The NotSo Daily Bulletin No. 378

Top Stories  
Today, March 18, the ASX fell for the 2nd day in a row to finish at 6746.

We are up 1% for the month, but it seems we are back in a trading range where we move between 6650 and 6900. This has been the case for much of this year, even though we had a good reporting season, a positive economic recovery (drop in the unemployment rate) and likely global stimulus in a post-vaccine world.

So we are likely to break on the upside, assuming the Bond traders don’t want to take on the Central Banks. 

Got to go. Footy is back. 

We are still cautiously Optimistic.   

Annual Advice Agreements (AAA) – Existing clients
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.   

US Federal Reserve – rate forecast unchanged
The US Federal Reserve (Fed) met overnight, as the market was expecting an update on when the US Fed was likely to raise interest rates. The Fed had previously said not before 2024. 

The market didn’t believe in this and moved the Bond rates higher to tempt the Fed to decide. However, the Fed held firm and re-stated their plan of waiting until 2024. 

There is a key change in strategy from the old Fed to the current Fed. Previously, they were trying to regulate inflation by being “in front of the curve”, meaning they would increase rates on the prospect of inflation, which would then become a headwind for any economic recovery. However, in the last 20 years, inflation has been materially low, so the Fed wants to see some inflation before acting, therefore moving to be “behind the curve” as they don’t want to stop the recovery from the Pandemic.  

Markets are having trouble with this change. It could lead to bouts of volatility as market players try to 2nd guess the Fed, especially now with the economic data starting to improve and the vaccines rolling out. Below is a chart showing the 10 year Bond rate rising above the Cash rate. It indicates that if the Fed is holding rate firm for an extended period of time, then Bond rates aren’t likely to push much higher, which means there could be a rally back into Equities, especially those providing profit growth and a dividend.   
All-Time Highs
The Australian market is still 5% below the All-Time Highs (ATH) peak before the pandemic.

However, the US markets continue to hit new ATH, with the Dow Jones hitting a new one last night. While ATH can be a sign of a pricey market, it’s not always a sign of an overpriced or a bubble market, as the chart below shows that ATH are reached most years. Over the last 40 years (since 1980), ATH have been reached in 27 years which suggest the market continue to grow over time as company profits and returns increase. In fact, since 2013, there have been 260 new ATH established. 

Therefore new ATH’s are part of the journey. Let’s hope for many more! 
Australian Market 

CITIGROUP’s (Citi) research update on the Aussie Market
The Australian sharemarket continues to lag global peers due to a lack of exposure to Growth industries, despite successfully navigating the pandemic so far. Australia is currently trading at  PE 18.0x compared to the US at PE 21.9x.

At a sector level, Citi is positive on resources, building materials and retail. In resources, they expect elevated commodity prices, strong cash flow, and high dividends to continue. Conversely, building materials and retail upside come from underperforming the market YTD despite earnings upgrades. Citi expects earnings growth and the utilisation of healthy balance sheets for dividends and M & M&A to be the main source of upside for the year ahead.

Australian market underperforms due to lack of Growth — The Australian sharemarket continues to lag behind its global peers, particularly the US. This underperformance is driven by the structural differences in the two markets. In contrast, Australia lacks the same exposure to technology and health care stocks but over indexes in resources and banks.

The Australian share market, trading at 18x 12 month forward PE, is above its long-term average but consistent with a low-interest-rate environment. Banks have re-rated in the past three months, but resources are below their long-term PE relative.

Drivers of sector performance mixed — Strong year-to-date performance for resources has been driven by upward revisions to FY22 earnings. Banks performance has been driven in equal parts by both earnings upgrades and a re-rate to the sector. Conversely, strong earnings revisions have been offset by a de-rating in building materials, on concerns about a weaker rebound in infrastructure and multi-residential, despite strong detached housing.

Citi’s preferred sectors — While the market is near fair value in Citi’s view, they see the potential for earnings growth; they expect resources and banks to be the market’s key drivers in the next twelve months. Additionally, many companies are sitting on very healthy balance sheets. Dividends, mergers and acquisitions will be key thematics creating upside risk.

The chart below shows the different sectors of the ASX market and how they have performed since 2008.

The best performer has been growth sectors led by health care and technology. This is starting to wane from the rising Bond rates. This is probably a dip rather than a structural change. 

Resources and Banks have started to move higher after having a period of under-performance. The yield stocks (utilities, transport property trusts) have a poor time with the pandemic and rising bond prices. While there has been plenty of talk about switching from Growth to Value stocks, this hasn’t appeared in the Value stocks (apart from Resources and Banks which are considered Value sectors). 

Global Market Summary 

Morgans provided a summary of the market position. 

US equities dipped in late February after the 10-year US Treasury note yield rose above the S&P 500 dividend yield, erasing the stock market yield’s advantage and driving weakness in equities.

The NASDAQ also saw a sharp fall. Technology stocks are particularly sensitive to rising yields because their value rests heavily on future earnings, which are discounted more deeply when rates go up.

While bond market volatility is disconcerting, the move up in (depressed) bond yields is a positive signal around economic growth, which is ultimately positive for markets.

Other tailwinds are Joe Biden’s $1.9 trillion economic aid package, the latest US economic data pointing to a solid consumer recovery and better than expected earnings for cyclical companies both overseas and domestically.

The S&P500 finished 2.6% higher while the ASX200 finished up around 1% in February.  

Other Stories   
– $25.8bn of dividends will be paid to ASX shareholders in the coming weeks. 
– The Australian unemployment rate fell unexpectedly to 5.8% from 6.3%. The market was expecting 6.3%   

Broker Target Price changes 

Goldman Sachs
BHP increased from $47.50 to $53.40
Rio Tinto (RIO) increased from $114.60 t $118.80

Ord Minnett/JP Morgan 


Morgan Stanley
Computershare (CPU) decreased from $16.50 to $16.30
Nine Entertainment (NEC) increased from $3.42 to $3.50


Bell Potter/Citigroup
Goodman Group (GMG) increased from $20.50 to $21  

Today’s Sector Movements
Best –    Materials +0.1% 
Worst –  Healthcare -1.7%   

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 92.01% to 91.63%.  

Overall Earnings Per Share (EPS) 
FY21 Increased from 25.76% to 25.79% 

Most expensive – (SEK) 115.8%.   
Least expensive – Next DC (NXT) is the cheapest at 75.1%. NXT is where “cloud computing” is stored.  

The CORE Watchlist is still mixed with 2 (3) stocks trading above 100% while 6 (3) are trading below 85% (AMC BXB COL NEC NXT & ORG)

Stocks trading below all broker forecasts are as follows; (it has been a handy indicator in the past).
AMC current price $14.67    Broker range $17.00 to $19.00
AMP current price $1.41      Broker range $1.45 to $1.80
BXB current price $9.89      Broker range $11.70 to $13.84
COL current price $15.57     Broker range $17.30 to $20.70
CSL current price $256.09   Broker range $261 to  $310
NEC current price $2.87      Broker range $3.25 to $3.80
NXT current price $10.64     Broker range $13.50 to $14.80
ORG current price $4.63      Broker range $4.76 to $6.85
ORI current price $13.40      Broker range $13.60 to $16.20
SHL current price $32.35     Broker range $33 to $39.70
WOW current price $38.75   Broker range $40.65 to $44.50
WPL current price $24.92     Broker range $25.91 to $34.10
  AMP added  

Banking Index 
Like the CORE Watchlist index, the Banking index is the four major banks’ average target price 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 100.3% to 99.6%.

Banks have continued to rally on the back of rising bond rates which is good for them. ANZ is up 7.5% in March (market up 1%), CBA 5% NAB 5.6% and WBC 2.6%. 

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. PLUS FRANKING. SUMMARY                  FY20 % FY21 % FY 22 % FY 23 %
ANZ 60.0 2.13% 127.5 4.53% 139.3 4.95% 149.0 5.29%
CBA 298.0 3.48% 337.5 3.94% 377.8 4.41% 385.3 4.49%
NAB 60.0 2.31% 106.5 4.09% 122.3 4.70% 132.0 5.07%
WBC 31.0 1.27% 115.3 4.72% 127.5 5.22% 137.5 5.63%
MQG  430.0 2.84% 475.2 3.14% 548.4 3.62% 609.4 4.02%  

Other Indicators 
US VIX Index decreased from 20.69 to 19.23. first time below 20 in a couple of weeks. Returning to near normal 
Iron Ore increased from $165.44 to $166.19.  Hit a nine-year high of $177.98. 
Copper decreased from $4.13 to $4.11. Near ten year high of $4.35. A good sign for a commodity boom!!  
Gold increased from $1724 to $1749. Bounced off 9 month lows. Record high $2063.
AUD/USD increased from 77.47c to 78.18c.  Some forecast 80c+
USD/CNY remained at  $6.50  The lowest point $6.45 in 2.5 years Asian markets – UP    
US 10 year Bonds decreased from 1.64% to 1.68%. Rates are rising again. Hit a low of 0.31%. A recent high of 1.69% The US 30 year Bond increased from 2.20% to 2.45% The highest level 2.47% for 18 months. 
German Bonds increased from -0.31% to -0.30%. Hit a low of -0.9%. Highest for some time -0.2%
Japanese Bonds decreased from +0.10% to 0.10%   
Aussie Bonds 10 year Bonds increased from 1.79% to  1.80%. Lowest point 0.68%  Recent high is 1.91% 
– Other rates 1 year 0.051% 2 year  0.10% 4 year 0.48% 5 year 0.77%. 15 year Bonds 2.17%. Global interest rates have moved slightly higher on inflation expectations.  
Oil price decreased from $66.14 to $64.19 US inventory levels higher than expected.  
Tungsten rose again from $263-$268mtu to $268-$275mtu.    

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

This week –  March reviews 

Next week –  March reviews 
Contact details  PO BOX 149 Deniliquin NSW 2710
125 End St Deniliquin NSW 2710
Ph. 03 58950100
Fax 03 58950101
Mobile 0412113524

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