Market News – 16 September 2019

For those who hoped Donald Trump would just go away, or look forward to the day it happens, you may be disappointed to learn that financial markets expect him to be around for long enough that they must closely monitor the financial impact of his utterances.

JP Morgan has launched an index that monitors market reactions to his ‘Decrees by Twitter’.

JPM has called it the ‘Volfefe Index’ to tease the President’s unusual use of language, which includes some unrecognisable terms. (Vol is from Volatility, but Fefe is from one of the President’s manufactured words).

You wouldn’t bother making this effort (create an index) if you expected the Presidency to end in 2020.

INVESTMENT OPINION

Fun quote – From the Commerce Commission:

Fonterra's 'Velocity' programme doesn't appear to have delivered.

Small News – but of relevance to ongoing change that impacts us all;

Inland Revenue and Accident Compensation Corporation will no longer accept cheques as a method of paying obligations owing to them.

Having the biggest ‘business’ (IRD) in the country adopt this position will inspire others to follow.

Banks will not fight the development, given the costs of processing cheques and Kiwibank has already confirmed its position of no longer offering cheque books to customers.

This behaviour will undoubtedly be replicated by others.

AML and Capital Markets – Anti-Money Laundering legislation, thrust upon us by the G20 in 2012, is well meaning but has been very disruptive to regular business administration and is often anti-competitive given the new inconvenience for trying to arrange normal business elsewhere.

There was an interesting case on Fair Go last week where a bank thought a person was behaving poorly so the bank simply shut down the client’s bank account and refused to explain why (the AML law demands secrecy!).

As it happens the person was an honest law-abiding citizen and the bank had made an error with their assessment, but couldn’t say that either.

I guess the central bank should, at the margin, be a little concerned about the impact of this bank’s behaviour with respect to financial stability in NZ. It certainly destabilised this particular man’s finances and probably had domino effects to payment of his utilities, rates, groceries, etc. each month.

However, in its defence, the new AML law is effective at uncovering criminals too; witness the ‘surprise’ busts of NZ crime (especially the drug trade) every other week in the news, where you might wonder ‘how on earth did they discover that?’.

A huge proportion of the vital information provided to the Police is sourced to the banks based on their improving AML monitoring and deep knowledge of NZ payments.

Our opinion is that the AML law has created a vast workload for all organisations, multiplied by the fact that all businesses are doing the same things for the same shared customer. This must surely be a meaningful drag on the economy (proportion of time allocated to an unproductive activity).

Meeting one’s AML obligations should be done at a central point (a government organisation) and then shared with the person’s permission because the AML evidence obligations are the same for all of us.

I raise this because I was very pleased to see this ‘centralise AML’ message as one of the recommendations to regulators within the recently released Capital Markets 2029 task force report.

I doubt such a development will happen fast, but if a Minister is bold enough to set it as a strategy, where IRD seems the appropriate catchment organisation, (unless your name is Orwell – Ed) then we can tolerate the delayed delivery of the strategy knowing that a new improved AML process would be on its way.

Segue moment -

Switching to the rest of the Capital Markets task force report;

With our immediate focus being you, the investing public, I was pleased to see other good recommendations from the task force to government that they enable more private investment in public sector assets and necessary infrastructure.

This recommendation should also be read as being directed to all territorial councils and the report takes a firm view on this by also recommending that central government reforms local government law to ensure that councils assess all funding options for necessary infrastructure.

Debt funding may seem fine until you are choking on debt as Christchurch and Auckland would seem to be doing, but at some point the sale of shares (equity funding) will be an appropriate solution too.

Councils would do well to reflect on the recent success by Hawke’s Bay Regional Council and the Napier Port in raising capital for economic expansion in their region, or the government’s success with the Mixed Ownership Model where many of their diluted shareholdings are worth more than the original 100% investment holdings (various reasons).

The task force would like to see the new Infrastructure Commission accelerate partial (or full) private funding solutions for infrastructure projects in NZ.

Interestingly that whilst the task force does make recommendations about the need to increase the number of investment listings on the NZX it does not then link this ideal as a recommendation to try and ensure all infrastructure projects that involve private investment (such as Public Private Partnerships) are listed on the NZX.

I spoke of the value of liquidity from an NZX listing recently after Matt Whineray’s article encouraging the government to enable more Public Private Partnerships (investment in necessary infrastructure). NZX listings provide valuable liquidity and should provide valuable disclosure behaviours from directors of such entities.

Whilst we do not participate in Kiwisaver it is covered well in the report and makes recommendations for what it perceives to be the best moves to ensure this very large savings pool is well directed in terms of its use to the NZ economy.

Kiwisaver is a fast growing but poorly led elephant. Investors and managers are too short term in their focus and thus they remain too liquid, which hinders long term investment in growth assets which demand some stability with funding.

The Reserve Bank has made it abundantly clear that investing in short term liquid securities will be the least reward asset to hold, so it shouldn’t be difficult for financial advisers and investors to conclude that longer term commitments will be rewarding.

Proposal – Kiwisaver fund managers offer fee discounts for term commitments to the management contract (a bit like the days of discounted mobile phones).

A longer term commitment has ‘equity’ value to the fund manager.

A commitment of say three, four, or five years enables that fund manager to determine a scale of funds that can be invested into longer term, developing or less liquid investments that seem likely to add long term value to the fund.

The fund manager’s process should then be no different to the way you manage your portfolio as you assess the amount of money that is ‘probably’ required for repayment over a short time frame, ‘possibly required’ over a short to medium time frame and lastly ‘unlikely’ to be required over a medium to long term time frame.

Given the ongoing growth in funds under management it’s hard to believe a fund manager couldn’t define a proportion of funds that could be invested in good quality but long term and illiquid assets (imagine if Transmission Gully had been offered as an investment).

My proposal would see a fund gaining the highest fee for the investor adopting the shortest term commitment and asking for the lowest risk asset.

My 25 year old son should avoid this choice like the plague; Reducing fees should be as important to him as pursuing some more rewarding long term investment options.

Folk approaching retirement who might be reducing their risk profile and be contemplating withdrawal from Kiwisaver (again a fee reducing behaviour) should not mind paying the higher fee for short term commitment because that cost of that short term will be modest.

(You’re beginning to sound like a Kiwisaver dictator – Ed)

No, just opinionated.

There’s heaps of good thinking in the Capital Markets 2029 report so it is worthwhile reading for those curious about how our markets operate and where experienced professionals believe the resistance points are currently.

Touching on one other commendable recommendation - adding financial literacy to NCEA for the secondary school curriculum; This should be so easy to install and offer to kids for their obvious long term benefit.

It would also be an easy way to gain extra NCEA credits from extra-curricular learning.

One of our kids gained extra credits from a high quality holiday programme in the art/design field that she enjoys. It would be so easy to develop a short, sharp, two week course on financial literacy that could be presented and tested during school holidays. It would help to fill the kids brains with relevant life training skills plus ‘some’ well received extra NCEA points to boost the score card.

Congratulations to Martin Stearne for chairing a successful capital markets task force and the quality of its recommendations.

Here is a link to the document: https://www.fma.govt.nz/assets/Reports/Growing-New-Zealands-Capital-Markets-2029.pdf

AML for Crypto – Facebook’s proposed payment unit, crypto currency, ‘Libra’ continues to make progress and rather than dropping it on the market to see how it goes they are interacting with regulators as they develop what they surely want to be a long-lasting service.

US Regulators have logically demanded that Libra must meet the most stringent of rules relating to money laundering and terrorism finance and if Facebook wants its payment method to be truly successful they’d be wise to allow regulatory influence into its development.

Mavericks like Bitcoin will not be allowed to succeed as very wide use, or legal tender payment methods given their pursuit of operating in the shadows.

I would like to believe that the preferred country of registration for Libra, Switzerland, will result in some more high-quality standards for participation in the financial settlements arena.

Mind you, before Facebook has even expressed a position with respect to working with regulators the French have come out swinging and declared they will block Libra from Europe if it threatens monetary sovereignty (this relates to my oft used points about legal tender and tax collection).

Facebook might be able to temper regulatory concerns if it offers to pass through to governments a modest tax on Libra transactions, a little like the fees collected by Visa and Mastercard but these fees don’t make it to the government purse.

Lastly, of political interest, at present Libra only intends to include the following major currencies (or government bonds) in its asset pool: US dollars, Euro, Japanese yen, British pound and Singapore dollar.

Spot the missing currency.

Cheap Money – Businesses with very long-term strategies, such as Mainfreight’s 100-year plan, must view today’s interest rates as a gift from the gods.

Observe Apple with its holding of US$200 billion cash yet it also wants to borrow money on today’s terms where interest rates are low on a nominal and real (ex-inflation) basis.

The better the long-term planning, the longer the term such businesses can borrow at today’s apparently low cost.

EVER THE OPTIMIST

Poor old Statistics has had a rough time over the past couple of years, losing their Wellington building to earthquake demolition, then a messy Census and finally the departure of their CEO accepting responsibility (for an earthquake? – Ed).

Well, they suffered two earthquakes; one terrestrial and another managerial.

However, my point is that they remain a very good source of data for investors, with last weeks ETO item being their report about NZ tourism.

Some had feared the drop off in visits from those in Asia would finally slow the sector and our economy, given that tourism is now our largest business, however, increase in visits by Australians and Americans have more than filled the gap (gross numbers +2.00% year on year).

Of granular detail to me was the fact that the fastest growing subset was people staying in NZ longer than 15 days, which seems to reflect the demographics of more people in the retired cohort(s) with more time and more money.

So, if tourism folk and their marketing advisers are at the top of their game they will direct more of their budget to seeking out this group and then treating them really well once they get here.

ETO II

I am scraping the barrel a bit here but RBNZ Governor Adrian Orr will be pleased to read that consumer spending was up for the month of August at +5% relative to 2018 spending.

INVESTMENT OPPORTUNITIES

Infratil Bond – new bond offer remains open, but this is the final week.

If you wish to invest please act now. If you need a slight delay before delivering your application please contact us to discuss the options.

On offer are two different terms:

7 years at a fixed rate at 3.35%; and

10 years at a floating rate, reset annually (3.50% for the first period).

Metlifecare (MET) – offer of $100 million senior, secured, bond (MET010) is available to investors.

The term offered is 7 years (2026) and the interest rate will be set on 20 September.

Helpfully, recent increases to interest rates have resulted in a Minimum rate set at 3.00%.

MET is paying the brokerage costs on this offer; however, it is a fast-moving offer (closing on 20 September) so we will issue contract notes to participating investors (no application form required).

The offer document is available on the Current Investments page of our website and with MET being an NZX listed company one can access a long history of public announcements from them.

Investors seeking a firm allocation in this new bond offer are encouraged to contact us now (and no later than 5pm on Thursday 19 September). Firm allocations will be confirmed by 10am Monday 23 September.

Payment will be required by Thursday 26 September.

Kiwibank – last week replicated the behaviour of the other banks and issued $400 million of senior five-year bonds (maturing 20 Sep 2024) to the market as part of its funding programme.

The yield on the bonds was 2.155%, interest paid semi-annually.

These bonds rank alongside term deposits with Kiwibank, even though yields on the two items do not sit ‘alongside’ each other. A five-year term deposit with Kiwibank currently offers a return of 2.70%.

To confound the theorists the additional yield here does not relate to additional risk.

The only meaningful difference between these two investments is liquidity; one can sell a Kiwibank bond but one cannot sell a Kiwibank term deposit (and banks say no to breaking deposits, or penalise harshly if they happen to agree).

Liquidity has a value, but it is hard to price. The price is cheap when you don’t need to sell an asset, but that same price is rather high when the need for a sale becomes urgent.

I think I’d be willing to give up something between 0.15% - 0.25% in yield to accept the Kiwibank bond relative to the term deposit.

I can reduce my need for lower returns via liquid assets, such as bonds, if I maintain higher levels of cash and very short term bank deposits (always plenty of money around me), but as you all now know returns from short term deposits will deliver the lowest returns.

Dairy Farms NZ – Based on stories fed to the media it seems possible that Dairy Farms NZ (a diary farm consolidator) could consider listing on the NZX to raise capital for expansion.

They had been buying up farms with money from private investors but the government’s additional limitations on foreign investors has reduced the pool of wealth to tap into, which in turn has also placed some downward price pressure on the value of dairy farms.

There’s no point in debating land or share pricing here because there is no offer on the table but being able to invest in the land and cows has been very difficult for New Zealanders even though it is one of our biggest sectors of the economy.

I once urged the government to consider selling 49% of its share in Landcorp to provide wider access to our primary industry. Jacinda didn’t even return my call.

Maybe Dairy Farms NZ will present the next opportunity to invest in the sector?

Maybe they are one of the ‘several other possible IPOs’ that NZX CEO Mark Peterson referred to in their latest results report?

TRAVEL

David Colman will be in New Plymouth on 19 September

Edward will be in Taupo 24 September.

Chris will be in Christchurch Tuesday 24 September and Wednesday, 25 September.

Kevin will be in Christchurch on 17 October.

 

Mike Warrington