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Rudi’s View: Back To Pre-Covid Forecasts

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Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | May 13 2021

This story features AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: ANZ

In this week's Weekly Insights:

-Back To Pre-Covid Forecasts
-Conviction Calls
-Research To Download
-All-Weather Stocks: My Research & The Model Portfolio

By Rudi Filapek-Vandyck, Editor FNArena

Back To Pre-Covid Forecasts

In the end, the local share market did not require another momentum boost from the local banks to rally towards a fresh all-time high for the ASX200 at the start of the second week in May.

Financial updates delivered by ANZ Bank ((ANZ)), National Australia Bank ((NAB)) and Macquarie Group ((MQG)) proved, on balance, a rather mixed affair after the well-received, better-than-expected operational performance from sector laggard Westpac ((WBC)) on the first trading day of the month.

But look beyond the immediate share price responses, and the media headlines, and the end result was simply not that bad. In FNArena terms: most consensus target prices have moved higher post market updates, effectively handing investors more wriggle room to push share prices higher without running the risk of moving into overheated 'bubble' territory.

A brief recap post last week's results releases:

-Westpac – consensus price target moved to $28 from $26.79
-ANZ Bank – consensus price target moved to $29.92 from $30 (down!)
-NAB – consensus price target moved to $27.49 from $27.20
-Macquarie – consensus price target moved to $161.20 from $152.38

The sobering post-results observation is, of course, that ex-Westpac most moves have remained pretty benign. Both Westpac and ANZ Bank shares are trading well below their respective targets, but this is no longer the case for National Australia Bank, Macquarie or sector leader CommBank ((CBA)).

Equally noteworthy: there have been no universal upgrades to earnings estimates for the sector.

Hence, the market's upside limitation has not been removed, at least not via the banks. With copper rallying to an all-time record high and iron ore achieving the same feat, breaking through US$200/tonne last week, the next upgrades in earnings forecasts, dividends and valuations & price targets will be coming from resources companies led by index heavyweights BHP Group ((BHP)), Rio Tinto ((RIO)) and Fortescue Metals ((FMG)).

Here the not so good news is that share prices for all three are already trading above targets, implying the market is front running the next mark-to-market updates from mining sector analysts.

Banks Not Reliving Their Golden Glory Era

Sticking to the banks, investors should be aware the sector has received enormous assistance from macro-economics which helped boosting share prices and lending operations over the nine months past, but the sector is not reliving the glory days pre-GFC, not by a mile.

Analysts at Morgan Stanley did an excellent job in pointing out the respective weaknesses that came to the fore via the financial results released last week. Key points highlighted include:

For Westpac; risks remain margins in retail banking might come under pressure from increased competition, while the business banking franchise is not performing and the need to continue building capital will weigh on future dividends. Market consensus thinks Westpac dividends will still rise in the year ahead;

For ANZ Bank: the franchise in Australia is underperforming, revenues are declining and there is need for additional investments with less scope to surprise through cost control in the near term. Morgan Stanley doesn't see dividends growing before FY23 (but market consensus does);

-For NAB: below-system growth limits the revenue growth outlook, while the risk profile through business mix and industry exposures remains higher, in addition to the fact that $12bn in fresh equity raisings over the past three years will weigh on return on equity (ROE) and future growth in dividends. There is still unresolved potential for more negative news from Austrac.

Not to be dismissed: a big chunk of future growth for all of ANZ Bank, National Australia Bank and Westpac is now dependent on sizeable cost cutting.

Pre-Covid Earnings Forecasts Are Back

Depending on whose calculations we rely upon, market forecasts for corporate profits in Australia are back or almost back to the pre-covid level in early 2020. This, of course, to a large extent explains why the ASX200 is equally back to where the index was pre-covid sell-off.

The graphic below, sourced from Ord Minnett, shows the gradual recovery in earnings forecasts since about September last year. The vertical dotted line marks the point at which markets temporarily fell into the abyss and profit estimates followed soon after (as that is how this process goes).

Added observation: profit forecasts were already declining in January and February last year, so we'd still have to make up some more ground to rise above forecasts as they were in late 2019.

The graphic below, also from Ord Minnett, shows the key difference between today's situation and comparable periods in 2010-2012 and 2009-2010. Back in the post-GFC bear market recovery, equities rallied before earnings estimates started recovering, but they eventually stalled and allowed forecasts to surge much higher.

Equities trading sideways over 2011-2012 created the awkward situation that, relative to market forecasts, share markets seemed undervalued. This situation was quickly resolved through the strong rally in the second half of 2012 (That moment when the ECB's 'Super Mario' declared we'll do anything that is required).

Today, the situation thus far is different from both historical precedents. Anno 2021 share markets have rallied in anticipation of a recovery in profit forecasts, but a noticeable gap remains. Note that since 2015, when bond yields sank to extremely low levels, the local share market has mostly traded at a premium to underlying forecasts.

Meanwhile, market analysts at JPMorgan keep reminding us all dividend estimates are still on the rise, and rising strongly (stronger than profits). JPMorgan earlier in the year predicted Australian investors will be enjoying a Dividend Super Cycle, and the analysts are sticking by this view. Market strategists at Macquarie note earnings per share revisions in Australia have been positive for eight months straight, marking the longest streak in over two decades.

One, rather important, added observation is that market forecasts are predominantly rising for FY21 with far fewer upgrades occurring for FY22 (though still positive). This, of course, can change come August.

Most share market research likes to emphasise the strong correlation between corporate earnings growth and the direction of markets, over time, not necessarily always immediately and into the here and now, but past research conducted by the likes of Citi suggests an equally strong correlation can be identified between share markets and underlying growth in dividends.

Combining all of the above, what should then be the key questions on investors' minds? Is a premium now permanent and if so, how large/narrow should be the gap between profits and share prices? Or should we prepare for a return to pre-2015 dynamics, which also includes much higher bond yields?

Observe also how on each of the two prior occasions when the share market rallied above and away from forecasts -2007 and 2010- this either marked the top of the cycle or the start of a sideways trend until earnings forecasts had truly caught up, and then some. No wonder investors keep telling each other equities might be in a bubble. But will this close relationship from the past be reinstated anytime soon? That, as they say, remains the $64m question!

Equally important, while media commentators are likely to make a big hullaballoo of the fact the ASX200 has surpassed its pre-covid high, fact remains the ASX200 Accumulation Index, which includes dividends paid out and in shareholders' pockets, already crossed last year's record peak in early April.

Conviction Calls

Small cap analysts at JPMorgan, whose stock picks are no longer communicated by Ord Minnett despite the latter still white labeling the former's research, consider Tyro Payments ((TYR)) the best opportunity in the space. The domestic payments disruptor is yet to fully recover from last year's terminal outage, but JPMorgan (and by extension Ord Minnett) clearly have high expectations for the year(s) ahead.

On the other side, JPMorgan remains of the view that Flight Centre ((FLT)) shares seem well-overpriced, up to the point where the analysts simply cannot see how forecasts can sufficiently rise to make the current valuation sustainable. Hence, while Tyro Payments is the broker's Top Pick among small caps on the ASX, Flight Centre is the Bottom Pick.

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Over at Credit Suisse, the team of technology sector researchers recently updated their local sector favourites. In order of preference: Xero ((XRO)), Life360 ((360)), Audinate Group ((AD8)), Altium ((ALU)), Iress ((IRE)), and Infomedia ((IFM)).

In an update published before Appen's ((APX)) update at the Macquarie Conference, Credit Suisse continued to express its concern about the company's immediate outlook.

As global travel is expected to resume late this year and/or in 2022, Credit Suisse also continues to see upside in Corporate Travel Management ((CTD)) and Webjet ((WEB)).

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JPMorgan's Model Portfolio continues to bank on reflation and cyclicals. The portfolio recently added JB Hi-Fi ((JBH)) on weakness, while exiting Beach Energy ((BPT)) on operational disappointment, in addition to selling out of Viva Energy ((VEA)), Suncorp ((SUN)), Cleanaway Waste Management ((CWY)) and Mirvac Group ((MGR)).

Apart from JB Hi-Fi, the portfolio also added Oil Search ((OSH)), Rhipe ((RHP)) and Bank of Queensland ((BOQ)).

Research To Download

RaaS on Pointerra ((3DP)):

https://www.fnarena.com/downloadfile.php?p=w&n=4E540641-0B0F-BEA2-A84793C467A6EF70

RaaS on Total Brain ((TTB)):

https://www.fnarena.com/downloadfile.php?p=w&n=4E5BFA7E-A053-09D3-317562BCAD6B6BA2

RaaS on Future First Technologies ((FFT)):

https://www.fnarena.com/downloadfile.php?p=w&n=4E6B5717-B90E-4930-E42C5553172F1A48

RaaS on Rent.com ((RNT)):

https://www.fnarena.com/downloadfile.php?p=w&n=4E743831-C957-5676-8506CD5206C31D61

All-Weather Stocks: My Research & The Model Portfolio

The various lists that make up the All-Weather Performers section on the website are being reviewed. In first instance this has led to some companies shifting from "All-Weathers with question marks" back onto the All-Weathers list, while the likes of a2 Milk ((A2M)) and Appen ((APX)) are no longer represented as a Prime Growth story.

As some might recall, previous inclusions Treasury Wine Estates ((TWE)) and Blackmores ((BKL)) lost their presence in early 2020 when a general update was similarly conducted. Having added a few additional names to Emerging New Business Models and Prime Growth Stories, I intend to keep adding additional names over the week(s) ahead.

It is my intention to accompany this month's updates with follow-ups in writing and via a dedicated video, so watch this space.

Meanwhile, a general portfolio review for April has been released. It can be downloaded here:

https://www.fnarena.com/downloadfile.php?p=w&n=51C9C4D8-CC0D-24EC-9FE75F69E9D98B9F

(This story was written on Monday 10th May, 2021. It was published on the day in the form of an email to paying subscribers, and again on Thursday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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BONUS PUBLICATIONS FOR FNARENA SUBSCRIBERS

Paid subscribers to FNArena (6 and 12 mnths) receive several bonus publications, at no extra cost, including:

– The AUD and the Australian Share Market (which stocks benefit from a weaker AUD, and which ones don't?)
– Make Risk Your Friend. Finding All-Weather Performers, January 2013 (The rationale behind investing in stocks that perform irrespective of the overall investment climate)
– Make Risk Your Friend. Finding All-Weather Performers, December 2014 (The follow-up that accounts for an ever changing world and updated stock selection)
– Change. Investing in a Low Growth World. eBook that sells through Amazon and other channels. Tackles the main issues impacting on investment strategies today and the world of tomorrow.
– Who's Afraid Of The Big Bad Bear? eBook and Book (print) available through Amazon and other channels. Your chance to relive 2016, and become a wiser investor along the way.

Subscriptions cost $440 (incl GST) for twelve months or $245 for six and can be purchased here (depending on your status, a subscription to FNArena might be tax deductible): https://www.fnarena.com/index.php/sign-up/

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CHARTS

360 3DP A2M AD8 ALU ANZ APX BHP BKL BOQ BPT CBA CTD CWY FFT FLT FMG IFM IRE JBH MGR MQG NAB OSH RHP RIO RNT SUN TTB TWE TYR VEA WBC WEB XRO

For more info SHARE ANALYSIS: 360 - LIFE360, INC

For more info SHARE ANALYSIS: 3DP - POINTERRA LIMITED

For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED

For more info SHARE ANALYSIS: AD8 - AUDINATE GROUP LIMITED

For more info SHARE ANALYSIS: ALU - ALTIUM

For more info SHARE ANALYSIS: APX - APPEN LIMITED

For more info SHARE ANALYSIS: BHP - BHP GROUP LIMITED

For more info SHARE ANALYSIS: BKL - BLACKMORES LIMITED

For more info SHARE ANALYSIS: BOQ - BANK OF QUEENSLAND LIMITED

For more info SHARE ANALYSIS: BPT - BEACH ENERGY LIMITED

For more info SHARE ANALYSIS: CBA - COMMONWEALTH BANK OF AUSTRALIA

For more info SHARE ANALYSIS: CTD - CORPORATE TRAVEL MANAGEMENT LIMITED

For more info SHARE ANALYSIS: CWY - CLEANAWAY WASTE MANAGEMENT LIMITED

For more info SHARE ANALYSIS: FFT - FUTURE FIRST TECHNOLOGIES LIMITED

For more info SHARE ANALYSIS: FLT - FLIGHT CENTRE TRAVEL GROUP LIMITED

For more info SHARE ANALYSIS: FMG - FORTESCUE METALS GROUP LIMITED

For more info SHARE ANALYSIS: IFM - INFOMEDIA LIMITED

For more info SHARE ANALYSIS: IRE - IRESS LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: MGR - MIRVAC GROUP

For more info SHARE ANALYSIS: MQG - MACQUARIE GROUP LIMITED

For more info SHARE ANALYSIS: NAB - NATIONAL AUSTRALIA BANK LIMITED

For more info SHARE ANALYSIS: OSH - OIL SEARCH LIMITED

For more info SHARE ANALYSIS: RHP - RHIPE LIMITED

For more info SHARE ANALYSIS: RIO - RIO TINTO LIMITED

For more info SHARE ANALYSIS: RNT - RENT.COM.AU LIMITED

For more info SHARE ANALYSIS: SUN - SUNCORP GROUP LIMITED

For more info SHARE ANALYSIS: TTB - TOTAL BRAIN LIMITED

For more info SHARE ANALYSIS: TWE - TREASURY WINE ESTATES LIMITED

For more info SHARE ANALYSIS: TYR - TYRO PAYMENTS LIMITED

For more info SHARE ANALYSIS: VEA - VIVA ENERGY GROUP LIMITED

For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

For more info SHARE ANALYSIS: WEB - WEBJET LIMITED

For more info SHARE ANALYSIS: XRO - XERO LIMITED