| Top Stories Today, October 13, the ASX 200 continued its post-budget rally with a 1% jump to a seven month high of 6196. It’s now above the recent trading range and at it’s highest point since early March, just before the 30% oil sell-off when Russia and Saudi Arabia disagreed. Global markets are still counting on Government stimulus and low-interest rates, even though the US can’t agree on how many trillions for the next package. The US pre-election melodrama continues, while Europe increases restriction on rising cases. We are unlikely to see another hard lockdown as the W.H.O has indicated it doesn’t;t work and has other unintended consequences. There is still only nine countries that have removed active cases. Even the Vatican has seven new cases today. Provincial Wealth (PW) Investment Committee Kevin Hanson and I had our weekly investment discussion. We thought we would share with you some of our current thinking. Big Picture The global economy and markets are a mixture of lots of moving parts and not all in the same direction. Research from Macquarie suggests the leading economic indicators in the US and Europe are moving to the expansion phase of the economic cycle as they are following the Chinese economy out of recession. We noted the recovery is two speed (K economy). The first (up leg) those sectors that are open and functioning at near-normal levels are doing reasonably well. The second (down leg) are parts of the economy that are still closed or heavily restricted due to social distancing. These industries are struggling and may do for some time (travel, hospitality, retail & other consumer discretionary sectors). At the moment, these areas are supported by government stimulus, but the support won’t last forever (2021). Unfortunately, most are small businesses and not large listed (stock exchange) companies. This is part of the reason why we are seeing stock markets rallying. On a sector basis Cash rates may be cut in Australia at the next RBA meeting (Melbourne Cup day), but they aren’t rising anytime soon. Fixed Interest Interest rates globally remain down and will for many years. We are watching the long end of the interest rate curve (10 years plus) for any movement of inflation. Bonds remain unattractive given the low rates. US 10 year bonds 0.779% 30-year bonds 1.577% Aus 10 year bonds 0.85% These rates have flowed into regular term deposits that are below 1%. We are looking at several options regarding searching for higher income, but the numbers are still meagre. Property/Infrastructure These sectors sold off in March. Prices have recovered, but question marks remain on the outlook for shopping, office and some residential property. The excellent quality properties will still be an attractive option based on low-interest rates and consistent rental income. The market might have seen the bottom already; however, it will depend on how banks and other lenders treat the businesses that don’t reopen. Infrastructure is seen as preferred in this area, given the likely boost from government spending and consistent income stream from providing essential services. Australian Shares The “kitchen sink” budget, friendly interest rates and COVID controls are likely to see a better economic position than forecast. These, coupled with a good recovery in our major trading partners China, Korea and Japan will assist our recovery. However, a growing list of Chinese bans could be a concern. The Australian market has underperformed the recovery compared to other parts of the world as our market is seen as being “öld economy” or value-orientated. According to Macquarie, the expansion phase is when “value” stocks perform better as investors look for reasonable value and income. The ASX has outperformed in the first year after the last four US recessions. International Shares The world is still trying to deal with growing COVID numbers as no major country has been able to eradicate the virus. This means COVID limitations are likely to remain until a widely used vaccine removes the spread. This could be late 2021 and into 2022 (assuming vaccine works). Government stimulus and low-interest rates will remain in short to medium term. Specific markets, notably the US, Germany, China & Japan, have bounced well with the technology and healthcare sectors being the best. These areas are bringing change and/or disruption to age-old business models. We think this change will continue and even quicken in the POST COVID expansion world. That’s why are still firm believers in the global growth themes we have referred to many times in the past. In the short term with the US election drawing closer, anything is possible, and so we remain wary but optimistic. The US markets are likely to be comfortable with a change or the status quo. What they won’t like to see is a disputed result.  Other Stories – Sports Bet – US Election Trump $2.88 ($2.80). Biden $1.43 ($1.40). Trump needs a hail mary from here based on these odds. – Apple is having a product launch tomorrow. – Chinese exports grew by 10% YOY. Especially strong were medical supplies (CNEW). – Morgan Stanley recently said NextDC (NXT) will rise above the market due to 1) Growing cloud computing market. 2) Asian JV opportunities 3) Capacity expansion & 4) Refinancing debt to lower rates. The latter occurred today with an expected saving of $10m in interest. – Telstra AGM – chairman stated they were prepared to overshoot the dividend payout ratio to back the current dividend level. – Banks are showing loan deferrals are reducing and bankruptcies are down but government stimulus is delaying some businesses from hitting wall. Signs of the K economy. – Johnson and Johnson (JNJ) has suspended COVID trial. Broker Target Price changes Goldman Sachs Ord Minnett/JP Morgan ANZ increased from $19.50 to $20 CBA increased from $65.30 to $66.30 NextDC (NXT) increased from $13 to $14 Westpac (WBC) increased from $18.20 to $18.80 CIMB/Morgan Morgan Stanley Goodman Group (GMG) increased from $20 (highest broker) to $20.90 (still highest broker) NXT increased from $13.40 to $14.60 (highest broker) Macquarie Bell Potter/Citigroup ANZ increased from $20 to $20.50 Orica (ORI) increased from $18.30 to $19.50 Woodside (WPL) increased from $21.64 to $21.67 Today’s Sector Movements Best – Communications +2.2% Worst – Materials -0.3% 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 new stocks include in the CORE WATCHLIST Amcor (AMC) Brambles (BXB) JB Hi-Fi (JBH) NextDC (NXT) ResMed (RMD) and Trasurban (TCL). The Core index increased from 93.1% to 94.47 Overall Earnings Per Share (EPS) (including new stocks) FY21 decreased from 19.75% to 19.74% forecasts of some companies to have a large rebound after the 15% drop in FY20 profits. In the medium term, markets need profit growth to see the indices increase in value. Most expensive – Seek.com (SEK) 119.7% (buoyed by jobs growth) Least expensive – Origin Energy (ORG) is the cheapest at 66.3%. Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). AMC current price $15.89 Broker range $17 to $18 BHP current price $36.31 Broker range $37.80 to $45 BXB current price $10.86 Broker range $12.05 to $13.67 COL current price $17.91 Broker range $18.90 to $21 LLC current price $12.15 Broker range $13.25 to $16.74 ORG current price $4.38 Broker range $5.35 to $7.80 RIO current price $96.55 Broker range $98.10 to $122 TLS current price $2.89 Broker range $3 to $3.60 WPL current price $18.50 Broker range $20.60 to $33.70 MQG moved out due to rising price. Banking Index Like the CORE Watchlist index, the Banking index is the average target price of the four major Banks 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 97.2% to 100.4%. The budget has provided a strong boost to the banks and reduced the chances of bad debts. For October, ANZ up 13% WBC 12% CBA 9% NAB 9%. ANZ, NAB and WBC have their half-yearly results in early November. There are mixed views regarding the prospect of dividends. ANZ is mostly likely to increase theirs whereas NAB (capital raising) and WBC (Austrac fine) may pay a little or suspend their dividend. Other Indicators – US VIX Index decreased from 29.48 to 25.07. This is elevated above normal levels (10 to 17) More volatility expected. – Iron Ore – increased from $123.47 to $125.72. A six year high was $130.17 – Copper decreased from $3.07 to $3.06. Recent high $3.10. – Gold increased from $1915 to $1923. Record high $2063. – AUD/USD increased from 71.8c to 71.86c Fell to a low of 55c. The future direction is more about the USD rather than the AUD. – USD/CNY increased from $6.71 to $6.75 The lowest point was $6.71. China decided to stop strengthening by fixing it. – Asian markets – MIXED – US 10 year Bonds decreased from 0.77% to 0.76% Hit a low of 0.31%. I’m adding the US 30 year Bond which decreased from 1.57% to 1.56% (if this one start to rise, then it could provide inflation and volatility sign). Near the highest level for the year. – German Bonds decreased from -0.53% to -0.55%. Hit a low of -0.9% – Japanese Bonds decreased from +0.029% to +0.027% – Aussie Bonds 10 year Bonds remained at 0.85% Lowest point 0.68% – Other rates have slightly fallen 1 year 0.11% 2 year 0.16% 4 year 0.22% 5 year 0.32%. The market is starting to price in a November rate cut to 0.10% or 0.15%. However, we need to watch the long end of the yield curve. Aust 15 year Bonds 1.16%. – Oil price decreased from $41.13 to $39.85. – Tungsten remained at $215-$220 mtu. This week & next week Last “Not So” opened in 6 Aust states (missing NT & Tas) US 4 states (California, South Carolina Virginia & Georgia) & Singapore This week – Starting October reviews Next week – October reviews and HSC (good luck to Georgina) and all in year 12. 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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