Income Report / Income Report; Taking a step back & looking at market stats

By Market Matters 28 November 18

Income Report; Taking a step back & looking at market stats

Market Matters Income Report 28th November 2018

The ASX has opened marginally lower this morning being dragged down again by the resource stocks. BHP down -1.5%, Rio down -2% providing most weight. As I type, banks are also ticking lower however volume is light so far this morning. Sydney has had a tough start to the day weather wise and we don’t typically handle a normal Melbourne day all that well.   

AMP is once again getting hit following news that the acting chief executive Mike Wilkins said the  fees-for-no-service issue might cost the bank up to $1.2 billion and take nine years to complete. AMP trading down 4.32% at $2.32. Coles (ASX:COL) is also trading down today around ~3%  after UBS initiated with a SELL. They have a similar view to MM (click here) – a good business but too many near term headwinds. They have an $11.90 target price which is the most bearish in the market. COL current price of ~$12.50

Analyst expectations – Coles (ASX:COL)

At time of writing, the market is trading down 13points at 5715.

ASX 200 Chart

For the week, the MM Income portfolio added +0.56% against a backdrop of the ASX which added  +1%. For the financial year to date, the portfolio is down -1.2%  versus its benchmark of RBA cash rate +4% which sits at +2.25%  while the ASX 200 accumulation (including dividends) is down by -5.72%. NAB (ASX:NAB), CBA (ASX:NAB) and Nick Scali (ASX:NCK) were up around 4% on the week while Fortescue (ASX:FMG) fell by a similar amount.

Taking a step back & looking at market stats

When equity markets get hit, as they have done in the last month or so, we get the inevitable bears gaining most airtime. They’re usually the bond guys who promote ‘somewhere to hide’ during turbulent times. We’ve often written about market corrections calling a 20% pullback at some stage which attracted attention, pushback from some but it’s not a huge call, nor does it mean the end of making money from stocks. Corrections of that magnitude happen every few years, they’re a normal part of the market. Right now the ASX 200 has fallen from the peak of 6373 on the 30th August to the low on the 21st November of 5594, a drop of -779 points or -12.22% .

At MM, we’re all about having an opinion and writing about it on it daily basis, however on a rainy day in Sydney we thought it worthwhile doing something different for today’s income note. Today we’ll look more at market data, facts rather than opinion to provide a backdrop for where markets currently sit. It can often be worthwhile to sit back and think about the market in more general terms and today we’ll look at market performance over time, earnings and dividend expectations and what the market is pricing around interest rates.    

Market performance

6 month return; ASX 200 with and without the inclusion of dividends – down 5.04% for the 6 months excluding dividends, down 4.37% if dividends were reinvested

1 year return; ASX 200 with and without the inclusion of dividends – down 4.34% excluding dividends, up 1.2% if dividends were reinvested

10 year return; ASX 200 with and without the inclusion of dividends – up an annual equivalent of 3.79% excluding dividends, up 10.13% annually if dividends were reinvested.  

Looking at the same stat for the US market shows an annual equivalent of 13.2% assuming dividends are reinvested in the index.   

Looking at the returns of the Australian market (excluding dividends) versus other global markets all converted back to $US shows underperformance annually of 2.4% over the past 10 years versus US stocks however outperformance versus both the UK and emerging markets (EEM).  US stocks have added ~13% annually over the past 10 years while the Australian market has added nearly ~11%.

Since the inception of the Dow Jones  back in 1928 the index has returned ~10% annually.  Australia is similar with the All Ords returning just shy of 10% per annum since 1900, with around 8 out of every 10 years generating positive returns.  

Comparable 10 year returns in $US – ASX 200 (AS51), S&P 500 (SPX), INDU (Dow Jones), UKX (FTSE 100), EEM (Emerging Markets)

Earnings & Dividends

In 2008 the ASX 200 had earnings per share (EPS) of ~380 which declined to around ~260 in the GFC, a 30% deterioration. The index has just got back to the pre-GFC levels now (green line) with analysts expecting moderate growth in earnings from here

ASX 200 earnings per share – last 10 years + expectations to 2024

Dividends have (unsurprisingly) followed earnings, and are expected to do so into the future.

ASX 200 dividends per share last 10 years + expectations to 2024

The dividend yield on the ASX 200 over the past 10 years has tracked between 4% at the low and around 5.40% at the high.

ASX 200 Dividend Yield

Looking at expectations 1 year out, the ASX 200 is expected to grow earnings by around 8% collectively and dividends are expected to follow suit. Payout ratios stay stable around ~78%. Interestingly, that compares with the US market which has a payout ratio on the S&P 500 of ~47%.

The current price to earnings (P/E)  ratio of the ASX 200 is 15.81x  however 1 year forward is 14.58x, which is about average. If we apply a PE multiple of 15x on expected earnings 1 year out, we get an index that should be trading at 5892, or  2.86% above where it is today plus dividends of 5% equates to an ~8% return – pretty standard. If we get bullish and apply a multiple of 16x (justifiable given low interest rates), the index should be trading at 6285, or 9.8% above yesterday’s close plus 5% yield equates to a 15% time. If we look at the collective of analysts target prices and add in forecast yield, the total expected shareholder return is ~16%, but as I say, analysts often drink the coolade and are generally a positive bunch…

ASX 200 consensus expectations

Interest Rates

In Australia the RBA has interest rates set at 1.5%. Looking at forward pricing implied by the futures market, there are no interest rate hikes on the horizon. Currently, the market is pricing a 65% chance that by September 2019 interest rates will be exactly where they are today.

Australian Interest Rate Expectations

In the US the Federal Reserve has interest rates set at 2-2.25% however the outlook is different, with interest rates expected to go higher, although at a slower pace than the market had thought only a few months ago. Markets are pricing a 77% chance of a December hike however there are now only 1.5 hikes priced in for 2019.

US Interest Rate Expectations

Conclusion (s)

Markets are concerned about a few things, and those few things have caused a 12% correction for local stocks

Taking a step back, local stocks generally return ~10% per annum with 8 out of every 10 years being positive ones

While we’ve been in a prolonged bull market underpinned by huge global stimulus returns over the past 10 years have not been significantly more than prior cycles

Earnings are expected to grow and so too are dividends.

The market remains about ‘average’ in terms of valuation however interest rates are below average, implying that we now have room to combine PE expansion with earnings growth

*Charts sourced from Bloomberg

Have a great day!

James / Harry & the Market Matters Team


Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.


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