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Live to invest another day

Scratch a broker and you find an optimist. You can sell hope, but not necessarily doom and gloom. 

Over $15 billion in Covid inspired capital raises ponders a question whether the share discount delivered to investors becomes tomorrow’s premium. Close to three quarters of name raisers are trading in the black, delivering an average gain of 17%. Remember capital raisings deliver best long-term outcomes where companies can achieve a high return on invested capital rather than pay down debt accruing little interest, to stay in business, hoping for better times.

So, within this crisis there certainly are seeds of opportunity. The ASX has shed close to 3000 points or just 39% in a record staggering 23 days to its lowest point two weeks ago. It has since bounced 23% and those who have had to sell have been washed out and interestingly the small caps are attracting back risk on investors.

There is still, however, a dystopian contradiction between the top down and bottom up risk analysis, yet to play out in the market. The market probably can hold these levels – we ae seeing consolidation gains most days. But there is still a big chance something in the next 2-3 months will leave the market as unstable as a broker on Friday night with a wobbly boot on. And those lows could be tested again. Perhaps even broken.

Investors looking at top down economic analysis have the right to feel like the portrait in Edmund Munch’s Scream. It is a nightmare and the growth figures are hellishly negative.

Investors though are buying hope. And evidence this week was the banks. The black sheep of the big four, NAB, tapped the market for $3 billion, well subscribed by both instos and private investors, but slashing interim dividend by 64% to 30 cents. Reminding the market dividends are a return of excess capital and not annuity streams. Trading in the high $15’s well above the cap raising price of $14.15, NAB is on a not very compelling forward P/E of nearly 12x and a forecast dividend yield (under a cloud) of just over 4%. NAB has also booked a first half loss provision of $807 million.

In the bank’s favour, they are well capitalized and well provisioned. But Covid losses could grow exponentially and the latest banking analysis is a collective $35 billion over the next three years.

Westpac is also getting ahead of the curve. On Monday it reported its interim results, taking a provision of $2.2 billion against Covid and a deteriorating worst-case economic scenario on loan repayments. Westpac went to the capital markets back in November raising $2.5 billion.

The impairment charge is about 4.5 times what Westpac provided for in its previous financial year results and its dividend cut will be tracking a similar path to NAB’s. Westpac’s equity tier one capital stands at 10.8%, above the APRA provisioned 10.5% mandate. And if future impairments are bigger than provisioned Westpac will have its hand out asking for more capital. 

So, do the top down/ bottom up views merge and we get a V shaped recovery?

Still too hard to tell. But if investors see good profits on capital raises, they should take them. Seeds of opportunity. This is not a buy and hold. This is a stock picking market. And all are not equal.

Is the biggest economic stimulation since the Great Depression factored into the market, and if the worst economic data is still to come isn’t the market looking through that? You decide. Or in typical market fashion has it, like the bears think, overshot on the upside. Certainly there is no pandemic playbook and comparisons with previous crashes are just that. This is, as I have said a big game of chicken yet to play out. So if you take profits and miss out on the next 10% upside, consider that cheap insurance. You have lived to invest another day.

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