Market News 24 April 2017

While some fret about immigration, forgetting that the human species has always been migratory, consider this quote from Warren Buffet’s 2017 letter:

‘From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.’

Save for a little too much meddling at times by our central and local government NZ has a similar opportunity to be more prosperous than our forefathers dreamt of too.

Actually here’s another quote from Buffett that I like, which is consistent with our low cost philosophy for investors:

Investors who avoid high and unnecessary costs and simply sit for an extended period with a

collection of large, conservatively-financed [sic] businesses will almost certainly do well.

Investment Opinion

ASX and BlockChain – This item is a mix of news and opinion.

The move toward use of Distributed Ledger Technology (ie BlockChain) was always going to be fast and continuous progress being made on the concept by financial market participants confirm this to be true.

Refresher – Distributed Ledger Technology (the more generic branding of ‘BlockChain’ used to develop BITCOIN). Wikipedia succinctly describes DLT as ‘a distributed database that maintains a continuously growing list of ordered records called blocks. Each block contains a timestamp and a link to a previous block. By design, blockchains are inherently resistant to modification of the data — once recorded; the data in a block cannot be altered retroactively’.

The ‘Distributed Database’ aspect of the definition highlights to wide use across computer networks, something that the world wide web’s inventor (Tim Bernes-Lee) would surely endorse.

You may recall me talking about banks having already set up test payments and begun to prove its potential for improving current banking systems. Another major story caught my eye; the Australian Stock Exchange (ASX) has begun a formal process for considering a change to its trading platform CHESS from old technology to DLT.

The obvious benefits covering wider application, lower costs, higher security and better historical data have triggered a short sharp timeframe for the ASX proposal for change. The assessment phase will be completed during 2017 and the ASX will likely make a decision whether or not to proceed in March 2018.

Cognisant of the global move toward using Distributed Ledger Technology the ASX plans to change its DLT communication method to be ISO 20022 being an international messaging standard and not coincidentally this is the language standard used by international banking (SWIFT).

This consistency of messaging logically will bring together property transactions (in this case shares on the ASX) with payment transactions across the banking network. By extension we shouldn’t expect it to be long before land based property transactions are recorded and settled on Distributed Ledger Technology in real time (5 minutes after winning at auction? – Ed).

I know that the NZX technology team took a liking to DLT last year, when exposed to it, so I hope they too are walking the NZX toward a technology upgrade once the ASX is settled on its new technology model. It clearly makes a lot of sense for the Australian and NZ financial markets to align themselves with each other for future banking and asset settlement methods (via DLT).

The Reserve Bank of NZ recently tried to sell ownership of one of our country’s main live settlement systems (NZCLEAR) but was unsuccessful with its sale. As I understand the NZX was the only bidder at presumably too low a price; but was the price too low or was it well informed about the future of settlement via DLT?

It is entirely possible that both our major settlement systems, NZCLEAR (RBNZ) and FASTER (NZX) will be ‘replaced’ by a new combined DLT based system.

Here’s a recent development from another major player; the Bank of England has disclosed that its forthcoming version Real Time Gross Settlement system (ie immediate payment processing in the banking environment) will be compatible with Distributed Ledger Technology. BoE is not the only central bank thinking along these lines and once central banks’ become comfortable with DLT you can be sure that they will expect banks to adopt it.

The BoE also reports estimated savings of 10-15 billion for banks through the use of DLT. If this is even close to being accurate the central bank won’t have to fight very hard to have banks agree to its use.

Once banks adopt DLT, bank customers will in turn be encouraged to operate in a manner that is efficient for a DLT network, and this will undoubtedly exclude cheques.

In the past when I addressed the sunset nature of cheques for payment I pondered silently that this may yet mean a 10 years sunset, but I am now more inclined to think the sunset for cheques may only be five years.

DLT is moving that fast.

The Financial Markets Authority has a role here too in advancing the legally accepted processes for securities transfer (change of ownership of bonds and shares etc). Some of this is done on NZCLEAR (between institutions) and on FASTER (NZX members) but all other transfers are arranged via the use of old (out of date) paper transfers; essentially the cheques of the securities transfer space.

The presence of Common Shareholder Numbers (CSN) and Faster Identification Numbers (FIN) would tie together nicely with a new Distributed Ledger Technology for electronic, and immediate, transfer of securities. The process could be kept compliant with AML by ensuring that all transfers must be completed via a Financial Service Provider (see further AML comments below).

The Justice Department (land transfer) and the legal community (with new AML obligations) can ensure land based property transactions are similarly efficient and compliant.

I am beginning to wonder whether the Indian population, with their new and impressive developments in the field of identity, will soon be able to buy and sell any asset, arranging simultaneous settlement, all with a finger print and an eye scan!

New Zealand’s cumbersome approach to Anti Money Laundering checks will not enable such efficiency and thus will be somewhat of a drag on the economy, which could otherwise be freed up a little by the arrival of Distributed Ledger Technology.

The NZ government (Cabinet) and the Department of Internal Affairs need to quickly revisit the concept of centralising compliance with respect to Anti Money Laundering obligations to avoid unnecessarily slowing our economy.

As a result of another unnecessary AML complication we recently found ourselves asking the Financial Markets Authority (and by extension the Reserve Bank) to support a centralised requirement for recording AML compliance for all licensed Financial Service Providers (entities and natural persons on the Financial Service Providers Register). Shortly thereafter we think Internal Affairs needs to offer the same centralised AML compliance service to all natural persons.

The final piece of my master plan (spooky laughter) is to have all entities domiciled in NZ obliged to be registered with MBIE (as companies are on the Companies Office register), which would help tie together the tracking and AML accuracy entities and natural persons.

Before you jump to the keyboard to chastise my opening of the door to Big Brother monitoring and potential new taxes from government think about how moderate our government is, know that taxes are required to govern a fair and efficient economy and think about the savings that should exist based on increased knowledge of how the whole economy operates at any point in time.

I don’t yet see near term investment winners based on the emergence of Distributed Ledger Technology. Near term DLT will direct money in the direction of clever young technology developers. However, longer term it does seem likely that businesses that operate with major technology networks (most of them now?), such as banks, will benefit from DLT as it should bring down various recurring costs for them.

I have never seen previous technology enhancements bring down the fees I pay to the bank so I won’t be expecting any savings as a result of DLT either. This implies that bank shareholders should see some benefit from the development of DLT, after the clever technology people have been paid to build it and reduce bank costs.

NPT – The outcome from the NPT special meeting is a display of voter scale as opposed to broad opinion. This is what business control is about and is an example of how sometimes small shareholders are left on the side-lines regardless of their opinion.

Whilst 76% of the people who voted preferred the Kiwi Property Group proposal this group only represented 45% of the votes, so the KPG proposal was rejected.

The NZ Shareholders Association, whose motivation is to represent small shareholders, supported the KPG proposal.

In this case small shareholders have also missed out on some of the value being handed around as the likes of Augusta agreed to pay premium prices to rapidly purchase large shareholdings from other institutions to try and secure the position of dominating the voting.

The two other things (beyond the logical majority wins) that I take from this are:

That NPT is currently too small (at $150 million of property) to achieve operating efficiency; and 

That small shareholders’ in NZ must make more effort to vote when invited to do so, which they can do by assigning a proxy vote to the NZ Shareholders Association if they do not wish to vote themselves.

Investment News

UK Election – Last month when we talked about 2017 being a year of elections, some of which would be important in forming some investment decisions in the foreseeable future, the calendar of events was quite busy.

That calendar has just had another important waypoint added with the snap election called for the UK by Prime Minister Theresa May.

It is important because May will win the election comfortably and thus have the BREXIT mandate reinforced, and probably with a greater majority than 52% setting the UK on a course well clear of the dishevelled ‘Remainiacs’ who hoped to derail UK’s exit from the European Union.

The move is political but in fairness to Theresa May she became Prime Minister after David Cameron stood down post losing his preferred outcome in the BREXIT vote. Now that the UK has exercised its Article 51 exit from the European Union it makes sense to me that May is asking the people to rally behind her, and the nation, by issuing her a new mandate.

May is not Margaret Thatcher but she may well have learned a lot from studying her.

As I said, I believe Theresa May will win this election comfortably and along with the election outcome in the Netherlands I think it will represent another reason why the European Union will be strengthened, albeit in small steps, as a result.

By the time the UK election arrives we will know more about the preferences of the French population. If Marine Le Pen fails to gain influence this is another element of progress for the EU.

Further, Turkey’s lurch away from democracy assists the EU as the nations in the core of Europe revisit the initial values of operating together to ward against political tensions that surround them and avoid creating tensions within.

Greece will have repaid or written off its national debt before Turkey reconsiders membership of the EU!

Outside of the domino trail of elections this year you are all aware of the extra-ordinary political disruptions involving nations who do not even have elections to contend with so, it is quite clearly a politically disruptive year.

None of the political developments make Europe’s job of staying together easy, but it never has been.

For me this political roll-out of change means a year of patient contemplation for investors, sticking to the plan (which I hope you all have) and not giving up on your fixed interest asset allocations just because a few headlines would have you believe the sun is falling out of the sky (yes I am using a metaphor to describe my opinion that fixed interest assets shall not be killed off by the Romans within the US Federal Reserve).

French Election – Stage I of the French Presidential election is complete. 

Stage I is a process of weeding out the weakest candidates to establish a run-off between the two preferred people. This effectively is a two stage ‘single transferable vote’ where the electorate declare who they would vote for if their primary choice is knocked out of the running.

Those who did not vote for Emmanuel Macron and Marine Le Pen in stage I must now think again about which of these two they want to be President of France. They ‘grey’ process now becomes ‘black and white’.

The biggest news from the preliminary stage of the election is that the representatives from the two major political parties (Republican and Socialist) have missed out on the opportunity to stand for the Presidency. Gareth Morgan may take heart from this development!

At this stage the outcome looks to me as being like the recent election in the Netherlands where the extreme and negative candidates achieved solid support, but ultimately not enough support to beat the more sensible, middle ground, tolerant candidates.

The public have successfully sent a message about ‘failure’ to the major political parties.

Stage II of electing a President occurs on 7 May.

Armed with only school-boy French I’ll predict that the ‘sensible, middle ground, tolerant candidate’, being Emmanuel Macron, will win the Presidency. He is independent, he seems genuine in his passion for France and he is a young face who should be able to draw support from the young and hopeful.

Marine Le Pen will attract support from those who are reluctant to change (noting the impact from immigration) and the intolerant. I believe, and hope, that this group will be the minority of French people.

Poll results over the next 10 days will be interesting but for now we must wait until May 8th NZ time to have the real outcome disclosed.

Ever The Optimist – India’s Revenue Department (Tax) has rejected Apple’s demand for tax exemptions for setting up a manufacturing unit in India.

Good on them for having the fortitude to not hand out free lunches like some other nations.

ETO II – US imports of NZ premium quality priced wines have grown by 11% to NZ$400 million and now exceed the value of cheap wine purchased from Australia.

This is great news for our high quality producers and a clear lesson to NZ business to try and pursue high quality, high price, value added products when seeking to be an exporter.

Be the best, then you cannot be ignored.

Investment Opportunities

Oceania – share placement begins trading on 5 May. Thank you to all who participated in this offer with us.

Bonds – we expect the next offers to be bond issues and hope to be in a position to discuss detail shortly.

The fastest way to hear about new issues is to join our ‘All New Issues’ email group, which can be done via our website or by emailing a request to us to be added to this list.

Travel

Edward will be in the Wairarapa this Wednesday and in Napier 27 April.

Edward will be in Nelson 2 May and in Blenheim 3 May.

Chris will be in Auckland on May 9 and 10, in Hastings on May 16, and in Christchurch on May 23 and 24. 

Kevin will be in Christchurch on 4 May and Ashburton on 18 May.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

Michael Warrington


Market News 17 April 2017

We hope you have had a very pleasant Easter break.

Investment Opinion

 

Kiwibank – There are some large chess pieces being moved around on the Kiwibank chess board.

Let me preface the comments that follow with the fact that my risk assessment of Kiwibank is neither stronger nor weaker as a result of the current changes, most of which are yet to be revealed.

What do we know?

Kiwibank is expanding, which NZ should be proud of, and this expansion requires increased equity to meet regulatory obligations. Regular readers will recall Kevin Gloag’s many contributions explaining bank equity to investors, including common equity and subordinated securities (Tier I and II).

NZ Post injected equity as necessary during the first 10 years of Kiwibank’s life. The bank also issued subordinated bonds to the public which also qualified as equity capital for regulatory purposes. (Tier I and Tier II securities).

As Kiwibank began to outgrow NZ Post’s ability to invest additional capital the government wisely contemplated how Kiwibank’s common equity capital would be provided in future. Sadly, politics got in the way of the best commercial decision and the government discounted the option of selling 49% of the bank to the public and listing the bank on the NZX.

Some of you may recall that after our own ‘strategic meeting for the benefit of Kiwibank’ we concluded that Kiwibank should merge with Heartland Bank and thus the government would retain control, reduce taxpayer risk, gain an NZX listing and instantly solve the question of access to additional capital to support the bank’s growth trajectory.

This deal is still possible.

Disclosure: I own a few Heartland Bank shares, but this is not influencing these thoughts.

This newly merged ‘local’ bank could then also discuss expansion options with other modest scale banks and financiers around NZ.

Let’s get back to the flag that is flying, which is not a white flag but it is one of alert. Perhaps the diver’s flag is the most relevant; there is something going ondeep below at this location but we are yet to see what reaches the surface.

Kiwibank had been preparing to issue some securities into Australia.

This bond issuance plan ran into a brick wall when the Reserve Bank of NZ, Kiwibank’s regulator, informed Kiwibank that the RBNZ has formed a preliminary view, which they have yet to finalise, that  subordinated Bonds issued by Kiwibank in 2014 and 2015 do not comply with certain requirements in Document BS2A, Capital Adequacy Framework (Standardised Approach).

This statement from the RBNZ has a negative impact on the effectiveness of the already issued subordinated bonds (Tier I and Tier II).

I’ll bet there was at least a double take by many bankers’ around NZ once this RBNZ statement was disclosed. It would appear that absolutely nobody was actually expecting any announcement on this subject from the RBNZ.

Once the statement was confirmed as from the central bank there will undoubtedly have been a large number of calls, emails and meetings between some of NZ’s most senior bankers to discuss what this new RBNZ stance meant for Kiwibank and perhaps NZ banking in general. Those calls emails and meetings will also have undoubtedly drawn in the CEO’s of ACC, NZ Post and Guardians of NZ Super and it is illogical to suggest that high ranking cabinet ministers were not drawn into the vortex.

Actually, in this little country the Prime Minister will have been involved too, such is the significance of the subject matter.

The bold, underlined, text above is my emphasis, intentionally. The instigator of this current disruptive situation is the Reserve Bank of NZ, not Kiwibank. Disruption is not a RBNZ objective, so something is yet to be disclosed by the RBNZ.

You may not be able to see the dust from your position but I assure you the RBNZ has stirred it up.

Recall that the RBNZ will have been involved in the development of the structure for the subordinated bonds issued by Kiwibank. If the RBNZ took issue with these securities during 2014 and 2015 surely they would have raised their concerns at that point, right?

Regular readers of this site or those who attended our seminars two years ago might recall that under   new global banking regulations, known as Basel III, all regulatory capital must have the ability to absorb losses, meaning either converted to shares or written off in certain circumstances, like non-viability or insolvency.

The problem for Kiwibank is that, in terms of loss absorbency options there is no direct pathway to conversion to shares because it’s current ownership structure, being 100% owned by Crown entities and not a listed company.

NZ’s other major banks, all of whom have now issued the ‘new style’ Tier 1 or Tier 2 bonds overcome this hurdle by being able to offer shares in their listed Australian parents if a trigger event were to occur.

When the two Kiwibank securities in question were issued (KCF010 and KCFHA) they were done so through a special purpose entity (KCFL) which was established solely for the purpose of issuing debt securities.  Kiwibank and KCFL are both wholly owned subsidiaries of Kiwi Group Holding Limited, which is itself owned by NZ Post.

It was structured so that KCFL used the proceeds from the two issues to invest in Kiwibank bonds which qualified as regulatory capital for Kiwibank and mirrored exactly the same terms and conditions as the securities KCFL had issued to the public.

KCFL’s ability to make payments on the KCF010 and KCFHA bonds (interest payments and capital repayment) was, and still is, entirely dependent on KCFL receiving corresponding payments from Kiwibank on the securities it holds.

Effectively all payments, and potential loses or write-downs, on the securities held by KCFL in Kiwbank are passed on to the respective holders of KCF010 and KCFHA thus delivering investors with the same financial impact as  being a shareholder in Kiwibank, but without actually holding the ordinary shares in the bank.

In the unlikely event that the regulator triggered a non-viability or insolvency event on Kiwibank KCFL’s bonds would be converted into shares in Kiwbank based on certain conversion formulas and it would in turn replicate exactly the same behaviour on the KCF010 and KCFHA bonds, in terms of payments and write downs.

Same outcome but always one step removed in terms of actually owning the shares. Investors in Fonterra’s NZX listed units should understand this position where they receive the economics of Fonterra share performance but do not own shares and have no voting rights.

It seems that this anomaly (RBNZ inconsistency) now threatens the effectiveness of these securities as regulatory capital, even though they were signed off as qualifying regulatory capital by RBNZ prior to their issue.

Holders of Tier 2 bonds in The Co-operative Bank might be wondering how these securities will fare under the RBNZ ‘re-think’.

Like Kiwibank The Co-operatives Bank’s ownership structure doesn’t allow for the issue of ordinary shares to the public if the regulator calls time but unlike Kiwibank The Co-op Bank didn’t offer a conversion to shares option for its issue, only write-down or write-off.

Presumably Kiwibank could also appease the regulators by issuing new Tier1 and 2 bonds and simply removing the conversion to shares options although we understand that securities issued under these terms would receive a lower level of equity recognition.

This also seems bizarre.

Kiwibank reacted to the unexpected RBNZ announcement by cancelling the planned Australian offer of senior debt securities, recognising that there may be a significant change to the credit profile of Kiwibank.

This will have been frustrating for Kiwibank but this timing issue is surmountable and is a red herring to the greater problem, being ‘who is at the steering wheel at the RBNZ and do they realise which side of the road to drive on?’

Given the potential for this surprise regulatory change from the RBNZ to linger the shareholders of Kiwibank, namely NZ Post, Guardians of NZ Super and ACC, agreed to inject NZ$247 million of common equity.

This was done last week. This is roughly equivalent to the volume of subordinated bonds issued by Kiwibank ($250 million) but has the absolute benefit of being unquestionable common equity for the bank.

For clarity, the $300 million Uncalled Capital Facility provided by the government remains in place and unused after the $247 million injection.

Accordingly, as I write, Kiwibank’s balance sheet is stronger this week than it was prior to the recently issued RBNZ statement.

As a side thought, I’d be quite comfortable if financial markets moved away from the use of subordinated securities masquerading as equity on a balance sheet but there is the small matter of the Bank for International Settlements and the credit rating agencies who disagree with me and recognise this capital as equity.

Until Monday 10 April I thought, ‘this development will be very frustrating for Kiwibank’s board, CEO and Treasurer but they’ll find a way through it’.

On 10 April though, respected businessman Rob Morrison resigned at short notice from his role as Chairman of Kiwibank. He was joined by the resignation of the deputy Chairperson, Rhoda Phillippo.

This was completely unexpected news for me and unless I am missing something these resignations disclose a rather more serious matter at governance and regulatory levels.

You can discount the polite headlines and general responses being offered about the resignations.

Rob is too good a person to lose from the Kiwibank board yet he is now lost. I don’t know Rhoda Phillippo so cannot comment about her contribution.

If Rob’s departure doesn’t spark some urgent attention to resolving the weakness wherever this problem began I’d be both surprised and very disappointed.

To be clear – I do not see that this situation means any change for people using Kiwibank for banking services or for investors holding securities issued by Kiwibank. Repeating my comment above; Kiwibank’s balance sheet is stronger this week than it was prior to the recently issued RBNZ statement.

Investment News

US Tightening – News that the US Federal Reserve is finally considering a reduction to the size of its balance sheet is significant for financial markets.

For almost a decade the Fed has been cutting interest rates and has itself been offering vast quantities of the cash (US$4.5 Trillion) that they felt the economy required to fund its activities.

There has been plenty of debate about the merit, or problem, of extremely low interest rates but this was compounded by the central bank’s willingness to also fund ‘everything’ with artificial liquidity.

It now seems that we are finally inching up to the period (years) when the Fed is willing to tighten monetary policy through a slow sequence of interest rate hikes and a willingness to ‘sell’ some of the bonds held on their balance sheet and thus slowly remove some of the artificial liquidity currently circulating in financial markets.

I say circulating in financial markets because it is not clear that any of this additional liquidity actually reached productive businesses.

To ‘sell’ many of their bonds the Fed will need the US government to repay on maturity, which is a given, but to avoid large increases in interest rates financial markets will need to discover additional lending demand (new or expanded buyers of bonds) from private investors to provide financing to the US government and replace the Fed’s funding of the past.

You can be almost certain that the US government will not be enjoying fiscal surpluses (as we do here in NZ) and thus will not have spare cash each year to actually repay any net debt so refinancing options are the only alternative.

President Trump may not like the idea of the Fed ceasing to lend money to central government because this plays into the hands of countries like China and Japan when they sit down with Trump to negotiate trade agreements.

China may well be prepared to increase its lending to the US (holdings of US bonds) in return for, say, lower trade tariffs on Chinese manufactured products, or agreement on a lower ‘neutral’ value for the Chinese Yuan.

I agree with the US Fed that it is long past time for tightening monetary policy and moving away from the illusion of lending to oneself but what they are able to ‘show us’ will disappoint many in my view.

The US Fed likes Trump’s idea of replacing monetary policy stimulus with fiscal stimulus (extra government spending) but this won’t be possible if the US government isn’t able to issue an enormous volume of new bonds to willing lenders (enough to pay for the fiscal spending plus repay the Fed for the bonds held in house!).

Vector – has announced an intention to rollover its Capital Notes which reach their Election Date on 15 June 2017.

Holders of these securities will be approached in early May and a response will be sought about rollover or exit preferences. This notice will need to publish the new interest rate being offered as it has not yet been publicly announced.

In our opinion the return will need to exceed 5.00% to appeal to investors.

India – Significant progress continues for India with the latest headline capturing my attention being the roll out of GST across India to replace various inefficient, and it would seem ineffective, taxes.

Their GST laws were supported by all parties and I think we can therefore assume that the State government representatives will also support the changes.

Unlike NZ, the land of GST efficiency, India has decided to have several different GST settings, currently from 5%, 12%, 18% and 28%. Perhaps modern technology will enable India to move Goods or Services between the different ratings based on targeted outcomes (both behaviour and revenue).

Maybe the likes of Apple and Google products will attract a 28% GST if corporate tax is reported at an unrealistic level relative to product sales in India?

Recently a reader of Market News wasn’t happy about my suggestion that NZ drop personal income tax a little further and bring our GST up to 20% to gather more from the tourism sector’s activity. This person should be relieved about a 20% setting because India’s legislation has capped its GST at 40%!

The Indian economic story appears to be on a roll.

I hope our trade negotiators are already over there negotiating.

Ever The Optimist – Law around what will be deemed as Insider Trading has begun its development.

The person who had allegations laid against them relating to information exchanged and trading in EROAD shares has pleaded guilty to the charges.

May this outcome and ongoing monitoring by the NZX and FMA of trading around sensitive releases continue and all who may be tempted to cheat now exercise the integrity not to abuse their position.

 

Investment Opportunities

Bond Issues – It sounds as if you can enjoy the current school holidays with family and then come back refreshed and ready for the next couple of bond opportunities.

Infratil – has already announced (over and above the previous paragraph) that it intends to offer a new bond to replace the one maturing this June.

Travel

Edward will be in the Wairarapa on 26 April, Napier 27 April, and Taupo 28 April.

Chris will be in Auckland on May 9 and 10, in Hastings on May 16, and in Christchurch on May 23 and 24.

Kevin will be in Christchurch on 4 May and Ashburton on 18 May.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

Michael Warrington


Market News 10 April 2017

Here’s a ‘big data’ story for you.

It is an example of how business use of data is evolving, fast.

Last weekend my wife went to the supermarket, walked in, chose her items, went through a check-out where a human assisted, she paid and left.

10 minutes later we received an email at home from the same supermarket group explaining the virtues of shopping online.

Coincidence?

What would Mr & Mrs Orwell do in response if this happened to them?

Investment Opinion

India – India looks as if it will jump ahead of the rest of the world with its plans for a centralised national digital infrastructure which reads as if it will provide high quality service to Indian citizens for financial and identity matters. The project has a name ‘Aadhaar’.

The project began 8 years ago but this is the first time I had read and understood its impact and it resonated with me in relation to both Anti-Money Laundering obligations in NZ and the potential for Blockchain (Distributed Ledger) technology developments.

Aadhaar creates a biometric database based on a 12-digit digital identity, authenticated by finger prints and retina scans for all people.

Apparently, prior to the development of Aadhaar approximately half of India’s population had no birth certificate and thus no formal recognition of identity, which seriously compromised access to services from almost all institutions for these people.

The Indian government recognised that this was a major contributor to holding back these people’s prospects, which holds back the economy, holds back tax collection and enables corruption.

You may recall the recent, and relatively successful, efforts by the Indian government to replace the cash notes used in their economy to begin the process of reducing the presence of corruption and to improve tax collection. This cash exchange was a huge project but this identity development is bigger.

According to the article 95% of India’s population now has a digital identity (1.1 billion people). That is a remarkable development if it is even close to accurate.

With a government recognised identity a person can now open bank accounts and enter into commercial arrangements (such as mobile phones for communication) which many have been unable to access in the past.

The Indian government has a Unique Identification Authority of India (UIDAI) and they are exerting influence over acceptable technology platforms (such as mobile phone hardware), software reporting obligations and unsurprisingly involvement in the banking system.

The Indian government will be able to better monitor activity and will capture its fair share of taxes, to be spent on further development of the Indian economy and whilst some of this will upset poor old George Orwell (RIP) it will undoubtedly help their economy to expand.

Imagine a system that enables you to confirm who you are, provide historical reference data and arrange transactions with your fingerprint and/or retina scans!

India is clearly very serious about competing with China in the economic growth race.

I think it is near certain that investment capital is now beating a faster path to India’s door to try and participate in their economy. I hope my Kiwisaver provider is on top of this opportunity.

As I read of this impressive development I continued to lament the ineffectiveness of New Zealand’s attempts at a central identity service with Real Me. Our journey into Anti-Money Laundering compliance has been unnecessarily cumbersome and is an inefficient walk through a pool of honey compared with what India is developing.

I’d like to believe that the greater potential (hope) from the Real Me infrastructure is not lost, especially given the evolving potential of Blockchain technology, but it will take a bold government to develop this identity framework properly and then add an all-encompassing obligation for its wide use.

We often laugh about the ultimate requirement of recording a client’s genetic code to truly confirm identity but India has both proved that the concept is not laughable and moral concerns aside is likely to see India leap-frog the rest of us with respect to identity and economic performance in less than a decade.

Coincidentally India began their project in the year that NZ drafted its Anti-Money Laundering and Countering Financing of Terrorism Bill 2009.

Risk Based Lending – The banking sector is moving toward risk based lending rules.

Most of you probably find this headline incredulous, as you should.

Isn’t that what banks have always done?

To some extent, yes, but it sounds as if the approvals are about to become more granular and will result in different pricing (interest rate costs).

Historically if you think of housing loans (mortgages) often the banking response has been binary; yes we will lend you the money or not we won’t and here is the current interest rate. This concept should make sense if you consider that when you look up mortgage interest rates they are the same (e.g. 2 year fixed rate at 4.79%) and access to the loan is where one meets the ‘yes’ conditions set by the bank.

However, with banks becoming more granular in their assessment of borrower risk this may be opening the door to more ‘yes’ responses but there will now be a two part response; ‘Yes’ or ‘No’ followed by the interest rate that will be charged if the ‘Yes’ condition is met.

We have had an introduction to this thinking with the Loan to Value Ratio regulations put in place by the Reserve Bank of NZ where loans exceeding 80% of a house value are frowned upon. Frowned upon doesn’t mean they are rejected but borrowers will typically pay a higher interest rate (e.g. 2 year fixed rate at 5.19%, 0.40% above standard rate).

In practice a borrower with high levels of equity, say 50%+, may well be able to negotiate a 2 year mortgage rate below 4.79%.

Regular readers will know that I am a fan of the RBNZ rolling out additional macro-prudential tools so that the banks factor in loan to income ratios and greater equity requirements for property investors.

Two recent headlines caught my attention on this subject:

NZ’s Co-operative bank is to apply personalised interest rates based on an applicant’s credit score (multi-portal assessment of a person’s credit behaviour); and

The Australian Prudential Regulatory Authority (APRA) has tightened lending rules in Australia citing ‘an environment of heightened risks’.

The Co-op bank has introduced a regime offering personal loan interest rates that will range from 9.5% for an A+ credit score to 19.5% for a D score with an expectation that the majority will be set at a rate of 13.95%.

Peer to Peer lenders (P2P) have operated this way since they launched and this change by Co-op bank is evidence that P2P lenders are indeed stealing some of the banks’ customers. Interestingly the 13.95% ‘for most’ interest rate from the Co-op bank sits above the Harmoney platform average of about 12.25%.

This evolution to a wider range of risk conclusions and a wider range of relative interest rates for loans makes sense but I do have one reservation, the setting of the credit scores.

Armed with a natural curiosity I once tried an online portal that offered to disclose my ‘personal credit score’ to me. Without wishing to let pride get in the way the result was disappointing in its inaccuracy. I was left to conclude that if the credit score business is unable to discover enough data points (borrowing events to measure) they mark down the credit assessment.

Meanwhile in Australia, APRA has placed restrictions on the proportion of lending that each bank may do for interest only loans (30% maximum for new lending) recognising that if a borrower displays no intention to repay principal they should be considered a higher risk than a borrower who does make principal repayments.

Westpac has stated that it will charge 0.20% additional interest on their interest only loans.

APRA has, like NZ, also introduced restrictions on lending with a LVR above 80%.

Nobody should be surprised by these developments.

High levels of personal debt in developed countries, including the NZ public who have been poor savers on the whole, seem to have become the norm but thank goodness the regulators are finally pushing back and declaring today’s debt ratios to be abnormal and an increased risk to financial stability.

High proportionate levels of personal debt must imply that default risk is rising and the finance sector is responding with higher interest costs and demands for more equity.

By extension the increased cost of debt will begin to catch out the most fragile of the highly leveraged. This will become a certainty if underlying (ie not risk adjusted) interest rates continue the upward path that is preferred by the US Federal Reserve.

Debt repayment defaults are a normal part of economic cycles, it’s just that for the past 20 years the world has tried to pretend that such defaults can be avoided by hiding them under the rug or ‘kicking the can down the road’, none of which makes the inevitable problem go away (witness Greece).

I commented a couple of weeks ago that Iceland provided a contrasting example of acknowledging failure, accepting one’s medicine and then moving on with better standards.

Fixed interest investors must always assess the default risk of a borrower and the level of increased cost that the borrower can tolerate, and this requirement won’t change, but with the regulators adding further tension to lending standards and thus higher pricing to the mix it should sharpen the focus of lenders/investors as to who they will lend to over the cycle ahead.

Investment News

Kiwibank – Something disruptive is afoot at Kiwibank and I’ll write a little more next week once we have a better understanding of the situation.

Recently the Reserve Bank surprised (shocked? – Ed) Kiwibank by rejecting an equity funding structure that the bank had successfully used in the past.

Today, respected businessman Rob Morrison resigned with immediate effect, as did his deputy Chair.

There is definitely a lot more to be revealed about the current situation for Kiwibank.

I am not alerting concerns for customers and investors; rather I am highlighting unexpected tensions regarding regulation of the bank.

What would prompt Rob Morrison to resign so abruptly?

I would suggest to you that inappropriate influence might be part of the reason.

The Reserve Bank, and for that matter the Financial Markets Authority often quote their objectives including Financial Stability and Market Confidence.

At this stage the RBNZ might have disrupted their own financial stability objective.

If the problem is what I think, then, the solution is simple; Cabinet should agree to the Mixed Ownership Model for Kiwibank by retaining 51% ownership long–term and offer the rest of the shares to external investors.

More Rubbish Leadership– Australia’s Small Business and Family Enterprise Ombudsman has rightly criticised several major businesses, such as Fonterra and Kellogg’s for extending the time frames before paying suppliers and then trying to profit a second time by offering those suppliers finance if they require cash in the shorter term.

The Ombudsman concluded that this behaviour had the hallmarks of extortion and it’s easy to understand her point of view. The major corporate dictates that payment will be delayed and then follows this up with an offer of financing if the supplier’s cash flow is badly impacted.

Of course the small supplier is negatively impacted. They are likely required to pay cash, or within 30 days, when purchasing products that form part of delivering the contract to the major corporate. The major corporate then pays after 120 or more days.

By definition the major corporate is using the small businesses’ balance sheet.

We commented, vigorously I suspect, in 2016, or perhaps 2015, when Fletcher Building extended its payment terms to 270 days. With the benefit of hindsight this should have been seen as a self-imposed sell notice for FBU shareholders!

Maybe this behaviour is sell notice for Kelloggs and Fonterra too?

This use of corporate scale to bully smaller suppliers displays appalling leadership and does not encourage good corporate behaviour across the many relationships enjoyed by the major companies. I’ll bet that the major companies are invariably intolerant if a smaller supplier underperforms with respect to their agreement in anyway.

If these larger businesses are not well enough organised to make payments shortly after a service is delivered then they have greater problems to worry about than cash flow management. By definition the major corporate is using the smaller businesses balance sheets so it is either a signal that the major entity is struggling or abusing its position.

If the businesses are seeking to turn their suppliers into a ‘profit centre’ through delayed settlement and profitable short term financing arrangements then they have taken their eye off the true revenue ball. For Kelloggs it is cereal, for Fonterra it is dairy products. Fletcher’s no longer seem clear about what their focus is.

I recall when criticising Fletcher’s behaviour of delayed settlement that the banking sector was moving in the other direction with cleared funds several times per day now, not just overnight, and the imminent arrival of BlockChain technology being able to link settlement to a completed agreement with immediate effect.

Given the central banks of the world driving toward improvements in real time settlement, recognising the benefits of this to the overall economy, central bankers must be less than impressed by the delayed payment behaviour of major companies.

Further, perhaps the Commerce Commission in NZ should stop looking at tenuous opinions about media domination and Sky TV control and start looking more closely at businesses displaying the examples of the abuse of power over small suppliers and quite likely over consumers. (Z Energy anybody? – Ed)

It’s not hard to find rubbish behaviour and scams that undermine public confidence in business and finance but it is wholey disheartening to witness some of our ‘best’ corporate leaders behaving so poorly too.

Voting – Z Energy has backed away from its preference to only hold online Annual Meetings after strong criticism of the concept, especially by the NZ Shareholders Association.

This is good evidence of NZSA’s increased influence for small investors. We encourage small investors to consider membership of the NZSA. It is great value and provides a useful proxy for voting at meetings if you prefer not to attend yourself.

NZSA website is: https://www.nzshareholders.co.nz/

Z Energy plan to arrange a hybrid meeting mixing onsite and online service, which I think is wise.

I think they could consider reducing costs by unashamedly planning to use one of their own meeting rooms, rather than a large commercially hired venue, given the low turnout that they have experienced in the past.

Replace Cheques – ANZ recently reported that they are investigating the potential for voice recognition as a security method when using mobile banking access (phone, ipad etc).

This makes sense, if it can be made near fool proof in its accuracy. The bank spokesman described technology that uses ten times as many security points as a finger print and can recognise the difference between identical twins.

If the banks are serious about killing off cheque use, and I believe they are, then getting voice recognition right will be important for providing services to the many senior citizens who prefer not to use technology for banking services.

It might be worth framing a cheque to hang on the wall to initiate fun conversations with your grandchildren because it’s pretty clear that banking is changing so fast that your youngsters won’t understand what the slip of paper was for.

‘Grandad, did you really just write a note on a piece of paper to pay somebody’?

Ever The Optimist – The three Chinese banks located in NZ reported significant growth in their local lending last year (>50% for two of them).

Some of the growth went to business and some to residential property but whatever the split this growth is another indicator of the robust health of the trading relationship developing between NZ and China.

Accordingly, I’d like it if these Chinese bank branches double again in size in short order.

ETO III thought it was only insurance sales people who were consuming all the champagne but judging by the ever-increasing car sales data this industry might be fighting for space at the bar too.

Our new favourite vehicle, the ute, hit a new all time record of 4,639 units for the month of March.

Now, I don’t know how many sales yards there are in NZ but 150 utes being sold every day of the month it is safe to guess that they all missed out on some sleep (the balance being spent in the office and the Champagne bars!)

This news may belong under ETO but at times I worry about the rampant consumerism of many non-commercial purchases and the negative impact they have on the NZ trade balance. (meet the Grinch – Ed)

Investment Opportunities

Oceania Healthcare – Oceania’s Initial Public Offering of shares of up to $200m to reduce debt and enable Oceania to further develop their Villages closed today.

The share price will be set on Wednesday 12 April with estimates now at [$0.82] after a competitive bidding process.

The offer closes 28 April 2017, being the last day to deliver payment with an application form (we encourage delivery to us prior to this date to avoid disappointment).

All applicants must have a firm allocation before submitting the application form to us.

Fletcher Capital Notes – last week there was a flurry of trading in a Fletcher Capital Note (FBI160) ending 15 March 2022 at a yield of 5.00%.

If this investment option would appeal to you please get in contact with us. We will advise this list of people if new selling emerges.

Travel

Michael will be in Tauranga on 18 April (morning).

Edward will be in the Wairarapa on 26 April, Napier 27 April, and Taupo 28 April.

Chris will be in Nelson on 20 April and in Christchurch on 27 April.

Kevin will be in Christchurch on 4 May and Ashburton on 18 May.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

Michael Warrington

Chris Lee & Partners


Market News 3 April 2017

In another of my bursts of conclusions from shallow anecdotal evidence;

It is my opinion that the insurance sector is doing increasingly well financially.

It wasn’t just one anecdote that makes me feel this way, it was Friday’s ferry from Devonport that lead to this comment.

As I looked up at the Auckland skyline I counted six insurance company names shining brightly atop the most visible ‘sky scrapers’, dominating the visible options where banks, lawyers and accountant brands once dominated.

This was followed by another anecdote where a friend reported some rather luxurious travel being enjoyed by financial advisers within the insurance sector.

Investment Opinion

 

Geopolitical – Last week the Reserve Bank of NZ highlighted a growing concern with respect to ‘extensive geopolitical uncertainty’ around the world.

I share their concerns and like the rest of the planet I am still trying to deduce what it means for my investment decision making.

The RBNZ may have been predominantly focused on President Trump, which is fair enough given the cut of his jib and the scale of the US economy, but I am more concerned about the behaviour of Turkey and the current uncertainty with elections for major European nations (France, Germany).

Trump has an economic focus whereas Erdogan seems to be focused on power for power’s sake.

I was surprised and disappointed by Turkey’s behaviour in trying to interfere in the Dutch elections. Turkish President Erdogan is making a mistake by overstepping his mandate to lead Turkey and his behaviour will be disruptive for the region.

Initially I added Erdogan’s behaviour to Trump’s and Brexit and concluded we were entering a very disruptive period politically and I still think this is true, but, this new set of circumstances is likely to be the saviour for the European Union.

The reasons for attempting collegiality across Europe, which began 60 years ago with the Treaty of Rome, remain in place and even though that collegiality has become a little disjointed I am beginning to think that Britain’s decision (BREXIT) to the West, Russia’s behaviour to the North East and and Turkey’s unacceptable behaviour to the South East will restore the resolve of Europeans to cooperate as much as possible.

It is possible to interpret the moderate result in the Dutch elections as a sign of pushing back against the more radical political philosophies that had been gaining traction. I think this is a good sign from the wider population where the 81% voter turnout was the highest in 30 years (ie prior to the Maastricht Treaty that established the single European Currency).

Next in line, and very important in scale of influence, is the French election on 24 April.

Marine Le Pen represents the extreme right in France. If her current rise of popularity is deflated by the French electorate it will reinforce my view that the European Union’s future is on a more sound footing, albeit with plenty of financial stress points still to resolve.

Angela Merkel seems, from this distance, to have done a very good job leading Germany but the winds of change in Europe are strong, even if the far right fail to gain power in Europe, and voters look likely to usher in a new leadership in Germany too.

If the new European leadership take a moment to reflect on ‘why does the EU exist’ and manage to reinforce solidarity between France and Germany then they stand some chance of tackling the distressing financial problem that is Italy.

As ugly as all of the headlines are, which of course I discount heavilly these days, I am inclined to think we will witness a ‘moderate’ and ‘European Union surviving’ outcome once we reach late 2017.

It won’t, though, be a comfortable ride for investors.

TeamTalk – There is an irony in TeamTalk (TTK) trying to display pride in being able to sell the Farmside portion of their business to Vodafone for more money than they declared they would receive under the Spark takeover offer.

You see, it was the purchase of Farmside at what was a grossly excessive price that destroyed so much shareholder value in the first place. TTK shareholders will no doubt recall the journey from a share price of about $2.00 down to around $0.50 over the past 24 months.

The market now perceives the sum of the parts valuation to be about $1.00.

TTK’s strategy has changed, witnessed by an agreement to sell the part they most recently purchased.

In my view they should push on and sell the other parts. I think they have learned that they are up against too much competition from the major service providers and have struggled to form their own cohesive strategy or ability to assess value within the sector.

This is of course just one opinion from a past shareholder who lost a few dollars during the journey.

 

Education

Our recurring use of the term ‘Swaps’ for setting benchmark interest rates on various bond offerings has lead to more than one person asking us to explain what Swaps are and why are they the benchmark.

This gives me pause to draw breath as it is a little complex once the conversation moves beyond titles and influences. However, it is a useful test of whether or not I can translate my knowledge into your understanding.

I’ll focus on the three terms above for this: Swaps, Benchmark and Interest Rates, in reverse order.

If I showed you a Swaps yield curve you would be looking at set of different Interest Rates for different periods of time, just like any yield curve.

You can draw this on an X and Y axis to see the ‘curve’ (being a line drawn between the plotted points).

In written form, today, it looks like this:

1 year – 2.08%

2 year – 2.34%

3 year – 2.57%

4 year – 2.77%

5 year – 2.94%

7 year – 3.21%

10 year – 3.46%

Don’t focus too much on the nominal numbers. (ie why are they lower than bank deposits etc).

The public cannot invest in Swaps, nor would they want to do so.

Swaps are used by banks and financial institutions as a risk management tool in the interest rate markets.

This role of using Swaps in interest rate risk management makes them the preferred contender for an interest rate Benchmark when trying to set interest rates for bonds (or loans).

Once a Credit Margin can be defined, being the additional reward sought for accepting additional risk when lending money, it can be added to the Benchmark rate to identify a nominal return (interest rate) that should be paid on a bond.

For example, if investors (and their financial advisers) seek a credit margin of +1.65% for a seven year bond issued by Meridian Energy then the yield on that bond should be about 4.86% based on the 7 year Benchmark rate above (3.21%).

Some banks and institutions may buy Meridian bonds at 4.86% but then immediately use a Swaps transaction to lock in the +1.65% of Meridian based reward but remove (neutralise) the risk of movement in the inderlying interest rate market.

The presence of the Swaps market enables them to manage their risk in this way.

The physics trained among you might understand further if I present it this way:

(Plus) 4.86%  ->   <-  (Minus) 3.21%

= (plus)1.65% -> (being the residual return from accepting the risk of a loan to Meridian for seven years).

So, lastly, how does a Swap work?

This is truly academic as retail investors cannot use Swaps, however, it should display how the bank or institution removes the long term interest rate movement risk from the equation (<-  (Minus) 3.21%)

Swaps are a derivative transaction. No assets are exchanged.

To ‘swap’ something is as you might guess; two parties agree to exchange risk types between themselves.

In the interest rate world the two parties (A and B) exhange interest rate risks with each other where the following happens (based on my 7 year example above):

(A)agrees to receive a fixed rate of return (3.21% p.a.) for the period (7 years) and simultaneously agrees to pay out floating rate of return which changes every 90 days;

(B)agrees to pay out a fixed rate of return (3.21% p.a.) for the period (7 years) and simultaneously agrees to receive a floating rate of return which changes every 90 days;

The net effect of this sees (A) winning if long term interest rates decline, but losing value if they rise. The opposite is true for (B).

A and B will be active managers of interest rate risk and thus need tools such as Swaps to regularly adjust their exposure to rising and falling interest rates.

To repeat myself though, retail investors will never use Swaps, but their frequent use for interest rate risk management results in them becoming the Benchmark for setting interest rates on most other fixed interest investments (bonds etc).

Crystal?

Investment News

Long Bonds – The NZ government has issued a bond maturing in 2033 (16 years) and now, as is common, the Local Government Funding Agency plans to issue a very long term bond with the same maturity date.

As a guess this new 2033 LGFA bond will offer a yield of about 4.25% - 4.35%.

How confident are you about stable inflation for 16 years, centred around 2.00%?

A real pre-tax return of 2.25% from a very low risk borrower isn’t a bad prospect. Many Northern Hemisphere investors would relish it.

If you harbour some inflation concerns perhaps you could address these with a selection of shorter investment or annual reset securities. Maybe a few shares that offer a reasonably disciplined access to repricing their services (inflation link).

It’s very hard to imagine such stable inflation, but it remains quite possible that inflation will average a relatively low number.

In the volatile ‘Land of Trump’ 30 year bonds still only yield 3.00% p.a.

Infratil (IFT) – Last week we attended the annual Infratil Investor Day, which we publicly thank them for running and inviting us along.

IFT, managed by HRL Morrison & Co, continue to set the standard for being the market’s greatest communicators.

This year IFT confimed that it has been succeeding with identifying new investment opportunities for the cash released via the sale of Z Energy and Lumo Energy, along with the potential to borrow further funds against its currently under-leveraged balance sheet, if required.

Regular readers may recall me once describing the risk profile of IFT increasing as they concede that returns were typically too low from many monopoly like utility investments compressed to near bond-like returns by investments from the world’s largest soveriegn or superannuation funds.

IFT has retained a few of its lower risk asset types (such as Wellington Airport and Trustpower) where they see options to invest in expanding the businesses but new businesses are being chosen for being ‘ahead of the curve’.

By that I mean they are investing in opportunities which have development risks in the immediate future which many utility investors are uncomfortable accepting. However, once all the uncertainties are removed those very large utility investors emerge as happy to buy from the ‘developer’.

I don’t think IFT would use the label ‘developer’ for itself but it has certainly committed some of its capital to developing high probability investment opportunites into validated utility-like investments, clearly hoping to secure the uplift in value that will occur once the change is apparent to the short-sighted or inflexible investors.

I always enjoy seeing passion and knowledge in senior executives and several within the IFT stable presented in this way, which I enjoyed.

I once commented about the Canberra Data Centre (CDC) investment pondering what the investment was, at its core. Is it a property investment, given that most of the product (technology) within the buildings is owned by the tenants?

Well, it is a highly specialised offering, upon two properties, lead by an irrepressible CEO with an excellent tenant management strategy and excellent tenants!

I over-simplfy, as you know I do, but when passion exists it is always worth listening to the investment thesis and I came away pleased with what I heard about CDC. They know what they are trying to achieve and they are delivering upon their strategy.

My favourite quote from the CEO was ‘we have very few staff numbers but revenue keeps going up’.

I have grown to be wary of NZ businesses investing around the world. There are so many examples of misplaced confidence.

So, IFT’s investment in Longroad Energy in the US had me feeling the same concerns of elevated risk of failure.

The CEO was over for the investor day and he too spoke passionately and expertly about why they expected to succeed.

The two most apparent competitive advantages that I heard were ‘the flexibility of IFT money as investor’ (ie we IFT investors provided one of the competitive advantages) and the executive team at Longroad.

It is true that the Longroad team deserve respect for past successes and an ability to succeed again.

However, I was left with my ‘show me, don’t tell me’ feelings. I shall however give them the benefit of the doubt and I look forward to being proven incorrect (elevated fear of failure) on this foray into the US.

There was a lot more to learn on the day and I have only focussed on a couple of the assets. IFT has uploaded its slides and video presentations onto its website.

https://infratil.com/for-investors/company-presentations/

If you are an IFT investor I encourage you to spend a little time viewing this material.

I think investors in IFT shares and bonds have plenty to be comfortable with, including the quality of HRL Morrison management skills and some of the new assets that are entering the portfolio.

Ever The Optimist – updated FTA with China and government commitment to FTA’s covering 90% of our exported goods.

ETO II – Proud Wellington company, XERO, reports that it now has 1 million customers and the rise will continue. Perhaps the next two milestones should be to breach Auckland’s population, and then NZ’s, to display just how international this ‘little’ NZ start-up business can become.

It also confirms the importance of technology use in all our futures where change is happening faster than I can read about it.

ETO III – The new Trans Tasman underwater communications cable (Raglan to Sydney) has been completed by Spark, Vodafone and Telstra and has been officially opened for business.

This clearly enhances our data transfer opportunity, and economic activity with it, and one hopes that the Hawaiki cable will be done next.

Given the rapid expansion of technology use and the vast amounts of data that will be moving around it is clear that we need these links to the world as much as we need the plumbing that brings water to our homes.

Investment Opportunities

Oceania Healthcare - Oceania has today announced an Initial Public Offering of shares of up to $200m to reduce debt and enable Oceania to further develop their Villages.

The indicative price range for the shares is between $0.76 and $1.04.

The minimum application amount is 5,000 shares.

The investment statement PDS is now displayed on our website under ‘current investments’.

The key dates for this offer are:

- Firm bids close 10 April 2017

- Pricing of shares and allocations announced 12 April 2017

- Offer closes 28 April 2017

If you would like to make a firm bid for an allocation of shares please email penelope@chrislee.co.nz no later than 5pm, Friday 7 April 2017.

When indicating a firm bid, please let us know the dollar value that you would like to invest. The actual pricing of the shares will occur after all firm bids are in.

Travel

Michael will be in Tauranga on 18 April (morning).

Edward will be in the Wairarapa on 26 April, Napier 27 April, and Taupo 28 April.

Chris will be in Nelson on 20 April and in Christchurch on 27 April.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

Michael Warrington


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