Market News 16 October 2017

After such a long, and strong, rise in share prices are you feeling flush with cash?

If so, you might be pleased to learn that an oversupply of private jets has seen their prices fall by a third.

Clearly some people have missed out on the gravy train recently.

Investment Opinion

BREXIT – on the subject of politics, unresolved locally, it’s possible that New Zealand will benefit from BREXIT if both the UK and the European Union decide to fight for pole position in free trade negotiations with us.

You’ve got to love genuine competition, especially in a world (led by Trump) that is showing signs of retreating from competitiveness.

BREXIT is clearly going to take a while yet, with politicians delaying progress, just as we are experiencing locally.

Politics II – There is another example of the importance of trying to be careful about the politics of governing a country; the sharp change in approach in Turkey from President Erdogan is unsettling important political relationships.

Turkey’s swing toward relationships with Iran and Russia is disrupting its strong prior relationships with old Western allies, including the US.

The US has accused Turkish banks of aiding money laundering for Iranian entities. President Erdogan has responded by supporting the banks.

Turkey would be unwise to see themselves removed from trusted global banking networks. This would not serve their people well.

It was only two years ago that Turkey was bidding to join the European Union.

Financial markets in Turkey are beginning to experience significant price declines, which indicates to me that capital once dominated by Western providers is withdrawing from the Turkish market.

I’ve always held a view that rapid change is unwise when working with issues that involve politics.

FMA tightrope – The Financial Markets Authority, within its quest to increase public confidence in financial markets, is simultaneously trying to set tighter regulatory standards around market pricing and to encourage more institutions to participate, so as to help add depth to the market.

More depth, and diversity, in market participants should indeed add to the quality of market pricing, but will the new rules encourage this?

The latest news item was about the wholesale market for setting short term interest rates each day (30-180 day terms), which through extension have an impact on setting interest rates for mortgages and floating interest rate corporate debts or derivatives.

I think the FMA has bitten off more than they can chew and will not be successful with both of their goals (tighter rules and regulations plus more participation for market depth).

The tighter rules and regulations approach is consistent with trying to increase public confidence in the outcome, thus trying to avoid scandals like those endured overseas with rate setting or foreign exchange trading. However, the tighter rules will also reduce participation, in my opinion, not increase it.

One of their descriptions was quoted as:

‘FMA said it expects banks to think about how they can record contextual evidence that will show what the purpose of any trading activity was, at the time it took place. It says banks should have a clear trading strategy and should record its explanations for varying from that strategy. The regulator may conduct spot checks.’

Thinking back to my previous roles that involved trading or price making in financial markets, I would have reduced my activity if I had a new obligation for recording ‘evidence of purpose and context’ around every transaction.

Sometimes the risks being managed by a financial markets trader (which differs from a fund manager) are changing by the second, influenced by multiple purposes and changing context, so I smile at the prospect of a regulator asking for a tight new process to be followed.

Banks will look at improving their processes and will aim to behave well in price setting roles for financial markets but I don’t see other institutions becoming involved, so I don’t see the market expansion that the FMA seeks.

These short terms only have modest financial leverage for smaller market participants, unlike the banks with balance sheets in the tens of billions, so the smaller market participants will focus their attention and regulatory workload on risks where they can make greater financial gains.

To put this in perspective; do you think about the risk and reward of your 90 day bank deposits more than the changes occurring with your shares?

Ongoing improvements to financial market integrity are to be applauded, but NZ is a very small market and no amount of polite encouragement will change its depth.

Share Prices – It’s a little repetitive to say, especially to those who believe in the hypothesis of perfectly efficient markets, but markets are imperfect and often the mistakes they make are significant in scale.

Sometimes the participant making the error is the investment entity and the error, once disclosed, is larger than the shareholders or board members hoped was possible.

Sometimes the error is, well, illegal, and once disclosed is immediately damaging from a financial perspective and from an integrity perspective; both result in collapses to share prices.

Last week Kobe Steel disclosed they had used false data for aluminium and copper products (Volkswagen and emissions – same, same) so its share price fell by 40%.

A perfectly efficient market would have factored in this risk a little more or progressively made comparative reviews about the product relative to market norms and investigated risks to profit further.

Kobe Steel shareholders may argue they couldn’t access such information, and perhaps that is the case, but the inability to reduce this risk with a higher volume of knowledge should have reduced the height to which the share price reached.

This leads to another of the ‘sometimes’; often the investor accepts too many assumptions and becomes emotionally attached to an optimistic expectation about the investment.

This results in the ‘market’ accepting a share price that all recognise as optimistic, or in the upper quartile of justifiable valuations; until, suddenly it is not.

Another example from the retail sector in the US, where you’d expect investors to now be well aware of the ‘Amazon Affect’ on retail competition, clothing retailer J.JILL announced that sales would be 3-5% lower and earnings would be down.

3-5% lower, yet the share price fell by 52% the next day.

There is something imperfect about that situation.

One commentator on the Kobe Steel story dragged in the value of diversity though (one of Markowitz’s recommendations for investing) by disclosing that their investment in Japan was via an Exchange Traded Fund and thus the loss for them attributable to Kobe Steel’s behaviour was only 0.15%.

The argument for the value of diversity should be unquestioned, but the theory regarding perfectly informed markets is clearly a sham.

I have a view that within a portfolio of reasonably broad diversity one must also try to back a few of the most athletic looking thoroughbreds to at least try and increase your odds of outrunning the pack.

The only way to further protect your emotions from harm, and to minimise negative financial impacts, is to try and stick to a well-defined investment policy (set of investment rules).

If you have this in place, then when you are hit by an unpleasant financial loss, and it is when not if, then you will be able to rationalise the presence of the investment in your portfolio and its impact on your financial position.

I’ll give you two real examples:

I invested in ERoad on day one during its Initial Public Offering at $3.00 and this price subsequently fell in half for various reasons including slower progress and a loss of faith from investors. However, I understood the evolving information and I knew why I had invested; these reasons had not changed, so I remain as a shareholder.

By contrast, I intensely dislike that I lost some money investing in Wynyard shares because I was not a fan of the story, they clashed with my investment policy and I didn’t admire the management.

When they failed I wasn’t shocked.

Regular readers may recall me criticising Wynyard’s naivety with respect to how to manage a fresh capital raising.

This investment outside my own investment policy thinking was inexcusable really (I guess you are hoping that Mrs Warrington doesn’t read Market News – Ed).

The answer to your obvious question is – greed and a misguided view about my trading prowess.

You can all be certain that share prices will move around on you, and be equally certain that they will move down as well as up.

A growing number of commentators and analysts are publicly expressing their concerns about the probability of a decline in share market pricing. Without wanting to declare this camp as correct I do agree that investors would be wise to address these opinions, conclude that risks are elevated and to respond to that risk level within their own portfolios.

In a nutshell this paragraph is another reminder to all investors that they should have a well-defined investment policy and, with only mild bias, you should be engaged with a financial adviser.

Investment decisions – following on from the above, I came across a relevant article that addresses the difference between good advice and effective advice.

I hope the author will be OK with me directing your attention to them too and re-presenting their very ‘effective’ points to you:

Good advice is preaching to your clients to stay the course.

Effective advice is building portfolios that are durable and behaviourally aware enough to help clients stick to their plan.

Good advice is to buy low and sell high.

Effective advice is to create a rules-based system that forces you to sell a little bit of what has worked and buy a little bit of what hasn’t.

Good advice is to ignore the noise.

Effective advice is to create a comprehensive investment plan, which focuses exclusively on those things that are within your control.

Good advice is giving people tactics they can apply right now.

Effective advice is building people systems they can apply over and over again to different situations.

Good advice is telling people to save more money.

Effective advice is helping people automate their finances so they don’t even need to think about saving money.

Good advice is telling investors to think and act for the long-term.

Effective advice takes into account the fact that people don’t live their everyday lives in the long-term.

Good advice is to do nothing most of the time when it comes to your portfolio.

Effective advice is helping people do less harm than they would do otherwise by implementing behavioural release valves.

Good advice is theoretical and unemotional.

Effective advice is practical and takes into account human nature and behaviour.

Good advice offers optimal solutions.

Effective advice withholds judgment and takes into account a client’s personality, current situation, and circumstances.

Good advice is universal.

Effective advice is personal.

Good advice takes into account the historical evidence.

Effective advice marries an evidence-based approach with a deep understanding of the human element involved.

Good advice tells you how to succeed.

Effective advice shows you how to succeed.

Good advice looks for the best ideas.

Effective advice looks to destroy the worst ideas.

Good advice incorporates the best in academic research.

Effective advice incorporates academic research with real-world experiences.

Good advice finds the best investment strategy.

Effective advice finds the best investment strategy for you personally.

Good advice is intelligent.

Effective advice is easy to understand.

With credit to: Author – Ben Carlson

http://awealthofcommonsense.com/2017/10/good-advice-vs-effective-advice/

Investment News

Integrity – I see the Financial Markets Authority has laid new insider trading charges relating to a staff member at a different business.

I record this paragraph simply to applaud their ongoing attention to this matter and to hope that monitoring trading (against CSNs) and share price behaviour around news releases is stress tested for the potential for people benefitting from inside information (not yet disclosed to the market).

Once the FMA gets a few more convictions under its belt for this behaviour I would hope to see less suspicious share price movements in future.

Ever The Optimist – The price of butter has hit an all-time high (retail distribution pricing), which is good both for dairy farmers and my waistline because I can no longer afford to spread it to the edges of the toast.

ETO II – It’s a fair distance from NZ, however, reading that German industrial production jumped the most in six years after a summer lull is useful news given the political and employment disruptions occurring in Europe.

ETO III – It seems a little unfair to claim a win from other’s misfortune, but a poor grape season in Europe might allow NZ winemakers to sell more product in 2018.

ETO IV – We knew tourism growth was happening but it is nice to read about businesses securing value.

Cardrona Alpine Resort reports that it set a new record for sales in 2017 (not yet closed!), after the previous record set only in 2016.

Investment Opportunities

 

Auckland Int. Airport bonds – AIAL completed its issue of 6-year senior bonds last week, issuing $100 million with an interest rate set at 3.64% p.a.

Demand for the bonds was high enough to result in scaling of the issue.

The bonds will begin trading this week, so if any investors missed out on the offer and wish to purchase these bonds they are welcome to contact us and we will assist.

Bank of China bonds – also completed a successful issue of $150 million bonds with a 5-year term at an interest rate of 4.09% p.a.

These bonds will begin trading this week if you missed out but would like to add these bonds to your portfolio.

Christchurch City Holdings – we observe that we have also been invited to a results presentation for CCHL and this may result in an approach to capital markets for debt funding support.

This would be consistent with the region’s funding needs, payment of robust dividends to the Christchurch City Council and the latter’s reluctance to offer shares in its various entities.

CCHL has a strong ‘A+’ credit rating.

We have a CCH bond list which anyone can join as we await more information.

Property For Industry – announced an intention to ‘consider an offer’ of bonds to the public.

We have started a list and all investors are welcome to join it if they wish to hear more from us if the potential offer is proceeds.

Vodafone – has also announced its intention to list Vodafone NZ on the NZX.

We have a mail list for investors wishing to hear more about this proposed offer.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ email group, which can be done via our website or by emailing a request to us to be added to this list.

Travel

Chris will be in Christchurch on October 24 and 25.

Kevin will be in Invercargill on 19 October and Christchurch on 26 October.

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