The NotSo Daily Bulletin No. 370

Top Stories
Today, February 18, the ASX was flat to finish at 6886. This was after reaching an 11.5 month or pandemic high of 6912 on Tuesday. 

Profit season is full-on this week with most profits being better than expected and providing some comfort to investors. Additionally, the 3rd quarter bank results have been great which has seen WBC up 15% ANZ up 11% MQG up 11% & NAB up 8% this month. Other good results from BHP up 11% and RIO up 16% on record dividend payments. 

Tomorrow we will provide more detail regarding some of the dividend opportunities.   

Early in the economic cycle
Research from Morgan Stanley (MS) today stated we are still early in this current economic cycle. This means the best, in economic terms, is yet to come. 

Some of the observations made
1) The health of businesses will continue to improve from here as profits return and grow again.The following sectors are best poised to benefit going forward: Financials, Energy, Consumer Discretionary, Consumer Durables, Healthcare and Industrials.

2) Long term interest rates will continue to rise. Whether at a fast or slow pace, they will increase as the economy improves, resulting in a steeper yield curve. For the critical US 10-Year Treasury yield, Morgan Stanley forecasts this rate will reach 1.45% by the end of 2021 (~1.3% today). In Australia, they have already exceeded our year-end target of 1.2% for the Australian Government 10-Year Bond.

3) Corporate default rates should remain low, so credit risk should remain muted. Lending money to lower quality companies in return for higher yields might not be as risky compared to if we were towards the end of the economic cycle.

4) These forecasts are underpinned by the substantial amount of monetary and fiscal stimulus already injected into the global economy.

Looking at Australian shares
1) Long duration, defensive securities like utilities, airports and toll roads are our least preferred companies.

2) Dividends are likely to surprise during this reporting season due to capital raising activity during Covid.

3) The worse seems to finally be behind the Australian banks. MS see limited opportunity for robust profit growth, the major banks’ dividends look poised to return.

4) The Resources sector for its exposure to a recovering global economy. 

5) The like fiscal winners. These companies help Australia deliver the government’s infrastructure pipeline of works or directly benefit from the Australian government. DOW, BLD, SGP, REA, WES.  

Rising Bond Yields 
Global equity markets have continued to move higher with the US again hitting record highs, Japan hitting three-decade highs and the ASX pushing towards 7000 and near all-time highs. 

At the same time, global Bond rates (10-year rates) have also moved higher by 0.25% in the last couple of weeks to around 1.3% in the US and 1.4% in Aust. The rise has been due to the expectation of an economic recovery POST COVID vaccines and higher inflation. 

Equity valuations have increased (PE ratios) due to the lower interest rates. Still, the latest move in Bond rates higher has some market strategists asking whether we are likely to see an equities sell-off. 

While we can never discount a sell-off (predicting future is difficult at the best of times), the chart below shows a history of the US Equity Market Valuations and Bond Yields over the last 160 years. 

There are a couple of interest points to note;

1. Interest rates have NEVER been lower than they are today. 
2. Global Central Banks led by US Fed ECB & RBA are looking to keep short term interest rates down for an extended period of time (years) and allowing inflation to occur before raising rates.
3. The previous low for interest rates was during WWII (just below 2%). It took 10-15 years for rates to move to 3.5%. Like today, most of the world debt is owned by Governments.
4. There is still an expectation of large stimulus programs by Governments to be announced in the POST VACCINE world. Therefore Governments and Central Banks will want to restrict Bond rates from rising. 
5. As a comparison, Bonds at 1.5% are trading on a PE of 66.6, whereas ASX PE is around 20. US PE is higher due to growth stocks. 
6. PE valuations can sustain higher Bond rates in the medium term, but if they rise sharply to say 1.5-1.75% in the next few weeks, we will likely see Equity markets have a wobble as institutions may take some profits.

In short, interest rates are likely to remain down for several years. PE valuations are important, and it’s something we are monitoring. However more than half of the CORE stocks have a PE’s below 20. This is why we are more monitoring the current earnings season to understand the profits and dividends.      
Profit results 
There is a raft of profit results coming in the next two weeks. Accord to Coppo Report (Bell Potter). He has found after looking at 5 years of data that there is a strong correlation between the price movement of the stock on the day of the results and the price direction over the next 4 months, this is not to say a down stock won’t turn around ‘but he has found it will take time. I have recorded the price movement on day 1. 
The CORE Watchlist stocks are due to report their profits on the following dates;

Jan 29 Resmed (RMD) – quarterly result was up 12% 
Feb 10  CBA Profit dropped 20% but increased dividend to $1.50. Price -1% 
– Feb 11 AMP Profit dropped 33% No dividend Price -10%
Telstra (TLS) Profit dropped 2.2% maintained 8c dividend. price +2.5%  – Transurban (TCL) dropped to a loss of $448m given the reduction in COVID traffic. Price -0.67% 
– Feb 15 JB Hi Fi (JBH) up 86% to $317m Dividend doubled to $1.80. Price up 3%
– Feb 16 BHP $3.8bn but this was after one off write down of $2bn from coal assets. Dividend US $1.01 which is up 55%. Price increased 2%
Brambles (BXB) profit $465m up 7% Dividend 13.08c Price up 1.5%
– Feb 17 Coles (COL) $560m up 14.5% Dividend 33c up 10% Price down 5%
Rio Tinto (RIO) results after market. Profit $9.7bn up 22% for full year. Record dividend including special of $US4.02.  
Feb 18
CSL Profit 1.8bn up 44% Dividend US$1.04 up 9%. Price 2.79%
Crown (CWN) net loss & no dividend. Price up 0.41%
Origin Energy (ORG)  underlying profit of $224m Dividend of 12.5c 0% franking. Price Down 2.17%
Wesfarmers (WES) Profit $1.41bn up 25% Dividend 88c up 17.3% Price up 0.63%
Woodside (WPL) underlying profit $447m (large write down) Dividend US$0.12. Price Down 2.39%
Orora (ORA) Profit $91m  up 19% Dividend 6.5c 0% franking, up on last year. Price up 5.5%
Sonic Health (SHL) Profit $678m up 166% on 18m COVID tests, ex-COVID revenue down 1%. Dividend 36c up 6%. Price up 1.16% 
– Feb19 Goodman Group (GMG)
– Feb 22 Lend Lease (LLC)
– Feb 24 Woolworths (WOW)

Not all companies report at this time of year.   

Other Stories     

Broker Target Price changes  

Goldman Sachs
Brambles (BXB) increased from $13.69 (highest broker) to $13.84 (still highest broker)
BHP decreased from $47.90 to $47.50
Coles (COL) increased from $20.40 to $20.70
JB Hi Fi (JBH) increased from $51.60 to $54.50
NAB increased from $24.72 to $28.73 (highest broker)
Rio Tinto (RIO) decreased from $118 to $114.60
Westpac (WBC) increased from $21.43 (lowest broker) to $25.76

Ord Minnett/JP Morgan 
BHP decreased from $53 (highest broker) to $52 (still highest broker) 
COL decreased from $19 to $18 (lowest broker)
JBH increased from $50 to $55
NAB increased from $26.50 to $27.10
RIO increased from $151 (highest broker) to $154 (still highest broker)
WBC increased from $22.40 to $24.50

BXB increased from $11.90 (lowest broker) to $12.10 (still lowest broker)
BHP increased from $40.55 (lowest broker) to $42.20 (still lowest broker)
COL increased from $19.40 to $19.45
JBH decreased from $52.19 to $50 (lowest broker)
RIO increased from $109 (lowest broker) to $113
WBC increased from $25.50 (highest broker) to $27.50 (Still highest broker)  

Morgan Stanley
JBH increased from $48 (lowest broker) to $52
NAB increased from $24.50 to $25.30
Origin Energy (ORG decreased from $5.86 to $5.10
Orica (ORI) decreased from $18 to $16.50 (equal lowest broker)
Wesfarmers (WES) increased from $48 to $53
WBC increased from $24.60 to $25.30

BXB decreased from $12.35 to $11.70 (lowest broker) 
COL decreased from $18.50 to $18.20 
JBH increased from $53.10 to $55.10 
NAB increased $24 (lowest broker) to $26.50
Nine Entertainment (NEC) increased from $2.90 to $3.80 (highest broker)
RIO increased from $125 to $135 
WBC increased from $23 to $25.50 

Bell Potter/Citigroup
BXB decreased from $12.90 to $12.89
COL decreased from $21.20 to $19
Orica (ORI) decreased from $19.45 to $18.65  

Today’s Sector Movements
Best –  Materials +1.5% 
Worst Consumer Staples -3.5%  

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 95.32% to 94.08%.  The ASX has increased over this period which means the target prices have increased at a quicker rate than the overall market. This has been going on since the US election & the discovery of the vaccine. At that point, the CORE index was 98.08% and close to fully priced and the ASX was 6498. 

Since then the CORE index has dropped to 94.08% (or 4%) while the ASX has increased to 6886 or 6%. This means the analysts have increased their target prices by 10%. 

In the 10 years I have been recording this data. I haven’t seen a sustained period (3months) where the ASX has been going up and the CORE going down – see chart below ASX pink CORE brown Banking blue. 

Overall Earnings Per Share (EPS) 
FY21 increased from 32.09% to 33.67% a new record. This is not uniform as some are expecting large bounces LLC 344% SEK 121% SHL 119%, but it suggests that we are likely to receive a recovery in profits. Bank profits are now being factored in.   

Most expensive – (SEK) 125.9% 
Least expensive – Lend Lease (LLC) is the cheapest at 79.4%.

The CORE Watchlist is very mixed with 7 (7) stocks trading above 100% while 5 (5) are trading below 85% (AMC BXB LLC ORG & ORI)

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $14.68    Broker range $17.00 to $19.00
AMP current price $1.35      Broker range $1.45 to $1.55
BXB current price $10.50     Broker range $11.70 to $13.84
COL current price $16.23     Broker range $18.00 to $20.70
LLC current price $11.77     Broker range $13.16 to $17.17
NEC current price $2.66       Broker range $2.75 to $3.80
NXT current price $11.82     Broker range $13.20 to $14.75
ORG current price $4.50      Broker range $4.76 to $6.50
ORI current price $15.19      Broker range $16.50 to $19.70
SHL current price $33.97     Broker range $35.50 to $40.10
WPL current price $25.34     Broker range $26.01 to $32.50
  CSL 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 100.8% to 98.7%. The quarterly updates from NAB WBC and ANZ this week have shown a very strong recovery. Part of the recovery is the allowance of expected bad debts the banks had provisioned for (partly at the behest of APRA) during the dark days of the pandemic, haven’t materialised, so this amount has been added back to their profits. As an example, NAB’s bad debt provision fell 98% from last quarter. 

This has seen an increase in target prices as noted above and an increase in future dividends. ANZ quarter was out today and so we are expecting TP and dividend forecasts to be released tomorrow. Overall this is a good result which has fed into the share price with WBC up 15% this month. The PE’s of the banks are still reasonably low at 15 to 18 times.  

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 2.32% 103.7 4.01% 125.5 4.86%
CBA 298.0 3.54% 337.5 4.00% 377.5 4.48%
NAB 60.0 2.34% 106.5 4.16% 122.0 4.77%
WBC 31.0 1.32% 108.5 4.61% 123.5 5.25%
MQG  430.0 2.95% 415.4 2.85% 552.6 3.80%  
Other Indicators 
US VIX Index increased from 19.98 to 21.5. Briefly below 20.  10-17 is normal.   
Iron Ore remains at $166.88. China on holidays. Hit a nine-year high of $176.45. 
Copper increased from $3.83 to $3.91  Nine years high $3.91. A good sign for commodity boom!!  
Gold decreased from $1822 to $1781. Record high $2063.
AUD/USD decreased from 77.85c to 77.53c.  Some forecast 80c+
USD/CNY increased from $6.45 to $6.46 The lowest point $6.45 in 2.5 years
Asian markets – MIXED   
US 10 year Bonds increased from 1.21% to 1.28% Hit a low of 0.31%. A recent high of 1.31% The US 30 year Bond increased from 2.01% to 2.05% (if this one start to rise, then it could provide inflation and volatility sign). The highest level for the 18 months. No volatility as yet, but will keep watching.  
German Bonds increased from -0.42% to -0.37%. Hit a low of -0.9%
Japanese Bonds increased from +0.07% to 0.087%   
Aussie Bonds 10 year Bonds increased from 1.32% to  1.37%. Lowest point 0.68%  Recent high is 1.40% 
– Other rates 1 year 0.052% 2 year  0.13% 4 year 0.33% 5 year 0.51%. 15 year Bonds 1.72%. Global interest rates have moved higher over the week on more liquidity from US COVID funding and a growing expectation of inflation. 
Oil price increased from $60.83 to $61.55. US weather causing demand.  
Tungsten remained at $250 to $255mtu.   

This week & next week 
Last “Not So” opened in 6 Aust states (missing SA & ACT) US 4 states ( Virginia, South Carolina, Georgia  & California) & UK.

This week –  Starting February reviews

Next week – A road trip to Central NSW (haven’t been on one of these for many months).  

Contact details  PO BOX 149 Deniliquin NSW 2710
125 End St Deniliquin NSW 2710
Ph. 03 58950100
Fax 03 58950101
Mobile 0412113524


Not just Deni, we will travel

Regardless of where you are in Australia, we offer you the best financial planning and advisory services. Feel free to call us today with any question you may have.

Our Values

People, Big Picture Framework, Quality Services and Value for Money!

We are strong believers in integrity, honesty, professionalism and respect! Our aim is to foster healthy relationships with our clients that last a lifetime.

Subscribe to our ‘Not So Daily Bulletin’

Stay social with Provincial Wealth