Market News 21 June 2021

I see the United States of America is trying to win the rights to the 2027 Rugby World Cup.

The NZ Rugby Union should put all its weight behind making sure this happens.

Then spend a lot of time and money developing its marketing plan… www.allblacks.com, @allblacks, #allblacks

INVESTMENT OPINION

New Taxes – Tax working groups of recent years remind us that a population is willing to pay tax if its collection appears shallow and broad. I would add that simplicity demonstrably helps (think GST).

I think the current government is complicating matters and it will be detrimental to IRD (need more staff), to productivity (additional cost) and to the disadvantaged (the clever will successfully manipulate complex rules).

The new property taxes are already leading to discussions about exceptions to the headline (non-deductibility of interest). They will not be simple.

The new tax on vehicles (fossil fuels) will have unintended consequences.

Initially it will drive a huge sales increase for fossil fuel vehicles prior to January 2022 (good for investors in Colonial Motors and Turners Auctions, and the chance of a special dividend in early 2022?), and then also by extending the average life of the NZ vehicle fleet.

If one can't afford an EV, or use one for their vehicle purpose, then extending the life of an old vehicle has financial benefits.

The irony of the second point above is that this may be better for the planet (reduced mining) than trying to subsidise electric vehicles!

The manufacture of new EV cars is increasing, but it will not deliver sufficient numbers to us in the time frame that our government hopes, nor will EV pricing fall as fast as politicians are guessing. This makes ambitious EV targets impossible to achieve.

The G7, with its dominant economic influence, agrees to set policies that increase the use of zero emission vehicles, but they chose not to define a rate of change between now and 2030 and this consumer setting will influence global demand, which will map directly to the production schedules of the car manufacturers. New Zealand's preferences will not be considered at the board tables of the car manufacturers.

Being a small country is one of New Zealand's good fortunes, but it also makes us a price and product taker, not maker; we don't get to set the global rules.

For fun, when considering our level of global influence, I looked up some numbers – NZ GDP is roughly US$205 billion, but Toyota's annual revenue is US$275 billion.

This should put in perspective our influence in the vehicle marketplace. Toyota has more global influence on this matter than NZ.

Toyota cares about the planet, which can be witnessed in their early move to hybrid engines and ongoing assessment of global energy resources. Toyota is very capable of expanding its EV production, and will if forced, but they are focused on hybrid and think the political rush to EV is an error.

Toyota's lens is far longer than that of our government (all voices).

I view all of this (new taxes on cars in NZ) as complicating the NZ tax policy, which is a negative outcome and likely to direct more wealth in the direction of the few.

Almost frustratingly, our job is to help investors to dance out of tune with the new government policy to extract any possible financial gains from the situation. (short term special dividends referred to above?).

I'd bet that Toyota's annual revenue will rise faster than NZ GDP over the coming decade (not investment advice to buy Toyota!).

I would feel better about the government increasing the budget provided to the Crown Research Institutes with specific projects to assist industries with improving carbon and climate related outcomes (measurable).

China – Is China being 'Game stopped'?

If a collective of smaller investors can, against all expectations, drive up the share price of a business that others thought would fail (Gamestop), can a similar political collective change the supply/demand dynamics of global commodities?

OPEC I hear you say.

Now, in the face of China trying to artificially suppress the Australian economy, the price of iron ore needed for steel making has doubled and since President Xi Jinping has forced Chinese commodity users to reduce demand, the price has…. gone up again.

''Go on, have three children''. No thanks.

''Stop buying iron ore from Australia''. If we do, we might lose supply access for those projects you are insisting on (there's a shortage of renewable energy in China, for example).

While China is trying to reduce such demand, the rest of the world seems to be directing a portion of the trillions in fiscal spending into new infrastructure projects. (Are you referring to the cycle bridge – Ed)

Hey wait, Mr Xi, maybe this global fiscal push strategy has something to do with the rising price of iron ore?

Or maybe other political leaders disagree with China's tactic of having state media declare they will 'send Australia into a wintry economic period by wiping $81 billion from their economy' and others are placing additional buy orders with Australian miners?

The UK has just signed a new trade agreement with Australia, in what looks like a record time for a negotiation and with what seem to only be modest restrictions.

Maybe the market noticed that even though China claimed steel recycling would assist with up to 50% of their future needs (this doesn't seem credible) China's iron ore inventories are still falling.

Then, just to rub salt into the wound, another major producer (Brazil) is reducing production at present to solve problems in the sector.

So, in a classic example of 'talk is cheap' the Chinese dictatorship is learning that issuing verbal threats has less influence on market dynamics than actual business.

I think political leaders would do well if they backed away from yelling political philosophy at each other or using artificial and thus temporary forces and get back to trade agreements based on more reasonable expectations.

The rising iron ore price makes me pleased for Australia, which by one degree of separation is good for New Zealand.

Subsidy removal – Even though most governments are directing huge sums into additional fiscal spending, to have it flow as widely as possible across an economy, it is nice to read about the removal of some of the pure subsidies (no performance measure) from the Covid19 era.

In the UK, the Chancellor of the Exchequer (Rishi Sunak), has rejected business demands that the government extend the subsidies for furloughed workers.

Good on him.

At this point, 15 months after Covid impacts began, and 50% of the way into their vaccination programme, the businesses were simply trying it on. If they haven't reformed their business strategies to succeed without subsidies, then they should no longer be in business (or the board and executive team should have been changed).

Running a business based on a dependence on taxpayer subsidies is the very definition of unproductive and unnecessary within the economy. (Tiwai Point did you say? – Ed)

Don't get me started.

The German's must still be laughing at the rest of us with our bulk subsidy methods, given their more admirable financial support strategies that are dependent on regularly disclosed revenue from business.

Genuine businessmen in Germany would strive to get away from such subsidies because to see them as a revenue item should result in anger from directors because it flags corporate failure risk, not good political negotiations.

If we don't remove unconditional taxpayer subsidies, we will hold back the next transformations that our young and clever are trying to develop.

To be fair to the UK, they are about to demand employers pay 10%, then 20% of the 80% of normal income being received by furloughed workers. Businesses have known for months now that the furlough scheme ends in September, providing plenty of time for planning.

I doubt that it is a coincidence that the global shortage of skilled labour seems to be aligned with the global excess of subsidies (employment related).

US Fed Meeting – The US Federal Reserve has again reminded financial markets not to factor in large interest rate increases, or to expect them soon.

They plan to hold their overnight interest rate at 0.00%-0.25% until late 2023.

They now talk in terms of 2% average inflation over long periods, not imminent inflation over the near term.

They remind us that their goals are both 'maximum employment and price stability' without actually defining 'maximum'.

2% average inflation gives us a focal point, but today it is badly blurred by the imprecise objective of maximum employment, and I doubt that a single eye prescription will help to understand the Fed's evolving opinions.

The employment situation has far more political influence than inflation. 100% of the voting population understand employment, with far less understanding inflation. So, getting the employment outcomes right is now far more important for political stability than getting inflation right.

The other sentence that may as well have been full of bold highlights was:

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals. (bold highlights mine)

Just as we are becoming used to the theme in New Zealand, it is no longer solely about the overnight interest rate setting.

Speaking of using additional monetary tools….

Tools – The Reserve Bank of New Zealand (RBNZ) now has more tools available than Mitre 10.

The Minster of Finance has finally approved Adrian Orr's new high priority item, permission to set regulations for Debt to Income (DTI) ratios.

The governor has been on a crusade to reduce financial stability risks (a key mandate for the central bank) in New Zealand and he saw too much risk on bank balance sheets (how risk was measured by them and the true equity held by them) and on private balance sheets (huge increases in mortgages).

The need for more 'real' equity to be held on bank balance sheets (less use of complex bonds that may look like a duck, but don't walk or quack like one) has been addressed and the new simpler, stricter, capital rules are about to be announced.

However, more column inches (scrolling depth? – Ed) will now be occupied by the subject of DTI, covering the influences that politicians prefer (restrict investors) and the central bank governor demands (increase financial stability).

The current fuss on this subject surprises me because approval of my early car and home loans centred around what the bank manager believed I could afford to borrow, based on a direct relationship between the debt, my income and risks to my income changing.

I like the potential for the Reserve Bank, and thus banks, to set tougher constraints on investor use of debt, especially in the unproductive space of residential property (so too should the Productivity Commissioner).

New DTI regulations are another resistor for the aggression of residential real estate investors, but it will not solve the house price problem nor improve access to homes for those with very little equity.

Those with the most equity will still appear to be modest risk borrowers to the banks, but it is nice to see cash flow becoming a more important part of the approval process.

I hope Adrian Orr also considers different DTI ratios between interest only mortgages and those with capital repayment tables (declining risk and thus beneficial to financial stability).

For investors, I think this has very little impact on those holding shares in retirement village operators. We are still short of houses in NZ so the more they can build the more those with real equity (retired) can downsize their accommodation, migrate toward preferred services and release capital for spending.

Demographics and housing supply problems still make the retirement villages a highly desirable part of our economy and property scene.

EVER THE OPTIMIST

NZ Company Rocket Lab has been contracted to deliver a project to Mars in 2024.

This fabulous business story is becoming universal.

Maybe our councils and central government should reflect on how far ahead businesses plan when they make strategic decisions, the evidence required and then actually delivering.

ETO II

Even with the borders still heavily restricted Air NZ has reached a point they like to call 'revive' and presented staff with a small bonus plus returned wages to normal settings (they had been cut during 'survive' mode).

ETO III – Vaccinations

Global Data:

Good news, another vaccine has been added to the market: Novavax has released a vaccine with 90% effectiveness, after trials including 30,000 people (are trial numbers going to overtake NZ vaccination numbers? – Ed)

Supply and choice are no longer an issue for global vaccination, just administration and opinion!

Vaccinations doses delivered – 2.60 billion jabs

Total (recorded) Corona Virus cases – 179 million

Active Cases – 11.5 million (declining)

Daily rate of new cases – 350,000

People in serious condition – 82,000

Daily Deaths – about 8,000

Hospitals are celebrating. The highly contagious nature of Covid19 is its greatest threat, and particularly to our health systems, which when overwhelmed cannot help those whose lives are at greatest risk.

That is changing.

US hospitals are now beginning to report zero cases being cared for. Boston Medical Centre had 229 Covid19 patients one year ago, but today they have zero. Others are reporting the same situation.

Investment Opportunities

Precinct – Holders of Precinct Properties will be approached soon with the opportunity to purchase a few additional shares via a placement, at a modest discount ($1.52 per share).

TRAVEL

Edward will be in Nelson on July 8 and July 9.

Edward will also be in Auckland on 21 July (North Shore), 22 July (Remuera) & 23 July (CBD)

Kevin will be in Christchurch on 6 July.

David Colman will be in Palmerston North on 30 June

Johnny will be in Christchurch in mid to late July.

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

Mike Warrington