|Looking forward to a better 2021. |
Today, January 5 the ASX finished with a small drop of 2 points to finish at 6682. However, the drop would have been bigger, given Wall St dropped over 1%, had it not been for the Resources sector, BHP up 2.9% and RIO up 2.2%.
The US Senate run-off in Georgia is being held tomorrow. If the Democrats turn both, then they will control the Senate and all three houses of power. I’m not sure the market has factored this in yet. So we could see some volatility of this were to occur. However, I think it would be a buying opportunity rather than a run to the door as Biden needs to govern in the Centre and not be pulled to the whacky left or right.
The UK has entered its 3rd lockdown as have other European countries. it would seem the only answer for them is a vaccine. VERY THANKFUL Australia is one of the few countries that have the virus under control. We are ranked 100th country in total cases. Not bad when our population ranks 55th.
Investment Outlook for 2021
Trying to predict the future is difficult at the best of times, and I have never thought at the beginning of a year, that investment markets will be worse in 12 months (optimistic). So with this in mind, I outline our best guess regarding the investment areas over the next 12 months.
Before outlining each asset class, the economic backdrop is positive for growth assets. Low inflation, historically low-interest rates, high government debt and a high likelihood of further global government stimulus.
The RBA has cut rates to a historic low of 0.1%. They could cut again, but it’s unlikely. However, they are unlikely to raise rates this year due to high government debt, government stimulus, and low inflation. So the amount held in cash should be emergency funds only.
These investments are linked to cash rates. Globally rates are low, and so returns from fixed interest are likely to follow. On the domestic front, term deposits are also low, with 0.3% being a typical 6-month rate.
That’s why we prefer the Macquarie Accelerator account at 0.5% with no fixed period instead of term deposits.
We have been working with our investment consultant and found several Fixed interest Bond funds that we expect to earn 2-4% over the year, but the minimum time frame for these investments should be 2-3 years.
Overall fixed interest is likely to provide a low-income return than other assets, but it has little volatility, so its primary aim is capital stability.
Property & Infrastructure
There are many types of property, and COVID has impacted them all differently. Residental is likely to see support from low-interest rates and lower mortgagee sales than first predicted. While immigration will be 0 this year (normally 200k), this will put a hole in demand, but we may continue to see a move from city to regional areas.
Industrial property is likely to remain strong, again due to low rates, as long as the tenant remains in business. This is likely to be a concern for retail and shopping centres who are likely to see permanent business closures from COVID. An oversupply and lack of demand may mean rents are dropped to retain tenants. In turn, this could put pressure on prices, but the listed property investments in these areas have already factored in a price drop (back in March-April).
The office property is likely to see a permanent shift to working from home for some employees, whether part-time or full time. Again this is likely to put pressure on rents.
Infrastructure investments are the most favoured in this area due to the increased spending from governments globally as part of their re-stimulation of the economy. There will be trillions spent in this area to kick start economic growth. Additionally, infrastructure investments have a reliable income stream.
Real Estate Investment Trusts (REITS) the way we are playing these investments as they are listed on the ASX and generally provide exposure to most of the areas mentioned above. Income expectation ranges from 2-4% while we are likely to see 2-4% from capital growth.
The ASX has recovered well with strong gains over the last quarter (up 12%). Until that point, the Australian market had underperformed the rest of the world. Still, the prospect of a vaccine, heightened government spending and low COVID numbers has provided the Aussie market with a boost. The boost also came to areas that had been poor through 2020, namely financial, industrials, resources and energy. The VALUE stocks were and probably still are considered cheap. When we break shares into two major groups VALUE and GROWTH (stocks that have ongoing growth prospects above the economy), we find Australia doesn’t have many growth stocks (CSL and some small tech stocks).
However, there are a couple of things in the ASX’s favour this year.
1. Dividend yields are higher than most other markets, especially with the restriction on banks removed. There will be a global search for yield given low-interest rates.
2. The domestic economy re-opening means business profitability (EPS) is likely to improve given the extra stimulus and liquidity in the economic system.
3. A global commodity boom looks likely as nearly all countries stimulate their economies.
4. Price to Earnings (PE) ratios have expanded to historic highs; they are still low compared to other assets. Which means prices can push higher without increasing profits. For example, a 1% return on 10-year Govt Bond is a PE of 100. At present, the ASX is on a PE of around 20 times. While I’m reluctant to chase sectors with high PE’s (priced for perfection), there are parts of the market that are still reasonably priced with PE’s sub 20. Some of the CORE PE’s are mentioned below.
5. The AUD is likely to be stronger on the back of a weakening USD and a commodity boom. Therefore preferring domestically orientated stocks with dividend yield.
6. Low-interest rates could see increased takeovers which generally provides a lift to the market.
In recent years, global share markets have provided a higher return than the Australian market, especially from a growth perspective. This is likely to continue; however, overall Australia may do better, especially if the currency becomes a headwind. Therefore we are recommending to hedge the currency where we can.
We are still very keen on the global themes (thematic) that we have discussed in review meetings as they are providing growth well above most sectors. This means investing in those themes such as healthcare, technology, robotics, 5G and cybersecurity. Additionally, we are likely to see other areas of the world apart from the US performing well. This means Asia and Emerging Markets are likely to benefit from a lower USD, lower interest rates, lower energy costs, lower wages and lots of liquidity and stimulus.
In short, I see a year that will provide a reasonable return from shares and property due to the factors mentioned above. Still, the importance of diversity and liquidity remains as normal as the odd hiccup along the way is likely.
Buy the DIP
This has been one of my strongest investment mantras over time. BUY THE DIP. The market never goes up in a straight line and in recent months, the down days have been only for a few days. The chart below shows the US S&P 500 annual value since 1964 (56 years) –BLACK LINE. The direction of the market is UP.
The RED LINE indicates the movement of the market during the year. While last year (2020) was a volatility year moving approx 70% within the year, it wasn’t the most volatile. However, the chart does indicate a reasonable amount of movement in most years and any sell-offs should be used as buying opportunities for investors.
CORE Watchlist and ETF performance
The returns from investments we watch closely were again varied. Below are the best and worst for the month, financial year (FY) and the whole of 2020. These exclude dividends.
Bank account interest rates are virtually 0%, and term deposits aren’t much better.
We have just been advised by Macquarie the Cash Management Account (CMA) interest rate will drop to 0.12% (it normally tracks the RBA cash rate, currently 0.10%). The Macquarie Accelerator account will remain at 0.5%.
At this point, we prefer the Accelerator account for short term holdings. Still, if money has an investment profile of more than 2 years, then it should be allocated to other areas, including fixed interest.
US political circus continues. Georgia votes for Senators Jan 5 and confirming Biden’s Presidency Jan 6 (sideshow from some Republicans). In meantime, Trump pressured Georgian secretary of state to find more votes.
– China offers trade talks to BIDEN administration.
– CNBC reports some Chinese cities are having electricity blackouts due to reduced supply of coal. The Chinese have a ban on Australian Coal at this point.
Broker Target Price changes
Broker research will be light on in January, so little changes expected.
Ord Minnett/JP Morgan
Rio Tinto (RIO) increased from $113.25 to $116
Today’s Sector Movements
Best – Materials +1.8% ( 2 days in a row)
Worst – Energy -1.1%
It’s strange these two went in opposite directions today. They are usually closely linked.
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 96.02% to 95.77%
As mentioned above PE ratios have moved higher in recent months. Higher there are still some reasonable PE around.
Amcor (AMC) 14.9 ANZ 15 BHP 11.3 Lend Lease (LLC) 12.9 Macquarie 16.9 NAB 14.9 Nine Entertain (NEC) 17.3 Orora (ORA) 17.2 Orica (ORI) 17.4 Rio Tinto (RIO) 9.3 Sonic Health (SHL) 14.9 Westpac (WBC) 14 Woodisde (WPL) 18
Overall Earnings Per Share (EPS) (including new stocks)
FY21 remained at 28.67% Little broker research
In the medium term, markets need profit growth to see the indices increase in value.
Most expensive – Seek.com (SEK) 133.1%
Least expensive – Origin Energy (ORG) is the cheapest at 74.6%. Energy demand will increase.
Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $15.08 Broker range $17.25 to $19
BXB current price $10.55 Broker range $12.16 to $13.69
CSL current price $285.62 Broker range $294 to $330
NEC current price $2.37 Broker range $2.75 to $3.00
NXT current price $12.29 Broker range $13.20 to $14.75
ORG current price $4.79 Broker range $5.47 to $7.85
ORI current price $14.95 Broker range $16.50 to $19.70
SHL current price $33.06 Broker range $34.57 to $40.40
WBC current price $19.52 Broker range $20.20 to $23.50
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 101.7% to 101%.
Based on yesterday’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.
FY20 % FY21 % FY 22 %
ANZ 60.0 2.60% 97.5 4.23% 120.0 5.21%
CBA 298.0 3.56% 287.3 3.43% 338.3 4.04%
NAB 60.0 2.62% 90.0 3.92% 111.8 4.88%
WBC 31.0 1.58% 91.7 4.67% 112.0 5.71%
MQG 430.0 3.07% 375.4 2.68% 560.6 4.00%
– US VIX Index increased from 22.75 to 26.97. Is the market repricing a Democrat win in Georgia.
– Iron Ore increased from $160.47 to $165.29. Hit a nine-year high of $176.45
– Copper increased from $3.57 to $3.58 New recent high $3.58. A good sign.
– Gold increased from $1927 to $1943. Record high $2063.
– AUD/USD increased from 75.56c to 76.97c Fell to a low of 55c but USD weakening, so AUD increasing. Some forecast 80c+
– USD/CNY decreased from $6.55 to $6.49.The lowest point $6.49 in 2.5 years Asian markets – UP, better Chinese data.
– US 10 year Bonds increased from 0.93% to 0.94% Hit a low of 0.31%. I‘m adding the US 30 year Bond which increased from 1.67% to 1.68% (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 increased from +0.01% to +0.018%
– Aussie Bonds 10 year Bonds increased from 0.97% to 0.99%. Lowest point 0.68%
– Other rates 1 year 0.047% 2 year 0.076% 4 year 0.19% 5 year 0.34%. The RBA is 0.1% Aust 15 year Bonds 1.34%. The short rates have dropped to new ALL-TIME LOWS.
– Oil price increased from $47.68 to $49.03.
– Tungsten remained at $230 to $235mtu.
This week & next week
Last “Not So” opened in 5 Aust states (missing ACT, SA & NT) US 3 states (South Carolina Virginia & California)
This week – TIDY UP. Chris and Kevin are still on holidays.
Next week – Back into the swing of things.
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