| The Not So DAILY BULLETIN 31 May 2022 No.480 Top Stories Tuesday, May 31, the ASX dropped 75 points to finish at 7211, which is up from the last Not So, but the ASX is down for May by 3.01%. In recent months, the Australian market has held up reasonably well, but selling pressure and profit-taking have been a feature of any rallies. Today’s drop was after a gain of 104 points yesterday, so the volatility remains high. As I have mentioned, we are still within the trading range of 7000 to 7500, which is a good sign. A change of government seems to have been priced in by the market; however, increased talk of new taxes may change that, given none were mentioned in the election campaign. International markets staged a slight recovery last week, with the US having their first positive week in 7. Economic data released last week shows that inflation may have peaked in the US. This would be an excellent signal, and if correct, it could settle interest rate forecasts and put less pressure on stock prices. Another positive is the Chinese lockdowns are being reduced as of tomorrow. This has assisted some of the Asian markets. There is still lots of talk of bear markets and even recessions. The Citigroup Bear checklist below explains why they think we won’t have these events; however, we know markets can be very fickle, positive one week or day and negative the next. We believe there is still plenty of volatility to come over the coming weeks, and we haven’t seen the capitulation event yet. Kevin and I will be holding our investment meeting tomorrow to discuss the latest data. Caution is still warranted. Market Signals Most of the financial news we see continues to be negative; – Higher inflation – Rising interest rates – China lockdowns – Russia/Ukraine conflict – Global supply chain issues. – US economy slowing – US markets are nearing a BEAR market However, all this news is changing some of the closely watched market signals. One of the main ones is Citigroup’s Global Bear Market checklist (BMC) Citigroup noted the global Bear Market Checklist (BMC) wants to buy this dip, given it hit only 8.5/18 red flags at last year’s peak in equity markets (see checklist table below) When the BMC falls to the current 6/18 red flags, buying has generated healthy 12mth gains (average +31%), even in multi-year bear markets. But we suggest patience; the BMC is not a market-timing indicator. Europe/EM Less Stretched Than US — The US showed more red flags (9/18) than Europe (6/18) or EM (4.5/18) at last year’s global market peak. Hence, the BMC would instead buy the dip in EM/Europe than the US. Bear Market Checklist — This looks at a broad range of market and fundamental indicators, including valuation, credit spreads, analyst bullishness, profitability, IPOs, M&A, US yield curve and credit spreads. At any time, some may give bearish signals, but others look benign. Last December: 8.5/18 Red Flags — The BMC measures the frothiness of the previous market peak. Last December, red flags were raised by stretched valuations, high IPO activity, bullish stock analysts, and peak-cycle profitability. More benign indicators included low credit spreads, middling M&A, low-ish equity fund inflows, and a reasonable equity risk premium. Buy The Dip — 8.5/18 red flags is well below 13/18 reached immediately before the 2007-09 bear market and 17.5/18 prior to the 2000-03 drawdown. Hence, the BMC still wants to buy this dip. It is now down to 6/18 red flags. Buying when the BMC declines to this level has led to very healthy 12m gains (average +31%), even in previous multi-year bear markets. The BMC was designed to suggest action when the inevitable dips come along. If the number of red flags was low as the sell-off began then the signal might be to buy the dip. If it was high, then stay away. The BMC’s last strong call was in the 2020 Covid sell-off. Given there were only 5.5/18 red flags at the February peak beforehand, it always wanted to buy the subsequent dip. The MSCI AC World fell 35% in March, but had recovered all of its losses by September. While 8.5/18 was the most red flags in 15 years, to signal the next major bear market, it probably needs double digits. We did not get there. The BMC has made its call. It wanted to buy this dip. Sure, there was froth evident at the December 2021 market peak, but not enough to require an extended bear market to clear it out.   CORE & ETF’s performance May 2022 The ASX dropped 3% for May. As normal, the performance of individual stocks and sectors were mixed with a range of results. I have included the best and worst three for the month, calendar year CY (5 months) and financial year FY (11 months). The CORE stock for the month was Amcor, up 8% as their 3rd quarter results were better than expected, and they have contracts where they pass on any cost increases to customers. At the same time, entertainment stock Channel Nine (NEC) was down 18% on expected lower ad revenue. Goodman Group (GMG) had its first poor month in many years and is now on the BUY radar. The Exchange Traded Funds (ETFs) saw a range of results. China New (CNEW) was the best, up 5% as cheap valuations and growing interest in China, with the expected lockdowns to finish soon. The technology orientated indices are still suffering from a lack of computer chips and supply chain issues. Over the CY and FY, Resources, Banks, Infrastructure, and Health have held up well compared to other global market sectors.  Other Stories – LABOR is likely to finish with 77 seats and a majority. – Local Member Sussan Ley (Farrer) is the Deputy Liberal leader & Local Deniliquin resident Perin Davey (Senator NSW) is the Deputy National Party leader. Congratulations to both. Likely to increase the voice of the bush. – CBA expecting housing to fall 10% this year. – Most economists are expecting Aust quarterly GDP to be 0.5% to 0.8%. Released tomorrow. – EU has agreed to ban most of the Russian oil, but oil prices are up on Chinese demand increasing. – Chinese lockdown slightly ease in some cities tomorrow. Broker Target Price changes Ord Minnett/JP Morgan ANZ decreased from $29 to $28.30 Goodman Group (GMG) decreased from $23 (lowest broker) to $22 (still lowest broker) Morgans BHP decreased from $54.30 to $48.30 Woodside Energy (WDS) decreased from $33.60 to $32.90 Morgan Stanley GMG decreased from $27.88 to $25.98 Macquarie BHP decreased from $60 (highest broker) to $57 (still highest broker) Nine Entertainment (NEC) decreased from $2.80 (lowest broker to $2.20 (still lowest broker) Origin Energy (ORG) increased from $7.19 to $7.32 Santos (STO) decreased from $10.50 to $10 Seek.com (SEK) decreased from $32 (equal lowest broker) to $19 (lowest broker) Bell Potter/Citigroup BHP decreased from $56 to $50 UBS BHP decreased from $43 (lowest broker) to $38 (still lowest broker) Wesfarmers (WES) decreased from $59 (highest broker) to $56 Today’s ASX sector Movements Best – Utilities 0% Worst – Financials -2% 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 87.73% to 88.56%. Below 90% (usually a good entry point). Overall Earnings Per Share (EPS) FY22 increased from 19.23% to 19.47%. Bank & Commodity profit forecasts are up. FY23 decreased from 7.78% to 7.2%. Most expensive – CBA 112.3% Least expensive – Nine Entertainment (NEC) cheapest at 64.8% The CORE Watchlist is still mixed with 2 (1) stocks trading above 100% while 8 (10) are trading below 85% (highest 17). ALL GMG JBH NEC NXT RMD 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). 14 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Good value to be found. ALL current price $33.79 Broker range $41 to $46 ANZ current price $25.04 Broker range $26 to $32 COL current price $17.53 Broker range $18 to $20.65 CSL current price $271.83 Broker range $295 to $335 GMG current price $20.55 Broker range $22 to $29.50 JBH current price $45.96 Broker range $54 to $62 MQG current price $185.98 Broker range $187 to $234 NAB current price $31.26 Broker range $31.80 to $35 NXT current price $11.01 Broker range $13.50 to $15.00 RMD current price $27.76 Broker range $33.10 to $40.46 SHL current price $36.66 Broker range $37.30 to $40 TLS current price $3.88 Broker range $4 to 4.85 WES current price $47.19 Broker range $50 to $59 WOW current price $34.65 Broker range $36 to $40.50 Added TLS Removed NEC SEK 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 95.9% to 96%. 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. Slight increases in dividend forecasts from the brokers. FY20 % FY21 % FY 22 % FY 23 % ANZ 60.0 2.36% 142.0 5.60% 142.0 5.60% 154.2 6.08% CBA 298.0 2.84% 350.0 3.33% 377.0 3.59% 406.4 3.87% NAB 60.0 1.93% 127.0 4.08% 147.8 4.76% 163.3 5.25% WBC 31.0 1.32% 118.0 5.01% 118.4 5.03% 128.2 5.45% MQG 430.0 2.40% 470.0 2.63% 627.2 3.51% 617.2 3.45% 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 6.99% 430.60 9.01% 348.00 7.28% RIO 1444.00 13.07% 1292.50 11.70% 993.50 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 28.48 to 26.54 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). – Iron Ore increased from $135.97 to $136.60 Brokers expect an average in 2022 to be $142. ALL-TIME HIGH of $237.57. – Copper increased from $4.30 to $4.36 However, it hit a NEW ALL-TIME HIGH $5.03 – Gold decreased from $1854 to $1847. Climbed above $2000 at the start of the Russian invasion. Record high $2063. – AUD/USD increased from 70.8c to 72c. 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 $6.67 to $6.66. Lowest $6.31 Highest $6.80 USD stronger. Will the Chinese intervene? – Asian markets – DOWN – US 10 year Bonds decreased from 2.84% to 2.83%. Higher inflation is pushing rates up. The recent high is 3.2% (3 year high). US 30 year Bond decreased from 3.04% to 3.03% The highest level was 3.30%. US Federal Reserve is increasing rates and may increase by 0.5% at the next meeting, plus BOND selling of $95bn per month (QT). The US 2 year rate has decreased from 2.61% to 2.56% The gap between the 2 yr and 10 years was 0.23%. It has remained at 0.23% & not inverse (inverse suggests a recession). – German Bonds increased from 1.01% to 1.07%. The highest point in several years 1.10%. Higher spending, higher inflation. Only the 1 year Bond is now negative. – Japanese Bonds increased from 0.23% to 0.24% 0.25% highest in some time. – Aussie Bonds 10 year Bonds increased from 3.32% to 3.35%. Recent high is 3.56% – Other Aussie Bonds 1 year 2.04% 2 year 2.73% 4 year 3.06% 5 year 3.15% 15 year Bonds 3.58%. – Oil prices increased from $109 to $118.59. It reached $125. EU mostly banning Russia oil and China re-opening. – Tungsten – China remained at $342-$353mtu. Europe & US remained at $348-$359mtu. This week & next week Last “Not So” opened in 5 Aust states (excl WA Tas & ACT) US 5 states (California, Massachusetts Virginia South Carolina & Connecticut). This week – In the office – May reviews. Next week – Will be in the office Monday and Tuesday. Wednesday- Friday preparing for father (Bill’s memorial service). Passed 9 June 2021. Contact details PO BOX 149 Deniliquin NSW 2710 125 End St Deniliquin NSW 2710 Ph. 03 58950100 Fax 03 58950101 Mobile 0412113524 scottm@provincialwealth.com.au kevinh@provincialwealth.com.au chrisp@provincialwealth.com.au maddyl@provincialwealth.com.au |
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