Market News 7 October 2024

David Colman writes:

October marks the start of the final quarter of 2024 and I noticed the run up to the holiday season has begun as I walked through the Farmers store at Coastlands during the last weekend of September flanked by Christmas trees and decorations already for sale.

I would like to share the optimistic nature displayed at the department store despite New Zealand's economic conditions have been muted for much of the year.

Expectations seem to be growing that the economy is in a position to improve towards the end of year and beyond with ANZ’s business confidence survey results improving in each of the last 3 months.

Unemployment was 4.6% in the June quarter 2024 (up a full percentage point from the same time the year before) and based on news of closures of a pulp and paper mill in the Hawkes Bay, and a meatworks in Timaru, it seems likely to unfortunately, and sadly, rise.

Treasury forecast unemployment to be 4.9% for 2024 and reach 5.2% in 2025 before falling in the years beyond (possibly to 4.5%).

Global Market Trends have been mixed although the New Zealand market, which was flat for the first half of 2024, has improved of late and is now up 7.00% year to date reflecting some optimism on the back of the long-awaited Reserve Bank of New Zealand's (RBNZ's) Overnight Cash Rate (OCR) cut in August.

The RBNZ and other central bank rates that have also been cut reflect inflation data that has eased which may result in further loosening monetary policy (lowering rates).

RBNZ release another Monetary Policy Statement and OCR announcement on Wednesday 9 October and inflation data is expected on Thursday 17 October.

Australian and Chinese share markets have also improved lately and have positive performance for the year to date with the S&P/ASX200 (Australia) up 6.8% and Shanghai (China) up 15.8%.

The Shanghai market up 18% in the last month on the back of Chinese government stimulus. 

New Zealand and Australia will welcome the seemingly improving fortunes of their largest trading partner.

2024 has been an extraordinary year for gold which has increased in price by 29% for the year to date.

Interest rates have fallen across the board this year exemplified by term deposit rates.

1 year term deposit rates a year ago were typically 6.10%p.a. or higher and are now at or just above 5.00%p.a.

5 year term deposit rates a year ago were about 5.60%p.a. but have fallen to 4.30%p.a.

New issues of bonds, capital notes, and perpetual preference shares listed earlier in the year are all trading at premiums (cost more to buy than when they were issued) validating views earlier in the year that interest rates were destined to ease.

Current expectations are that this trend of easing interest rates will continue into the new year with expectations beyond 2025 having a bias towards a continuation of easing rates.

Longer term views are understandably vague but the RBNZ has previously noted an OCR of about 3.9% could be a reasonably neutral rate (neither stimulatory or restrictive) to maintain an inflation rate of 2% over the long term.

Fans of lower interest rates will still need to be aware that inflation, that dictates the direction of interest rates, may rise again.

Instability associated with harrowing conflicts particularly in Eastern Europe and the Middle East continue to inflict heavy human losses but appear somewhat ignored by global exchanges despite the major uncertainty they expose markets to.

A war in Ukraine and Russia still rages.

Escalating events involving Israel, its allies, its neighbours, and its enemies have pushed oil prices higher.

Increases in energy costs such as oil and electricity tend to be an inflationary factor.

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Synlait Milk Bondholders are reminded that the option of early redemption will close on 15 October.

A change of control event occurred on 1 October with Bright Dairy increasing its stake in the company from 39.01% to 65.25%.

Bondholders who want to elect to have their Bonds redeemed early can do so online using the webpage: www.synlaitbond.co.nz

If Holders elect to redeem their bonds, that election will be irrevocable.

Bondholders who elect to have their Bonds redeemed early will have their Bonds redeemed on Wednesday, 13 November 2024.A suspension of trading of the bonds will apply for the 10 working day period until pre-market open on 16 October 2024.Holders who do not elect to have their Bonds redeemed early will be able to trade those Bonds once the suspension of trading is lifted on 16 October 2024. In that case, holders should note that the reduced number of outstanding bonds on issue may impact trading of the remaining bonds during the period from when the suspension of trading is lifted until the bonds cease trading on 4 December 2024. Those remaining bonds will mature on 17 December 2024.

Advised clients who hold SML010 bonds are welcome to contact us regarding this offer.

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Fletcher Building (FBU) shareholders should be aware that the company’s Retail Entitlement Offer closes at 5.00pm on Tuesday, 8 October 2024.

The offer is available to eligible retail shareholders at the same application price as the Placement and Institutional Entitlement Offer of NZ$2.40 per New Share.

Advised clients who hold FBU shares are welcome to contact us regarding this offer.

-------On Friday 5 December 1952, a dense, dark fog coalesced in the streets of London.

The next four windless days allowed the putrid air to penetrate endless nooks and cranny’s city-wide including indoors.

The city was famous for smog but the Great Smog of London was a more deadly course of ‘pea soup’ than the multitude of exhaust pipes and chimneys had served before.

The smog was so thick that visibility in some areas could be just a single metre during the day and zero at night.

Air borne particulates included smoke, sulphur dioxide, carbon dioxide, hydrochloric acid, sulphuric acid, and fluorine compounds.

The toxic air was inhaled into the lungs of men, women and children with thousands of deaths resulting directly from the calamity with tens of thousands more suffering respiratory illnesses.

Electric trams had been abandoned in the decades prior to the event as they were seen as out-dated and had been all but replaced by diesel buses. Notably buses could hardly operate in the smog and public transport was halted until it cleared.

Power stations such as Battersea (an iconic building with 4 chimneys that featured on the cover of Pink Floyd’s ‘Animals’ album), which was conveniently located close to where the electricity it produced was used, contributed greatly to the situation.

Battersea systems intended to reduce pollution instead exacerbated the issue.

Coal was being burnt commercially and in people’s homes in great quantities as colder temperatures demanded its use for warmth and a lack of wind for days meant the smog stagnated.

The coal used was of low quality domestically in England as higher quality coal was exported to pay off the debts associated with World War 2.

New Zealand joined the coal polluting countries of the world as Genesis Energy (GNE) was burning the dirty fuel again at Huntley over winter as gas supply was insufficient.

The gas for Huntley is supplied by the Kupe gas field which is 46% owned by Genesis, 50% owned by Beach Energy (BPT.ASX) and 4% by New Zealand Oil & Gas (NZO).

Gas production in New Zealand has declined faster than expected and unfortunately means more coal will be used in its place.

Not only is coal more harmful to the environment than burning gas, it is also more expensive to buy in a country that is not a major coal producer.

Genesis Full year operating earnings are forecast to be down by $20million to approximately $430million.

The company’s share price, which had been on an upward trajectory from $2.31 in November 2023 to $2.57 in February 2024 (likely due to the company’s clearer plans regarding transitioning to renewables) has since tumbled to $2.13.

The current GNE share price is close to the low of $2.00 briefly reached in the depths of the early 2020 covid-19 dive.

Genesis expects to burn through much of its 500,000-tonne coal stash and then replenish as needed to maintain a stockpile of 350,000 tonnes.

The cost of CO2 units for Genesis are well below higher levels seen in 2022 which might partially offset the more expensive and less efficient fuel for Huntley.

There is still much debate about whether the purchase of carbon credits actually has a meaningful impact on global pollution.

The company’s plans are to have 95% renewable generation by 2035 (the Gen 35 Strategy).

Genesis has had to tap the brakes on this transition due to the use of coal but is committed to a $1.1 billion investment in renewable electricity infrastructure including the recent $150 million investment in a 100 MW/200 MWh grid-scale battery at Huntly Power Station and delivering up to 500 MW of grid-scale solar by FY28.

Genesis last week acquired a majority stake in New Zealand’s largest nationwide electric vehicle (EV) public charging network known as Chargenet.

Chargenet operates more than 400 public fast-charging points across New Zealand with Genesis paying $64 million for a 65% stake in the business.

Genesis and Chargenet plan to expand the country's charging infrastructure with a doubling of charge points targeted by 2030. This is intended to make EV adoption more accessible, convenient, and support the government’s goal of a national network of 10,000 chargers by 2030. Value for shareholders will be another goal of the plan.

It is disappointing to see coal use return in earnest in New Zealand and it is worrying that some of our country’s energy sources look uncertain.

Progress towards goals regarding pollution, that were committed to in treaties such as the Kyoto Protocol (New Zealand signed in December 2002) and the Paris Agreement (2016), are proving challenging for New Zealand (an archipelago with a low population density) and likely more so for the world in general.

The Great London Smog was over 70 years ago and despite the obvious polluting factors associated with its use, international coal use hit an all-time high in 2023 with India and China heavily reliant on coal for electricity.

Air pollution is estimated to lead to the deaths of approximately 7 million people a year.

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Kiwibank - Perpetual Preference Shares

Kiwibank (KWB) has announced that it is considering making an offer of perpetual preference shares (PPS).

The PPS are expected to constitute Additional Tier 1 Capital for KWB’s regulatory capital requirements and to have an investment grade credit rating.

This investment is perpetual, with a likely redemption date in 5.5 years’ time.

The initial 5.5-year distribution rate has not been announced, but based on comparable market rates, we are expecting a rate of between 6.75- 7.00% per annum.

KWB will be paying the transaction costs on this offer; accordingly, clients will not have to pay brokerage.

More details are expected on 14 October.

KWB has a strong credit rating of AA.

If you would like to be pencilled in on our list, pending further details, please contact us promptly with an amount and the CSN you wish to use.

Indications of interest will not constitute an obligation or commitment of any kind to acquire this investment.

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Travel

8 October – Ashburton – Chris Lee

9 October – Timaru – Chris Lee

16 October – Albany - Edward Lee

18 October – Ellerslie – Edward Lee

29 October – Takapuna – Chris Lee

30 October – Ellerslie – Chris Lee

14 November – Arrowtown – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee and Partners Limited