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Market News 16 May 2022

 

So, Bitcoin has made its way back from the heady days of USD$65,000 to now be about USD$29,000 and falling.

Bloomberg offered a nice one liner on the subject:

Pity the man who has now lost everything on Bitcoin and lamented that it would have been better if thousands of people had warned him about the risks!

INVESTMENT OPINION

NZ Budget – our 2022 budget will be presented this week.

I don’t think it will turn the dial and effect change for local investors. Worldly influences will be more important.

We can chat about the details seen next week.

Inflation – The threat of the disruptive change to the inflation landscape becoming even worse is a leading concern for investors, followed very closely by declines in economic activity being experienced in China and Europe.

This combination is the very definition of stagflation where economies earn less but are asked to pay more.

It feels worse if you are willing to pay more yet cannot even access the products sought.

Experienced investors and economists have long been concerned that the oversupply of cheap money would drive inflation higher. They were all perplexed by the fact that it was not happening over the past decade.

Now it is, and whilst the cheap and plentiful money supply was leaning on consumers to act with purchases and investment, this was what governments and central banks wanted, so I don’t think it is the major driver of inflation data being witnessed today.

For me the main driver is an item we cannot control, nor invest to guard against, the fracturing of global tolerance.

There are plenty of egotistical politicians in the world and for the most part world economics maneuvered around the smaller road bumps put in place, but Vladimir Putin has quite literally destroyed the map.

President Erdogan’s selfish and foolish displays in Turkey were a serious concern, witnessed by the collapse in the value of their currency and the surge in their local inflation, but this did not disrupt the global networks.

Countries and leaders of the world had reached a point of tolerating a lot of poor behaviour from smaller players so reactions were modest and routines were, for the most part, retained.

That all changed with Putin’s invasion of Ukraine.

It was the straw that broke the camels back for the majority.

Not all nations have engaged in pushing back on Russia, and some who are silent are unsurprising, but when the economic powerhouse that is China decided to support Russia’s actions, this news compounded the economic fracture that Putin initiated.

The lack of resistance from India is also unhelpful.

Those opposed to Russia’s behaviour have very quickly moved past the negotiating table and are establishing new policy settings to reduce their economic interaction with Russia, and I suspect silently reducing their exposures to China too.

Europe is taking steps to make huge reductions in the energy volumes that it purchases from Russia and to stop doing business inside Russia.

Siemens is exiting after a 170-year association! 170 years straddles all the conflicts that I can remember!

Neutral countries are taking sides.

China has a policy of expanding its autocratic governance footprint, now obvious in Hong Kong and they are wanting to control Taiwan. China’s preferred approach to Covid management is having a strongly negative impact on economic activity, and as we know, the virus is not going away; the evolution of a virus is unconnected to political preferences.

Not even Xi Jinping can command a virus to do something, and it would be nice if he learnt some hubris from it and governed a human population differently too.

These policy settings are having enormous impacts on the economic networks that the world had come to rely on for heightened efficiency and thus price stability.

We are in the midst of discovering the price of global inefficiency (relative to the past decade or two) via the inflation being experienced in each local jurisdiction.

New Zealand’s tiny size in the world, and our reliance on external products makes us more vulnerable than many.

When manipulation is not the policy of the day, an interest rate is a construct of inflation plus some real return (the higher the risk of the borrower, the higher the real return required).

I apologise to those who find this repetitive, but congratulations to you for having such a good grasp of the drivers of returns for part of your investment portfolio.

With the exception of my first five years work, interest rates have been declining throughout my career, albeit with bouts of increase along the way as economies tested appropriate interest rate levels.

This means that there must be a large number of financial advisers, and investors, who have never endured an extended period of rising interest rates.

It’s hard enough to make decisions with 35 years of experience let alone ‘only’ having 10 years under your belt.

Central banks are now stepping in to change the scale and pressure of tension applied to their economies, so I don’t think they will lose control of the situation as some contemplate, but no matter how skilled the central bankers are they cannot influence the egotistical fools leading some nations.

Putin’s actions have triggered a fracture of prior trade efficiencies and the newly found attention on improving our use of the planet.

It’s going to be rather more difficult now for fund managers adhering to good ESG principles to find enough tolerable investment options to satisfy ESG investors.

Putin has blown up my ‘Lorax moment’ for the world.

Reflecting upon our thoughts last Christmas about what 2022 might bring, where I decided to place my chips on ‘Rising interest rates and share markets lower’ (and Bitcoin down – Ed).

I didn’t think central banks had the spine to push interest rates above the level of inflation.

Long term bond returns in New Zealand are roughly the same as short term inflation results and we will soon know whether inflation is to push higher, and whether the central banks are willing to insist on even higher interest rates to move above inflation and beyond current intentions.

I know some of you now think you have too many long bonds, just as you thought you had too many short-term bonds when interest rates were declining, but the ongoing truth is that a portfolio needs both.

For investors managing their own portfolios (ie not using managed bond funds), the average life (duration) of fixed interest portfolios in New Zealand is very short. Most invest in the range of 90 days to 5-years with a few items beyond that. You’ll find these portfolios average less than 3 years when you do the calculations, and this is very short in term and thus only has a modest exposure to the damage caused by rising interest rates.

Rising interest rates won’t be fun to watch relative to one’s old bonds (or other asset valuations) but will be fun to watch for new investment opportunities.

For the record though, whilst still debating whether inflation can move higher (it was +8.30% in the US at last reading), and whether interest rates can increase further, long term interest rates in the US are falling again (for the moment). +8.30% inflation was lower than the markets had feared.

There’s never any certainty and there’s nothing quite like a nicely diversified portfolio with an overlay of financial advice.

Risk reduction seems wise.

We seem to have returned to living in a period of ‘interesting times’.

Bias – As an appendix to the item above, now is an excellent time to double check your thinking to ensure that you do not let confirmation bias creep into your decision making.

Trade– Then, overlaid on the period where trade is being disrupted by poor behaviour from dictators, New Zealand is also suffering a trade disruption from a friendly nation (Canada) simply refusing to respect well negotiated trade agreements!

The Pacific trade agreement with the unnecessarily long name is to be tested under dispute resolution protocols after Canada fails to accept the agreed volumes of NZ dairy product.

After only two years we are already debating the ABC’s of the CPTTP to test the TRQ’s and hopefully reach XYZ without fracturing this agreement.

I hope this proves to be a misunderstanding and not an example of a trade agreement being ‘say one thing but do another’.

OIL – As the policies of idealism are developing, we are getting a stark reminder about the importance of oil (all reliable energy sources) to the world’s population.

Saudi Aramco is again the world’s most valuable company, and after Apple, they are probably followed by the likes of Shell, BP, Exxon Mobil, Chevron etc.

Money – It is instructive to watch the majority of the world buying more US dollars and selling other currencies and speculative assets (think crypto currencies) as confidence declines or narrows its focus.

Ever The Optimist

Finally, a news item that differs from the concerns I discussed above:

President Biden is discussing potential reductions to the trade tariffs between China and the US put in place by Donald Trump.

I am sure there will be strings attached, but if tariff cuts happen it would be great news.

ETO II

Here’s a nice statistic:

The Guardians of the NZ Superannuation Fund delivered the highest annual returns of any sovereign wealth fund in the world over the past six years (11.79%).

The also beat all but two public pension funds globally.

ETO III

A plummeting Bitcoin price might rescue some nations from the excessive (and I would argue wasteful) use of electricity resources.

Investment Opportunities

Channel Infrastructure (CHI) – CHI completed the issue of $125 million senior bonds (CHI020) with the interest rate set at 5.80% (being the pre-defined minimum that it could be).

Thank you to all who participated in this offer through Chris Lee & Partners.

Christchurch International Airport – completed its offer of $100 million new 6-year senior bonds.

The interest rate was set at 5.18%

Thank you also to those who participated in this bond offer with Chris Lee & Partners.

Infratil – We think you will hear from Infratil next (19 May) about their next bond offer and rollover offering for those holding IFT190 bonds maturing in June.

Vector – has begun the process of rolling its VCT080 Capital Notes (subordinated bonds). Holders have been approached to make a decision prior to 31 May.

Holders who plan to roll their investment are encouraged to actually complete the online process and select their broker (or us!) because by doing this some brokerage will be directed from Vector to the broker. (This doesn’t happen if you do nothing, even though your notes will be rolled over).

The interest rate will be set on 15 June, but will not be lower than 5.50%, (current market conditions imply about 5.65%).

Genesis Energy – subordinated bonds (GNE040) are coming up close to their review date (9 June 2022) and all things being equal will offer a new, similar, product to invest in.

Previous such offers have invited participation by new investors and Mercury has just set the reward scene with its 5.73% interest rate.

Watch this space…. Or the NZX announcements.

Thereafter – we expect Property For Industry and the banks to announce new bond offers.

 

 

Travel

Kevin will be in Timaru on 20 May.

Chris will be in Taupo on Monday June 6, available to meet with clients, before talking to a group on June 7

Edward will be in Auckland over three days in June. He will be in Mount Wellington (exact location TBD) on Wednesday 8 June, on the North Shore (exact location TBD) on Thursday 9 June, and in Jarden House, Auckland CBD on Friday 10 June.

If you would like an appointment, please contact our office.

 

Seminar Dates ahead:

Monday 23 May, Mt Wellington - Mt Richmond Hotel, 1.30pm

Tuesday 24 May, Takapuna - Milford Yacht Club, 11am

Thursday 26 May, Whangarei - Flame Hotel, 11am          

Monday 30 May, Palmerston North - Distinction Coachman Hotel, 11am    

Tuesday 31 May, Napier - Crown Hotel, 11am 

Michael Warrington

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