Question 1: Big US tech stocks have come under pressure in recent weeks as a consequence of forecast interest rate increases. Do you think they are now in buying territory or hold off for a while? Specifically looking at Microsoft, Apple, Amazon, Alphabet and Nvidia Corp.
Answer: We are not too far away, but I don’t think that the US 10-year bond yield has topped out yet and if it heads up to 2%, there is a good chance that tech and other growth stocks will come under pressure again. While the relationship between bond yields and tech/growth stocks is tenuous, the market is using it as an “excuse” to sell, take profits and rotate into other sectors – a needed correction. My sense is that buyers will come back into the market – and they will buy the quality (the big tech players like Microsoft, Apple, Alphabet etc) first. Maybe nibble here… but keep some powder dry.
Question 2: What are your thoughts on the revised Westpac (WBC) buyback offer?
Answer: The revised terms should make the Westpac off-market share buy-back attractive to low and zero rate taxpayers. I will cover this in detail in a future edition of The Switzer Report.
The major change was to reduce the tender discount range from 8% to 14% to a new range of 0% to 10%. At 0%, it will be very attractive – at 10% moderately – so it will probably go somewhere in the middle. Also, Westpac’s share price has rallied – which means that the dividend component (and franking credits) are higher than when the terms were amended.
The buyback closes on Friday 11 February.
Question 3: I would appreciate your opinion on Magellan Financial Group (MFG). Do you think there is more bad news to come? I am a holder. Is it a sell?
Answer: If I was a holder of Magellan Financial Group (MFG), I would now probably hang on. While I am wary of “catching a falling knife”, I think most of the bad news is probably out. It is trading on a very cheap multiple of 9.0 times FY22 earnings and 9.9 times forecast FY23 earnings. The broker analysts have a target price of $24.94, compared to the last ASX price of $20.50. In the short term, it will experience more funds outflow, particularly from retail clients, and publication of these monthly reports could temper any gains. Hopefully, these are factored into the price. Ultimately, it is going to need to lift its investment performance – and in the absence of this, it is unlikely to be materially re-rated by the market.
Question 4: Could you please explain something to me that I have never heard anyone address. If we assume markets go up over time, and I wish to purchase the Australian index and hold for the long term, why would I ever put my money in VAS (Vanguard Australian Shares Index ETF) and not completely in GEAR (BetaShares Geared Australian Equity Fund)?
Answer: If markets go up over time, an investment in a leveraged index investment like GEAR will produce higher returns than an investment in the market index per se (i.e. through VAS or IOZ). I guess it depends on how much “pain” you can stand. If the market falls by 40% in a crash, GEAR will fall by about 80%. Most people can’t cope with an 80% loss of capital (albeit on paper), so that is why GEAR is not recommended to anyone who doesn’t have an aggressive/high growth risk profile.
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