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Market News 22 May 2017

None of you will be shocked to learn that SPARK is again having failure issues with its email management process!

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Investment Opinion

Tax Opinion - I know that one’s residential property is not a commercial investment, its purpose is to provide shelter and perhaps to own it is to hedge oneself against changes in value of that shelter, but I have a proposal for government (I’m sure they’re all ears – Ed).

Level the playing field and offer exactly the same tax circumstances to the family home owners as those enjoyed by investors in residential property; namely deductible debt costs. (plus taxes on gains if traded too fast).
This is the opposite of the complex proposal from Labour to try and remove some of the tax deductions from professional investors, an idea that clashes with wider tax law.

Investors currently have a financial advantage over home owners and this must be part of the distortion of higher prices for those who use a house for shelter ahead of investment. Investors can tolerate paying a higher price than the family owners of a home due to the tax effect.

Wouldn’t this proposal create an immediate hole in the government’s future revenue accounts?


You’ll not be shocked to hear that the government will find ways to collect sufficient taxes to resolve the reduction implied by my changes to property related tax. This proposed change opens up the opportunity to revisit the Tax Working Group recommendations and further evolve how NZ tax is collected.

After all, the likes of Amazon, Apple and Ebay are evolving the way they pay tax (or don’t) globally, so our government is certainly entitled to evolve the way it collects tax.

Long-time readers may recall the Tax Working Group review of NZ tax collection (must be broad, fair, effective etc) and you might also recall that the TWG said the two gaps in NZ tax collection were from measurement against capital and land.

I debated the land item briefly given the impact that councils have on the population with the rapid rise in rates collection.

However, where I am going with this is that if all property owners had access to tax deductions then the government could re-approach the concept of a land tax, or a capital based tax that would also capture all persons, especially those with the most.

Perhaps the Australian stamp duty (tax) on property transactions isn’t so bad after all? Given that nothing is ‘stamped’ anymore and Blockchain technology may mean bureaucrats aren’t even involved in the property settlement process maybe this tax could be renamed what it is, a property transfer tax.

This type of tax might slow the turnover of property and thus reduce some of the unnecessary hype in the property market.

Maybe ‘we’ could then define any investment in property beyond the first item as being ‘in the business of property investment’ and thus have these properties regulated under the higher equity demands from the banking sector. The higher interest costs for investors would slightly tilt the property market away from them and toward residential home owners/users.

Whilst I am reforming the tax base, in quicker time than was required by the TWG (standing on the shoulders of giants) I would increase consumer based taxes but reduce the tax impact on good savings behaviour (e.g. match Australia’s 15% tax rate on superannuation saving schemes  like Kiwisaver).

I know we need more houses to be built to help resolve high house prices relative to incomes but offering the same tax conditions to resident home owners and house investors would iron out another wrinkle in the yet to be levelled playing field.

Rabobank – further to our commentary about Rabobank and its perpetual notes last week, trading of RBOHA securities on the NZX has been busy lately.

I interpret this as healthy interaction between the believers and the non-believers with respect to repayment this October.

The market price has lifted to about 98 cents in the dollar reflecting the force of the believers.

I think the believers will get another shot in the arm in June when Rabobank repays a US listed Tier 1 security issued in that market and reaching its ‘Call Date’.

Negative – Last week the yield curve in China (interest rates measured across different time frames) showed signs of moving toward a negative slope.

The yield on the 10 year bond is slightly lower than yields for 2, 3, 5 and 7 year bonds. Oddly the yields on 15 and 20 year bonds are higher, so the 10 year dip is a ‘kink’ at this stage.

The ‘kink’ needs explaining (to me) but my message for you is that negative yield curves are a sign of concern because it is one guide from financial markets that an economic recession is within sight.

There could be plenty of reasons for a slow-down in China but excessive debt is definitely one of them.

I’ll keep an eye out for useful stories about the Chinese economy but the behaviour of the Chinese yield curve will precede most analysts actually spelling out declines in the economy.

If the yield curve slope tips more steeply negative it will be a reason for elevated concern and our exporters, such as our dairy sector, should become very conservative about their own spending at that point.

Investment News

Heartland – The good performance by the bank (HBL) continues (untaxed by the Australians – Ed).

I would say ‘unsurprisingly’ but in truth all that we knew about HBL’s plans from day one (the 2008 restructure and new plan), and expected them to deliver, has been achieved, and more, so now we are just like you in viewing HBL from a ‘what happens next’ frame of view.

HBL’s nine month update reports profits of $44.9 million, up 13% on the same period last year, and an expectation for the annual profit near the top end of the forecast range ($57-60m).

The analysts will like seeing a fall in the cost to income ratio (now 42%) proving more profit can be made from the same input costs but the most impressive sentence for me was ‘growth in receivables across all divisions’, disclosing more than just a growing economy to me but also hard work and a good team spirit.

There’s no harm having friendly internal competition followed up by shared congratulations.

Disclosure: Happy, biased, HBL shareholder and depositor.

Ports of Auckland – It seems that the Auckland Council is considering what Christchurch would not; the debate around the sale of some mature assets to fund other new, necessary, assets for the city.

The mayor’s musings will spark a flurry of political energy between those who support or oppose this proposal. Much of the heat in this political debate will be wasted in column centimetres for the media and not in making good conclusions about progress for the city.

Many will scream at Phil Goff that he would be a turncoat if he didn’t ensure his Labour heritage blocked the prospect of asset sales (even though he was here in the 1980’s) but the facts of the matter are that Mr Goff now has a different job, leading the business that is Auckland City.

The capitalist and markets participant in me supports the prospect of Ports of Auckland returning to the NZX. If I was an Auckland ratepayer I would definitely encourage all attempts at intelligent capital allocation and better control over ratepayer expense.

The Council need not sell all of its shareholding in the Port; it could follow the government lead of retaining control.

I haven’t seen it referred to but it could also contemplate the sale of a long term management contract to a third party, thus raising some cash and removing itself from some of the regulatory risks of owning and managing the Port.

How well might the two dominant ports in NZ be run if Port of Tauranga held a 25% share plus a management contract for the Port of Auckland?

How much efficiency could be offered to freight carriers in NZ from such a partnership of port management?

(Aren’t you forgetting the Commerce Commission? – Ed)

Fair point; ComCom won’t let us share video content across different mediums nor media content so maybe they won’t let us share freight movement either.

There is no rush for investors’ to get excited here because there is an enormous volume of tidal movement to be had under the wharf before any decisions will be made about the sale of Ports of Auckland shares.

It’s nice to consider though.

European Politics – European politics may just be settling down a little.

Maybe the low points were BREXIT and the heat generated by extreme subsets of society leading into the Dutch and French elections but it is beginning to look as if the ‘unionists’ (as in a preference to retain the EU) hold the majority middle ground.

A few months ago headlines would have us believe that Germany’s impressive leader, Angela Merkel, was likely to lose control of power. However, last week Merkel’s Christian Democratic Union comfortably won an election in the country’s most populous state (20% of total population) – North Rhine-Westphalia.

Of more modest interest from the election was a lift in support for the ‘pro market’ Free Democrats and the decline of the Social Democrats (the second largest political party in Germany).

The next milestone that the EU must help to settle is the political leadership of Italy.

Good luck with that one.

The steps are small but they are in the direction of more stable outcomes.

ETF Info – Further to Kevin’s articles last week about Exchange Traded Funds, I learned that in the US the three largest funds, being Vanguard, BlackRock and State Street, now have US$11 Trillion in funds under management.

These three are now the largest shareholder(s) (when combined) in 90% of the companies listed on the S&P500 index in the US and the largest shareholders of 40% of all listed companies in the US.

When one ‘follows the money’ they usually see what has motivated the decisions of those controlling the money and it should be no surprise that reducing fees for investing is the main driver. (a philosophy that we adopt here).

Next week I think I’ll take up the subject of exercising voter rights on shares held within Exchange Traded Funds.

Lloyds Bank – The UK government has managed to exit its compulsory support investment in Lloyds Bank (2008 Global Financial Crisis) by selling its remaining shares and retrieving the money it invested, being GBP 20 billion.

There is much political noise about how the return over the past 8 years has been very poor when measured in terms of lost interest (Time Value of Money) but frankly a financial return for risk was not a consideration in 2008, survival for the banking framework was the objective.

I think the UK government is entitled to say ‘objective achieved’ and the public plus the diluted Lloyds Bank shareholders should be saying ‘thank you’ and not measuring minutiae of the financial opportunity cost.

Examples like this and General Motors in the US confirm that when a good business with a clear future potential to succeed is simply short on equity during a period of distress then the correct thing to do is inject new equity (preferably private money) and work patiently toward positive cash flow and profits.

NZ didn’t handle its financial crisis management as well as we might have.

2 Degrees – It is nice to see 2 Degrees Mobile announcing its maiden profit, hopefully cementing its position as the third meaningful competitor in the telecommunications space for NZ consumers.

However, what stands out for me is that it has taken them eight years to reach the point of profitability and in my view much of this reflects NZ’s small population.

A new business is typically expensive to establish but gaining sufficient scale in a small country is clearly difficult and this difficulty offers part of a moat that protects established businesses from would be competitors.

2 degrees mobile has proved it is possible to compete in major industries but they have also proved how difficult it is to succeed.

Ever The Optimist – NZ based Rocket Lab’s inaugural rocket is on the launch pad and testing for launch over coming days.

Peter Beck said that the plans are to make several test launches before moving to phase II of the programme of 20-50 launches per annum (!) for paying customers.

This is an awesome business story launched (pun intended) by a passionate young New Zealander.

ETO II – US Industrial Production was stronger than forecast last month at the fastest pace in more than three years, +1.0% versus estimates of +0.4%.

The US Federal Reserve will use data such as this to reinforce why they would like to lift the Fed Funds rate further during 2017; by 2018 they might even reach 1.75% being New Zealand’s Official Cash Rate!

Investment Opportunities

Genesis Energy (GNE) – offer of $225 million subordinated Capital Bonds has announced a minimum interest rate for the initial five year period at 5.70% p.a.

Thank you to all who joined our list and requested an allocation. The issue was very popular and allocations were less than sought across the market.

If you received an allocation from us please now urgently deliver your application form to us, even if you wish to post date the application. (The application form can be downloaded from the Current Investments page of our website).

At the time of writing we are fully allocated but we have established a waiting list which investors are welcome to join.

Investors require a firm allocation from us before investing as there will be no public pool.

Infratil – During its annual result announcement (profits ahead of forecast) IFT has also confirmed its new senior bond offer to the market.

The bonds being offered are:

5 years – 5.65%; and
8 years – 6.15%.

Please contact us if you would like a firm allocation.

The issue is open now and closes on 23 June for new investors (closing 12 June for investors rolling the maturing IFT160 series bond).

The offer document can be downloaded from the Current Investments page of our website and application forms must be delivered to our offices.

Goodman Property Trust – GMT has announced a new senior bond with a seven year term.

We bid for an allocation this Friday and estimate an interest rate between 4.50% - 4.65% based on today’s market information.

This offer is one of the ‘fast moving booked by contract note’ method, with clients paying the brokerage expense.

We have a list for this offer. If you wish to invest please contact us including an expression of the amount that you wish to invest.

The fastest way to hear about new issues is to join our ‘All New Issues’ email group, which can be done via our website or by emailing a request to us to be added to this list.


Chris will be in Christchurch on May 23 and 24, in Whangarei on June 12 and Auckland on June 13.

Kevin will be in Christchurch on 22 June.

Edward will be in Auckland on 26 May and then in Hamilton on 7 June.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Michael Warrington

This work is Copyright © 2017 by Chris Lee & Partners Ltd. All rights are reserved. You may not copy, republish or distribute this page or the content from this site without having obtained written permission from the copyright owner.