Will they drop in the coming months as reporting season starts in August?
Most expensive – CBA 103.7%
Least expensive – Nine Entertainment (NEC) cheapest at 53.7%
The CORE Watchlist has 1 (1) stocks trading above 100% lowest (0) while 11 (11) are trading below 85% (highest 18). ALL ANZ GMG JBH LLC MQG NEC NXT SEK STO WBC (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). 16 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24.
ALL current price $34.38 Broker range $41 to $46
AMC current price $18.04 Broker range $18 to $19.20
ANZ current price $22.03 Broker range $23.50 to $30.75
CSL current price $269.03 Broker range $295 to $330
GMG current price $17.84 Broker range $22 to $29.50
JBH current price $38.46 Broker range $40.90 to $58
LLC current price $9.11 Broker range $11.40 to $14.37
MQG current price $164.51 Broker range $187 to $234
NEC current price $1.83 Broker range $2.20 to $3.80
NXT current price $10.64 Broker range $13.01 to $15.00
ORG current price $5.73 Broker range $6.06 to $7.70
ORI current price $15.77 Broker range $16.20 to $19.70
SHL current price $33.01 Broker range $37.30 to $40
STO current price $7.42 Broker range $8.31 to $11
TLS current price $3.85 Broker range $4 to 4.85
WBC current price $19.5 Broker range $22 to $29
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 86.7% to 84.9%. The banks sold off late today.
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%
Demand for commodities and potential reduction of supplies occurring. Commodity prices and Resources usually do well in higher inflation & rising interest rate environment.
FY21 cps % FY22 cps % FY23 cps %
BHP 334.17 8.10% 461.80 11.20% 395.40 9.59%
RIO 1444.00 14.06% 1259.17 12.26% 976.83 9.51%
Plus franking. Please note RIO is Calendar Year (CY). Cents per share (CPS)
Other Indicators (change since the last Not So)
– US VIX Index increased from 26.95 to 28.16 In a rising interest rate environment, the new trading range is likely to be 17-28. Above the top of the range (a contrarian view is the higher the VIX, the better buying opportunity). 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 $120.60 to $121.50 Brokers expect an average in 2022 to be $139 down from $142. ALL-TIME HIGH of $237.57.
– Copper decreased from $3.78 to $3.76 It hit a NEW ALL-TIME HIGH $5.03
– Gold decreased from $1827 to $1817. Climbed above $2000 at the start of the Russian invasion. Record high $2063.
– AUD/USD decreased from 69.27c to 68.79c. USD stronger on higher interest rates from the US Federal Reserve. USD strongest it’s been against all currencies for 20 years.
– USD/CNY decreased from $6.70 to $6.69. Lowest $6.31 Highest $6.80 USD stronger. Chinese re-opening may see a stronger Yuan.
– Asian markets – MIXED
– US 10 year Bonds decreased from 3.18% to 3.10%. Higher inflation is pushing rates up. The recent high is 3.48% (8 year high). US 30 year Bond decreased from 3.30% to 3.22% The highest level was 3.50%. US Federal Reserve increased rates by 0.75% with more to come. Plus BOND selling of $95bn per month (QT). The US 2 year rate has decreased from 3.09% to 3.04% The gap between the 2 yr and 10 years was 0.09%. It has decreased to 0.06% & not inverse but very close (inverse suggests a recession).
– German Bonds decreased from 1.54% to 1.51%. The highest point in eight years 1.71% as the ECB is likely to start raising rates, this year. Higher spending, higher inflation. All German rates are now positive.
– Japanese Bonds increased from 0.22% to 0.23% 0.44% highest in some time. Bank of Japan (BoJ) are buying Japenese Govt Bonds and now own 54%. Some are questioning how long can they keep rates suppressed.
– Aussie Bonds 10 year Bonds decreased from 3.74% to 3.69%. Recent high is 4.20%
– Other Aussie Bonds 1 year 2.42% 2 year 2.99% 4 year 3.36% 5 year 3.45% 15 year Bonds 3.84%.
– Oil prices increased from $105 to $109.95. It reached $125. EU mostly banning Russia oil and China re-opening.
– Tungsten – Baltimore & Rotterdam $345-$350 mtu
This week & next week
Last “Not So” opened in 5 Aust states (excl NT ACT) US 6 states (California, Massachusetts Colorado South Carolina Virginia & Connecticut) and UK,
This week – Out of office tomorrow – Regional Victoria
Next week – Out all week – Port Douglas and Cairns seeing clients.
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