The NotSo Daily Bulletin No. 342

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Today, October 27, the ASX 200 dropped 105 points to close at 6051 or 123 points lower than the last Not So.

As mentioned in the last “Not So”, the market is waiting for the next catalyst. Overnight the US market dropped more than 2% as growing COVID numbers and uncertainty regarding the US election is like to cause some market flux as the VIX (fear index) is now above 30 (normal 10-17).

October has been a very good month, but it has given a little back in the last couple of days and may remain volatile until we have a clear election result. After that the focus will be on COVID and impact will have until we have a vaccine.

From that perspective Australia looks better with restrictions being lifted in Victoria after two days of NO cases. ANZ results out Thursday may provide some domestic guidance but we are likely to remain range bound while the COVID storm continues.

In Europe, cases hit 200k per day with restrictions being re-introduced while the US added another 70k cases and the highest weekly total since the pandemic started. While a total lockdown isn’t likely, total economic freedom is unlikely until numbers are vastly reduced or a vaccine.

As stated a number of months ago in the Not So. A prominent US Fund Manager said that while Americans think their liberty and freedom are more important than their obligation to the rest of society, the virus will continue to win. As we near 9m US cases and 230k death”. The virus is unfortunately winning!

After nine months of this virus, there are only nine countries who have no active cases and the biggest population of those is Solomon Island (692k). This is going to be with us for some time to come.

Australian Equities

Citigroup updated their research on the Aussie market. They think the Australian market underperformance versus the rest of the world might be over as Australia has managed COVID better than most which should lead to stable business conditions and employment (depends on the industry).

Their ASX 200 target is 6200 by June 2021, which only slightly higher than the current level, which suggests not all areas will do well. At present, they have a preference for domestic cyclicals (financials, insurance and industrials) plus resources as a POST COVID world is likely to see commodity prices push higher as inflation starts to increase.

The overriding caveat would be finding a vaccine, which may provide a growth boost to other areas. However, we won’t be holding our breath just yet.

US Election over soon!

It seems like the US election campaign has been going on for years. Finally, there will be a vote on Nov 3 (Nov 4 our time).

A blue (Democrat) or Red (Republican – GOP) wave where either party controls the three houses, this will mean a sizeable COVID package of $2-$3trillion.

At this point, voter turnover is expected to be larger than in 2016 with already 62 million votes cast (many postal). The postal votes may take a few days to count which could mean the overall result may not be known and Trump has cast doubt on his acceptance of the vote. If this occurs it could create market volatility unless there is a strong wave of either colour. A total of 123m were cast in 2016.

Morgan Stanley believes markets are going to remain range-bound until they have clarity on the US election and COVID, but using any weakness as an opportunity because the virus will eventually have a solution.

Aberdeen Investments have outlined the following scenarios and their probability.

Scenario 1 Description Probability
Democrat clean sweep President Biden with Democrat majority in House and Senate 50%
Policy impact
• Significant increases in taxes for corporates and high earners (dependent on majority).
• Higher spending on entitlements, infrastructure, education, green technology and jobs.
• Tighter environmental, tech and financial regulation.
• Multilateral approach to China and progress on the OECD digital tax initiative.

Scenario 2 Description Probability
Biden with split Congress President Biden with Democrat majority in House and Republican majority in Senate 25%
Policy impact
• More rapid fiscal consolidation due to gridlock in Congress.
• Tighter environmental, tech and financial regulation.
• Multilateral approach to China and progress on the OECD digital tax initiative.

Scenario 3 Description Probability
Trump with split Congress President Trump with Democrat majority in House and Republican majority in Senate 20%
Policy impact
• Highly uncertain path for fiscal policy based on the ability to find compromise.
• Loose environmental and financial regulation.
• Erratic and unilateral approach to China and other trading partners including EU.

Scenario 4 Description Probability
Republican Clean Sweep President Trump with Republican majority in House and Senate 5%
Policy impact
• Slow tightening in fiscal policy.
• Lower taxes for corporates and households.
• Looser environmental and financial regulation.
• Erratic and unilateral approach to China Uncertainty over next Fed Chair

Graph below is from Peter Switzer. This shows the value-added under each President.  

Banks reporting soon

The banks provide excellent insight into the rest of the economy.

Goldman Sachs research piece.

ANZ: Reports on Thursday, October 29. We expect 2H20 cash earnings growth (continued operations) of -8% to A$2,670 mn, diluted cash EPS growth of -13% to A86.1¢, and a Dividend (DPS) of A40¢.

WBC: Reports on Monday, November 2. We expect 2H20 cash earnings growth (company basis) of -37% to A$2,223 mn, diluted cash EPS growth of -37% to A62.0¢, and a DPS of A25¢.

NAB: Reports on Thursday, November 5. We expect 2H20 cash earnings growth (company basis) of -17% to A$2,512 mn, diluted cash EPS growth of 7% to A79.5¢, and a DPS of A37¢.

In order of likelihood to surprise:

1) Bad debts: Expect 2H20E sector bad debts (BDDs) to fall to 44 bp down from 54 bp in 1H20.
2) Profit margin pressure to persist in 2H20E but then subside in 1H21E given deposit repricing done late in 2H20.
3) Volumes: We expect negative sequential volume growth in 2H20E due to the unwind of commercial lending that happened late in 1H20, in response to Covid-19.
4) Expenses: Underlying expense growth of 3% in FY20E but expect management to be more optimistic about productivity opportunities into FY21E.
5) Capital: All majors to report capital ratios >11%; DPS to resume.
6) Markets: We expect continued trading income momentum in 2H20E.

In the near term, we think the sector’s fundamentals can be supported by:

i) loosening monetary, fiscal and macroeconomic policy to support 5% system mortgage volumes in 2021, ii) while medium-term net income margins (NIM) pressures from lower rates remain, we think the full-year impact of deposit repricing that has taken place through the back-end of FY20 can provide some support to FY21E NIMs, and
iii) loan deferrals are starting to cure, and we remain of the view that the market underestimates the level of collateral that sits behind the SME loan book on deferral.

Therefore, with the sector multiples are cheap, we think valuation support exists.

Other Stories

• Sports Bet – US Election Trump $2.80 ($2.70). Biden $1.47 ($1.50).
• Coke Europe has made a bid for Coke Australia (CCL). A reasonable premium to the last traded price.
• US Senate has confirmed Amy Barrett as US Supreme Court judge.

Broker Target Price changes
Goldman Sachs
Coles (COL) increased from $20 to $20.40
Crown (CWN) decreased from $9.40 to $9
JB Hi Fi (JBH) increased from $48.30 to $49.10
National Aust Bank (NAB) decreased from $21.06 (highest broker) to $20.89
Westpac (WBC) decreased from $20.71 to $20.65
Wesfarmers (WES) increased from $45.50 to $46.90
Woolworths (WOW) increased from $38.80 to $39.30
Woodside (WPL) decreased from $33.40 (highest broker) to $31 (still highest broker)

Ord Minnett/JP Morgan
Resmed (RMD) increased from $20 (equal lowest broker) to $21

CIMB/Morgan
AMP decreased from $1.66 to $1.50
Orora (ORA) increased from $2.37 to $2.67
WPL decreased from $23.40 to $23.30

Morgan Stanley
BHP decreased from $41 to $40.45
WPL increased from $20.60 (lowest broker) to $21.20 (still lowest broker)

Macquarie
Transurban (TCL) decreased from $14.49 to $14.33

Bell Potter/Citigroup

Today’s Sector Movements

Best – Nil
Worst – IT -3.3%

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 Core index decreased from 93.79% to 92.15%

Overall Earnings Per Share (EPS) (including new stocks)
FY21 increased from 20.64% to 21.82% 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) 117.5% (buoyed by jobs growth)

Least expensive – Origin Energy (ORG) is the cheapest at 64.4%.

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

AMC current price $14.82 Broker range $17 to $18
BHP current price $34.94 Broker range $39.40 to $45
BXB current price $10.05 Broker range $12.05 to $13.67
COL current price $17.21 Broker range $18.90 to $21
CWN current price $8.53 Broker range $8.60 to $12
LLC current price $12.58 Broker range $13.25 to $16.74
NXT current price $13.09 Broker range $13.20 to $14.75
ORG current price $4.26 Broker range $5.35 to $7.80
RIO current price $92.30 Broker range $97.10 to $121
TLS current price $2.71 Broker range $3 to $3.60
WPL current price $18.00 Broker range $21.20 to $31

CWN and NXT have been added.

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 99.4% to 98.2%.

See Goldman Sach piece above.

Other Indicators
• US VIX Index increased from 29.18 to 32.46. This is elevated above normal levels (10 to 17) More volatility expected, especially when it’s above 30.
• Iron Ore decreased from $120.49 to $114.63. A six-year high was $130.17
• Copper decreased from $3.18 to $3.10. Recent high $3.18.
• Gold decreased from $1916 to $1911. Record high $2063.
• AUD/USD increased from 70.86c to 71.34c Fell to a low of 55c. Expecting interest rate cut.
• USD/CNY increased from $6.67 to $6.7 The lowest point was $6.67.
• Asian markets – DOWN
• US 10 year Bonds decreased from 0.81% to 0.80% Hit a low of 0.31%. I’m adding the US 30 year Bond which decreased from 1.62% to 1.60% (if this one start to rise, then it could provide inflation and volatility sign). Near the highest level for the year.
• German Bonds increased from -0.58% to -0.57%. Hit a low of -0.9%
• Japanese Bonds decreased from +0.03% to +0.026%
• Aussie Bonds 10 year Bonds decreased from 0.83% to 0.81%. After Reserve Bank Governor Lowe’s speech stating another rate was possible. Lowest point 0.68%
• Other rates 1 year 0.09% 2 year 0.12% 4 year 0.19% 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 1.12%. They are nearing ALL TIME LOWS.
• Oil price decreased from $39.82 to $38.82. A Biden win could see increasing energy prices. WATCH THIS SPACE!
• Tungsten remained at $215-$220 mtu.

This week & next week
Last “Not So” opened in 5 Aust states (missing ACT NT & Tas) US 3 states (South Carolina Virginia Georgia & California) & Singapore

This week – October reviews

Next week – October reviews

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