Rudi’s View: BHP, Codan, Macquarie, Santos And QBE

This story features BANK OF QUEENSLAND LIMITED, and other companies. For more info SHARE ANALYSIS: BOQ

In this week's Weekly Insights:

-Forecasts Are Falling
-Conviction Calls
-Research To Download

By Rudi Filapek-Vandyck, Editor FNArena

Forecasts Are Falling

As if investors didn't already have enough to worry about, earnings forecasts around the globe are now in a negative trend, as in: forecasts for corporate profits are falling, but they are still positive and likely to remain positive for the year ahead.

But falling forecasts in combination with fragile investor sentiment because there are so many other factors to be concerned about, while average valuations are still perceived as high, even after weeks of volatility and weakness, is not an ideal combination for equity markets, to say the least.

Not helping matters is growing awareness that companies are still being affected by lockdowns and hesitant consumers, as well as by the rising price of oil and other input costs.

In the USA, another quarterly reporting season is about to commence and both analysts and investors will be keen to find out whether expectations need to be lowered. In Australia, the results post-August have been rather weak, but then we are to date still only talking about 12 stocks and the banks are yet to report their full-year financials.

Bank of Queensland ((BOQ)) is scheduled to kick off the seasonal local bank reporting season on Wednesday (October 13) and nobody is anticipating a shocker of an announcement. The likes of Unibail-Rodamco-Westfield ((URW)), ResMed ((RMD)), Janus Henderson ((JHG)) and Macquarie Bank ((MQG)), plus three of the Big Four banks in Australia will follow suit over the coming month.

FNArena's Corporate Results Monitor will be keeping track of the finer details: https://www.fnarena.com/index.php/reporting_season/

But more than the three dozen or so local companies that will soon be revealing their financial performance over the past six months, this year investors' attention shall be primed towards the flood in AGMs that are scheduled for this month and November. Who will be brave enough to quantify the outlook for the six or twelve months ahead?

More importantly: are companies preparing to downsize expectations?

Those worried about a potential gap opening up between market forecasts and what companies can reasonably achieve in light of deteriorating momentum, ongoing supply challenges, labour constraints and rising input costs worry there might be more negative adjustments ahead, which might well create the trigger for more weakness in equities.

As per always, the proof will be in the statements delivered to shareholders over the weeks ahead, be it with the release of interim or quarterly financials, be it in front of anxious shareholders at the annual corporate gathering.

Quant analysts at Macquarie believe investors should expect a positive catalyst from the likes of Aurizon Holdings ((AZJ)), Charter Hall ((CHC)), Coles ((COL)), Cleanaway Waste Management ((CWY)), Mineral Resources ((MIN)), and Seek ((SEK)) among the Top100 companies on the ASX.

Outside the Top100, these analysts expect positive updates from Australian Finance Group ((AFG)), City Chic Collective ((CCX)), Codan ((CDA)), Charter Hall Retail REIT ((CQR)), Elders ((ELD)), Healius ((HLS)), Imdex ((IMD)), Karoon Energy ((KAR)), Liberty Financial Group ((LFG)), Monash IVF Group ((MVF)), Premier Investments ((PMV)), Resimac Group ((RMC)), Shopping Centres Australasia ((SCP)), Steadfast Group ((SDF)), Seven West Media ((SWM)), Southern Cross Media ((SXL)), and Universal Store Holdings ((UNI)).

That list contains exposure to the local housing market, alongside traditional media laggards, a number of specialised retailers, and landlords, plus some cyclicals. Summary: 'value' stocks rather than quality or growth.

Worries, in a general sense, are concentrated around companies that have performed well to date, but are facing lockdown-impact or a change in consumer spending, including companies such as Carsales ((CAR)) and Baby Bunting ((BBN)), as well as Bapcor ((BAP)), JB Hi-Fi ((JBH)), and Corporate Credit ((CCP)).

As per always: we will have to find out who or what exactly. Meanwhile, investors' nerves will be tested by the price of oil and gas remaining in a persistent up-trend.

Two weeks ago, I wrote the following concluding sentences to Weekly Insights dated 30th September 2021:

"Combining all of the above, I think it is more than likely some hard questions will be asked from financial markets in the months ahead and only a brave man, or a fool, would pretend to know what all the responses will be.

Previously, I have written that having some cash on the sideline, for comfort, but also to jump on opportunities that might open up, seems but appropriate for investors with only a moderate appetite for risk and, let's call it that, "adventure".

I think that statement remains valid, without getting too bearish or panicky about what can possibly lay ahead.

That edition of Weekly Insights can be read in full here: https://www.fnarena.com/index.php/2021/09/30/rudis-view-the-market-has-a-carrot/

Conviction Calls

Short-term risks and volatility? Yes, say Michael Knox and share market strategists at stockbroker Morgans. But Australia will be enjoying a number of boom years on the back of a strong recovery in global trade and this -all else remaining equal- will translate in ongoing positive gains -net- for the local share market.

In Morgans' view on the world, global growth is poised for better-than-expected growth numbers once we move past the present lull, significantly supported by ongoing firm spending deficits in the USA. Inflation will remain contained and central bankers will remain in a non-hurry (if that's a word) to start hiking interest rates.

So get prepared for mildly higher bond yields, a weakening US dollar, AUD at US80c and onto US90c by late next year and the local ASX200 index on its way to 8100 over the year ahead. Volatility in the short term means opportunity for those who can look over the bridge.

The RBA is not going to move on rates and the Federal Reserve will eventually get there, but the year will be 2023, not sooner.

To deal with the current uncertainty and volatility, Morgans' model portfolios have lifted the cash component. Favourite exposures remain linked to the reflation trade, i.e. energy, commodities and financials, as well as the re-opening trade, i.e. travel, gaming and traditional retailers.

Most preferred exposure is the energy sector. Plus Morgans' forecast is that, when all is said and debated about the outlook for China and global steel, the price of iron ore will settle inside a price range of US$120-140/tonne for years to come.

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Local market strategists at JP Morgan would make for ideal friendship material, at least as far as share market views go, for Morgans strategists. JP Morgan strategists in the US have been on the value and reflation trade appeal for many months, and their local colleagues keep repeating the same mantra.

Global growth might be experiencing a slump this quarter, but by year-end everything should be fine and the trend should once again revert upwards as populations get vaccinated and governments prepare for living with covid.

JP Morgan's Model Portfolio still owns CSL ((CSL)), NextDC ((NXT)), Transurban ((TCL)) and Ramsay Health Care ((RHC)) but it's true passion (overweight exposure) lays with the energy and materials sectors, plus financials, plus discretionary retailers.

The Portfolio owns both Santos ((STO)) and Oil Search ((OSH)), as well as BHP Group ((BHP)), Fortescue Metals ((FMG)), Incitec Pivot ((IPL)), Rio Tinto ((RIO)) and Fletcher Building ((FBU)), as well as JB Hi-Fi ((JBH)), Premier Investments ((PMV)) and Super Retail ((SUL)), as well as ANZ Bank ((ANZ)), Bank of Queensland ((BOQ)), Macquarie Group ((MQG)), National Australia Bank ((NAB)) and QBE Insurance ((QBE)).

Equally noteworthy: JP Morgan's forecasts for the average price of iron ore in the three years ahead are not dissimilar from Morgans'. Year-end target for the ASX200 is 7500.

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JP Morgan's target for the local index is pretty similar to what peers at Citi have set for the ASX200; 7550 by year-end. This is also the key reason as to why Citi's global asset strategists have set Australia next to Emerging Markets in the Underweight basket as most developed markets are believed to have 9% upside over the remainder of 2021, and that would mark another period of noticeable underperformance for Australia.

The three key themes for investors to incorporate in their strategies are, according to Citi, higher bond yields, China slowing and ESG. Given the second theme, we don't think investors need to look any further to explain as to why the Australian share market is not seen as an equal beneficiary from the anticipated switch into value stocks globally.

On Citi's projections, US bond yields will reach 2% some time in the course of 2022. Citi remains worried about valuations and is not 100% singing from the same song sheet as strategists at Morgans and JP Morgan, instead preferring Industrials, Financials and Healthcare as the three sectors to overweight globally.

Citi's in house view is the FOMC starts hiking rates in late 2022 and the US dollar should thus remain firm over the next twelve months. The Model Portfolio is also overweight cash with a neutral weighting for commodities. One of Citi's key concerns is that slowing momentum in China might spread to other regions, which also affects Australia.

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Whereas most market strategists, on average and broadly speaking, have turned mildly more positive on the medium term prospects for equities post a wobbly-looking number of weeks, Morningstar strategists in Australia led by Equity Research Strategist Gareth James have remained undeterred in their assessment the ASX remains, on average, some 8% overvalued.

James & Co agree with the outlook for global economic momentum to bounce in the final quarter of calendar 2021, but Morningstar also sees local mining companies' profits sag as a result of a lower iron ore price. And that view covers the two years in front of us. Clearly, Morningstar does not share the Morgans and JP Morgan price projections for Australia's most valuable export product.

Morningstar agrees with just about everyone else the energy sector remains undervalued on the ASX. The outlook for domestic EPS growth is considered rather benign for the years ahead; one more reason to not expect the RBA will be thinking of lifting interest rates anytime soon.

Morningstar's assessment of "opportunities" is usually strictly valuation based, with no consideration for anything else. Hence, it should not surprise a company in deep trouble like Crown Resorts ((CWN)) is mentioned among potential opportunities on the ASX, as is Southern Cross Media ((SXL)), as well as G8 Education ((GEM)), Blackmores ((BKL)), a2 Milk ((A2M)), Aurizon Holdings ((AZJ)), Unibail-Rodamco-Westfield ((URW)), Lendlease ((LLC)), Link Group ((LNK)), AGL Energy ((AGL)), and Contact Energy ((CEN)).

In the energy sector, Morningstar's most preferred opportunities are Woodside Petroleum ((WPL)), Beach Energy ((BPT)) and Santos while it's hardly a surprise Challenger ((CGF)) sits alongside Westpac ((WBC)) and Magellan Financial Group ((MFG)) among most preferred financials.

The one eye-catching surprise sits in the technology space where WiseTech Global ((WTC)) accompanies Computershare ((CPU)) and Link Group.

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Meanwhile, technology analysts at Credit Suisse suggest investors should be more selective when owning technology stocks these days – risks are on the rise!

Credit Suisse's favourites to play the re-opening trade are Flight Centre ((FLT)), Life360 ((360)) and Audinate Group ((AD8)).

The four sector favourites overall are, in order of preference: Xero ((XRO)), Life360, Audinate Group, and Infomedia ((IFM)).

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The list of Australian Best Ideas at Canaccord Genuity has now swollen to 21 inclusions. In line with the broker's local business focus, the list of favourite ASX exposures only contains micro, small and mid-cap stocks:

-Codan ((CDA))
-Mighty Craft ((MCL))
-DDH1 ((DDH))
-Calix ((CXL))
-Ricegrowers ((SGLLV))
-Northern Star Resources ((NST))
-Orocobre ((ORE))
-Pilbara Minerals ((PLS))
-Firefinch ((FFX))
-Paladin Energy ((PDN))
-Carnarvon Petroleum ((CVN))
-Superloop ((SLC))
-Elmo Software ((ELO))
-Playside Studios ((PLY))
-MNF Group ((MNF))
-Praemium ((PPS))
-Kogan ((KGN))
-Marley Spoon ((MMM))
-OFX Group ((OFX))
-Uniti Group ((UWL))
-ImpediMed ((IPD))

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Small cap specialists at JP Morgan have nominated Superloop as their Top Pick while Flight Centre is Bottom Pick (least preferred) as the team sees significant risks in management's plan to retain pre-pandemic levels of leisure transaction volume. Flight Centre is also believed to remain loss-making until international borders open up.

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As reported previously, Morgan Stanley strategists are more circumspect about prospects and direction for equities in the weeks and months ahead. US strategist Mike Wilson has been calling for a -10%-plus correction for weeks now.

In Australia, Morgan Stanley is sticking with a 7200 target for the ASX200, accompanied by lots of worries about further growth in corporate profits (or the lack thereof), and so it is not difficult to understand why a defensive and cautious bias dominates Morgan Stanley's Australian Model Portfolio.

Reduced exposure to iron ore goes hand-in-hand with reduced exposure to customer-facing businesses such as your typical bricks and mortar retailer.

Morgan Stanley's Model Portfolio recently added Karoon Energy ((KAR)) for additional exposure to oil&gas prices; Computershare was added in light of rising bond yields; while positive views on copper and aluminium respectively led to the inclusion of 29Metals ((29M)) and Alumina Ltd ((AWC)).

Otherwise, the more defensive bias shows up in overweight exposures to the likes of CSL, ResMed ((RMD)) and Sonic Healthcare ((SHL)), while Goodman Group ((GMG)), Telstra ((TLS)), APA Group ((APA)), Mirvac Group ((MGR)) and Scentre Group ((SCG)) are of similar ilk.

Stocks including NextDC, Woolworths ((WOW)), Ansell ((ANN)) and Sydney Airport ((SYD)) are also in the Model Portfolio but with relative underweight positions.

Among the banks, Morgan Stanley's Model Portfolio simply owns the Big Four -all of them- while Macquarie Group sits next to Computershare for ex-banks and Insurance Australia Group ((IAG)) and QBE Insurance make up the insurance segment.

There is plenty of leverage to metals and mining and the energy sector through BHP Group, BlueScope Steel ((BSL)), Rio Tinto ((RIO)), OZ Minerals ((OZL)), Newcrest Mining ((NCM)), Ampol ((ALD)), Oil Search, Santos and Worley ((WOR)) alongside the new additions mentioned earlier.

Your typical housing market exposure comes through James Hardie ((JHX)) and REA Group ((REA)).

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Finally, I regularly keep readers of Weekly Insights updated on changes made to stockbroker Morgans list of Best Ideas, but I don't think I've ever published the full list of inclusions. So here it goes (46 stocks in total):
 

-Acrow Formwork and Construction Services ((ACF))
-Alliance Aviation Services ((AQZ))
-Ansell
-ANZ Bank ((ANZ))
-APN Convenience Retail REIT ((AQR))
-Beacon Lighting ((BLX))
-BHP Group
-Booktopia Group ((BKG))
-Corporate Travel Management ((CTD))
-Dalrymple Bay Infrastructure ((DBI))
-Eagers Automotive ((APE))
-Endeavour Group ((EDV))
-Frontier Digital Ventures ((FDV))
-GrainCorp ((GNC))
-HomeCo Daily Needs ((HDN))
-Hotel Property Investments ((HPI))
-Hub24 ((HUB))
-Incitec Pivot ((IPL))
-Karoon Energy
-Kina Securities ((KSL))
-Lovisa Holdings ((LOV))
-Mach7 Technologies ((M7T))
-Macquarie Group
-MoneyMe ((MME))
-NextDC
-Nufarm ((NUF))
-Panoramic Resources ((PAN))
-PTB Group ((PTB))
-QBE Insurance
-Ramelius Resources ((RMS))
-Reliance Worldwide ((RWC))
-ResMed
-Santos
-Senex Energy ((SXY))
-Sonic Healthcare
-Tabcorp Holdings ((TAH))
-TechnologyOne ((TNE))
-TPG Telecom ((TPG))
-Transurban
-Treasury Wine Estates ((TWE))
-Tyro Payments ((TYR))
-Universal Store ((UNI))
-Volpara Health Technologies  ((VHT))
-Waypoint REIT ((WPR))
-Whitehaven Coal ((WHC))
-Woodside Petroleum

Research To Download

Independent Investment Research (IIR) on Qualitas Real Estate Income Fund (QRI):

https://www.fnarena.com/downloadfile.php?p=w&n=47C76FF8-9613-80F4-4FA4C4C544CD6046

(This story was written on Monday 11th October, 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).

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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