The JMP Report with Chris Hagan

20 March, 2023

Welcome to this week’s JMP Report

Last week was a quiet week for the local bourse with CCP and KSL doing the heavy lifting. CCP traded 10,631 shares closing higher to close at K1.91, KSL saw 13,411 shares trading lower by 11t to close the week out at 2.60.

Refer details below

WEEKLY MARKET REPORT | 13 March, 2023 – 17 March, 2023

STOCK

QUANTITY

CLOSING PRICE

CHANGE

% CHANGE

2021 FINAL DIV

2021 INTERIM

YIELD %

EX-DATE

RECORD DATE

PAYMENT DATE

DRP

MARKET CAP

BSP

0

12.50

-0.5

-4.00

K1.4000

–

13.53

THUR 9 MAR 2023

FRI 10 MAR 2023

FRI 21 APR 2023

NO

5,317,971,001

KSL

13,411

2.60

–0.11

-4.23

K0.1610

–

9.93

FRI 3 MAR 2023

MON 6 MAR 2023

TUE 11 APR 2023

NO

64,817,259

STO

0

19.09

-0.01

-0.05

K0.5310

–

2.96

MON 27 FEB 2023

TUE 28 FEB 2023

WED 29 MAR 2023

YES

–

KAM

0

0.95

–

–

–

–

–

–

–

–

YES

49,891,306

NCM

0

75.00

–

–

USD$1.23

–

–

FRI 24 FEB 2023

MON 27 FEB 23

THU 30 MAR 23

YES

33,774,150

NGP

0

0.69

–

–

–

–

–

–

–

–

–

32,123,490

CCP

10,631

1.91

0.01

1.00

K0.225

–

6.19

FRI 24 MAR 2023

WED 29 MAR 2023

FRI 5 MAY 2023

YES

569,672,964

CPL

0

0.95

–

–

K0.05

–

4.20

WED 22 MAR 2023

MON 1 MAY 2023

THU 30 MAY 2023

–

195,964,015

Dual listed Stocks PNGX/ASX

BFL – 4.80 +10c

KSL – 73c -2c

NCM – 24.21 +87c

STO – 6.93 -27c

 

Alternatives

Gold – 1978 +5.94%

Oil – 67 +.95%

Silver – 22.41 steady

Bitcoin – 28,333 +28.71%

Ethereum – 1812 +14.27%

AX Gold – 1981 +3.47%

 

On the interest rate front we saw a little pressure released on the short end of the market with the 364 TBill average at 2.73%. Still no word on the 2023 Government Inscribed Stock tender but April becoming more likely. No change to Finance Company money with the 12-month paper around 2%.

 

 

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The AI chatbots are here, what does this mean for you?

by CHARLES DANE, POLICY AND GOVERNMENT RELATIONS ADVISER, GOVERNANCE INSTITUTE OF AUSTRALIA

15/03/2023

AI chatbots using large language models (LLM) process vast amounts of information to predict writing patterns and human speech tailored to the user’s needs, intentions, and context.
You will probably be familiar with Open AI’s Chat GPT, the fastest-growing consumer application ever launched, with over 100 million active users and growing, surging it into notoriety.

The rise of Chat GPT is fascinating, to read about it, check out this article in the New York Times by Kevin Roose.

AI chatbot’s are here and are not going anywhere

We need to ignore the typical media hyperventilation about how AI will impact your life and career prospects and embrace the role AI chatbots will have as a fundamental piece of this decade’s technological infrastructure.

Organisations must learn to mitigate the risks and leverage the benefits.

It is true that the current iteration of LLM’s are not without significant risks to organisations and boards. They’re not designed to produce new insights, knowledge and opinions, where human experts already excel.

These models also tend to be riddled with biases that may not be immediately apparent to users. For example, they can purport to produce opinions as if they were verified facts, while leaving users none the wiser.

Boardrooms will have to have to learn to tackle major issues emerging from AI, from ethical questions, accountability and transparency issues, and liability implications.

The growing integration of technology in business has already seen boards and senior managers developing a range of new governance skills such as overseeing those running technology units directly, procuring technology services and outsourcing technology and services to third parties.

But more needs to be done.

Integrating AI and chatbots into your board activity should lead to quicker, more reliable audit information, assisted by automated big data AI analysis that will reduce costs, and improve the consistency and reliability of information.

Automated data processing can also help decision-making and prevent management from abusing its power. Algorithmic decision-making is the next step, but that’s a topic for another day.

Risks exist for externalising audits for businesses, from a lack of data control, increased routine data verification costs and potential delays. Integrating AI to complete such raw data verification processes gives directors better process control and will enable directors and shareholders access the data in real time without waiting for reports.

Given the embedded problems within corporate governance, the ability for an innovative approach to tackle such problems could be the solution we have long awaited.

Dr Joseph Lee & Mr Peter Underwood – AI in the Boardroom: Let the Law be in the Driving Seat

To properly manage integrating AI into the boardroom and in organisations more generally, AI governance frameworks are needed to learn, govern, monitor, and mature the AI adoption. Guardrails need to be implemented to ensure that AI works as intended. This is not just a job for your IT team or software engineers, rather, it should encompass your entire organisation.

Governments across the world are introducing new regulations and guidelines to prevent the harms caused by both intentional and unintentional misuse of AI, led by Singapore’s world-first AI Governance Testing Framework and Toolkit for companies. AI is expected to contribute US$15.7 trillion to global GDP by 2030 — more than the current economic output of India and China combined.

But given the speed at which AI is growing, can governments keep up?

Our government agencies need to understand and use these systems well to be able to regulate them effectively and manage the changes they will bring.

The Australian federal government is currently pursuing the long overdue reform of the Privacy Act 1988 (Cth), conducting a public consultation to help the government make the Act ‘fit for purpose’ to ‘adequately protect Australians’ privacy in the digital age’.

It might be time to fold in a review of the guardrails in place for AI given our Artificial Intelligence (AI) Ethics Framework was published in November 2019.

Careful guidance on how we can use these new technologies and make them far more accessible is critical. The government must be more proactive in educating people on the limits, as well as the benefits of using large language models in their business.

One place to start is our Ethical AI Good Governance Guide but more work is needed to not let the AI revolution overwhelm regulation.

 

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Top tips for boards in 2023

by SPONSORED ARTICLE BY DILIGENT

Boards need to be agile, capable and effective, now more than ever, to grab new opportunities and to manage emerging risks. Adopting best practices can dramatically streamline your board’s operations and equip it to respond to an ever-changing corporate landscape. We share seven top tips for boards to tackle 2023’s most pressing challenges.

1. Stay on top of new risks, opportunities, and the best approach

It’s proving to be a volatile year with good governance crucial for boards to navigate current and emerging uncertainty. Good governance not only creates a solid foundation for effective oversight but also builds trust with stakeholders.

As regulatory and legislative requirements continuously evolve, keeping pace with best practice is a challenge. One solution is to join industry forums and subscribe to relevant newsletters (such as Diligent’s), will ensure you’re in tune with the ever-changing corporate landscape.

2. Keep shareholders and stakeholders top of mind

When identifying and striving for board management governance goals, stakeholders should be front and centre of mind. This doesn’t just mean investors – other major stakeholders are increasingly vocal about the issues they believe organisations and their boards should prioritise.

Regulators too, are scrutinising conduct and the actions and omissions of Australian businesses. The corporate regulator ASIC has used its enhanced powers to begin civil proceedings against a company for alleged greenwashing – with others also in their sights in 2023.

3. Cultivate an agile approach…

The need for corporate agility, which came to the fore during the COVID-19 pandemic, becomes even more vital in a recession. With global recession predictions slated for 2023, boards need to engage cross-functional and self-organised teams to rapidly learn, adapt and evolve alongside stakeholder needs.

Adopting digital and analytical board tools is a vital step to improving board agility. The right technology empowers boards to quickly and efficiently access critical insights that foster deeper understanding and diverse business perspectives.

4. …and an adaptive board

Agility is as vital within your board as across the wider organisation. The best boards recognise when they need external expertise, drawing on skills honed outside your sector. Flexibility is one of the top board management tools in 2023. The best boards recognise when they need external expertise, drawing on skills honed outside your sector. They keep an eye on current trends like specialist board technology committees to help them tackle changing risks.

5. Challenge your diversity of thinking

Diversity of thought delivers strategic advantages and is the basis of an ethically-sound company. So how do you structure a board? Leaders should aim to:

• Provide a diverse range of thinking;
• Explore the benefits of reverse mentoring to leave behind old thought processes;
• Question whether there are barriers to equality on your board and ensure your succession planning techniques promote a diverse board pipeline.

 

6. Get on top of governance

Whether it’s separating the roles of CEO and chair or ensuring a robust audit trail for board decisions, best practice GRC should be a key focus of every board.

Running more effective board meetings is a core element of good governance. By sharing information in a timely manner, decisions can be made and executed with 360-degree vision while meeting compliance standards.

7. Explore all routes to a more efficient board

Running effective board meetings benefits more than just governance processes. Board directors are busy people who often balance multiple responsibilities and roles. Efficiency is key, which is why using the right technology is a top tip.

Board management software is a useful tool for facilitating collaboration, streamlining meeting organisation and bolstering security while cultivating data-driven decisions.

Implement best practices to accelerate your board management

Board management is an evolving craft. However rigorous your approach, constantly seeking higher standards is a positive discipline that provides a solid baseline for boards seeking to challenge themselves.

About Diligent:
Diligent is the global leader in modern governance, providing SaaS solutions across governance, risk, compliance, audit and ESG. Learn more at www.diligent.com/au

 

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Using LICs for portfolio asset allocation

Australian Foundation Investment Company, WAM Global, Regal Funds and Qualitas

Four LIC managers comment on how different asset classes will fare in 2023.

Key points

• The LIC market on ASX has expanded in the past decade, offering a wider range of choices across more asset classes.
• Investors can now build an entire diversified portfolio using LICs, across Australian and global equities, fixed interest and alternative assets. 
• This article briefly discusses LICs and asset allocation, before asking LIC managers for their view on their asset class. 

From ASX

For many investors, Listed Investment Companies (LIC) on ASX are a convenient way to gain exposure to a diversified portfolio of Australian shares and fully franked dividends. Up to the late 1990s, most LICs invested in large-cap Australian shares on ASX. 

Today, there are LICs over global equities, Asian equities, infrastructure, property, fixed income and alternative assets, such as private equity. Even within Australian shares, investors can gain access to LICs that specialise in large- or small-cap shares. 

Some LICs specialise in technology stocks and emerging companies. Others focus on maximising income through stock selection and/or the use of options. 

Another emerging feature is LICs providing financial returns and social returns through philanthropy (the article on LIC governance in this edition of ASX Investor Update highlights the philanthropic work of the Future Generation LICs).

The LIC sector is now so diverse that it is possible to construct and maintain a diversified portfolio entirely with LICs, although few investors would do so. Investors typically prefer to use different styles of funds or combine them with stocks. 

The ASX Investment Products Report is a great starting point for data on LICs. This free monthly report is packed with useful information on LICs, Exchange Traded Funds, mFunds, Infrastructure Funds and Australian Real Estate Investment Trusts (A-REITs).

The latest ASX Investment Products Report has information on all 91 LICs and Listed Investment Trusts (LITs) on ASX. Those LICs and LITs had a combined market capitalisation of about $50 billion at end-January 2023, ASX data shows.

The ASX report categorises LICs and LITs by the asset class they invest in. That makes it easy to see what’s on offer with LICs and LITs for the asset-class exposure you seek.

The report also lists each LIC and LIT’s historical return and whether they traded at a premium or discount to the pre-tax Net Tangible Assets at the NTA date. 

The article on LIC NTAs in this edition of ASX Investor Update provides an overview of LIC discounts or premiums – and how investors can use this information. If you want to invest in LICs, it’s a good idea to understand an LIC’s NTA and what that data means.

Investors new to the LIC sector should visit Investing in LICs and LITs on the ASX website. This page explains the features, benefits and risks of LICs and LITs, and has links to free information on the sector provided by broking firms and research houses.

As ASX-listed companies, LICs release company announcements via ASX. For example, a search for Australian Foundation Investment Company on the ASX website (ASX: AFI) will show AFIC’s latest announcements and other price information.

Some LICs provide market and stock commentary with their monthly announcement on their NTA – and other market-related information in their earnings results. 

As with any investment, Listed Investment Companies have potential benefits and risks. Before investing, take time to understand how LICs differ from other types of funds, such as unlisted unit trusts or Exchange Traded Products.

Moreover, always understand the risks involved with LICs over different asset classes. An LIC that invests in property loans, unlisted technology companies or private equity, has a different risk profile to another that owns mostly top 100 ASX-listed companies.

Clearly, the ASX LIC and LIT market has evolved over the past two decades to offer a much broader range of tools for portfolio asset allocation. But LICs over large-cap Australian shares still dominate the LIC market, by capitalisation. 

It’s also true that the main reason why the LIC market has endured for many decades – access to a potential stream of fully franked dividends – is alive and well today. 

ASX Investor Update asked four LICs and LITs to comment on the outlook for their asset class in 2023.

[Editor’s Note: Do not read the commentary below as a recommendation to invest in a particular asset class or LIC or LIT. Talk to a licensed financial adviser or do further research of your own before acting on themes in this article].

 

Mark Freeman, CEO and Managing Director at Australian Foundation Investment Company

Asset: Australian Equities
Mark Freeman
Australian Foundation Investment Company (ASX: AFI)

Australian Foundation Investment Company is cautious on the outlook for Australian equities over the next 12 months. 

Australia has moved from an environment where earnings growth was supported by COVID-19-related stimulus measures to an environment of higher inflation.

AFIC is not expecting widespread economic weakness, but we do expect to see the higher living costs place pressure on parts of the economy. 

The valuation of the Australian sharemarket, in AFIC’s opinion, is now fair value to slightly expensive.  With rising interest rates, AFIC sees this backdrop resulting in a higher proportion of equity market returns to come from earnings/dividend income and less to come from capital growth.  

This is a reversal from what we saw in financial years 2020 and 2021 when falling interest rates led to strong capital growth across the market. 

Accordingly, AFIC’s focus in the near term is companies where we have a high degree of confidence in their earnings growth profile, including their ability to effectively manage cost pressures and provide attractive fully franked dividends.

In an environment where we believe that capital growth is more challenging, valuation and paying the right price is increasingly important.  Overpaying in this market can lead to many years of sub-optimal performance. 

Asset: global equities
Catriona Burns
WAM Global (ASX: WGB)

In 2022, global equity markets were hit as central banks aggressively raised interest rates in response to sticky inflation. Changes in interest rates altered the valuations willing to be paid for stocks. 

Over the next 12 months, the future path of interest rates and what happens to company earnings and cash flows will be key.

The future path for interest rates centres on what happens to inflation, employment and financial conditions. Although inflation is beginning to moderate, a key watch point is the labour market and we have seen job losses start to tick up. Signs of further deterioration here will be monitored carefully by central banks and will be an important consideration for possible interest rate cuts.

 

Catriona Burns, Lead Portfolio Manager at WAM Global

The ability to sustainably grow earnings over time is crucial to company share prices. Companies have had to operate through an extraordinary period since COVID-19 but pricing power has been high, given strong demand. Largely, they have been able to pass on inflationary pressures to protect margins. 

However, it will be important to select carefully the sectors and companies that will do well in this new environment of higher rates.

WAM Global is excited by the opportunities that will be available to disciplined global investors as we look ahead. The “everything bubble” is over. 

With higher rates, companies that only came into existence in a costless capital world will struggle to get further funding. Companies that are over-earning as a result of excess pricing or excess demand linked to COVID-19 could see a reset in their market values. 

Key themes emerging globally that investors must consider include: 

• Corporate earnings pressurein lower-quality businesses or interest rate sensitive sectors as higher rates hit demand whilst costs remain sticky.  
• The “Year of Efficiency”– formerly spendthrift tech companies getting discipline around cost control, driving improving margins in formerly loss-making technology companies
• A re-opening Chinaafter three years of lockdowns will be a driver of global demand after an initial period of turbulence from higher community infections. 
• Ongoing re-shoring expected.While China is likely to remain an important player in global supply chains, geopolitical tensions are likely to see companies seeking to further diversify their supply bases and manufacturing footprints.

 

Rebecca Fesq, Global Head of Distribution & Marketing at Regal FundsAsset: Alternative assets
Rebecca Fesq
Regal Investment Fund (ASX: RF1)

For investors, 2022 will be remembered as the year when the traditional 60/40 balanced portfolio failed. 

At the end of December, an investor with 60% in the S&P500 and 40% in the Bloomberg US Aggregate Bond Index was down approximately -16% for the year. This was the worst outcome since 2008 and the third worst on record.

The returns of 2022, coupled with changing market dynamics, including inflation and rising interest rates, have forced investors and market commentators to reassess the traditional asset allocation. 

Regal believes investors should consider diversifying their portfolios by introducing a third asset class: “alternatives”. Alternatives is a term that covers a wide range of investment strategies, including, amongst others, hedge funds, private equity, private credit, real estate and venture capital. 

Generally, an alternative investment aims to provide a return profile that is uncorrelated to the traditional asset classes of equities and bonds.  

Adding alternatives into a diversified portfolio can deliver a higher consistent return profile for the amount of risk taken within the portfolio, or a lower level of risk for a given return, in Regal’s opinion.

Institutional investors have invested in alternatives for decades, allocating upwards of 15-30%+ into the asset class. For example, as at December 2022, Australia’s Future Fund had allocated approximately 34% of its portfolio to alternatives (including private equity). [Future Fund Portfolio Update at 31 December 2022.] 

Wholesale investors, such as wealthy families and high net worth individuals, have also long held significant investments in alternatives strategies.

For retail investors, however, accessing alternative investment strategies historically has been challenging. Alternatives typically have high minimum investment amounts and higher relative costs, and can require capital to be locked up for extended periods. Significant capital is therefore typically required to gain exposure to a diversified portfolio of alternative strategies. 

Listed investment vehicles are one of the few structures available to retail investors that enable access to alternative investment strategies which are otherwise within the exclusive purview of institutional investors and high net worth individuals. 

Asset: Commercial real estate (CRE) credit
Kathleen Yeung
Qualitas (ASX: QAL)

CRE credit refers to loans provided to commercial borrowers to finance real estate for investment and development purposes secured by real property mortgages. 

CRE is part of a wider asset class sometimes referred to as “private credit”, which is essentially an asset class of privately negotiated loans and debt financing provided by a lender that is not a bank. 

CRE credit as an investment asset is a unique portfolio diversifier as it can fit into three asset allocation categories – fixed income, property, and alternatives. 

A key feature of CRE credit is its capital preservation characteristics, as a typical first mortgage loan is usually around 60% of the underlying value of the security. Therefore, during times of market volatility, when asset prices recalibrate, there is a “buffer” between the loan principal value and the value of the underlying security.

 

Kathleen Yeung, Global Head of Corporate Development at Qualitas

CRE credit can provide exposure to the growing CRE market without the risk of property ownership. Through listed and unlisted vehicles, CRE credit can also provide attractive risk-adjusted returns and, depending on the product, can provide a regular and predictable income stream through the borrower’s monthly interest repayments. 

In times of rising interest rates, it is expected that returns from CRE credit investments should also increase, in Qualitas’s opinion.

As to the outlook for CRE credit, we are currently observing increased migration, low residential vacancies and housing supply shortage. These are key drivers of demand for multi-dwelling developments. 

As traditional sources of finance continue to retreat from the sector with increased APRA regulation, the case for CRE credit remains positive in Qualitas’s view – providing an opportunity for alternate financiers to fill this funding gap with flexible and bespoke financing solutions to borrowers. 

Two primary risks for CRE include the loss of loan principal, which is when a borrower cannot repay the loan and the security property value declines and is insufficient to meet the full loan repayment. 

Second, the loss of loan income, when the cash flow from the property or other borrower sources are insufficient to pay loan interest and fees due to the lender. 

Managing the above risks requires intensive asset management as this is a specialised asset class. Fund manager selection is therefore critical when investors do their product due diligence.