| Looking forward to a better 2021. Top Stories Today, January 25, the ASX finished with a gain of 24 points to finish at 6825. January is continuing the move higher and moving away from the technical triggers (charting). This is the highest point in 11 months, or since 25 Feb 2020 as the sell-off just started. We are now less than 5% from the ALL-TIME HIGH. While this is an impressive recovery, the most global markets are above their Jan 2020 figures. The US reporting season starts this week and hopefully it provides a good lead into our reporting season which starts in earnest in a couple of weeks. Expectations are high for good profit rebounds and improved dividends. A rising currency may take some gloss of globally orientated companies as they have lagged the market this month. HAPPY AUSTRALIA DAY for tomorrow. The Barbells are back Morgan Stanley research update suggested the old “barbells” of the Australian market – Bank and Resources are seen as being at either end of the Australian economy (barbells), and they are likely to perform nicely in a post-COVID market, These two sectors are the largest on the ASX and dominated returns for twenty years. Morgan Stanley thinks Resources and Banks will see tailwinds in the POST COVID recovery as Resources benefit from the commodity boom and expansion and Banks recover with losses being less than expected. They are also expecting dividend yields to increase to 4% as cashflow improves. Reporting Season The upcoming reporting season should be one of the best we have seen if you compare it to the last reporting season, which was COVID impacted. According to Citigroup They think companies will show COVID-19 impacts less than feared — Australian reporting season for February 2021 is likely to show that domestic-focused companies have performed well with many reporting strong earnings growth. While the earnings could surprise on the upside, companies are likely to remain very reluctant to provide any guidance and may conserve cash on their balance sheets. Companies with the ability to demonstrate structural improvements in their market share and profit margins are likely to outperform. Potential for upside surprises (to consensus) to outweigh downside ones — In aggregate, Citi analysts see the potential for upside surprises to outweigh downside ones by two-to-one. Retail and mining are expected to have the most positive surprises, while the downside surprises are more idiosyncratic. Citi analysts see the biggest upside risk to these buy-rated companies: WOW, SHL, HVN, CHC, MGX and AFG. The following companies have downside risk to earnings and are sell-rated: ASX, DMP, BKL and NAN. n Domestic-facing corporates are likely to benefit — Retailers are likely to have stellar earnings growth, benefiting from the structural pivot towards at-home spending, temporary wage-subsidies and rent-reductions the redirection in spending due to travel restrictions. The focus will be on how much is sustainable vs. temporary. Housing-related companies are also expected to benefit from the upturn in the housing cycle, with calendar 2021 outlook a key driver of performance. n FY21e outlook for mining companies is promising — Resilience in the Chinese economic recovery through COVID-19 has resulted in persistently elevated iron ore prices. Mining companies should report strong dividend yields from strong cash flow generation and low debt levels this reporting season. We may see some pay special dividends. n Corporate balance sheets remain healthy — Citi analysts have called out retailers, miners, and healthcare companies as having strong cash flow and better balance sheets. Free cash flow yields may entice companies to undertake greater acquisition activity over the next six months. In contrast, FCF generation and gearing levels will be key to watch for oil and gas companies as they enter a CAPEX-heavy phase. n Company guidance uncertainty remains this reporting season — Owing to uncertainty over the pandemic and macro outlook, we expect a continued broad lack of guidance given there have been impacts on both revenue and costs. We expect outlook statements to point to rising AUD/USD as a potential headwind for those stocks with offshore earnings. Profit results due The CORE Watchlist stocks are due to report their profits on the following dates; Jan 29 Resmed (RMD) Feb 10 Amcor (AMC) CBA Orora (ORA) Feb 11 AMP Telstra (TLS) Transurban (TCL) Feb 15 JB Hi Fi (JBH) Feb 16 BHP Brambles (BXB) Feb 17 Coles (COL) Orora (ORA) Sonic Health (SHL) Rio Tinto (RIO) Feb 18 CSL Crown (CWN) Origin Energy (ORG) Wesfarmers (WES) Woodside (WPL) Feb19 Goodman Group (GMG) Feb 22 Lend Lease (LLC) Feb 24 Woolworths (WOW) Not all companies report at this time of year. Macquarie Banking SCAM Macquarie Bank has notified us there is a phone scam around where a caller says they are from Macquarie and they ask for a 6 digit pin that has been sent to your phone to complete a maintenance check on your account. DO NOT provide them with the digit pin. Please ring our office. Other Stories – Citigroup forecast Aust GDP of 3.6% for 2021 with no interest rate move for at least 2 years. – US earnings big week ahead. – Morgan Stanley increased the price target to 7,100 from 6,700. – Wesfarmers (WES) – all-time high. – Morgans currency forecasts AUD/USD to average 75.5c in 2H21, then 79c in FY22 and 78c in FY23 with the AUD/USD to settle at 74c over the long term. Broker Target Price changes Goldman Sachs BHP decreased from $48.70 to $47.90 Woodside (WPL) increased from $31 (highest broker) to $32.50 (still highest broker) Ord Minnett/JP Morgan Amcor (AMC) decreased from $17.80 to $17.30 Brambles (BXB) decreased from $12.16 (lowest broker) to $11.90 (still lowest broker) BHP decreased from $53 (highest broker) to $52 (still highest broker) Orora (ORA) decreased from $2.67 to $2.61 CIMB/Morgan BHP decreased from $40.90 (lowest broker) to $40.55 (still lowest broker) Morgan Stanley ANZ increased from $21.90 (lowest broker) to $26.20 (highest broker) CBA increased from $68.50 to $78.50 NAB increased from $20.10 (lowest broker) to $24.50 Transurban (TCL) decreased from $14.80 to $14.50 Westpac (WBC) increased from $20.40 to $24.60 Macquarie Amcor (AMC) decreased from $17.85 to $17.26 BHP decreased from $51 to $50 Goodman Group (GMG) decreased from $19.86 to $18.77 Lend Lease (LLC) decreased from $13.86 to $13.16 (lowest broker) Bell Potter/Citigroup AMP increased from $1.55 to $1.60 CSL decreased from $320 to $310 WPL increased from $25.62 to $26.01 Today’s Sector Movements Best – Consumer Discretionary +1.2% Worst – Energy -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 Core index increased from 96.10% to 96.49%. Overall Earnings Per Share (EPS) (including new stocks) FY21 increased from 30.36% to 30.54%. In recent weeks the upgrades have come via resources (even with the rising currency) however I’m now seeing rising retail (JB HI FI) and Banking profit expectation. This should be a good thing for the market and the reporting season. The other important observation. The average dividend yield is 2.69% and 3.39% with franking. This is the lowest level since I’ve started the CORE however is coincides with profit payout ratio (how much of the profit is paid in dividends) being at it’s lowest level of 53.03% of the profit. I’m expecting in the upcoming profit season to see a lift in profits and dividends. Most expensive – Seek.com (SEK) 131.7% Least expensive – Origin Energy (ORG) is the cheapest at 78.6%. The CORE Watchlist is very mixed with 8 (11) stocks trading above 100% while 5 are trading below 85% (AMC BXB NEC NXT & ORG) Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past). AMC current price $14.40 Broker range $17.25 to $18 BXB current price $10.62 Broker range $11.90 to $13.69 CSL current price $275.54 Broker range $289 to $329 LLC current price $12.53 Broker range $13.16 to $16.65 NEC current price $2.41 Broker range $2.75 to $3.00 NXT current price $11.81 Broker range $13.20 to $14.75 ORG current price $5.01 Broker range $5.58 to $7.85 ORI current price $15.81 Broker range $16.50 to $19.70 COL SHL removed 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 105.7% to 103.6%. This is partly due to Morgan Stanley increasing their target prices. 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. FY20 % FY21 % FY 22 % ANZ 60.0 2.43% 99.2 4.02% 120.0 4.86% CBA 298.0 3.49% 289.8 3.40% 340.8 4.00% NAB 60.0 2.49% 91.7 3.80% 111.8 4.63% WBC 31.0 1.42% 94.2 4.32% 113.7 5.22% MQG 430.0 3.14% 375.4 2.74% 560.6 4.09% Other Indicators –US VIX Index decreased from 23.24 to 21.91. The fear index is above normal (10-17) – Iron Ore decreased from $171.33 to $169.97. Hit a nine-year high of $176.45 – Copper remained at $3.63 Eight years high $3.64. A good sign. – Gold increased from $1850 to $1853. Record high $2063. – AUD/USD increased from 77.20c to 77.37c. Some forecast 80c+ – USD/CNY remained at $6.47 The lowest point $6.45 in 2.5 years – Asian markets – UP – US 10 year Bonds increased from 1.09% to 1.10% Hit a low of 0.31%. It has increased on the back of further US stimulus $1.9trillion. The US 30 year Bond which decreased from 1.84% to 1.84% (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 -0.53% to -0.51%. Hit a low of -0.9% – Japanese Bonds decreased from +0.031% to +0.030% – Aussie Bonds 10 year Bonds increased from 1.05% to 1.08%. Lowest point 0.68% – Other rates 1 year 0.044% 2 year 0.11% 4 year 0.27% 5 year 0.42%. 15 year Bonds 1.46%. Aussie Bond market has pushed off ALL-TIME LOWS ON BACK OF RISING US RATES. – Oil price decreased from $53.35 to $52.24. Saudis restricted production and prospect of more stimulus will mean more demand. – Tungsten remains at $235 to $240 mtu. This week & next week Last “Not So” opened in 5 Aust states (missing SA ACT &, NT) US 2 states ( Virginia, South Carolina & California) & Singapore. This week – Australia Day holiday tomorrow. Then I have my mother’s memorial service in Wodonga on Wednesday. Back on deck Thursday- Friday. Next week – Scott taking holiday Feb 1 to Feb 5. Contact details PO BOX 149 Deniliquin NSW 2710 125 End St Deniliquin NSW 2710 Ph. Fax Mobile scottm@provincialwealth.com.au kevinh@provincialwealth.com.au chrisp@provincialwealth.com.au maddyl@provincialwealth.com.au |
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