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Market News 19 March 2018

President Putin, for life;

President Xi, for life;

President Mugabe, almost for life.

What is it about such people that they think the population will not succeed without them.

Clearly none of them are serious students of history.

I wonder if Jacinda’s kids will allow us to keep her as Prime Minister for life?

Investment Opinion

Cryptocurrency – There is always an ocean of stories about cryptocurrencies when you open the media, regardless of the channel.

It is still difficult to forecast what the future for this commodity will be.

Without central bank endorsement cryptocurrency will remain a commodity, available for use to settle trade by those willing to accept valuations (i.e. is Bitcoin acceptable at US$9,000? or Ethereum US$700 etc).

I remain sceptical about investment in cryptocurrency as a commodity but continue to see merit in the underlying technology (Blockchain) and the potential for expanding technology-based payment methods.

On the point of central bank involvement, I wonder whether central banks will begin endorsing cryptocurrencies as they confirm the merits of efficiency, cost reduction and stability for a financial system.

Further, given various nations’ willingness to engage in trade wars, and technology disruption, I expect they’ll look very closely at the benefit of financial war too.

The European Central Bank (ECB) has been working hard to avoid having the future of the Euro undermined, post the BREXIT decision by the UK. They now have an Italian electorate that shall be as unpredictable as ever before. They might be keen on an idea to help push back, in their favour.

Maybe if they could draw other nations into their currency (Euro) without them needing to be members of the European Union.

My proposal to the EU and ECB, which comes cheaply if they happen to be reading, is to launch a cryptocurrency that is linked to the Euro and monitored and regulated by the ECB.

The regulated and monitored status may invite a few critical headlines but importantly it will exclude the criminal element and will increase the long-term stability of the new electronically based payment method, and thus legitimately be described as a currency.

Imagine the uptake by UK businesses, and those in Sweden, Norway and Iceland etc (not Euro use countries), all of whom have an absolute desire to trade with members of the European Union.

Many of these businesses will indeed have Euro bank accounts and financing arrangements already, but if the ECB offers them a settlement process that excludes a banking organisation and reduces transaction costs without increasing financial risks, surely these businesses will engage?

I am not encouraging readers to invest in cryptocurrencies, but in a world with increasingly disruptive political positioning we should expect more of the same and need to address the impact it may have on current investments (financial intermediaries, such as banks?).

The changes in the regulated cryptocurrency space will not happen quickly, so we’ll have plenty of time to consider them and their impact.

Banking – Speaking of banking, two other stories highlight reasons for caution on the weightings of investment in this sector, especially for we ‘down-under’ investors;

The Royal Commission of Inquiry into the Australian banks has begun, and it is logical to conclude that launching the investigation required a starting point of believing that the public were not being well served by the banks.

‘Excessive profits’ is a frequent allegation made against banks (rightly, or not).

The head of the inquiry has already invited the banks to confess their sins (my headline), so the tone of the investigation is clear.

Most of the banks initially replied that they could not supply that much detail in such a short time frame. This drew a critical response.

If the banks were stalling the behaviour is consistent with the criticisms of the sector.

If the banks were truly unable to respond it becomes unsurprising that CBA bank didn’t realise criminals were money laundering via their ATM network.

Neither response is impressive.

I’d be very surprised if the inquiry didn’t result in recommendations for increased service levels, without tolerating increase costs reaching the customer, which may mean a regulatory note about return on capital references.

The second word of caution for investors in bank shares came from the Bank for International Settlements (BIS), which recently released a report (available on their website) highlighting the uncomfortable (my word) level of financial risk in Australia and Canada (amongst others).

The BIS points out the currently high risks within debt-service ratios and cross-border claims (the volume of funding required from offshore lenders).

Lenders need to hold a view that housing prices will be stable at current levels, a view which I think is sound, but the BIS independent view is not to be ignored because it highlights that there isn’t a lot of room to move in the wrong direction.

PPP– Minister of Finance, Hon. Grant Robertson, says he will seek help from the investment community to fund infrastructure deemed necessary by the current government.

He’s an intelligent man, so I hope we can take him at his word, because he is describing Public Private Partnerships (PPP).

If I sound uncertain it’s because this would be a stark change in policy from the Labour party and frankly, from the underwhelming use of PPP by the National led government.

Further, the ‘show me’ scenarios like the changes to public transport (Public Transport Operating Model) validate the government’s (both colours) move away from encouraging private capital to invest in services that the government feels are needed.

The Labour government has ruled out using PPP to re-build the entire new Dunedin hospital.

However, let’s give this minister a chance to ‘show’ us his plans.

We know that the government, and councils can borrow the cheapest money in NZ (last week, demand for their 3.00% 10 year bond was 2.5x the amount required) and thus the theoretical approach to each new infrastructure project should be for the government to borrow 100% of the money and build it.

But it’s not that simple.

Bureaucrats and politicians with no ‘skin in the game’ are perpetually shown to make poor decisions about long term investment of other peoples’ money. They can bet on black, or red, (and do) without really feeling any pressure to spend time considering the consequences (other than vote capture – Ed).

When investing, as opposed to providing essential services (opinions vary on what is essential), the decision makers in government should also be considering who will pay for the use of the product or service; tax payers or users?

The answer to this question will help the minister to determine which items are in fact investments and which are essential services.

If the government borrows 100% of the money required for a project, the cost will massively exceed the low interest rate if the project is not required by tax payers and not used by those who would pay for the service.

It shouldn’t take you long to think of many government led ‘investments’ where the cost of debt may have been very low but ultimately cost much more than the 10-15% that a commercial business would be satisfied with from successful investment.

The ‘Bridge to Nowhere’ is a good actual and metaphorical thought.

I read an NBR article sourced to a lawyer at Simpson Grierson aimed at the NZX with ideas for expanding our capital markets. Coincidentally it connected NZ’s need for more infrastructure spending (see Grant Robertson assessment) with the need for private money and thus a confluence on the NZX.

The article discussed the potential for PPP that ultimately expired and returned 100% ownership to the Crown, after providing the opportunity for higher returns on private investment over a long-time window, such as 20-30 years. The expiry of the PPP could be timed to match any demographic declines that might indicate reducing liabilities elsewhere for the government.

This concept of ‘return the essential asset to the Crown’ would likely sit better with the Labour party, and perhaps most New Zealanders, than having their asset privately controlled, but logically the structure would allow providers of private capital access to the returns they deserve for the risk they accepted.

This aligns with Grant Robertson’s question from the markets; can you help me access additional capital and what is the price?

The premium price of the private capital could then be boxed in to the agreed time frame, of say 20-30 years.

The premium price could be lowered if the government agreed to a repurchase price for the asset of $1.00 at the future date; effectively reducing the capital risk to nil and placing only operational risk and returns with the investors.

Providing such a capital guarantee shouldn’t be too big a stretch for the government, especially if the comparison they are making is with the 100% funding and ownership model.

This PPP opportunity shouldn’t be hard to establish.

New Zealanders are allocating money to an ever-increasing pool via Kiwisaver and these fund managers will soon struggle to find sufficient good domestic assets to invest in. Given the NZ dollar liabilities of their customers (the savers) Kiwisaver fund managers have an absolute need to hold a significant proportion of assets in the NZ economy.

Given the ability for investors to change Kiwisaver managers, those managers require liquidity for most of their investing. This is where the Simpson Grierson point matters; encouraging the government and the NZX to reach agreement on establishing a variety of PPP investment vehicles and allowing those vehicles to be NZX listed (transferable, tradeable) will add to the demand profile for investment in such opportunities.

I know that the CEO of the NZX would be happy to see additional products listed on the exchange.

I know that our clients would benefit from additional investment products and risk types.

I know that Kiwisaver fund managers would be pleased to consider low risk, equity investment opportunities which also offer liquidity.

Other than government agreeing to get on with accepting this method of accessing the additional investment capital that they seek, I do not see any insurmountable restrictions.

So, in the form of an open letter to the minister:

Dear Grant,

If you approach us, with the following NZX listed Public Private Partnerships (PPP) we will be very keen to present the opportunities to the investing public seeking financial advice from us:

National Cancer Centre (Wellington) Fund;

Housing NZ managed, Kiwibuild funds (various);

Te Apiti highway (Manawatu) fund;

SH3 Taranaki to Hamilton Highway improvement fund;

Horowhenua Kapiti Expressway Fund;

Rail Corridor from Auckland City to Airport fund;

Golden Triangle Rail Fund (AKL, HAM, TGA);

Auckland Harbour Bridge Skypath Fund;

I only made one of these up, the rest are linked to your party manifesto.

I encourage you to make contact with James Hawes (Simpson Grierson, NBR commentary) and Mark Peterson (CEO of the NZX) and invite them to establish a pathway of PPP cash to your door.

In turn, they will make contact with the investment community who will be waiting for the opportunity to invest.


Etc, etc.

NZ Council’s should join in on any planning for increased use of PPP for funding. Funding tension exists in Christchurch, and now in Auckland (who have reached their borrowing limit via the Local Government Funding Agency); they too need to contemplate inviting other equity risk investors into their funding plans.

To our clients; do not accumulate too much cash earning 0.1% with the major banks (2.75% if in Heartland Bank) waiting for us to offer these new PPP investments to you.

Sadly, like all things in politics, this investment idea will be very slow to progress, if the current government progresses it at all as they fret over sharing value with the well behaved New Zealanders who are actually saving money!

GDP measure OK? - Our strong currency, on a gradual rising trend again without as many beneficial interest rate differentials, implies that NZ may be earning more from tourism than is being captured in GDP data.

Maybe our GDP measurement process is losing integrity?

The latest quarter for GDP measured at +0.60% disappointed economists who had been expecting +0.80%, citing a weak period for agriculture, but my anecdotal observation of ‘people busy spending money’ is of a high rate of activity.

Yet, in response the NZ dollar has not fallen. There has been sufficient trade, or optimism for future trade, to hold the price of the currency up.

Just a thought, not a deep thesis on the matter.

AML Wars – Above I referred to the potential for financial wars between trading blocs based on methods of payment.

Another battle line has been drawn by the US via Anti Money Laundering legislation; the US has instructed the Industrial and Commercial Bank of China to improve its AML capture and monitoring.

The less than veiled threat is the loss of banking licence or privilege with the US, and perhaps with US dollars.

Investment News

Trumped – There seems to be no end to the range of things Donald Trump wishes to control.

Maybe his behaviour isn’t so different to that of Presidents Xi and Putin with the only difference being Trump cannot stay on past 2024.

Last week President Trump used an executive order to block a takeover offer in the markets. (Broadcom’s hostile offer to buy Qualcomm).

We sometimes debate the merit, or lack of merit, in decisions made by our Overseas Investment Office (and Commerce Commission) but imagine how we’d feel if Jacinda had a simple YES / NO flow chart for corporate takeover decisions in NZ?

We, collectively, often question the value of committees but aren’t they, and disseminated authority, a safer long-term strategy for decision making than leaving it all to one person?

Maybe if I spoke for Donald Trump his response would be; ‘you have seen how the Senate and Congress fail to make progress, right?’.

This Broadcom decision is a long way from what I consider to be national governance responsibilities.

It is also becoming disturbing just how fast Trump hires and fires senior staff for the Whitehouse. The departed can’t all have been bad choices at the start point or provided appropriate reasons for dismissal during the past 18 months.

There is only one constant in the mass hiring and firing; Donald Trump.

Maybe he is videoing the activity for a future television show of ‘You’re Fired’?

There is something disturbing about the new ‘central dictator’ approach to government that has arrived in Russia, China and the US where in the past it was the domain of Zimbabwe and Cuba, but I am not yet clear on its impact on our investment decisions.

Sky TV – There is a ‘changing of the register’ occurring for Sky TV.

Turnover on Friday 16 March was 34.25 million shares. Prior to March, turnover ranged between 200-500 thousand shares per day.

I’ll speculate that the longer-term holders over the past decade are being convinced to exit a business that needs to remove its spots and apply some stripes.

[someone is buying… who believes in a new strategy]

Eroad – Actually, with a great deal of bias (as a shareholder) even I could be convinced to vote for President Trump if he delivers policy change consistent with the latest ‘Economic Report of the President’, in which, he describes a probable need to switch from fuel-based taxes to distance-based taxes in the transport sector.

Previously Trump had favoured a fuel-based tax. The change of opinion (normal for this President – Ed) in a formal report implies that someone has pointed out to him that this implies declining tax collection (engine efficiency and electric vehicles).

Eroad is rather nicely placed to provide service to the US transport industry with respect to measurement, regulatory obligations and tax collection.


Ever The Optimist – NZ guest nights rose to another record (4.97 million) up 1.4% from a year earlier.

This partly explains why I was asked to pay so much, for so little, during a recent trip to Auckland!

ETO II – Italian design business (Successori Reda) tells us wool, especially fine wool, is having one of its best ever moments.

I guess they were bound to be polite whilst visiting NZ, but actually making the visit speaks as loudly as the headline about why the sector should be upbeat at present.

Investment Opportunities

Investore Property Ltd – has formally announced its offer of a new senior, secured, 6-year bond.

The yield will be set on 20 March (minimum set at 4.40% p.a.) with quarterly interest payments. The interest payments are on the unusual, but helpful, months of January, April, July and October.

Kevin Gloag has published a research piece on the Private Client page of our website (accessible by all clients receiving financial advice services from us) which investors will find useful.

We are gathering interest from investors now (please contact us to join the list) and will bid for a firm allocation on 20 March (tomorrow).

The bond offer opens on 21 March and closes on 12 April.

Investments will be processed on application forms and investors do not pay the brokerage costs.

Fletcher Notes – FBI rolled their Capital Note on Election Date (15 March 2018 – FBI110), into a new 5-year replacement (15 March 2023 – FBI170) at 5.00%.

If FBI follows a consistent pattern they are likely to sell their holding (millions) of these notes to the market after 15 March.

Accordingly, we have started a list that investors are welcome to join if they’d like to purchase some of these new Capital Notes, should they be offered to the market.

Having said that, clients can now instruct us to buy FBI170 securities on market because trading has begun.

Possible deals for 2018:

Sky City Casino – bond;

Vodafone – IPO of ordinary shares.

All investors are welcome to join these lists by contacting us.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (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 March 27 (pm) and 28 (am) in the Boardroom, Airport Gateway Lodge, 45 Roydvale Road.

Chris will be in Auckland April 17 (pm) at Albany Motor Lodge and April 18 (am) at Waipuna Lodge, Mt Wellington.

Kevin will be in Christchurch on 22 March and Ashburton on 12 April.

David Colman will be in Palmerston North and Wanganui on 27 March and New Plymouth 28 March.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

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