Monday 30 March 5 possible takeover targets plus, will banks cut dividends? Do you really have to go to cash? Could you miss the rebound? Are you better off sitting tight and waiting for the market comeback? I go through these questions in my article today. For anyone wanting to hear from my team of experts on what they’re thinking about when this market will bottom and when it might be wise to start buying, check out tonight’s Switzer TV – Investing on YouTube. How things have changed in the space of five weeks as the Coronavirus became the “black swan”. Back in mid-February, bank dividends looked very secure. Sincerely, Peter Switzer Inside this Issue 02 When is it wise to start buying? When is it wise to start buying? by Peter Switzer 04 How much will bank dividends be cut by? How much will bank dividends be cut by? by Paul Rickard 06 5 potential takeover targets 5 potential takeover target by James Dunn 09 How long will the bears have the upper hand? When is it wise to start How long will the bears have the upper hand? buying? by Percy Allan by Peter Switzer 11 Buy, Hold, Sell – What the Brokers Say 02 42 upgrades, 15 downgrades by Rudi Filapek-Vandyck Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before Switzer Super Report is published by Switzer Financial Group Pty Ltd AFSL No. 286 531 acting, consider the appropriateness of the information, having regard to the Level 4, 10 Spring Street, Sydney, NSW, 2000 individual's objectives, financial situation and needs and, if necessary, seek T: 1300 794 893 F: (02) 9222 1456 appropriate professional advice. When is it wise to start buying? by Peter Switzer It’s times like these when I have to write a better from Morningstar. story than one I wrote way back in December 2008. Yep, it was the GFC and the Yanks hadn’t gone for broke on their mega rescue plan, Lehman Brothers had failed and negativity was on the rise. S&P 500 “Missing the single best month during a year drastically reduced returns,” writes Morningstar’s Tom Lauricella. “During years when returns were already negative, the effect of missing the best month Source: macrotrends.net only exaggerated the year’s loss. And in seven of the 49 years shown (1970, 1978, 1984, 1987, 1994, Look at the steep market slump in late 2007 to early 2011, and 2015), missing the best month would have 2009 (i.e. the GFC) and not how aggressively it dragged otherwise positive returns into negative climbed out of that slump. Remember this if you’re territory.” thinking about going to cash and ask yourself these questions: Tom makes the point that “…successful market-timing may improve portfolio performance, it is very difficult Do I really have to go to cash? to time the market consistently,” which I totally agree Could I miss the rebound? with. Am I better off sitting tight and waiting for the market comeback? A big reason I believe we’ll see a stock market rebound is the magnitude of the stimuli packages I showed in Saturday’s Report that over the past around the world — and even here we’re scheduled seven years for US stocks, if you missed the best 10 to see an Mk III stimulus package this week. Ours is days, your overall returns would be halved. And close to 10% of GDP, the Yanks are in the 10% of that’s why not getting in and out and trying to time GDP neighbourhood and could easily go higher, while the market is a risky play. the Germans are throwing 30% of GDP at their problem! Need more convincing? Well, have a look at this chart Monday 30 March 2020 02 You have to remember that when stock markets saw will celebrate that news with a decent bounce and the penny drop on how bad the Coronavirus could be you don’t have to be me to work that out! on 21 February, the freefall was based not only on the fear of what a world lockdown might mean, there Joye’s team thinks the US will see a flattening of the was also no take on what central banks and curve by late April and Chris says Microsoft’s Bill governments would be prepared to do to help Gates is coming to a similar, albeit cautious, economies. conclusion.These look like the best-case scenarios and you have to hope they’re on the money. S&P/ASX 200 Personally, I don’t know if they’re right but I’m sure hoping and praying that they are. Anyone wanting to hear from my team of experts on what they’re thinking, check out tonight’s Switzer TV – Investing on YouTube. There I get the latest views from Platinum’s Julian McCormack, AMP Capital’s Shane Oliver, CMC Market’s Michael McCarthy, Julia Lee of Burman Invest and, of course, my colleague Paul Rickard, on when this stock market The low for the S&P/ASX 200 Index was 4546 so the will bottom and when it might be wise to start buying. 8% or so bounceback in the Index represents how the stimulus package pluses are whittling down the Important: This content has been prepared without negatives of the virus infections and deaths data and taking account of the objectives, financial situation or the cost of the containment policies. needs of any particular individual. It does not constitute formal advice. Consider the I’ve said all along that you can forget about appropriateness of the information in regard to your economic data and concentrate on the virus-related circumstances. data. I told you on Saturday that Chris Joye and his research team at Coolabah Capital Investments are dedicating a lot of their time to watching the virus data. Let me recap on what I wrote on Saturday: “Assuming, for example, that Australia and the US are only half as good as South Korea at containing the virus, we should be able to observe a decline in new infection numbers by the second half of April. This could be an important inflexion point for markets insofar as they’ll be able to see across to the other side of the fiscal and monetary policy “bridge” that has been belatedly built by governments.” On Sunday, this is what his update said: “Australia’s peak new infection numbers are realised between April 4 and April 11, assuming it is 50% as effective at containment as South Korea and 75% as effective as Italy.” If we can be cheering a flattening to falling infection curve by the dates Joye cites above, the stock market Monday 30 March 2020 03 How much will bank dividends be cut by? by Paul Rickard Back in mid-February, bank dividends looked very Stanley between 10% and 18%. Target prices and secure. The Commonwealth Bank had emphatically dividend forecasts have also been reduced. confirmed that not only was it going to maintain its interim dividend of $2 per share, but it was prepared There are probably more downgrades to come, and to maintain a dividend payout ratio above its target. decisions in other jurisdictions are adding to the CEO Matt Comyn said, when announcing the Bank’s pressure on dividends. Last Thursday, the European half year profit, that “We are targeting a gradual Central Bank asked Eurozone banks not to pay return to our full year payout ratio range of 70% to dividends or conduct share buybacks during the 80%”. I wrote at the time words to the effect that “the COVID-19 pandemic. It said: “to boost banks’ biggest take to come out of the result is that CBA is capacity to absorb losses and support lending to going to do everything it can to maintain its full year households, small businesses and corporates during dividend of $4.31 per share”. the Coronavirus pandemic, they should not pay dividends for the financial years 2019 and 2020 until Of the major banks, the only anticipated cut then was at least 1 October 2020”. by Westpac, which would reduce its full year dividend to around $1.60 per share, in line with the ANZ and Australian banks are much better capitalized and NAB. considerably stronger than their European colleagues, so a similar directive is not expected from How things have changed in the space of five weeks APRA. Among large listed commercial banks, CBA as the Coronavirus became the “black swan”. has the highest capital ratio on an internationally comparable basis, ANZ comes in third, Westpac in It will impact bank earnings (and the ability to pay fifth and NAB is eleventh. dividends in) three areas. Firstly, lower net interest margins following the Reserve Bank’s cut to the cash The table below shows the latest dividend forecasts rate and lower lending rates to businesses. Secondly, from the brokers (source FN Arena): the cost of customer support packages, which include the waiving of fees and other assistance measures. Forecast Dividends – Broker Consensus And thirdly, the big one and the hardest to estimate – Estimates an increase in bad debts as businesses (and households) struggle in the new environment. Offsetting these will be market share gains from the minor banks (although possibly no net volume increase), the Reserve Bank’s very accommodating 3 year fixed rate borrowing facility and higher treasury markets income.