The NotSo Daily Bulletin No. 340

Top Stories  

Today, October 20, HSC started for NSW Year 12. Good luck to all!
The ASX 200 dropped 45 points to close at 6185. This is after reaching a new seven month high of 6229 yesterday.

Global markets had a poor night, so a pullback wasn’t a surprise given the recent strong run.  The US VIX (fear index) has increased to near 30, which is generally a sign for further volatility. We are now 2 weeks from the US election, and global COVID cases are still increasing with a new daily high of 416k on Friday, so anything is possible.   

Commodities rising 

Morgans updated their commodity prices and research. 

They believe major commodity complexes remain in good fundamental shape, with the stimulus-fueled recovery in Chinese demand playing an important role. Further helped by a weaker US dollar and rebounding views on global growth for post-Covid. They are encouraged by the commodity recovery broadening beyond precious metals and iron ore, with most base metals also now performing well and some energy resources showing tentative signs of recovery. Their most preferred commodity exposures are #1 Copper, #2 Oil, and #3 Gold. They view now as an opportune time to invest in resources, with supportive demand recovery conditions in several commodities visible and bottom-up developments being better rewarded by the market. Post revisions to commodity price assumptions upgraded the rating on BHP to Add (from Hold).

In terms of spot commodity prices compared to consensus forecasts for the calendar year 2021, the two standouts unsurprisingly are iron ore (+27%) and oil (-22%) at either end of the field. For iron ore, benchmark prices have held up better-than-expected against a backdrop of recovering Brazilian supply (which now stands at ~7mt/week up from ~3- 4mt/week 6 months ago), as expected this has started to translate into increasing China port stockpiles but regardless iron ore prices have remained firm on continuing demand. Meanwhile, oil remains heavily impacted by global Covid restrictions, given its use in transportation. They view this sensitivity as setting oil up as an appealing Covid-exit trade, as consumption growth is likely to closely track the lifting of global/domestic travel restrictions in key consuming regions.

The largest changes are 1) iron ore prices (15-25% upgrades to 2021/22 forecasts), 2) alumina (10-20% downgrades to 2021-24 forecasts), and 3) gold and silver (10-20% upgrades to 2021-24 forecasts).   

5G wireless technology is coming

– Last week Apple launched iPhone 12 which includes its first 5G iPhone. Macquarie research provided the following. The launch of Apple’s (AAPL) first 5G iPhone is likely to be the catalyst for a global handset replacement (super) cycle as well as the accelerant for the adaption and proliferation of 5G technological benefits.
– 5G will provide faster speeds, higher bandwidth (handle more devices) and reduced latency (response times). It is expected that 5G will allow the “connectivity” of everything (billions and billions of devices) and in turn fuse the physical with the digital, in real-time.
– This may sound futuristic, but this wireless technology is expected to be the accelerator for the fourth industrial revolution and with it, the potential to drive (almost) boundless possibilities via advancements that lead to outcomes such as smart cities and industries (i.e. agriculture, manufacturing), autonomous vehicles, telemedicine, virtual reality and more broadly the ‘Internet of Things’ (IoT).
– At this stage, the most obvious exposure is via chipmakers/hardware providers, telcos Telstra (TLS) and retailers JB Hi-Fi (JBH). Longer-term use-cases should see accelerating demand for data and artificial intelligence and we look towards more broad exposure via BetaShares Global Robotics and Artificial Intelligence ETF (RBTZ).

Macquarie expects the launch of Apple’s 5G compatible iPhone to drive the first global 5G handset upgrade (super) cycle. The roll-out of 5G wireless technology has been a long time coming and intermittent coverage suggests the benefits to both consumers and businesses will be constrained for some years to come. However, the consumer handset upgrade cycle will increasingly raise the awareness of the extent to which 5G technology will impact the world via real-time connectivity.

If 3G / 4G was focused on the consumers mobile experience, 5G can be considered as spreading the benefits to business via the connectivity of everything. 5G has been described as the accelerator of the fourth industrial revolution (1.0: steam, 2.0: electricity, 3.0: information technology, and 4.0: the internet) and with the potential to drive boundless and currently unthought-of possibilities.

For some, this might appear a set of grandiose statements, but it has been said that 5G will offer the potential to seamlessly fuse the physical with the digital world in real-time and, via connectivity that allows the collection, transmission and sharing of near-limitless data, allow us to reimagine a world which could be safer, smarter and faster (futuristic? … yes).

What will 5G look like in Australia? All three Australian mobile networks have commenced the rollout of 5G networks in major cities across Australia. However, the rollout is at an early stage with coverage patchy in the major cities and mostly not available in rural areas. Australia is a vast country and it will take years for 5G to be widely available across the country and become the new mobile standard. To access 5G, users will need: 1) a 5G device (such as an iPhone or 5G modem); 2) a 5G plan from a network provider (Telstra, Optus); and 3) in an area where 5G is covered by the network provider (mostly Metro currently). Consumers should see material improvements to 5G in the year ahead. Telstra has the most advanced 5G network, covering 41% of the population and expects to cover 75% of the population by June 2021. Optus and TPG / Vodafone are also investing aggressively in their 5G networks.    
Other Stories   

– Sports Bet – US Election Trump $2.45 ($2.88). Biden $1.57 ($1.40). Trump closing gap, but not sure attacking Dr Fauci while COVID cases are rising is a winning strategy.  
– AFL grandfinal Richmond $1.80 Geelong $2.10. GO TIGERS
– NRL grandfinal Melbourne Storm $1.72 Penrith $2.20 GO STORM
– Chinese quarterly GDP figures 4.9% which was better than last quarter but a little lower than expected. Retail sales were better at 3.3% as was Industrial Production up 6.9%. The Chinese economy looking like it’s POST COVID. 
– Westpac signed a deal with Afterpay (APT)  

Broker Target Price changes  

Goldman Sachs
Rio Tinto (RIO) decreased from $98.10 (lowest broker) to $97.10 (still lowest broker)

Ord Minnett/JP Morgan 
Orica (ORI) increased from $16.80 to $17
RIO decreased from $122 (highest broker) to $121 (still highest broker)
Sonic Health (SHL) increased from $36 to $36.50

BHP increased from $37.80 (lowest broker) to $39.70 (still lowest broker)
Morgan Stanley
Macquarie Group (MQG) increased from $133 to $152 (highest broker)

RIO decreased from $112 to $111

Bell Potter/Citigroup
National Aust Bank (NAB) increased from $19.90 to $21
Today’s Sector Movements
Best –  IT 1.7% 
Worst Financials -1.2%  

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 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 decreased from 94.97% to 94.27 

Overall Earnings Per Share (EPS) (including new stocks) 
FY21 increased from 20.25% to 20.33% 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 – (SEK) 118% (buoyed by jobs growth)  

Least expensive – Origin Energy (ORG) is the cheapest at 67.5%. 

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). 

AMC current price $15.94   Broker range $17 to $18
BHP current price $35.90    Broker range $39.70 to $45
BXB current price $10.49    Broker range $12.05 to $13.67
COL current price $17.85    Broker range $18.90 to $21
LLC current price $12.67    Broker range $13.25 to $16.74
ORG current price $4.46      Broker range $5.35 to $7.80
RIO current price $94.13     Broker range $97.10 to $121
TLS current price $2.80       Broker range $3 to $3.60
WPL current price $18.28    Broker range $20.60 to $33.70  

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 decreased from 99.8% to 98.6%.

The budget has provided a strong boost to the banks and reduced the chances of bad debts. For October, banks are up 10%.  

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 increased from 26.40 to  29.18. This is elevated above normal levels (10 to 17)  More volatility expected, especially when it reaches near 30.
Iron Ore increased from $119.52 to $119.53. A six year high was $130.17
Copper increased from $3.05 to $3.08. Recent high $3.10. 
Gold decreased from $1904 to $1904. Record high $2063.
AUD/USD decreased from 71.34c to 70.43c Fell to a low of 55c.  Expecting interest rate cut.
USD/CNY decreased from $6.72 to $6.69 The lowest point was $6.69. China decided to stop strengthening by fixing it. 
Asian markets – DOWN  
US 10 year Bonds increased from 0.72% to 0.77% Hit a low of 0.31%. I’m adding the US 30 year Bond which increased from 1.56% 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 -0.57% to -0.63%. Hit a low of -0.9%
Japanese Bonds  decreased from +0.022% to +0.017%  
Aussie Bonds 10 year Bonds decreased from 0.76% to 0.76%. After Reserve Bank Governor Lowe’s speech stating another rate was possible.   Lowest point 0.68%   
– Other rates have slightly fallen 1 year 0.11% 2 year  0.14% 4 year 0.20% 5 year 0.29%. 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 1.07%. 
Oil price decreased from $41.12 to $40.57. 
Tungsten remained at $215-$220 mtu.   

This week & next week 
Last “Not So” opened in 5 Aust states (missing ACT, SA & Tas) US 4 states (California, South Carolina Virginia & Georgia) 

This week –  Starting October reviews 

Next week – October reviews 

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125 End St Deniliquin NSW 2710
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