The Not So DAILY BULLETIN 8 May 2023 No.556

The Not So DAILY BULLETIN 8 May 2023  No.556
Top Stories
Monday, 8 May 2023, saw the ASX 200 gain 57 points to finish at 7277. We are in a trading range again between 7000 and 7400.  

Today, Westpac results were better than expected, up 22% and a nice dividend increase. Like the other banks, there is uncertainty in the outlook. So the results from the banks can be summed up by saying better than fear, worse than hoped!

Last week, the US and European Central Banks increased interest rates as inflation remains high and the jobs market is yet to be impacted by rising rates. On Friday, another 235,000 jobs were created in the US last month, which was more than expected. US unemployment fell to a recent record of 3.4% (difficult to have a recession with this level of unemployment). This led to a jump in the US markets on Friday, providing a strong lead for our market today. 

US regional Banks are under pressure from hedge funds short selling (selling shares you don’t own). This creates uncertainty, and we risk other banking collapses (deposits are ok). At best, this will force banks to undertake stricter lending (likely); at worst, it could cause another credit crunch (unlikely), but we are likely to see more volatility in the coming weeks. 

Important announcements this week.

Budget – tomorrow night, maybe expecting a surplus. 
Wednesday night- US inflation data. 
Thursday – Bank of England – rate decision. We are expecting another rate rise.

We are still cautious at this point.
Australian Equity Market 

Macquarie held a conference last week with 100 companies presenting. 

Some observations made were provided by Macquarie research today.

• Australian consumer is slowing. Despite the lowest unemployment in decades and high immigration, there are ongoing signs the consumer is slowing, especially in the areas that benefited most from COVID and where demand is impacted more by interest rates. Multiple companies talked to consumers trading down as household budgets come under pressure. As more fixed-rate mortgages roll-off, and past rate hikes bite the pressures on consumer spending will likely increase. Travel remains a bright spot as pent-up demand supports sales.

• Inflation is easing. Last year labour cost pressures were a theme of the conference, but this appears to be normalising. Industrial and Mining companies in particular appear to be seeing improving labour availability. Health Services appear to be one area where labour cost pressures are still more acute, but from a contrarian view, Health Services are one of the last areas impacted by COVID that can still see an earnings recovery.

• Was this the downgrade conference some feared? Probably not. There were downgrades, and all four media stocks posted disappointing earnings updates. On the positive side, there were a few upgrades

• RBA + Australian housing. Residential REITs called out the improvement in operating trends they were seeing when the RBA did not hike in April. It remains to be seen how much the surprise RBA hike impacts the nascent housing recovery in the short term. Longer term, there was a bullish view on residential property given Australia’s strong immigration and the housing shortage.

Actions from Macquarie 
• Remain defensive. We believe the results of the 25th Australian conference are consistent with our cautious view on the cycle. We continue to think the US is headed for a recession later this year and that this will drive more volatility. Australia may avoid recession thanks to high immigration, but a US recession is still likely to impact Australian equities. 
Bank Profits 

Over the last week, 4 of the five major banks (excl CBA) have provided profit results. All saw increases and importantly for investors, increases in dividends. However, the outlook statements suggested a tightening of the economy due to inflation and interest rates. 

In the table below, I have provided some information regarding their results.

Macquarie has produced a profit for the 54th consecutive year. 
Federal Budget 

Treasurer Chalmers will deliver his first budget tomorrow night. Expectations are for new taxes, including petroleum tax and cost of living hand-outs for electricity and delayed or dumped infrastructure.

While lots of talk over the last year about how bad the budget is, and we were likely to see a $1tr debt. There has been a significant turnaround to the point where FY23 could provide a surplus. The October budget update suggested the budget deficit for FY23 would be -$36.9bn and FY24 -$44bn.

There are suggestions the actual result for FY23 could be a small surplus. Either way a vast improvement from a year ago. 

The likely reasons for the improvements.
– rising wages (more income tax & GST)
– lower unemployment (fewer benefits paid)
– higher commodity prices (more tax)

The chart below from UBS shows the price of iron ore, coal and gas compared to the expectation in the budget. 

I will provide a more detailed update on the budget issues in the next Not So Daily.  
Investment Committee meeting (left in from last Not So)

Yesterday we conducted our investment committee meeting with Brad Matthew, Kevin and myself. We noted the number of crosswinds that were buffering markets
a) inflation remaining higher for longer,
b) interest rates hadn’t peaked yet
c) continuing issues with regional US banks, which is likely to tighten lending standards. 
d) China’s re-opening slower than expected
e) US debt ceiling is still to be resolved.
f) Jobs growth delaying recession or avoiding recession?
g) Consumer spending holding up.
h) Company profits are better than expected.
i) Expectations of higher minimum wages and increasing immigration 

These issues make it difficult to predict market direction and asset values. Many institutions believe we are still in a BEAR market. In recent Not So’s, we’ve discussed the likelihood of a HARD LANDING (major recession), SOFT LANDING (mild recession or slowdown) or NO RECESSION. 
In yesterday’s meeting, Brad presented the matrix below, which helped us understand these events’ chances.

To explain, the three scenarios of NO, SOFT and HARD landing are across the top. Down the left side, two variations of inflation.
The first is if inflation meets current expectations, which is seen as falling and will retreat to normal levels of 2% within a year or so. In that scenario, company earnings (profits) remain reasonable; markets will likely rally strongly. Unfortunately, this is only given a 5% chance.
Brad suggested the market consensus is for a SOFT LANDING and inflation within current expectations. This would justify the recent rally and may see a further rally—a probability of 20%. 

However, there is growing evidence that inflation may remain HIGHER FOR LONGER, given that services inflation is falling slowly. This is the second variation. Each probability is provided with the highest chance of going to a HIGHER FOR LONGER INFLATION and a SOFT LANDING. Higher interest rates and the share market may give up some of the recent rallies. 

Unfortunately, there is NOT ONE clear direction or landing point. That’s why we are still cautious but happy to buy and dip. 
Exchange Traded Funds (ETF) – series 

We prefer using ETFs with an intelligent beta system (where available). A smart beta ETF has rules (criteria) regarding the selection of investments.   
The 11th ETF profiled is an existing option focused on Australian Banks.

11. VanEck Australian Banks (MVB) gives investors exposure to Australian Banks

 At 25th April 2023 the fund holds 7 stocks, the Price to Earnings (PE) is 13.2 times, and the Dividend Yield is 4.98%. Return on Equity 12.09%.

Australian Banks have been the cornerstone of many portfolios with health tax-effective income. Instead of owning each bank, this option provides access to the five major banks, which account for over 97% of this ETF. It also pays 3 dividends per year. 

Previously reviewed 
1. Global Value (VLUE)
2. International Quality (QUAL) &  hedged currency (QHAL) 
3. International Small Company Quality ETF (QSML)
4. Global Health (IXJ)
5. China New Economy (CNEW)
6. Europe (IEU)
7. Asia (IAA)
8. Global Infrastructure (IFRA)
9. Australia Property (MVA) 

10. Cybersecurity (HACK)

Financial Planning Snippets
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 
– US may reach the debt ceiling by early June. No resolution yet. 
– US unemployment 3.4%  
Broker Target Price changes –

Ord Minnett

Amcor (AMC) decreased from $16.20 to $15.20
ANZ decreased from $26.24 to $25.74

JB Hi Fi (JBH) increased from $48 to $50
Macquarie Group (MQG) decreased from $214.50 to $201.80
National Aust Bank (NAB) decreased from $28.78 to $28.02

Morgan Stanley
AMC decreased from $15.50 to $14 (lowest broker)
ANZ decreased from $26.24 to $25.74

BHP increased from $41.35 to $41.75
MQG decreased from $231 (highest broker) to $215 (still highest broker)
NAB decreased from $30 (equal highest broker) to $27.70

AMC decreased from $17.38 to $15.70
ANZ decreased from $26 to $24 (lowest broker)
Computershare (CPU) decreased from $26 to $25
NAB decreased from $30 to $28

Bell Potter/Citigroup
ANZ decreased from 27.25 to $26.50
BHP increased from $43 to $45.50 
MQG decreased from $190 to $175
NAB decreased from $29.50 to $27.50

AMC decreased from $18 (highest broker) to $16.30 (still highest broker)
ANZ increased from $25 (lowest broker) to $26
JBH increased from $46 to $47.50

MQG decreased from $211 to $200

Tracking changes for 2023
Upgrades 135
Downgrades 131

(we have noticed the overall trend is down but the CORE stocks are seeing upgrades. It probably reflects the quality stocks in our 30 CORE stocks).
Today’s ASX sector Movements
Best –  Energy +2.5%   
Worst Consumer Staples -0.9%
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 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 92.36% to 93.64%.    

Overall Earnings Per Share (EPS) 

FY23 decreased from 5.15% to 5.08% 
FY24 decreased from 8.9% to 8.45% 

Most expensive – CBA 107.9% WOW 107.6%          
Least expensive –  Lend Lease 74.5%.    

The CORE Watchlist has 7 (6) stocks trading above 100%, they are BHP CBA COL JBH SHL WES WOW, lowest number ever is 0, highest 9. While 4 (6) are trading below 85% (highest 18) lowest for a while is 3. LLC NEC 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). 8 out of the 30 CORE stocks are trading below the lowest broker target price. Highest 24. Lowest for some time 5.

ALL current price $37.78    Broker range $41.20 to $43
ANZ current price $23.83    Broker range $24.00 to $31
CPU current price $21.99    Broker range $22.60 to $28
CSL current price $301.27  Broker range $315 to $350
LLC current price $7.79      Broker range $8.32 to $14.45
ORA current price $3.34     Broker range $3.50 to $3.80
STO current price $7.30      Broker range $7.75 to $12
WBC current price $21.74   Broker range $22.50 to $29


Removed    AMC
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 98.6% to 95.6% The Bank reporting season was OK(ish) but outlook statements were mute. Based on the target price changes ANZ 90% CBA 107.9% NAB 97.8% & WBC 97.8%.  

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 6.13% 162.5 6.82% 163.0 6.84%
CBA 385.0 3.96% 440.0 4.53% 451.3 4.65%
NAB 151.0 5.57% 169.2 6.24% 169.3 6.25%
WBC 125.0 5.75% 143.8 6.62% 148.3 6.82%
MQG  622.0 3.59% 738.0 4.25% 696.6 4.01%

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.
FY22 cps % FY23 cps % FY24 cps %
BHP 451.00 10.08% 295.40 6.61% 290.0 6.48%
RIO 702.00 6.27% 718.67 6.42% 700.7 6.26%
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 17.78 to 17.74  Bounced off the lowest level Oct 2021.  Trading range is likely to be 17-28. 
Iron Ore decreased from $102.05 to $98.70  ALL-TIME HIGH of $237.57.  Av expected for 2023  is $104.20
Copper increased from $3.85 to $3.93 China re-opening and shortage expected in 2023. It hit an ALL-TIME HIGH $5.03 at the start of the Russian invasion. 
Gold increased from $2026 to $2030.  near 1 year high. Record high $2063. 
AUD/USD increased from 66.65c to 67.87c.      
USD/CNY increased from $6.91 to $6.92  Lowest $6.31 Highest in recent years $7.35    
Asian markets – UP except Japan.
US 10 year Bonds increased from 3.43% to 3.44%. Rates have reduced on an expectation of a slowing economy & potential rate cuts. 4.23% (8 year high). US 30 year Bond increased from 3.71% to 3.74% The highest level was 4.27%. US Federal Reserve peak maybe lower than 5.4% to 5.50%, currently 5%. The US 2 year rate has decreased from 3.97% to 3.94%  (5.08%, highest since 2006).  The gap between the 2 yr and 10 years an inverse -0.5%. It was -0.64% but still inverted, which historically has suggested a recession. Widest inverse gap is -1.1%. This is the most it has been inverted in 42 years. 
German Bonds increased from 2.26% to 2.30%. 2.74% highest since 2008 
Japanese Bonds decreased from 0.42% to 0.41%   0.508% highest in many years. Widening the range to 0.5% Japan had the highest inflation read for 40 years. The Bank of Japan chair is changing. Will this change their low-interest rate policy?  
Aussie Bonds 10 year Bonds decreased from 3.42% to 3.41%.  Recent high is 4.21% 
Other Aussie Bonds 1 year 3.62%  2 year 3.19% 4 year 3.11% 5 year 3.14% 15 year Bonds 3.67%. The yields moved higher, but are still below the cash rate.    
Oil prices increased from $71.74 to $72.12. Fell below $70 over the weekend.  
Tungsten – Baltimore & Rotterdam remained at $340 – $345 mtu. China $325 to $340mtu.  
This week & next week  Last “Not So” opened in 5 Aust states (excl NT Tas ACT), US 4 states (California, Massachusetts Colorado & New York)  Sweden, Israel and UK 
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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