The NotSo Daily Bulletin No. 373

Top Stories

Today, February 26, saw the ASX have a large drop of 161 points or 2.4% to finish the month at 6673. The month of February was positive up 1% but it was well above 4% a week ago. Interestingly, this is the 3rd Friday in a row where the market has a reasonable drop. 

We have been mentioning the rising Bond rates and whether it would or not cause an equity sell-off. Well, we didn’t have to wait too long as the US markets fell from recent highs due to rising rates. 

The 10 year Bond rates are still below 2%, so there is little to really fear, but market sentiment is probably looking for a volatility event as markets have been lacking some in recent months. 

The Bond market saw rates rise on the “fear” of rising inflation. The market is fearful of inflation, as have Central Banks in the past, and they have raised rates in front of inflation happening.
However, this time Central Banks have said they want to see inflation and are happy for inflation to be even higher than the 2-3% target. US Federal Reserve Chairman Powell said during the week; he’s comfortable with rising Bond rates.
So, I think this volatility will be a dip rather than a market changer. However, not sure whether it will last a day, a week or a month.

We are seeing more weakness in the COVID winners which are the technology areas. This is likely to provide a good entry point for medium-term growth as the global recovery story isn’t being unwound by rising rates. The rates are rising because of economic recovery.     

Annual Advice Agreements (AAA)
These agreements will replace the 2 YEAR OPT-IN forms and the Fee Disclosure statements. The AAA is mandatory for all ongoing clients and the legislation provides little leniency regarding the timeframe of the agreements.

We will send these agreements out each year, 1-2 months before they are due to expire. IF THEY ARE NOT RETURNED BEFORE THE DUE DATE WE HAVE TO TERMINATE OUR ONGOING SERVICES AND FEES which may mean a new statement of advice (SOA) and additional cost.

Should you have any questions, please contact Chris Pyle.   

Market Outlook 

AMP’s Shane Oliver provided his weekly market outlook. As noted in yesterday’s Not So regarding the Bond sell off, Shane has been close to the market movements.
– Shares remain at risk of a further short-term correction after having run up so hard in recent months – with the back up in bond yields possibly being a trigger. But looking through the inevitable short-term noise, the combination of improving global growth helped by more stimulus, vaccines and still low interest rates augurs well for growth assets generally in 2021.
– We are likely to see a continuing shift in performance away from investments that benefitted from the pandemic and lockdowns – like US shares, technology and health care stocks and bonds – to investments that will benefit from recovery – like resources, industrials, tourism stocks and financials.
– Global shares are expected to return around 8% this year but expect a rotation away from growth heavy US shares to more cyclical markets in Europe, Japan and emerging countries.
– Australian shares are likely to be relative outperformers helped by: better virus control enabling a stronger recovery in the near term; stronger stimulus; sectors like resources, industrials and financials benefitting from the rebound in growth; and as investors continue to drive a search for yield benefitting the share market as dividends are increased resulting in a 4.5% grossed up dividend yield. Expect the ASX 200 to end 2021 at a record high of around 7200.
– Ultra-low yields and a capital loss from rising bond yields are likely to result in negative returns from bonds this year.
– Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield but the hit to space demand and hence rents from the virus will continue to weigh on near term returns.
– Australian home prices are likely to rise another 5% to 10% this year and next being boosted by record low mortgage rates, government home buyer incentives and the recovery in the jobs market but the stop to immigration and weak rental markets will likely weigh on inner city areas and units in Melbourne and Sydney. Outer suburbs, houses, smaller cities and regional areas will see relatively stronger gains in 2021.
– Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
– Probably now taking the $A up to around $US0.85 by year end.  

Profit results 
The profit results have finally been delivered and the overall position is quite positive and better than expected.

On February 8 the ASX was 6881. Today it closed at 6834 or 0.6% lower, however this amount may be due to some trading without their dividend. 

Over the same time frame, the CORE Watchlist was trading at 96% of target prices. This has now dropped to 91%. This shows that over the time of the reporting season, the market has virtually moved side but the target prices have increased 5%. Additionally, the profit expectations have increased by nearly 10% which provides fundamental support and suggests the Aussie market can cope with higher bond yields.  

 The CORE Watchlist stocks reported their profits on the following dates;

Jan 29 Resmed (RMD) – the 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 a 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% 
Goodman Group (GMG) profit $615m up 16% Dividend 15c remained the same. Gearing dropped to 4.8%. 
Feb 22
Lend Lease (LLC) profit $205m down 26%. Dividend 15c  50% franking ex-Feb 26. Still $100bn+ in work pipeline. Price up 2.8% 
Feb 24
Woolworths (WOW) profit $1.1bn up 16% Dividend 53c up 15%. ex Mar 4. Price up 1%. Nine Entertainment (NEC) profit $178m up 50%. Dividend 5c 100% franked up 100%. Price up 6%.  
Feb 25
NextDC (NXT) – the cloud computer storage facility. $3m loss, mainly depreciation. $66m before EBITDA. which is up 20%. Upgraded FY21 guidance.  

Not all companies report at this time of year.      Other Stories   
AMP and US-based Ares Management enter into a joint venture. The market liked it with AMP up 10% today.    

Broker Target Price changes 

Goldman Sachs
NextDC (NXT) increased from $13.20 (lowest broker) to $13.50 (still lowest broker)

Ord Minnett/JP Morgan 

NXT increased from $13.89 to $14.02

Morgan Stanley


Bell Potter/Citigroup

Today’s Sector Movements

Best –  Materials +1.7% 
Worst Industrials -0.7%   

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 91.76% to 89.63%.  The CORE has fallen below 90% for the first time since 2 October when the ASX was at 5792 and Trump caught COVID. 

The CORE below 90% has shown in the past to be a good entry point to the market. We will have a look next week.  

Overall Earnings Per Share (EPS) 
FY21 26.42% 

Most expensive – CBA 104.2. Seek was the most expensive but after their results the market sold it off. It shows the analysts were right again.  
Least expensive – Next DC (NXT) is now the cheapest at 78%. NXT had a good result and saw increases in the TP. For those who don’t know. NXT is where the “cloud computing” is stored.  

The CORE Watchlist is still mixed with 4 (4) stocks trading above 100% while 5 (6) are trading below 85% (AMC BXB COL NXT & ORG)

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $14.24    Broker range $17.00 to $19.00
ANZ current price $26.17     Broker range $26.50 to $31
BXB current price $9.90      Broker range $11.70 to $13.84
COL current price $15.33     Broker range $18.00 to $20.70
CSL current price $262.59   Broker range $276 to  $310
JBH current price $43.41     Broker range $50 to $55.10
NAB current price $24.64    Broker range $24.75 to $28.73
NEC current price $2.87       Broker range $3.25 to $3.80
NXT current price $11.20     Broker range $13.50 to $14.80
ORG current price $4.50      Broker range $4.76 to $6.85
ORI current price $12.56      Broker range $16.50 to $19.00
SHL current price $31.73     Broker range $36 to $39.70
WBC current price $23.82    Broker range $24.50 to $27.50
WOW current price $39.40   Broker range $40.65 to $44.50
WPL current price $25.43     Broker range $25.91 to $34.10
AMP 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 97.6% to 95.4%.

Over the month, the index started at 97.9%, so it has slightly fallen, however, the target prices have been moved higher as ANZ NAB & WBC are up 10.4  4.7% and 12.7% respectively. While CBA traded ex-dividend and fell 2.3% for the month.  

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. PLUS FRANKING

FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.24% 128.3 4.79% 139.0 5.19% 148.7 5.55%
CBA 298.0 3.56% 337.5 4.03% 377.5 4.51% 385.3 4.60%
NAB 60.0 2.39% 106.5 4.23% 122.0 4.85% 131.7 5.24%
WBC 31.0 1.27% 117.0 4.80% 127.2 5.22% 137.2 5.63%
MQG  430.0 2.96% 475.2 3.27% 548.4 3.77% 609.4 4.19%  

Other Indicators 
US VIX Index increased from 21.34 to 28.89. That’s a 35% increase.   
Iron Ore decreased from $172.05.05 to $171.10. . Hit a nine-year high of $176.45. 
Copper decreased from $4.35 to $4.21. Near ten year high of $4.35. A good sign for commodity boom!!  
Gold increased from $1797 to $1766. Record high $2063.
AUD/USD decreased from 79.73c to 78.29c.  Some forecast 80c+
USD/CNY increased from $6.46 to $6.47 The lowest point $6.45 in 2.5 years
Asian markets – DOWN 2%   
US 10 year Bonds increased from 1.40% to 1.49% Hit a low of 0.31%. A recent high of 1.49% The US 30 year Bond increased from 2.27% to 2.29% (if this one start to rise, then it could provide inflation and volatility sign). The highest level for the 18 months. Volatility happened today. How long for?  
German Bonds increased from -0.31% to -0.20%. Hit a low of -0.9%. Highest for some time -0.2%
Japanese Bonds increased from +0.133% to 0.16%   
Aussie Bonds 10 year Bonds increased from 1.74% to  1.87%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.056% 2 year  0.12% 4 year 0.58% 5 year 0.84%. 15 year Bonds 2.24%. Global interest rates have moved higher over the week on more liquidity from US COVID funding and a growing expectation of inflation. 
Oil price decreased from $63.46 to $62.83. 
Tungsten remained at $250 to $255mtu.   

This week & next week 
Last “Not So” opened in 7 Aust states (missing NT) US 3 states ( Virginia, South Carolina & California) &  Singapore 

This week –  Back from Central NSW. 

Next week – Catching up!

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