Insights

What is a regular savings plan?

A regular savings plan is an arrangement you can create with (generally) a fund manager to invest an initial lump sum followed by regular investment instalments; the most common instalment period being monthly.

Minimum monthly investments usually start at $100. You can nominate your own amount above this according to your cashflow and what you can afford to save.

The regular payments can be deducted from a nominated bank account. This monthly payment is then invested on your behalf by the fund manager in the same manner as the initial investment, which might be in shares or bonds for example, depending on the fund you have chosen.

When you invest in a managed fund, you own 'units' in the fund. The value of the units in the fund will rise and fall with the value of the underlying assets it owns.

How much do you need to start?

You can start a regular savings plan with a fund manager with as little as $1,000. This will enable you to start growing your wealth and start saving for a long-term goal, such as:

• a deposit for a home, or home renovations
• future holiday
• children's or grandchildren's education

Benefits of regular savings plans

Regular savings plans enable you to invest your surplus income at a flexible level while allowing you to access your funds if required. Other benefits include:

Easy investment plan – direct debit from your bank account each month. Ensures a "forced saving" regime for your surplus cash.

Reduced investment cost – via 'dollar cost averaging'. By implementing a regular savings plan you gain the benefit of purchasing investment units at different prices which helps reduce the risk of mistiming the market. Your regular investment purchases less units when prices are high and more units when prices are low. By averaging the unit price paid, your investment cost is reduced. This is 'dollar cost averaging' and means that you don’t have to worry about where share prices or interest rates are headed.

Compound interest "multiplier" – by re-investing your distributions rather than taking the cash, your investment capital benefits from the effect of compound growth; which means, the distribution from your investment also earns interest.

Tax benefits – when a regular savings plan is invested via a specific education savings bond, tax benefits can be enhanced further for education-related expenses.

Flexible access to your funds with the ability to vary or suspend contributions.

How much do you need to invest each month to reach your target?

Below is a an example of the savings targets you would reach over a set period of time, based on the amount you contribute per month (calculated using an average return of 6.5% per annum).

Choosing a managed fund

There are thousands of managed funds to choose from. It's important to understand the different types of funds, the risks and returns, so you can choose a fund that meets your needs.

Morgans advisers are qualified to help you choose an investment fund that’s right for you and put in place an appropriate savings plan to help you achieve your financial goals.

If you would like more information, please contact your nearest Morgans office for an obligation-free discussion.

We think that comparisons of the potential impacts of COVID-19 with those of the GFC are premature. Below we draw on the views of leading economists to explain the most likely scenarios for the global economy from here.

Uncertainties remain, but calm logic suggests the sky isn't about to fall, and that major economies are in far better shape now than they were in 2008 to combat coronavirus impacts.

The wave of global fiscal stimulus is now ramping up which should help to absorb market volatility.

COVID-19: Similarities and differences versus the GFC

The GFC was essentially a "balance sheet" recession. The bursting of an earlier housing bubble punched a hole in household balance sheets, forcing a collective shift towards saving/de-gearing rather than spending.

This exposed vulnerabilities in a highly-leverage banking system and as counter-party confidence collapsed, the financial system froze up. This all manifested itself in a collapse in demand.

COVID-19 affects both supply and demand within the economy. Restrictions on people movements (factories, travel etc) reduces the productive capacity of the economy.

Less patronage also represents a demand shock as consumer spending falls, not helped by a falling stock market. These effects can also be self-reinforcing as lower incomes can affect spending.

The GFC was a financial shock affecting the demand side of the economy while COVID-19 is an economic shock affecting both the demand and supply. The two situations are fundamentally different which has implications for what is likely to follow.

What's next from here

The GFC led to a deep recession followed by a slow recovery as households and financial institutions repaired their balance sheets. The coronavirus is likely to trigger material falls in output in affected economies over the next quarter but, provided that the virus fades, activity should rebound as supply constraints are lifted.

The outlook is unusually uncertain but a sensible base case scenario at this stage is most likely to be a short, sharp shock. Policymakers will play a critical role in cushioning the downturn and stimulating a recovery.

Both fiscal and monetary actions stimulate demand and had a clear role to play in 2008 but its role today is less obvious.

Targeted, temporary and large fiscal support (e.g. loans, subsidies) can help to mitigate the shock form the virus, and monetary support can help to counter financial effects.

Cheap finance to banks lending to the most affected sectors and regulatory forbearance may also help to mitigate any strains in the banking sector. However the speed of recovery will depend on how the virus spreads, when containment measures are lifted and life returns to normal.

The financial system is in better shape to cope with this shock

The worst-case scenario today looks different versus 2008. History shows the most severe depressions tend to be caused by asset price collapses. In 2008, these effects were magnified by high leverage in the banking system and vulnerabilities in the global financial system (dependence on wholesale finance, short-term credit).

Debt levels remain high today but are concentrated in less risky areas (government vs households). Meanwhile, banks are far better capitalised. Pockets of risk exist – particularly in the corporate sector – and some of these vulnerabilities in the energy sector may be exposed by the sharp drop in oil prices.

Logic suggests these aren’t large enough (yet) to trigger a global crisis. Overall the most likely worst-case scenario today is a sharp but probably short downturn, rather than an outright depression.

As the virus spreads, there’s a chance that this scenario becomes the most likely scenario, but the prognosis for the virus beyond the next 6-12 months remains uncertain.

The sky isn’t falling : Michael Knox’s view

Chief Economist Michael Knox acknowledges the unique healthcare challenges posed by COVID-19 and the unknowns in how the pandemic will be resolved.

In The China Panic, March 3, he explains how the US economy is far more important for financial markets than the Chinese, and that it's strong outlook offers support to world capital markets and investors.

Ultimately Michael thinks that fiscal responses by both the US and Australian governments – ramping up now and over the course of 2020 – will act in time to buffer the Australian economy from recession.

Globally, he thinks there is ample liquidity in the financial system to absorb financial market volatility.

Facts will help suppress speculation: What you should do now

This story is a rapidly evolving one and unfortunately we've seen financial markets yet again move quickly to discount (and potentially oversell) uncertainty. Markets hate uncertainty, which can see equities re-price at abnormal discounts just as readily as complacency can (and was) pricing them at abnormal premiums.

We think market’s will calm as more information on the humanitarian and fiscal responses from key policymakers ramps up, which is happening now.

We advocate investors keep abreast of the calm facts through volatility and keep an open mind to deploying spare capital to capitalise on equity opportunities priced at far more realistic levels then they were heading into this.

More to follow.

Acknowledgements: Neil Shearing, Capital Economics, Michael Knox, Morgans

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

• February results were slightly better than expected, particularly among large-cap leaders, which should give investors some comfort amidst the ongoing volatility.
• Consensus FY20 and FY21 earnings forecasts remained surprisingly resilient, but likely downward revisions in the months ahead will put a strain on valuations which do remain elevated despite the market pullback.
• We think investors will be rewarded for holding their nerve through current uncertainty. Our refreshed Morgans Best Ideas list profiles standout opportunities on weakness including Sydney Airport (ASX:SYD), Telstra (ASX:TLS), and BHP (ASX:BHP).

OK results overwhelmed by the COVID-19 curveball

Record ASX Industrials (ex-Financials) valuations ahead of results season (12-month forward PE +20x) made beating expectations a difficult task.

So we were impressed with stronger-than-expected results from key large-caps (including Commonwealth Bank of Australia (ASX:CBA), CSL Limited (ASX:CSL), Woolworths (ASX:WOW), Wesfarmers (ASX:WES), Coles Group (ASX:COL), Aurizon Holdings (ASX:AZJ)) which offered comfort to holders of balanced/lower risk portfolios.

Small-caps again disappointed, while glamour growth/tech (WiseTech Global (ASX:WTC), Altium (ASX:ALU), Kogan (ASX:KGN), Treasury Wine Estates (ASX:TWE), Zip Co (ASX:Z1P)) buckled under the weight of volatility and hyper-expensive valuations.

Unfortunately, the ongoing COVID-19 health emergency overwhelms what were broadly robust results printed by the more important large-caps, to become the market’s driving force in the interim.

An uncertain earnings outlook

Corporate outlook statements/guidance leave a lot of wiggle room given COVID-19 uncertainty with some also choosing to retain dry capital (BHP (, RIO).

Earnings revisions for FY21 and FY22 were surprisingly resilient, with forecast FY20 EPS growth (Industrials only) eroding only slightly to 2.0% (from 2.3%) through February.

This implies the market expects that disruption will be largely confined to FY20.

We're uncomfortable with this, and suspect we’ll see downgrades in the months ahead, putting a strain on valuations which remain elevated despite the market pullback (ASX Industrials 12-mf PE ~18.5x).

Other insights

Some other observations:

• Defensive positioning taking place well before the onset of the panic in markets
• Narrowing of the growth and value basket of stocks
• Tentative corporate outlook
• Significant changes to analyst recommendations

Updated tactics as volatility flushes out compelling ideas

To say that our market was vulnerable to a correction heading into February is an understatement. Australian Industrial stocks had delivered stunning 12-month total returns (27%) and were trading at record valuations despite the likelihood of negative FY20 profit growth and growing external risks (bushfires, virus).

The +10% correction has finally unearthed some value, and we think long-term investors will be rewarded for holding their nerve through current uncertainty.

We advocate topping-up exposure to our favourite businesses with strong balance sheets and market positions capable of weathering economic uncertainty.

Standout ideas currently include Sydney Airport (ASX:SYD), Telstra (ASX:TLS), BHP (ASX:BHP), Macquarie Group (ASX:MQG) and Amcor (ASX:AMC).

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

Disclosure of interest: Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.

Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month time frame, supported by a higher-than-average level of confidence. They are our most preferred sector exposures.

Here are our ten best large-cap ideas this October:

Telstra Corporation (TLS)

Communication Services

Our view on TLS is predicated on improving market sentiment. The merger or not of TPM and Vodafone is the key catalyst for this and perversely we view either outcome as a positive in the short term. Either they merge and the market becomes more rational or they don't merge and TPM is unable, at least for a while, to build a competing mobile network as they've told the high court of Australia they will not.

Wesfarmers (WES)

Consumer Discretionary

We see WES as a core holding. It has a diversified portfolio of businesses and the outlook for the core Bunnings division remains solid. Balance sheet remains healthy leaving capacity for value-accretive investments.

Treasury Wine Estates (TWE)

Consumer Staples

Treasury Wine Estates is a great example of a company leveraging the premium status of its brand portfolio to generate strong results in China. TWE remains our key pick in the sector due to the strong earnings visibility and long runway of earnings growth its growing Luxury inventory balance affords. While the stock has performed strongly, we believe it remains attractively priced.

Woolworths (WOW)

Consumer Staples

Dominant supermarket operator in Australia with defensive characteristics, an experienced management team and a healthy balance sheet. We view WOW as a core holding in a long-term diversified portfolio. Company.

Woodside Petroleum (WPL)

Energy

WPL boasts the largest and most sustainable dividend profile in our oil & gas coverage universe (sustainable yield +5% fully franked). It also has the strongest balance sheet amongst its large-cap peers, in a solid position to support new growth while maintaining yield.

Oil Search (OSH)

Energy

We like OSH for its robust profitability and its interests in globally competitive LNG operations. The PNG political risk has moderated with the government confirming it would honour the existing Papua Gas Agreement (while a discount for the recent government changes is still evident in OSH's share price). We expect OSH and its partners to also secure the P'nyang gas agreement, which would remove the final hurdle preventing the PNG expansion projects moving into FEED.

Westpac Banking Corp (WBC)

Financials

WBC is our preferred major bank. It has a relatively low risk profile regarding loan book positioning and low reliance on treasury and markets income. WBC reported a CET1 capital ratio of 10.6%, above APRA's 'unquestionably strong' benchmark. Strong capital position and sound asset quality support dividend.

Sonic Healthcare (SHL)

Health Care

Defensive earnings, with growing underlying momentum and a fairly benign regulatory backdrop. Strong B/S capacity (cA$1bn headroom) fuelling a pipeline of future acquisitions/JVs. Undemanding valuation (YE20 20x) and an attractive 3.1% yield.

Sydney Airport (SYD)

Industrials

We consider SYD to be a high quality, well managed infrastructure asset, with defensive attributes, a solid distribution yield, a strong balance sheet, and exposure to the international travel thematic. Next key events are the monthly pax releases, and the release of the Productivity Commission's final report where SYD is hopeful that the Federal Government ultimately makes the flight cap more flexible.

APA Group (APA)

Utilities

We view APA as best-of-breed among the ASX-listed energy infrastructure stocks. Based on FY20 DPS guidance and the current share price, forward cash yield is 4.5% plus ~35% franking. We believe APA is capable of growing the DPS by ~5% pa CAGR across FY20-FY24F, even with the ramp-up in tax paid.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

• We see a strong chance of FY19 results beating low expectations, but market estimates for FY20 look too heroic, leaving scope for some disappointment versus very stretched valuations. Be vigilant with high growth stocks in this context.
• We think upside surprise to capital management may again feature in August. Investors have sought returns in defensively oriented names since the February reporting season.

Watch

FY20 forecasts vs stretched valuations leave little room for error

Stocks enter the August reporting season with very low expectations for FY19 on aggregate. Consensus expectations for FY19 EPS growth (excluding Resources stocks) have eroded from around 4.7% post February results to only 1% heading into August. This has been a persistent theme for 3-4 years now.

So while we think that results can clear this low hurdle for FY19, we do worry about:

1. current consensus FY20 EPS growth expectations looking look too heroic at ~8%; and
2. aggregate industrials valuations at a decade high 17.5x (12-month forward PE multiple) leaving very little room for error in FY20 outlook commentary versus consensus expectations.

Capital management once again in focus

Lower rates have again fueled the 'yield' trade. A mix of slowing economic growth, interest rate cuts and companies dialling back expansion capex have created an ideal environment for yield investors.

We think upside surprise to capital management may again feature in August. Investors have sought returns in defensively oriented names since the February reporting season.

However, we're uneasy about this dynamic in the context that EPS expectations, which support DPS expectations, have continued to erode.

Pay close attention to the sustainability of future capital returns.

Growth names have defined 2019

Our basket of Growth bellwethers has outpaced Value by 41% YTD (page 10), and this highlights the ongoing trend of high PE stocks re-rating further against the pool of lower valued stocks. The spread is now 18 PE points vs the 10-year average of 10.

A slowdown in the economic climate and falling interest rates have contributed to the appeal of growth, extending valuations further.

However, as the focus turns to domestic earnings and given expectations are higher than ever, we could be nearing the eventual cyclical turning point.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.

Woolworths (WOW) has unveiled plans to consolidate its drinks and hospitality businesses into a single entity, Endeavour Group. This strategic move precedes a potential demerger in CY20, aiming to streamline operations and enhance focus within Woolworths' core Food business.

Endeavour Group Restructure

Overview

Endeavour Group will integrate Woolworths' drinks division, comprising retail brands like Dan Murphy’s and BWS, with its hospitality arm, ALH Group, which manages a portfolio of pubs, bars, and hotels. Following consolidation, Woolworths intends to pursue a demerger or explore other value-enhancing alternatives.

Timeline

The restructuring is slated for the second half of CY19, with the demerger or sale anticipated in CY20.

Ownership Structure

Upon consolidation, Woolworths will hold an 85.4% stake in Endeavour Group, while the Bruce Mathieson Group (BMG) will own the remaining 14.6%. Woolworths plans to retain a minority shareholding in Endeavour Group post-demerger.

Focusing on Food Business

Strategic Rationale

The separation of Endeavour Group will enable Woolworths to sharpen its focus on its core Food business. This move is strategic amid rising competition, escalating costs, and evolving consumer preferences, with digital platforms gaining prominence.

Growth Opportunities

With a more streamlined structure, Endeavour Group can pursue growth initiatives such as accelerating store renovations and expanding its store footprint. Capital investment in Endeavour Group was previously limited due to higher returns in the Food business.

Potential Gambling Exit

While Woolworths maintains it isn't distancing itself from the gambling industry, the Endeavour Group separation could facilitate a potential exit from gambling activities in the future.

Valuation and Investment Outlook

Endeavour Group Valuation

As a standalone entity, Endeavour Group is valued at an enterprise value of A$10.5-11.5 billion, based on a 14-15x FY20F EV/EBIT multiple. This valuation aligns with industry peers such as Coles Group (COL) and Wesfarmers (WES).

Investment Insights

No changes are made to earnings forecasts, but adjustments are made for recent off-market buybacks. Despite a robust balance sheet and positive sales momentum, Woolworths' fully valued status, trading at 23.3x FY20F PE ratio and 3.2% yield, prompts a hold rating.

In conclusion, Woolworths' strategic restructure underscores its commitment to optimizing its business portfolio and enhancing shareholder value amidst a dynamic market landscape.

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Begin your journey with Morgans today to view the exclusive coverage.