Market News 27 April 2020

L+33

Level 3 tomorrow, and judging by the numbers surely we are responsible enough to move to Level 2 in two more weeks.

BNZ's Stephen Toplis kindly invited us to dial into an update during the week and no matter whether you look through the front or back of the binoculars the outlook is dreadful for a while; we just don't know how long a while is.

We have a lot of work and cash flow to catch up on. (and tax to collect – Ed)

He estimated that Level 3 releases 500,000 people back to work, and by Level 2 it will be 1 million.

Staff numbers will not be rebuilt to 100% levels for a long time.

I have a new proposal for Hon. Grant Robertson; that for 3 months between June and September he allows businesses to apply for cash refunds for sick leave used in business.

We need to actively 'force' people who are feeling unwell to report this to employers and Healthline then stay away from work for 14 days. This will be easier to do with a combination of sick leave and remote work (again).

Maybe Grant could offer to pay $585 for one week. The employer pays the other week at $585, unless the staff member was able to deliver normal productivity from home (normal pay obligation).

Applications would require evidence from an online payroll facility. Those who pay manually could not apply, giving them an incentive to get online, which would in turn improve financial management (and tax collection – Ed) from the sector.

No, Grant hasn't called me yet about my other proposals, but I know he's listening.

By the way Grant, I think helicopter money for all would display a lack of strategic thought. I don't want it for me, or my family unit. I want it to reach the subset in most need, which I expect WINZ and Working for Families to resolve for you.

Happy to help.

INVESTMENT OPINION

Recession – As pondered a few weeks ago, China has indeed experienced a decline (contraction) in its GDP, shrinking 6.8% relative to the first quarter in 2019.

A move from the +6.0% zone to -6.0% puts some scale on the early economic impacts of Covid19.

A second quarter of decline seems inevitable, assuming they report honest data, which ticks off the defined 'recession'. 

Could they experience three or four negative quarters?

They might if the rest of the world cannot, or choose not to, buy from them and there are stories about nations trying to reduce their interaction with China at present.

In China's defense they are getting back to work themselves, quite actively now according to people operating there.

Speaking of -6.0%, this is the number Stephen Toplis defined as the proportion of our economy driven by tourism last year so we too will be experiencing a recession of at least this magnitude for 2020 and more likely greater than -15%.

Stephen, appropriately in my view, doesn't expect our GDP to regain 2019 volumes until 2024.

My inner optimist would like to believe we will be on the improve from our new low during 2021 if China and Australia (our largest trading partners) get back to work at the same rate as us.

The Asian time zone may well get ahead, economically speaking, of the European and American time zones. 

More from China – Here we go again.

A couple of years ago it was Hainan Airways (HNA) that tried to buy UDC Finance in NZ, claiming they wanted to become a conglomerate with diverse business interests.

That deal failed and now I see HNA is abusing its lenders who hold senior bonds, forcing unwanted changes on them via ineffective online meetings during lockdown.

Now, a Chinese computer wholesaler (BAIC) is buying in to PGG Wrightson, one of our major service businesses in the agriculture sector.

Should we now interpret such transactions as 'representatives of the CCCP?'

BAIC made its wealth in the computer technology space, and now it wants to service the rural sector of NZ. 

Really?

It does, however, remind me of my recent thoughts about who might be buying shares in Air NZ at the peak of the storm.

There are always people (businesses) with real equity, and/or access to more funding than others, who will emerge to buy businesses if others choose to sell them cheaply.

Not everything is as it seems.

Inventory – There will be a strange situation developing with respect to inventories right now.

Some consumables have gone from one's inventory and cannot yet be replaced; think of a builder and his/her nails.

The nail supply company will be back enjoying cash flow as soon as the government approves a return to work; builders will re-stock, hammers will swing.

Yet, in the oil market where they have trouble turning off supply (functional and political reasons) the world's inventories are almost full yet the suppliers still need to sell for cash flow to avoid insolvency.

In the US, West Texas Intermediate oil for immediate delivery fell to -$40.32 per barrel. Yes, that is a negative number. The oil producer paid to have the oil taken away.

Shortly OPEC and US oil producers will be lobbying global governments to let us out sooner to fill up our cars, trucks, motorbikes and jerry cans to extend the inventory reach, but then what?

The price of oil for future months seems likely to continue its decline until world activity rises again.

It may, in future years, become difficult for oil producers to negotiate the high prices of yesteryear because we now know that demand has more elasticity than supply. 

This causes problems for Saudi Arabia, and Russia, amongst many others and political tensions will become more obvious.

It also poses new problems for the climate change effort and competing energy sources.

Food – It has been a pleasure to watch New Zealand's primary industries roll on through the Covid19 disruption.

I appreciate the progress they have made with environmental improvement, within commercially affordable boundaries, and applaud their successes for NZ as we are reminded of the essential nature of this part of our economy. (again – Ed)

So much of this sector is not listed for public observation, but A2 Milk is and they have re-affirmed their rising revenues forecasting $1.70 - $1.75 billion for the full year. Such a good value add story for NZ, from the primary sector and surrounded by others doing a great job too.

Irrigation is such an important component for the food sector and further development really must feature in new investment plans being considered by both our government and primary industry operators.

I think I'll re-read some old reports relating to this sector because we need some catchment, storage and distribution plans that were denied in the past to be represented for reckoning in today's light.

Remember Ruataniwha in Hawke's Bay?

Public Private Partnerships anyone?

Food sector – Many good business developments will be accelerated in response to the commercial threats imposed by the Covid19 lockdown. 

One that hit my inbox last week was Allied Farmers (through NZ Farmers Livestock business) will begin online auctions to livestock trading.

Online auctions will now join traditional sale yards and on-farm auctions, and importantly the online option can begin under Covid19 Level 3.

I expect that this new process will improve the information available for each animal given that farmers won't be able to assess stock on location, which should in turn enhance the national register of livestock and have such service levels flow through to onsite auctions in future.

Remember the difficulties NZ had tracing under the Mycoplasma Bovis outbreak?

Better animal data will help reduce this risk.

The sharp change in people's financial circumstances mean that many are assessing what they can sell to raise cash, or where they can invest if they hold a surplus of cash.

Enabling livestock trading sooner, and more widely will unquestionably add value to the rural sector (and probably sooth a few worried bankers - Ed).

Well done Allied Farmers.

Airline buyers – A few weeks ago I speculated that the high volume of buyers for Air NZ shares may well include some of its well-financed peers.

Last week Virgin Australia declared that it was under extreme financial pressure and entered Voluntary Administration.

Within 48 hours the Administrator (Vaughan Strawbridge) reported that he had been approached by more than 10 parties wishing to participate in funding the future of the airline.

I'll wager that on that list are some of the people who were buying Air NZ shares.

Digital Coins – Reports from the Bank for International Settlements, and various individual central banks, makes it clear that research into issuing Central Bank Digital Currency (CBCD) is expanding, quickly.

The noises from some sound close to be functional. 

South Korea has introduced legislation recognizing cryptocurrency as part of the financial ecosystem and is running a CBDC pilot programme.

The traceability aspects of a CBDC are good features, as are efficiencies which should remove some of the current expenses in the global payments systems.

However, the global response by the public to the Covid19 crisis, and others before it (2008, 2002) has been to withdraw far more cash than under normal conditions, displaying some weakness in the respect of wealth transfer via computer.

Central Banks need to focus their attention on three things for CBDC:

An unquestionably trustworthy store of value via CBDC; and

An unquestionably reliable function for the payment system; and

Demonstrate the financial savings to the public from using such a payment system.

Now is not the time to introduce a CBDC but it is time for developing and testing.

EVER THE OPTIMIST

NZ, through David Parker, has co-signed a new trade agreement with Singapore. 

They announced a commitment to maintaining open supply chains and removing trade restrictions on essential goods, especially medical supplies.

All other nations are invited to sign, and several have.

It's good governance at work.

Donald Trump could surprise everyone (including himself – Ed) and remove all tariffs that he added during his squabble with China.

ETO II

Dairy farmers (Sharemilkers) are on the move, on schedule, on 1 June.

Real Estate agents are allowed to show people through homes again.

Let's get people back to work.

ETO III

Rio Tinto still describes Tiwai Point aluminium smelter as 'under review' even though they didn't deliver a decision within the time frame defined by them (to 31 March 2020).

What they have done though, in a formal release to the Australian Stock Exchange, is confirm that is maintaining its forecasts for production for alumina. 

Presumably this reflects its current profitability because it plans to cut production of other minerals such as copper.

SERIOUSLY?

An Australian media outlet trumpeted the 'biggest government bond auction ever' last week, seemingly lauding the financial market support for the nation.

No kidding; their government has just promised to spend its 'biggest ever' $213 billion in Covid19 support.

The money is borrowed. It doesn't grow on trees or come out of 2020 tax collection.

The same is underway with New Zealand's government bond auctions.

Investment Opportunities

Secondary Bonds

Yields on bonds from the secondary market have again lifted to the point of offering returns greater than bank deposits for equivalent terms.

I observe though that many are settling down a bit already.

When you ask us for reinvestment ideas, and fixed interest options happen to be the solution expect to see yields of 3.00%+ in the responses.

New Capital Raising Offers

We expect many businesses to approach the market over coming months seeking investors willing to buy new shares and perhaps new bond offers.

Share offers are likely to have appealing discounts to recent trading prices on the NZX. 

These offers will be fast moving and thus may have been and gone by the time you read the next Market News. The days of printed offer documents has surely ended.

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL 

We will align ourselves with the preferences of health officials to suppress potential spread of Covid19 and have suspended our regional visits and closed our offices.

Serving customer needs by phone and email has the same effectiveness and is working well.

If you run into an issue with phone connection please follow it up with an email asking one of us to call you back.

Thank you.

Find reasons to smile.

Mike Warrington 


Market News 20 April 2020

L+26

The Cabinet Decision comes later today. It will drive another 48 hours of Covid19 headlines.

You can tell I have too much time in front of my computer; I am now stress testing the appropriateness of clichéd headlines.

Last week's worst effort: Covid-19 will change the course of history.

No it won't. 

This is impossible.

They have tried to smash a future tense into a past participle.

Covid19 is changing our present, by the day, and it will influence our future, just as everything else does.

INVESTMENT OPINION

The effect of competition – It's like the modern version of the 1960's space race between the US and Soviet Union but this time it's the US versus China for Covid19 vaccines.

Quoted by the World Health Organisation:

The furthest along in the clinical process is an experimental vaccine developed by Hong Kong-listed CanSino Biologics Inc. and the Beijing Institute of Biotechnology, which is in phase 2. 

The other two being tested in humans are treatments developed separately by U.S. drugmakers Moderna Inc. and Inovio Pharmaceuticals Inc.

Oxford College tells us they are operating at the front line for delivery too. 

Wouldn't it be great for a tertiary institution to beat commercial businesses with delivery of vaccines.

Last week Wellington's wonderful Malaghan Institute asked the government for additional funding to try and advance locally produced vaccines and avoid being last in the global queue for supply.

Scientists must relish being in the spotlight with solid support for increased funding in future.

Buying Annuities – a reader of our website contacted us to disclose that he had, prior to his own retirement, authored a report in 2013 to the Ministry of Social Development on the need for the public to be able to buy annuities from the government, possibly delivered as increases to National Super.

My clever idea of last week was, it seems, a re-polished idea. 

Although, I think mine has the advantage of timing; the previous government didn't need the additional funding quite as much as the current one!

With an acknowledged bias I also prefer my idea of a limited asset purchase, meaning that if you live too long the payments run out. You are buying a defined amount over a defined time, with the greatest value offered being the government guarantee of payment.

Legally adding to National Super messes with your head on 'how long people might live'.

I haven't heard from Grant, Simon or Adrian yet about when they are meeting to set up the new annuity scheme.

Re-purpose – Most businesses need to (right now) look at how they will re-purpose for the future shape of our economy; some with little to change but others needing to recognise they'll need more than a new paint job.

The item that prompted this comment was my guess that some hotel owners would be wise to change a proportion of their rooms to long-stay apartments with rolling 12-month tenancy agreements.

Keep the facility operating until the usage pattern changes back to premium pricing from tourism use.

I could see my kids agreeing to live in the city, in such a unit, if the pricing was modest enough. 

They have the luxury of visiting a suburban house for changes of scenery and I'm sure they would be pleased to eat out once such facilities re-open (no kitchen in hotel rooms).

Claiming the available cash flow within the economy will be vital during the next 24 months, and the tourism sector looks like it will take at least that long to rebuild meaningful demand for premium pricing by hotels.

Don't let the distaste of lower current returns (from a hotel in this case) delay decision making; less cash flow for a limited period is clearly better than none forever if you are forced out of your investment. 

Minus 20% - If those guessing a 20% decline in business activity and personal incomes are even close to the truth I'd like to see some change in behaviour from our local government sector.

The government has been quick to change, recognising that ''financial potential'' for the economy is going to be different.

Air NZ is the most visible example for everybody with the scale of change required at the extreme end of the range.

Reducing our expenses cannot solely be left to business.

When I look at my annual household expenses council costs feature in the top three of non-discretionary items. 

If the 'average' NZ household is to experience a 20% reduction in income for 12-24 months I expect councils to re-visit some of their pipe-dream spending ideas and remove them from the budget, and from my rates bill.

No, I don't want them to fund pipe dreams with cheap long-term debt either. Why should our grandchildren repay our debts for unnecessary spending?

If we see no change they don't get it, and the Minister for Local Government may find herself being interviewed more often to discuss costs and authority issues within this sector of our economy.

I once poked Christchurch City Council in the ribs for trying to own everything as they bought back the portion of Lyttleton Port that they didn't own whilst coping with the impact of their earthquake; it was madness.

They now have new reasons to consider partial or full sales of the assets.

So does Wellington City Council.

When Wellington International Airport (WIAL) asks its shareholders for additional funding to bridge activities over the next 24 months will WCC ask me to pay more in rates or will they do as I think they should and sell their shareholding to Infratil?

If the council sells its 33% of WIAL they could make meaningful improvements to our essential infrastructure, much of which is failing at present. It's tiring hearing about the failures of our water in, water out, and various city properties.

If WCC wants to collect revenue via WIAL from movement of the public through Wellington, using it's resources, it should consider travel levies similar to the government levy on international travellers. 

If you visit our city, make a contribution to it's development and maintenance; maybe $1 per airfare?

If council's continue to wear their facemasks over their eyes and ears and roll out large annual rates increases, whilst the government is necessarily increasing tax collection to repay Covid19 funding, you can be assured there will be no inflation in NZ because discretionary spending won't exist for the majority of the population.

Don't forget the impact of rising insurance costs on your budget.

No inflation means little or no interest rate reward.

Stop It – Every time I pick up 'the paper' now I find new stories asking Grant Robertson to pay for everything!

This is not possible and not desirable.

Grant is working hard to help employees and some businesses to bridge the obvious financial shock caused by the government lockdown. This is an expensive short-term bridge but it must only be short term, hopefully only 12 weeks.

Work and Income will help the longer term for individuals, via Working for Families (a nicely targeted support mechanism) and via unemployment benefits.

Stop asking for long term financial support for businesses, it's disingenuous.

We do not want a business, or an economy, that is dependent on long term financial underwrites from the government (AKA the tax payer), because this would be an inward spiral to a collapsed economy.

We can see the other side of the bridge, even if the ground looks rough, so we can make planning decisions now.

Owners of a business must provide the financial assistance for the future.

As Johnny pointed out last week in Taking Stock, if private owners don't have sufficient wealth to support their business then they should call Mark Peterson (CEO of NZX) and list the business on public markets and broaden the potential to raise additional capital.

The past decade of trying to keep everything private will find out many businesses and the depth of their owner's pockets.

Stop asking the Minister of Finance to pay for everything. It's not appropriate in the short or long term.

Small News – Infratil - The Canberra Data Centre has won an additional contract for 10 years from the Australian Tax Office (via its technology provider DXC Technology).

The opportunity came about after the Australian government directive relating to data sovereignty, where the previous data centre provider was Chinese owned (since August 2019).

Apparently, the government demanded data storage be moved by September 2020, being an extra-ordinarily short time frame, highlighting the expanding global tension about China and its attempt to exert greater control globally.

Whatever the facts behind the change, CDC is clearly in a purple patch right now with respect to supply of the highest quality data storage, in a world where the data gathered is expanding at a parabolic rate.

This is welcome news for the IFT revenue line as they contemplate injecting capital elsewhere in their business.

Small News – equity support  - I see Warren Buffett's Berkshire Hathaway has agreed to make use of a Dividend Reinvestment Plan (DRP) to add equity into one of its oil company investments (Occidental).

Berkshire can sell the additional shares if they wish, and if the market pays a reasonable price, but its likely that the shares are undervalued, hence Berkshire willingness to receive more instead of cash.

In NZ you should expect more of your businesses to re-open their DRP and ask that you consider accepting more shares than cash at dividend time.

They should be a little more aggressive with the share price discounting to attract your attention – 'please read the price discount as a request to buy more shares and support your company financially'.

Over the past year or two DRP discounts ranged from 0-2%. I think the serious should be offering 2.5% - 5.0% (the equivalent of a full year's interest in the bank).

These discounts are equivalent to the costs a business will pay to borrow money from you, or their bank, so why not offer that value to longstanding shareholders, especially during a time of financial duress.

EVER THE OPTIMIST

Clever, energetic, people are not sitting idle whilst we sit in Covid19 lockdown.

Hack the Crisis (NZ) is the local version of people determined to identify real problems and to try and design effective solutions, during a 48 hour gathering.

https://www.hackthecrisis.nz/

The event occurred over the weekend and I look forward to reading about the output, hoping it also reaches government ears.

SERIOUSLY?

It didn't take long for standards to drop. 

My favourite headline from last week was:

Judge orders lawyers to get out of bed and put a shirt on for ZOOM meetings!

Investment Opportunities

Secondary Bonds

Yields on bonds from the secondary market have again lifted to the point of offering returns greater than bank deposits for equivalent terms.

I observe though that many are settling down a bit already.

When you ask us for reinvestment ideas, and fixed interest options happen to be the solution expect to see yields of 3.00%+ in the responses.

Some examples can be seen on the Current Investments page of our website: https://www.chrislee.co.nz/current-investments

New Capital Raising Offers

We expect many businesses to approach the market over coming months seeking investors willing to buy new shares and perhaps new bond offers.

Kathmandu and Auckland Airport have been and gone already. The Local Government Funding Agency issued $1.1 billion of a new bond.

Share offers are likely to have appealing discounts to recent trading prices on the NZX. Bond offers will need to offer attractive yields.

These offers will be fast moving and thus may have been and gone by the time you read the next Market News! The days of printed offer documents has surely ended.

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL 

We will align ourselves with the preferences of health officials to slow the spread of Covid19 and have suspended our regional visits and closed our offices.

Serving customer needs by phone and email has the same effectiveness and is working well.

If you run into an issue with phone connection please follow it up with an email asking one of us to call you back.

Thank you.

Find ways to spend.

Mike Warrington 


Market News 13 April 2020

L+19

Are we there yet?

No. 

The share market is behaving like a 12-year-old back seat passenger.

Prudent folk might view this as a nice plateau to double-check, that investment portfolio risks are as they want them to be.

Looking ahead:

Some conversations I have had over the past three weeks have included guesses at what business and society operations will look like post lock down.

One common thread is – work from home will mean less work in the city.

Well, it has only taken me 19 days to become very sick of 'Lock Down Yoga' wafting through the air whilst feeling like a 'virtual employee'.

I think the majority of employers and employees will want to (need to – Ed) get back to a collegial location.

A client who experienced the evolution of property use after the Christchurch earthquake agrees. As I suspected, they will be good investors in the current market condition.

I can however imagine a business that once thought it would require 25% more floor space sitting down with staff to discuss the potential for a less expensive combination of city and home property use. 

Societies evolve they don't crash into reverse.

INVESTMENT OPINION

Ownership – The more I read about government financial support packages globally the more it seems that in the end the tax payer will own everything, which is not appropriate for a healthy economy.

For example, the Bank of England, she who regulates the banking system, has now loaned money directly to Easy Jet (GBP 600 million) to help during the lock down crisis.

The US Federal Reserve is considering following the Bank of Japan and agreeing to buy businesses (shares).

Following the actions of financial support provided during the Global Financial Crisis we appear to have done nothing (globally) to remove government tentacles from involvement in private industry.

Actually, that's not completely fair; to our credit the NZ government did retreat after the combination of a GFC and an earthquake with its decline to 19% debt to GDP and occasional declines to its participation ratio within our economy. 

The past effort and focus from our government (both colours) is why we are positioned well now to deliver renewed government support for the latest crisis.

Note, latest crisis; there will be more and we will need to prepare for them too.

On a household scale, our entire working population should have learnt to save 4-8 weeks of cash in our own personal emergency fund. Or, maybe while I am thinking outside my own area of expertise the government could allow facility for temporary approval of eight weekly withdrawals from Kiwisaver of, say $250?

The approved amount might be calculated as the difference any possible government subsidy ($585 per week this time) and 80% of the median wage.

This concept should achieve the following:

Encourage greater use of Kiwisaver (tick);

Pass some financial crisis risk to private citizens (tick);

Deliver greater opportunity to those who save money (tick).

(President for a day stuff again – Ed)

Sure, but we must stop asking central banks and governments to buy everything as soon as it gets difficult.

Better behaviour required – It was nice to see Hon. Grant Robertson encouraging businesses to pay obligations on time, and preferably on shorter time cycles than normal to try and keep the velocity of money up.

The government's fiscal package is trying to add pressure to the monetary 'blood system'.

The least a business can do is play their part…. or within this disappointing example, a government department.

I'm not suggesting that directors should risk insolvency, although the government has introduced a safe harbour under the Companies Act to reduce legal risks relating to ‘possible insolvency’.

Just make payments that are owed.

This introduction is to record how extra-ordinarily disappointed I was to hear of several scenarios where big organisations are refusing to pay small organisations, even when there is an obligation to make payment and a capacity to do so.

Those not wishing to pay are making every embarrassing excuse possible, but these efforts belong in a Monty Python sketch, not in real business.

Yes, damn it; one example was a government department!

This paragraph is not for name and shame. This particular government department finally paid when pressed very firmly about their legal obligations, but it is a disgrace that senior government people would even try this stance when Grant Robertson is doing the opposite (paying out a lot of money, fast)

Grant is too busy to be told about this offending ministry, but it would be useful if he dictated a message to all departments that he expects payments to be made immediately, and he expects departments to continue booking normal activities, both via the virtual/remote service option and for delayed delivery.

Sadly, this paragraph continues with an unnamed, very large NZX listed business also refusing to meet financial obligations to a smaller business. It won't be the business you are thinking of.

This business didn't provide material for Monty Python; they were just downright rude and unprofessional.

The poor form discloses the intense pressure being felt by business managers at present.

The best managers will stand out because they will shine in the current environment.

The world hasn't stopped. Keep paying the bills.

'Covid19 Annuity' – The US is debating whether or not to issue 'War Bonds' (just a label) for new debt with a 100-year maturity.

The most common US long bond is a 30-year term, and it is surely the height of 'kicking the can down the road' to conclude that you cannot solve a temporary economic problem within 30 years.

Very long-term debt is one way to ask the young to repay the costs of today's battle.

As I stared at my keyboard I pondered a way for the older generation to help as the financiers; Grant Robertson could offer to sell government guaranteed annuities to the retired.

Instead of asking the Reserve Bank to fund much of his emergency funding, ask the retired to buy an annuity from the government.

The new, higher risk, settings offer a fertile environment for offering government guaranteed cash flows to investors.

The government already has the team to manage the asset and cash flows – Government Superannuation Fund and National Provident Fund, coincidentally led by another industry work colleague (remember how small NZ is).

Given Grant Robertson, Simon Tyler and Adrian Orr's skills they could have such a fund operational by July.

The public would 'buy' with a large capital sum today (exchange for) the payments stream of principal and interest over a defined time frame (10-30 years);

The reward would not be high, but it would be government guaranteed.

A person would buy either what they could afford, or more likely an amount that defined surety of minimum cash flows in retirement (National Super plus this new Covid19 amortisation fund = their guess at annual outgoings).

I have no idea what the public demand for my new facility would be, but given that the RBNZ has already underwritten the funding, and GSF operations already exist, introducing my new Covid19 Annuity Fund won’t delay Robertson's spending plans but it might just shift the risk to where it belongs.

Every dollar that the public buys from the new annuity fund could release a dollar of government bonds grudgingly held in the Reserve Bank portfolio.

Too much time for thinking when in lockdown?

Maybe, but I quite like this idea. (I'm sure you do – Ed)

IFT – Even in lockdown Infratil has continued its good form as a market communicator.

It was forced to cancel its normal Investor Day update so arranged an abbreviated online session to update us all on the impact of Covid19 to their various businesses.

Covid19 will have made most of their polished presentations immediately redundant, if you imagine Wellington Airport as an example.

Infratil investor can now see the slides and listen to the audio via the website:

https://infratil.com/for-investors/announcements/2020/infratil-market-update-3/

Infratil's full year result will now be announced on 29 May.

AIA – Auckland airport has acted early with its request that shareholders invest additional equity into the business as they address the new, more stark, financial risks for the next two years.

Going earlier than most can mean a few things:

A better awareness of their financial position than others and demonstrably able to make good decisions quickly;

Conscious that other businesses will also need to raise fresh capital and wanted to get in early before investors reach a point of indigestion for additional risk; and

AIA liked the bounce up in share prices recently and speculated that this was a wise time to issue more shares (higher price?).

AIA's share offer was very large at $1.2 billion.

With that in mind it was impressive to see the scale off support from professional investors who very quickly offered the $1.0 billion available to them.

The other $200 million is being offered to current AIA shareholders as I write.

AIA is clearly well funded, exchanging goodwill from shareholders for real cash, so the board can now return its focus to managing the business.

LGFA Bond – The Local Government Funding Authority (LGFA) raises money for a wide variety of councils that provide financial support to this vehicle.

It issues very high quality (strong, low default risk) bonds to deliver funding to those councils and it's latest bond offer was brought to market last week.

The bonds are sufficiently strong that they feature in almost all fund manager mandates and are accepted as collateral by the Reserve Bank. In fact, under Covid19 distress settings the RBNZ agrees to buy the bonds outright to ensure sufficient funding reaches the economy.

Last week LGFA announced a new bond offer and for the sake of presenting a number agreed to issue $300 million, but as usual in the fine print they actually agreed to take whatever they were offered.

It turns out that investors offered them $1.1 billion, a nice 'upsize' order.

They are excellent quality bonds (hence a low return) but the volume was seriously increased after the RBNZ agreed to buy these bonds into its portfolio as required to support ongoing funding.

This is tangible evidence that financial markets are open for business, just as the RBNZ wanted.

Smalls news (Patents) – There is an irony in the news that the nation accused of the most intellectual property theft (China) has become the leading global applicant for patents (59,000 during 2019).

Challenging any breaches might open quite the global can of worms for them.

Prior to this point the US was recorded as the highest every year since 1978!

Small News (Health Investment) – You don't have to be a rocket scientist (Health scientist? – Ed) to see that a lot more money will be invested in the health space over the decade ahead.

The Chief Medical Officer for health space giant CSL spoke of her disappointment that after SARS-cov-1 proved to be less of a threat than feared funding for research on that virus immediately dropped.

She laments the missing knowledge that should have been gained in 2004 would have been very helpful now as we confront Covid19.

My words – it seems that for the sake of some tens of millions spent then we may have reduced the need for trillions to be spent now.

It shouldn't be hard to justify those funding approvals now.

EVER THE OPTIMIST

It's beginning to sound as if many displaced hospitality workers are presenting themselves to the horticulture sector for picking and packing.

That would be great news for both sides of the equation.

Wouldn't it be nice if this highlighted an opportunity in future for shared work forces, reducing our need to rely on temporary immigrant labour?

Employers in other sectors who find they are able to minimise workload at harvest time might benefit from slightly lower wage costs and those employees can enjoy a little variety in their year.

ETO II

Aren’t we all pleased with the previous government focus on fibre roll out around the country?

ETO III

A favourite business story of mine, Rocket Lab, has successfully 'caught' one of its 'used' rockets in a 'drop test' over the ocean off New Zealand.

The video is on YouTube if you are curious.

SERIOUSLY?

The US share market was unusually strong last week in the face of so much disruption.

If it stays this strong it will confirm for me that Covid19 pandemic costs will be bourn predominantly by the 'have not' members of society, which would be a mistake, in my view.

Investment Opportunities

Secondary Bonds

Yields on bonds from the secondary market have again lifted to the point of offering returns greater than bank deposits for equivalent terms.

I observe though that many are settling down a bit already.

When you ask us for reinvestment ideas, and fixed interest options happen to be the solution expect to see yields of 3.00%+ in the responses.

Some examples can be seen on the Current Investments page of our website: https://www.chrislee.co.nz/current-investments

New Capital Raising Offers

We expect many businesses to approach the market over coming months seeking investors willing to buy new shares and perhaps new bond offers.

Katmandu and Auckland Airport have been and gone already.

Share offers are likely to have appealing discounts to recent trading prices on the NZX;

Bond offers will need to offer attractive yields.

We think these offers will be fast moving and thus may have been and gone by the time you read the next Market News!

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL 

We will align ourselves with the preferences of health officials to slow the potential spread of the Covid19 virus and have now suspended our city and regional visits and closed our offices.

Serving customer needs by phone and email has the same effectiveness and has worked very well over the past two weeks.

We will keep you updated in newsletters as things change.

Stay well.

Mike Warrington 


Market News 6 April 2020

L+12

I'm always looking for the positives.

Chris Lee & Partners has expanded to nine branch offices;

30 seconds commute to work (and back);

Less fuel expense;

Socks wear out slower than tyres and cost less to replace;

Online banking says my account balance is better than normal;

Water consumption has gone up (I am being monitored by Bubble Management);

For us, we are grateful that work continues, thank you.

INVESTMENT OPINION

You Shall Not Repay! – The Reserve Bank of NZ has instructed ANZ and Kiwibank not to repay their subordinated bonds (ANBHB and KCFHA). 

These investments were approaching the optional date to consider repayment.

Given that the central bank publicly rejected these securities as equity capital it is a surprise to the market that they are now instructing the banks to retain them as an equity buffer during the pandemic era.

Not only did Adrian Orr reject these as equity capital for the future, his predecessor Graeme Wheeler publicly rejected Kiwibank’s issue forcing them to raise additional ordinary shareholder capital from ACC and NZ Super Fund.

Yet today, under a different climate, the securities have transformed from that of an unwanted doormat to a protective aegis for the banks. 

Double standards?

Both of these banks (all our banks) are well capitalized and the governor has instructed them not to pay out dividends on ordinary shares during this period to increase retained earnings, so I do not worry for the holders of these securities but I also don't think this situation has been well handled.

Further, I think the Reserve Bank has now made it more difficult for banks to issue the securities the regulator likes (Perpetual Preference Shares) and they have definitely forced a significant increase in cost (higher interest rates) onto the banks for these new PPS, once issued.

This surprise announcement by the RBNZ with respect to the old securities (ANBHB and KCFHA) will have ramifications for bank lending (access and pricing) on in to the future.

Changing Share Registers – It's an odd thing for me to say right now as market prices decline, but I think the rich will become richer through this period.

There have been some very high volumes traded on the share market during the white-hot heat of the past month. The NZX reported its largest ever month at $6 billion turnover. They should be commended for the relatively seamless operation of the exchange during the past month.

Some of this market volume is from the traders I referred to recently, trying to profit from the extreme volatility. They will happily, sell, then buy back and go home owning nothing, hoping to extract profits from those arranging transactions fueled by emotion.

The ownership registers of our businesses, especially the largest, will be changing fast at present. I fear that ownership is moving from the small to the large.

I'll cite one example, but it is not a recommendation, or inference for any action on your part!

Air New Zealand remains an admirable brand and a very well led business. It is in almost the most unenviable position of any NZ business (with due respect to small businesses immediately forced to shut).

AIR share price is down by approximately 70%.

As one looks at the cash suffocation you could be forgiven for believing this share price would be on a constant decline until Covid19 treatment and vaccination are within reach.

Yet The AIR share price has paused between 80-90 cents and turnover of the shares has been large; committed buyers must exist for this scenario.

Why?

Someone, or several 'someones' see a future that they wish to be part of.

What follows is pure speculation, but I'll say it all the same:

Who might want to increase ownership in one of the world's most respected airlines?

Another airline with plenty of equity would, and thus with plenty of patience.

Qantas, Japan Airlines and American Airlines have all had shareholdings in AIR during the past (first time round with NZ privatization efforts).

Speaking of privatisation, I hope the 'don't sell it' folk now recognize the financial risk to tax payers from trying to own 100% of everything, let alone a business like an airline!

Singapore Airlines has a strong relationship with Air NZ and previously looked at expanding into Australia via Ansett (lucky escape for Singapore).

Chinese interests via Cathay Pacific in Hong Kong also have a strong relationship with AIR.

Just saying.

I repeat, this message is not buy, sell or hold.

The message is (after ensuring you have sufficient cash, and cash flow) look beyond the next 12 months with respect to your investment decision-making.

Political Leadership – I started re-reading our old Market News articles from February and March to remind myself what I said and just how fast conditions have changed.

From today, one thing that I hope to see from politicians, well into the future, is some 'Covid19 clarity of thought'.

I was becoming very tired of politicians efforts to promise everything to everyone, no matter how illogical or ineffective.

On 3 February, following the announcement of the General Election date I stated:

I want the impossible – major parties to agree on certain 20-year objectives that are demonstrably good for the nation. Thereafter they can argue at the margin about their other social or business friendly proposals. 

I hope that Labour and National no longer think this is impossible. The party with the most votes leads, the other contributes, whilst explaining its leadership preferences to the electorate.

In that same Market News I nominated various greater threats to our wealth than the NZ government and a pending election. I didn't even know to record the virus exploding from China.

One threat listed was 'management of the unmanageable – gross global debt levels' this has likely been triggered by the virus and massive declines to revenue and downstream employment.

Kevin Gloag released a research item on the property sector to clients on 3 February highlighting the hard to reconcile price premiums on the commercial property shares at that point.

It did not contemplate the market conditions we now experience, but alongside asset allocation discussions it was an example of providing you financial advice about where we see value, or price far exceeding value. 

Reducing holdings was the conclusion at that point.

We are pleased (relieved – Ed) for those who took some action.

10 February was my first mention of the impact of Coronavirus (Covid19).

The most helpful thing I said was (if you'll excuse the pun):

It is a healthy reminder that risk and price changes come from largely unpredictable directions and one's portfolio must always factor this expectation into their investment rules and financial management.

This relates to the times we have encouraged people to run stress tests across their portfolio for 25% swings in value. I acknowledge that the swing in March was far greater than 25% for many investments.

But my considered view about possible action was rather short sighted:

My conclusion, at this point (good on you, a bob each way – Ed), is that the virus will not disrupt long term economics and is proving to be a good test of readiness around the developed world.

The economic impact will be massive.

Thereafter Covid19 references became a weekly subject.

On 17 February I proposed that Auckland Airport use the greater down time to repair its main runway.

We all now have the opportunity to consider what can be done during the period of inactivity; especially government and council projects that can make more serious progress with the public off the roads and footpaths.

I criticized the media for poking holes in Greg Foran's income (Air NZ CEO).

We will all look back and realise how enormously lucky we were to have Greg accept this role a mere seven weeks before Covid19 crushed ‘normal business' for the airline.

On 17 February, from today's perspective, the most useful thing I said was:

So much of the world's economy seems to operate at the margin now, with high debt levels so they are more exposed to being unsuccessful if small deviations occur. Extremely low interest rates have protected that slim margin from some volatility, but health threats move too fast for regulators to control in the same way.

Those who foresaw major deviations occurring will have started to change their investment decisions. (Macquarie's sale of Oceania Healthcare may be an example of such a decision)

By 2 March we started to discuss the likelihood of business failure:

The public response to Covid19 has assured us of weaker economic outcomes for the balance of 2020.

It's becoming possible that slowed business will be the receivership trigger for businesses with excessive debt levels; not because the interest rate is high but because cash flow is low.

The words I like most from 9 March came from Warren Buffett:

What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level that businesses now enjoy, it is almost certain that equities will over time perform far better than long-term, fixed-rate debt instruments.

Tax rates might be the problem within his thinking, but only at the margin.

Beyond early March financial markets moved from the point of being increasingly concerned to sharp bouts of fear.

From this point I think two things will happen:

Financial markets will remain highly volatile for the balance of 2020 and unlikely to settle into a new pattern until Covid19 vaccinations appear close (not the distant horizon); and

Warren Buffett will be correct about investment value.

Tax – Picking out two of my comments above:

I want to see clarity of thought and better long term decision making from our future governments; and

Tax may be the problem within Warren Buffett's thinking.

Most of the time a government collects tax to pay for various commitments and in a NZ context to retain a small surplus to align with our impressive Fiscal Responsibility objectives.

Net tax usually flows toward government.

For all the right reasons net 'tax' is now flowing back out to the population and business to try and ensure our economy retains a heart rate; a bridging loan if you will.

As you have all been told, New Zealand can afford it from a low government debt position. However, for the long-term benefit of our nation it must be repaid.

Tax collection will need to increase from about 2022 onwards.

These so called one in one hundred year events that 'surprise' commentators are happening every decade. Don't factor in only 1% loss rates on investment returns, squirrel away 10% (i.e. 10% of a 5% return = 0.50% acorns).

Even though government finances are strong 'our' problem is that the public has too much personal debt. We were reliant on jobs and income not being disrupted so as to survive.

These personal financial risk decisions should not be a government responsibility.

So, it is my view that people should prepare for more tax to be collected by our government once we reach the far side of the current 'bridging loan'.

As a guess I expect the government to revisit the introduction of tax on property, tax on capital and corporate tax settings. 

We collectively need to repay the ferryman. (when we reach the other side – Ed)

As I have said previously, I'd like to see all entities (trusts, partnerships etc.) obliged to join a government register, just as companies must. It would come with Anti Money Laundering and tax effectiveness benefits.

PIE structures will be retained as part of the incentive to save money (Kiwisaver) so their tax efficiency value may be enhanced in future.

Minimum wage rates will increase. Employers need to remember that the government offered to pay the majority of these wages during the early stages of the Covid19 disruption.

Those with the most will be required to repay the most.

Smile as you do so.

Small news - Banks

Central banks around the world are cancelling their regular bank stress tests preferring to ignore statistics whilst trying to assist everyone in the economy.

In Australasia our banks have more robust financial footings than most of the Northern Hemisphere. The Reserve Bank of NZ’s leniency only delayed a move from 'robust' to 'very robust'.

Small news – trade hope

China's efforts to re-mobilise its population could be good news for the NZ economy.

If we manage to suppress the spread of Covid19 in NZ during 2020 alongside our largest trading partner there's a chance we 'sneak through the gap' with less damage than many other nations that are struggling to control the pandemic.

Small news – Oil

While you were busy on other price changes; the price for a barrel of oil fell below US$20 (not seen since 1999, and before that, 1947!)

This will lead to other problems for supplier nations. (a jump back to US$26 will help a little).

Small News – Interest rate direction

I caught a story last week that had Shamubeel Eaqub and Cameron Bagrie declaring a probability of higher interest rates if the government bond issuance programme becomes too large as it attempts to fund the recovery of everything. (supply argument)

These two would enjoy a debate with Dr Bryce Wilkinson, now with the NZ Initiative, who'll take the side that bond supply doesn't drive the interest rate, inflation does (+credit margin for non government risk).

Small news – Virus science

When there is a need, people will deliver.

Abbott Laboratories in the US claim (amongst others) that is launching a rapid Covid19 test. This would help enormously with the management of the virus threat.

Johnson & Johnson claim potential for vaccines by early 2021, which once delivered will quickly settle the anxieties and free up general movement of the population.

I hope these announcements are both from the science department and not the marketing department. 

Small news - Formula 1 

I love F1 for the racing, the drama and the technology.

The love affair continues on the last point when I read that the Mercedes team has designed and is now manufacturing ventilators after less than 100 hours of effort by clearly very clever people.

A variety of such businesses are joining the race to produce ventilators. Good on them.

EVER THE OPTIMIST

I love hearing these stories.

A client, who is a landlord (commercial and industrial) provided another anecdote of the immediate difficulties for small business.

He cut his rent in half and will review monthly to ensure necessary businesses get through.

ETO II

Abbott Laboratories got FDA approval for a 5-minute virus test, using machines already in widespread use

SERIOUSLY?

Fortunately I didn't read anything that drove me nuts last week. I probably wasn't looking hard enough.

Investment Opportunities

Secondary Bonds

Yields on bonds from the secondary market have again lifted to the point of offering returns greater than bank deposits for equivalent terms.

When you ask us for reinvestment ideas, and fixed interest options happen to be the solution expect to see yields of 3.00%+ in the responses.

Some examples can be seen on the Current Investments page of our website: https://www.chrislee.co.nz/current-investments

Please take pricing on the website with a grain of salt as it is changing fast.

New Capital Raising Offers

We expect many businesses to approach the market over coming months seeking investors willing to buy new shares and perhaps new bond offers.

Share offers are likely to have appealing discounts to recent trading prices on the NZX;

Bond offers will need to offer attractive yields.

We think these offers will be fast moving and thus may have been and gone by the time you read the next Market News!

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL 

We will align ourselves with the preferences of health officials to slow the potential spread of the Covid19 virus and have now suspended our city and regional visits and closed our offices.

Serving customer needs by phone and email has the same effectiveness and has worked very well over the past two weeks.

We will keep you updated in newsletters as things change.

Stay well.

Mike Warrington 


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