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Market News 25 April 2022

It’s not news that Russian oligarchs are close to Vladimir Putin (shared abuse of Russian wealth opportunities) but any illusion that there was some separation should have been shattered by the fact that the latest attempt at negotiations in Kyiv was led by Roman Abramovich.

Mind you, any belief that the institution that is the United Nations helps to reduce the risk of war between nations has also been shattered (several times – Ed).

The world has been constantly expanding its energy use over time, both as a direct result of population growth but also through expanded consumption per capita.

It’s on this point that the world needs to discover if they can operate on a little less energy (marginal reduction) and that other producers of oil and gas begin to distribute more volume to minimise Russian participation from the supply side, to increase the economic pressure on Russia.

Environmentalists will be unimpressed with such a notion, but unless they are willing to present their philosophies from Ukrainian locations then I’d prefer that they endured a moment of quiet.

If Russian use of nuclear weapons has quickly become the greatest threat, then why wouldn’t world leaders encourage Iran to provide more oil to the world, rather than claiming they are the world’s biggest threat?

Selling more fossil fuel and increasing revenue is hardly a difficult method of contributing to the war effort for OPEC, especially relative to the impact on those inside Ukraine.

One article that I read was convinced that Putin’s invasion will accelerate the production of renewable energy supply to reduce the requirement for fossil fuels.

This is surely a desired policy, but I doubt that the world can make it happen fast enough, given the scarcity of necessary minerals (which drives price increases) and the improbability of sufficient consenting by the Putinesque regulators elsewhere who also think they know best in their own sphere of influence.

Here in New Zealand the marginal reduction of energy use has a selfish financial motive of saving money, which is logical to pursue.

In Europe the population of the EU should be asking themselves if they can reduce energy use for political stability (massive reductions in buying oil and gas from Russia will help).

It’s a very difficult pill to swallow given the decades of comfort that we have been enjoying, but surely, it’s no worse than the prospect of Putin’s appalling behaviour expanding toward Europe.

Putin thinks he is claiming land that ‘belongs’ to Russia and is doing good things for the good of the nation, when in reality he is setting back the clock on progress for the population and the planet.

For me Putin’s behaviour is evidence of my view in the frailty of world leaders who convince themselves they alone know best. Xi Jinping represents the same problem, as does Erdogan in Turkey.

What a shambles.

Make your investment decisions based on a view that volatility has doubled for a while and remember that volatility is an important form of risk and that more risk demands more return (lower entry pricing).

INVESTMENT OPINION

US Federal Reserve – The Chair, Jerome Powell, continues to authorise his other board members to speak publicly with one after another testing the financial market’s tolerance for larger and faster interest rate increases.

This is important news.

Early in 2022 the debate was about 3, 4 or 5 hikes of +0.25%. That then expanded to a debate about 8-9 increases or more.

Now the Fed is testing whether the market will tolerate +0.50% and even +0.75% rate increases and a terminal Fed Funds rate as high as 3.50%.

The only thing that is certain to me is that they wish to accelerate the rate of increase, but the total nominal movement will continue to change based on progressive economic results.

This is all rattling the cage for long term interest rates, but I think that of more importance to long term interest rates is the willingness of the Fed to sell the bonds it owns and the quantum of such sales.

If the Fed bond sales happen too quickly the market will charge the Fed for the privilege through a (temporary) increase in interest rates (lower price to buy the bonds), which will further reduce the market values of many assets.

Maybe it is the central banks exiting (selling) bond ownership that will lead investors back to the relative nirvana of positive long-term real yields on fixed interest investing? (at the expense of tax payers, again – Ed).

As always, it’s a moving tide (where the US has the greatest lunar impact) and we are perched on a stand-up paddle board, so keep up with regular reviews to stay in balance with the market conditions that influence your investment decisions.

Consider financial advice as the gyroscope and the stability of fixed interest investing and diversity as the life jacket. Property and Shares investment represent the paddle.

What could possibly go wrong.

Japan – continues to be an interesting outlier in the world economies.

Regardless of forcibly imposed 0.00% interest rates Japan is not experiencing a loss of control over their inflation (struggling to move above 0.00%).

This combination is now placing downward pressure on the value of the YEN, having fallen from needing ¥105 to buy USD $1 to now needing ¥128 for the same purchase (22% deterioration in value).

Japan is a great exporting nation who until recent years seemed to constantly be in surplus (exports exceed imports).

Most nations would fret over a very weak currency (less capacity to buy from the world), but I don’t think Japan will mind one little bit if it drives the nation back into a position of financial surpluses again (something that has never sustainably occurred in New Zealand during my lifetime!).

All the same, it is an interesting, major, data point for financial analysts to consider, and to ponder its relativity with Japan’s now declining population numbers.

Z Energy – ZEL shareholders should look for announcements to the NZX tomorrow following the High Court hearing to confirm the takeover by Ampol and, if confirmed, a payment date for settling the transaction.

Health – investors in the likes of F&P Healthcare, Ebos, Infratil and perhaps Ryman should be pleased with news last Wednesday night that one of the world’s largest hedge funds (leveraged investors) is trying to buy Ramsay Health in Australia.

KKR has built deep investment respect over many decades, and it is significant that they are focused on investment in the health sector, deeming Australia big enough to pursue exposures in and having a suitable demographic profile to spur growth in the health sector.

Ramsay Health share price jumped from AUD$70 to AUD$80 last week, setting a new high point, after a long stable period for the share price since 2015. You’d get short odds on the share price moving higher now that strong players are competing to buy the business.

If you combine the massive health spend commitments from government during Covid responses and the ageing demographic around much of the world, you’d be hard pressed not to conclude that an investment exposure to the health sector is wise.

I do wonder whether the retirement accommodation providers should be adding more services (vertical expansion) to their hospital units (scanning, minor surgery, respiratory units, physio, etc) or leasing space to the likes of Infratil subsidiaries or Ramsay to provide this.

Ever The Optimist

It will take time, but Germany has announced a strategy of reaching zero energy purchases from Russia.

This doesn’t at first glance read as an item of optimism, but I hope the long game is the removal of Putin as leader and the return of Russia to the global fold of cooperation, albeit with a time frame of years.

Investment Opportunities

Interest Rates – Financial markets are jumping from headline to headline over the rate of change (upward) for long term interest rates, but investors will undoubtedly be pleased to see interest rate returns standing a chance of exceeding longer-term inflation.

The yield on the US 10-year Treasury bond has very quickly moved from 2.00% to 3.00%.

New Zealand investors can now buy bonds as short as 5 years long, from borrowers as strong as local government with returns above 4.00%.

Sure, interest rates can indeed move higher, but it is time (again) to re-assess whether or not you believe central banks will gain control of inflation again (probably) and thus how long you think it will take.

Don’t forget to factor in opportunity cost to your decision about investing in longer term bonds; it is a near certainty that one will earn less on short term fixed interest investing than longer term fixed interest.

If you accept an average return of say 1.75% on your call account and 6-month term deposits (remember you get 0.00% on your operating accounts), and reject 4.00% on a 5-year term you will need to access a 4.75% return for 4-years starting in 12 months time.

If 4.75% becomes true for a 4-year term (council strength borrower) then the future slope of the yield curve (more return for longer terms) implies a 5-year term will likely need to yield about 5.00% - 5.25% (+1.25% from today’s level).

Possible?

Sure, but it’s becoming increasingly improbable and is the reason analysts who endorse the rapid increase in interest rates are simultaneously debating the subsequent recession!

Those who invest in fixed interest via bond funds, or perhaps managed portfolios, will be less enthusiastic about rising interest rates because their ‘wealth’ captured the interest rate declines through capitalised valuations, so the opposite will now be true for them as interest rates rise (assuming the managers didn’t reduce the average duration of the bonds held).

Regardless of your perspective it is a positive development to watch interest rates move from absolutely providing negative real returns to presenting a chance at gaining a positive real return from your investment.

Precinct Properties – has announced that it intends to offer a new 6-year senior bond to the market.

The indicative interest rate is currently 4.75% as interest rates have been rising again.

We have established an investor list, which all clients are welcome

Vector –will be ‘’rolling’’ the VCT080 capital notes due on 15 June. They will soon formally define a new term and interest rate for holders to make an Election (roll, part roll, exit).

In our view the new interest rate will need to comfortably exceed 5.00% for a 5-6 year term.

VCT080 holders will be approached by the registry soon with details.

Vector may invite new investors to buy available notes (from those exiting VCT080). Accordingly, we have established a list, which clients are welcome to join.

Infratil – Infratil also has a bond maturity on 15 June (IFT190) and their usual behaviour is to ask bondholders to roll their investment over, so you should expect an offer to be made to you during May.

Infratil always likes to invite new investors to participate too, so you do not need to hold IFT190 to invest in a new Infratil bond, fresh cash will be fine.

As I understand it, the new strategy from Infratil will be to first offer the new bond to those new investors with cash, and thereafter (immediately) offer the same bond to IFT190 holders for rollover of their investment.

So, investors with cash, be ready soon.

Investors holding IFT190, you’ll be next.

Returns on Infratil bonds with maturity dates longer than 5-years are now above 5.00%.

Mercury Energy – The issuance calendar is becoming a bit crowded. I wonder when Mercury will claim a spot to issue their new subordinated bond?

We have established a deal list for those wishing to hear more about a new capital bond from Mercury Energy.

Property For Industry – Given all the options above, this item can wait for now in terms of me speculating about details.

Bank Tier II subordinated bonds – This speculation can also wait for now.

Travel

Edward will be in Auckland on Thursday 28 April, seeing clients at the Fisher House in Highbrook, and on Friday 29 April seeing clients at Aristotles in Wairau Valley.

Edward will be in the Wairarapa on Wednesday 4 May and in Wellington on Friday 6 May.

Edward will also be in Nelson on Thursday 12 May, seeing clients at Trailways Hotel, and in Blenheim on Friday 13 May, seeing clients at the Chateau Marlborough.

Kevin is on leave until May. He will visit both Christchurch and Timaru in May and will post dates in due course.

Chris’ Seminars

You must notify our office if you wish to book a seminar seat.

Tuesday 3 May Kapiti Bugatti Room, Southwards, 11am

Thursday 5 May Nelson Beachcomber Hotel, 1pm

Monday 9 May Christchurch Burnside Bowling Club, now 2pm

Tuesday 10 May Timaru Sopheze on the Bay, 1.30pm

Monday 16 May Tauranga Tauranga Yacht Club, 11am

Tuesday 17 May Hamilton Hamilton Golf Club, 1.30pm

Monday 23 May Mt Wellington Mt Richmond Hotel, 1.30pm

Tuesday 24 May Takapuna Milford Yacht Club, 11am

Thursday 26 May Whangarei Flame Hotel, 11am (note change of date)

Monday 30 May Palm North Distinction Coachman Hotel, 11am

Tuesday 31 May Napier Crown Hotel, 11am

Michael Warrington

Market News 18 April 2022

We hope you have enjoyed a chocolate filled, and relaxing, Easter weekend.

INVESTMENT OPINION

Finance – Is just lending someone money, no matter what the label is.

AfterPay argued loudly with Australian regulators that they should not be regulated under the same finance legislation as banks and other loan institutions.

‘We are not lenders’.

Yes, the consumer left the shop with the shoes. Yes, we paid the shop. Yes, the consumer is paying the price of the shoes to us (or not – Ed).

Over the past six months those consumers failed to pay $345 million to AfterPay.

AfterPay owes its financier $345 million. They will not be so flexible about non-repayment.

Some of those regulators will be smirking as they ask AfterPay how they would now define themselves if customers haven’t ‘repaid to them’? (upset you’d imagine – Ed)

It would be more than a little ironic if AfterPay begins to chase its customers in court for failure to ‘repay’ based on arguments based on Credit Contracts law.

This scale of loss, so soon in its business life, looks like a spectacular failure to me for this ‘new’ attempt to provide consumers with short term finance.

TowerCo – This is a story to follow if you are a Spark or Infratil shareholder (Vodafone holding).

The telecommunications retailers were forced by the government to split out their copper network assets (then the fibre contract was mostly awarded to Chorus) but this time the changes are commercially motivated.

Spark and Vodafone believe they can generate better returns from their capital if they remove it from owning the mobile network towers and apply the money elsewhere in their businesses.

This is quite logical. The towers are the ultimate utility-type asset, being absolutely necessary to society with a low commercial risk and thus attractive to utility investors but offering lower returns than Spark or Vodafone directors should be setting as their targets.

The Commerce Commission won’t fight a development like this and may even begin monitoring them in the same way that they do for Chorus. Which raises one point, they will not be allowing Chorus to buy TowerCo, New Zealand needs some forms of competition across telecommunication services.

I see that Guardians of NZ Super Fund are interested in buying the TowerCo assets, as many others will be, subject to price.

Spark and Vodafone are, at present negotiating their sales separately. It appeals to me more that they’d both place their assets into TowerCo and support an NZX listing to invite a wider investment community onto the register.

As I say, watch this space because is already underway.

RBNZ – The central bank increased the Official Cash Rate (OCR) by +0.50% to 1.50%.

I have some sympathy for the large move, even though the monetary policy committee clearly ignored my preference of a smooth but persistent series of +0.25% increases.

My sympathy lies in the fact the financial markets had already moved our local interest rates up by almost +0.50% indicating to the central bank that they agreed with such a move and were ready for it.

Mind you, the market was beginning to set an expectation that the OCR would ultimately reach 4.00% but the RBNZ has stuck, for now, with its 3.35% high point.

The surprise value for the market would have been if the RBNZ had ‘’only’’ increased the OCR by +0.25%, although the large difference in the finishing point will have many scratching their heads for a while.

Introducing less tension to monetary policy wasn’t a surprise that the RBNZ wanted to issue to the markets when they are indeed trying to tell the economy to expect more tension in the price of money.

Nominally, 1.50% is still not an interest rate that one would consider expensive, however, this isn’t the interest rate that the public experience when borrowing money (to increase consumption, or buy more assets), they see mortgage rates.

Mortgage interest rates have already increased sharply, driven by movement in longer term interest rates around the world, especially the US and Australia.

This point leads to a lesson for interest rate observers.

Most will have seen the OCR increase and will have expected to learn that all interest rates for all terms increased, but that is not the case.

Immediately after the announcement that the OCR had been increased by the larger amount (+0.50% not +0.25%) interest rates on terms between 2-10 years fell.

Those of you who watched that YouTube link last week on a yield curve changing over time will have learnt that interest rates for each different term do not move in parallel steps.

Why would long term interest rates fall when the central bank increases the Official Cash Rate?

Two reasons:

Firstly, the interest rates in the US and Australia may have declined over night, and we typically follow their lead; and/or

Secondly, our market may not have expected such a strong move and feel the risk of recession, a little further out in time, has increased (which may force interest rates lower again, at that time).

Actually, here’s a third less common reason: The addition of NZ government bonds to the global sovereign bond index may have begun to increase demand for our bonds relative to other government bonds.

If this last point is correct, it will have given the NZ market more confidence that our central bank will be able to exit its vast holdings of government bonds (sell to market) more easily than some other central banks around the world.

New Zealand should be able to exit its false economics position (interest rates below inflation, central banks printing money) faster than most other nations, which would be nice.

If you are an interest rate investor, as 99% of people should be, enjoy the rising interest rate environment (greater future rewards) but try not to become trapped in the view that short term investments are the only logical choice.

The answer to this opinion can be found beyond the financial advice fence line.

Z Energy – The long slow emigration to Australia for Z Energy (ZEL) is almost complete.

Shareholders voted in favour of takeover by Scheme of Arrangement (surprisingly strongly), Ampol has received consent from the Overseas Investment Office and the date for lodging any objections has passed.

The only remaining step is High Court Approval, now scheduled for a hearing on 26 April.

Payment would then likely occur in mid-May.

There should be a small final dividend payable to shareholders based on the implementation being after 31 March. The Chairperson described:

For each calendar day that the date of implementation of the Scheme is after 31 March 2022, Shareholders on the Scheme Record Date will also be entitled to receive NZ$0.00055 per Z Share per day (up to a maximum of 10c per Z Share).

The Scheme of Arrangement document describes Implementation Date as ‘The date on which the Scheme shareholders are paid’, which according to the documentation might be 10 business days after the High Court hearing (if approved).

10 business days after the High Court date is 10 May, which looks like a plausible Implementation Date to me. This is 40 calendar days after 31 March, which in turn looks like a dividend payment of $0.022 per share, or $220 on 10,000 ZEL shares.

This is the reason ZEL shares are trading above the $3.76 take over price.

Her Majesty’s Tax Collection Officer will want some of this money; presumably 33%.

Thereafter, your era of ownership of one of New Zealand’s dominant fuel distributors, and retail outlets, will be over.

Russia Defaults – Russia is failing to meet its financial obligations for the second time in my career.

Back in 1998 the Western world decided to be lenient on Russia and Yeltsin, applying only modest pressure in response to the financial default.

This was because the world wanted Russia more involved in the wider global economy.

Now, not so much.

Ever The Optimist

The world’s greatest ever database has begun; Human Pangenome.

I hope they plan to use Infratil’s data centres to store the explosive data volumes that will be generated.

Scientists are reporting that they have finally completed the first full sequence catalogue of the human genome.

I thought this was done years ago, but apparently, they had only resolved 92% and each incremental percentage is of parabolic importance to the knowledge, making 92% look a bit limited from back in the day.

The world is now positioned with the ability to gain full knowledge of an individual’s DNA and thus all individuals’ DNA. That’s something like 3 billion data points per person for 7 billion people!

The potential for understanding the evolution of the human species and for targeted health treatment is difficult to fathom given the scale of data, but it is unquestionably a massive step forward.

The world’s most impressive experts can put such discoveries into plain English for observers. One of them summarised the situation as:

It gives us the full description of the book of life, with all of the paragraphs and pages assembled.

Given the enormous potential that this situation delivers, it is mind boggling to think what it may now mean for the development of health treatments in future.

Investment in the health sector feels like it has a robust future post Covid and pre genomic data gathering.

I’ll happily line up to have my genomic code revealed as soon as such a service is offered to the public.

I feel like a global citizen again, which reinforces for me why we should be providing help to Ukraine in its hour of need, regardless of distance.

Investment Opportunities

Plenty seems to be happening.

Precinct Properties – has announced that it intends to offer a new 6-year senior bond to the market.

Yes, they are calling it GREEN like everyone else these days. Mmmmm….

The Goodman bond of a couple of weeks ago gives you a steer toward potential interest rate (above 4.65%, but below 5.00%).

We have established an investor list, which all clients are welcome to join.

Vector – has provided an early heads up that it will be ‘’rolling’’ the VCT080 capital notes due on 15 June, which formally means they will define a new term and interest rate and holders will make an Election (roll, part roll, exit).

In our view the new interest rate will need to comfortably exceed 5.00% for a 5-6 year term.

VCT080 holders will be approached by the registry soon with details.

Given that some holders will choose to exit, we anticipate that Vector will invite new investors to buy in and take up the available notes. Accordingly, we have established a list, which all clients are welcome to join if this type of investment appeals to them.

Infratil always likes to invite new investors to participate too, so you do not need to hold IFT190 to invest in a new Infratil bond, fresh cash will be fine.

So, investors with cash, be ready soon.

Investors holding IFT190, you’ll be next.

Returns on Infratil bonds with maturity dates longer than 5-years are now above 5.00%.

Mercury Energy – The issuance calendar is becoming a bit crowded. I wonder when Mercury will claim a spot to issue their new subordinated bond?

We have established a deal list for those wishing to hear more about a new capital bond from Mercury Energy.

Property For Industry – Indicated they’d like to issue a new bond too, but they too must now be thinking the runway looks ‘full of planes’!

Bank Tier II subordinated bonds – Lastly, we have been expecting more banks to come to market offering their own Tier II subordinated bonds.

Recall that the rules for capital and thus issuing these bonds were resolved late in 2021 and Kiwibank and ANZ quickly brought issues to market.

Others will follow, if they can find a space in the calendar!

Travel

Edward will be in Auckland on Thursday 28 April, seeing clients in Highbrook, and on Friday 29 April seeing clients at Aristotles in Wairau Valley.

Edward will be in the Wairarapa on Wednesday 4 May and in Wellington on Friday 6 May.

Edward will also be in Nelson on Thursday 21 April, seeing clients at Beachcomber Hotel, and in Blenheim on Friday 13 May, seeing clients at the Chateau Marlborough.

Kevin is on leave between April 4 – April 29. He will visit both Christchurch and Timaru in May and will post dates in due course.

Michael Warrington

Market News 11 April 2022

Dr Bloomfield clearly thinks we should be in a 'green light' setting.

Job done. Problem controlled.

Like him, or not, he deserves the nation's thanks as he moves on.

INVESTMENT OPINION

Air NZ – The early trading in Air NZ shares (AIR) and the Rights (AIRRG) discloses the impact of some investors not seeking financial advice.

The FMA will be disappointed, but they must not shoot the piano player (NZX). The FMA continues to direct the public to the universe of (highly) competent financial advisers that are available to them.

Mind you, AIR didn't help matters by agreeing with their investment banks and issuing 1 Right that buys 2 Shares, or is it possible that AIR is surreptitiously trying to steer the public toward their financial advisers too?

Prior to the capital raise being announced the AIR share price (value of the company) was about $1.40 per share.

After the capital raise announcement reached the market place the implied equivalent AIR share price was trading at $1.55-$1.60 (at the time of writing).

At one point yesterday the implied AIR share price (historical equivalent) was briefly $1.70.

The implied share price has now settled back to about $1.30 (old money terms).

Could it have been possible that Air New Zealand became more valuable, based on the knowledge that they have successfully raised the $2.2 billion required?

Yes, a little (financial confidence), but is the business more profitable?

No.

It is, of course, not profitable again yet. It aspires to be, and I think it will be.

Have interest rates declined to push company valuations up?

No, the opposite has happened.

The only tangible information I can see that aids the airline (the whole industry) is that people are proving to be very enthusiastic about enacting their plans to travel again.

Maybe, just maybe, AIR will enjoy higher revenues over the next 24 months than they have budgeted for (let's be honest though, it's just an evolving guess).

So, I'll guess that they'll enjoy a surge in travel, which will be very helpful financially (cash flow, reduce losses slightly), then bookings will be mean reverting to some lower ratio than 2019 bookings.

My man Greg will know this and manage his planes and staff resources accordingly.

This is already happening with the right-sizing and simplifying of the fleet.

Side Bar: No, I am not launching an Air NZ podcast marketing series and I have not been paid any free Airpoints!

I'm just postulating and speculating in the same breath, like all other investors.

I am also unashamedly reminding the public of the value of financial advice services.

US Federal Reserve – The Fed is doing the right thing and making it clear to financial markets that the 0.00% interest rates and lender of last resort party is over.

Global markets knew the Fed was increasing the Fed Fund rate (overnight rate) this year and the fun for early 2022 was in guessing how many times they would increase it but now we must also focus on the rate of reduction in the scale of the central bank's balance sheet.

You may recall in January the debate was moving from three rate hikes to four and outliers were saying five times. Now the debate seems to be between 9-12 interest rate hikes!

I can't yet buy in to that many interest rate hikes for the US, especially as the tone is tipping the long end of their yield curve into a negative shape (longer interest rates lower than medium term interest rates) – more on this below.

However, the governors of the Fed are very happy to keep the pressure on and they clearly tasked Lael Brainard with announcing (woven into speech notes) the Fed's intention to also begin reducing the scale of its balance sheet, at a rate ''considerably faster'' than the markets had anticipated.

The surprise element of this news can be seen in the 0.15% overnight increase in yields for 5-year US government bonds (Treasuries) straight after Brainard's disclosures. That's a very large interest rate move for a single day.

I liked Jim Cramer's declaration: The Federal Reserve's biggest dove (softly approach) has turned into a bird of prey!

It is significant that the Fed is already signaling that it will stop buying bonds and soon start selling bonds to market and will allow bonds to be repaid to them at maturity (and not refinance them with the government).

As I said, it is doubly significant that the Fed asked Brainard to be their spokesperson for this message.

There is financial tension coming, and it is happening faster than markets first estimated.

The message makes complete sense; cheap money and artificial funding support are over as central bank policies. Stand on your own two feet (or don't stand at all – Ed).

The Reserve Bank in NZ had begun saying the same thing. The Fed's tone will influence more followers globally, with the possible exceptions of Japan and China. Even Australia is bringing forward its once deeply delayed plans to tighten monetary policy.

The Reserve Bank of Australia (RBA) had declared their overnight interest rate would be 0.10% until 2024. Last week they began to change their wording and acknowledged that this may be too low for too long (tighter monetary policy through words).

New Zealand investors enjoyed the effect that these Fed announcements had on markets last week with the newly issued Goodman Property bond delivering an interest rate of 4.74% (see below) rather than the 4.50%-4.60% that was likely only two days earlier.

Headlines have been frightening fixed interest investors as the authors yell out that interest rates are on the rise and this will reduce the value of one's bonds and bond funds.

Technically this is statement is true, but it also means that the contemporary returns being offered to fixed interest investors on new bonds, now and in the near future, are better for investors and they now stand a much better chance of delivering positive real returns (higher than inflation).

None of our clients will complain about the prospects of rising nominal incomes and they have a reasonable level of confidence that central bankers will settle inflation levels down again.

2022 is shaping up to become rather more disruptive than I previously expected from central bank participation in financial markets.

Monetary Policy Review – This week brings another opportunity for our central bank to review New Zealand’s Official Cash Rate.

The debate is again +0.25% or +0.50%.

I prefer the stable and predictable approach of +0.25% in a sequence until the RBNZ sees evidence that controllable inflationary pressures are settling.

The market, and public who borrow money know the message of higher interest rates now. Aggressive movements aren't required.

Tune in on Wednesday for the point of interest, but investors will find it more interesting to monitor the movement of US 5, 10 and 30 year Treasuries.

Where's the Smoke? – the negative slope developing along the US yield curve is causing concern for analysts.

A negative shaped yield curve displays lower returns as you progress out to longer terms.

It is ''unusual'' as the opposite is usually true (longer terms deliver higher interest rates).

At face value, it is the market predicting economic weakness ahead and the subsequent need for a reduction to the price of money (interest rates) at some point in the future.

If you were to watch a time-lapse video of changes to yield curves, which I am sure you could find on YouTube somewhere, you would witness a slow-moving line, a little like a snake (making no progress).

Actually, for fun, and to save you time, I found such a link: https://www.youtube.com/watch?v=WM-NGndzBFo

After you 'get the picture' during the first few minutes of the video, grab your mouse and jump forward to the late 1970's and early 1980's!

Note the relative stability of very long-term interest rates.

At present the US yield curve rises from the overnight rate (0.50%) to a high point at the 5th year (2.66%) before then declining to 2.58% for the 10th year.

The US market seem comfortable with the view that the Fed can increase interest rates to about 2.50%, but not further.

The thing that surprises me, after Lael Brainard's declaration of selling bonds from the balance sheet, is that the market seems reasonably confident that it has the capacity to buy all of the bonds offered to the market.

So, financial markets smell smoke, and may be able to see it too, but the overall pricing of the market does not fear a fire.

That's a comforting thought amongst the many big headlines being published every day.

Low Coupon Rates – It must have been a quiet day because I found myself rummaging around in our securities table of recently issued bonds (during the past 12-18 months) contemplating if I could spot good decision making on debt management by NZX listed companies; specifically, companies that you might own shares in.

Who issued bonds with relatively long terms whilst interest rates were so low and perhaps low enough to be a negative real cost for the company (interest rate less inflation) and thus a financial gain without interest rates moving?

In New Zealand companies seldom issue bonds for long terms, from a global perspective. New Zealand investors have always been reluctant to invest in bonds with long duration, preferring to focus on terms between 1-5 years. Small sums are invested for terms between 6-10 years.

The shorter duration of NZ bonds means the nice savings from issuing bonds at a cost below 3.00% won't move the dial in terms of profit improvements for the businesses but they might display good management process.

Here are the NZX listed company names that were wise enough to issue bonds at interest rates below 3.00%:

Mercury Energy, Chorus, Argosy property, Summerset Group, Oceania Healthcare, Investore Property, Wellington Airport (Infratil), Ryman Healthcare, Fletcher Building, Precinct Properties, Kiwi Property Group, and Arvida.

Sky City Entertainment, Auckland Airport, Spark and Infratil issued bonds at just over 3.00%

Congratulations to these Chief Financial Officers for their debt management decision making. It's clear that the property management businesses are well managed.

On the same basis, I should poke the media with a stick again.

Do you recall the journalist who wrote about the Auckland Council's dreadful financial error when it issued its new 30-year bonds at 2.95% and interest rates fell further, ''costing Auckland ratepayers many millions of dollars''?

The decision by the council's finance team was impressive financial management; borrow for long terms at low nominal and real interest rates against the city's very long-life assets and ratepayer revenues.

The journalist will be pleased that I've forgotten their name.

Auckland rate payers have plenty to be upset about, but debt management is one of them.

AML Review – This item falls under the 'if you are having difficulty sleeping' category.

I have an idea that is cheaper than melatonin supplements; read a few submissions to the Justice Department review of Anti Money Laundering law in New Zealand.

ZZZZZzzzzz….

Success.

It is good that a review is occurring, but I have little confidence that regulators will make the process more effective through methods of simplicity that a few respondents have highlighted.

Sadly, I am confident that regulators will introduce more fees to AML Reporting Entities.

Some of the submissions that I reviewed deserve applause for the time committed to the contribution, to the content (some very good ideas) and for their hope that improvements will be made.

Regulatory over-reach was a common criticism but I feel certain that regulators will not back down on this pressure.

Constantly describing the law as relating to actual risk (a grey scale), but then regulating as if all is black and white is an ongoing problem.

Insisting that every Reporting Entity do some of the same work (common obligations) is a gross inefficiency for New Zealand, highlighted by many, but I don't recall a submission from the Productivity Commission lamenting the wasted man-hours.

I don't recall anyone commenting on the anti-competitive pressures created by AML legislation because customers are now minimising who they do business within response to the onerous AML obligations in place.

I am pleased that from an oversight point of view this subject will drop of my radar this year.

Ever The Optimist

New Zealand government bonds have been included in the FTSE World Government Bond Index.

A 0.19% weighting in the index reflects just how small our economy is on a global scale, but it is better to be in, than out, of an index for respected participant nations.

I couldn't quickly find a value for total government bonds on issue, however, if the US economy is 25% of the world, and they have about US$15 Trillion in net government debt, maybe this can be a proxy for the world being US$60 Trillion.

0.19% of US$60 Trillion seems to be the entire government debt balance in New Zealand.

This confirms two things:

My estimates are rubbish; and

The scale of index driven buying of New Zealand government bonds will be very helpful in funding our government and, very importantly, enable the Reserve Bank of NZ to actively sell some of its government bond holdings to market, and avoid the need to wait for the government to refinance and repay them.

Investment Opportunities

Goodman Property GMT – Completed its offer of $150 million 5-year senior bonds and the interest rate was set at 4.74%.

Thank you to all who participated in this bond offer through Chris Lee & Partners.

Secondary Bonds – rising interest rates can be seen in the secondary market too. You need not wait for new issues to access some of the more appealing returns on offer.

There are many senior bonds offering yields above 4.00% now, and one or two have yields touching 5.00%.

If you have a surplus of cash to invest, please contact us to discuss options or take a look at the Current Investments page of the website.

Vector – has pre-announced its planning, but not details about terms, for the Election Date on the Vector Capital Notes (VCT080).

The Election Date is 15 June 2022 and holders will be told about the new term and interest rate offered on 3 May.

Mercury Energy – We have established a deal list for those wishing to hear more about a new capital bond from Mercury Energy. We are expecting this bond issue to open over the next three months. We expect this bond to be long dated and have an interest rate of above 5.00%.

Property for Industry - We have established a deal list for those wishing to hear more about a new senior, secured bond from Property for Industry. We are expecting this bond to open over the next few months and are expecting an interest rate of around 4.75%.

Clients are welcome to join this list.

Travel

Johnny will be in Christchurch on Wednesday 20 April, seeing clients at the Russley Golf Club Boardroom.

Edward will be in Auckland on Thursday 28 April, seeing clients at the Ellerslie International, and on Friday 29 April seeing clients at Aristotles in Wairau Valley.

Edward will be in the Wairarapa on Wednesday 4 May and in Wellington on Friday 6 May.

Edward will also be in Nelson on Thursday 12 May, seeing clients at Trailways Hotel, and in Blenheim on Friday 13 May, seeing clients at the Chateau Marlborough.

Kevin is on leave April 4 – April 29. He will visit both Christchurch and Timaru in May and will post dates in due course.

Michael Warrington

Market News 4 April 2022

Even the warmongers are confused if they think it is a good idea to dig up heavily irradiated ground for trenches in Chernobyl.

INVESTMENT OPINION

Air New Zealand (AIR) – It is time.

Let's do this. (sorry)

AIR has reached the point of asking its owners to raise new capital to help them ''refuel and relaunch'' (nice phrase) into their post-Covid future. They are leaving behind runway 'C19' South and taking off from runway 'GO22' North.

Last week Johnny carefully and politely described AIR management as competent, but I'd like to be a little more effusive by saying that in Greg Foran AIR has the man of the hour at the helm (control stick – Ed).

I have said it before, and I doubt Greg will want me saying it again (no obvious ego), but we will look back and be pleased that the CEO handover was January 2020 (fresh eyes, no legacy restrictions) and that Greg wanted to return to NZ with his strong skill set.

I feel a need to allocate some flight control terms:

The AIR board can have the rudder for strategic direction;

AIR shareholders are providing the lift (ailerons) through equity;

Greg Foran, ably assisted by senior management control the success (elevators and axes rotation); and

Last, but not least, the AIR staff provides the service, which ensures each aircraft has a reason to leave the ground.

Various articles have described the large scale of the AIR capital raise ($1.2 billion) and the ongoing risk from the sector, but my instincts are that this issue will be very well supported by both proud New Zealanders (with savings) and professional investors who will apply a high level of credibility to the plan and skill of management at delivering it.

Now is the time to make your AIR Rights decision.

Once this process is complete I'd be pleased to participate in an AIR bond offer to make sure the businesses funding is as far removed from the imposition of bank lending limitations as possible.

AIR is an excellent brand. We should be using it as an integral part of telling the world we are open for business again.

Post Script: IMPORTANT Please be very careful when considering any transaction in your Air NZ Rights (AIRRG). The company has issued one Right to buy two new shares!

This is unnecessarily confusing for the market and AIR should be expressing its disappointment to its lead managers.

Transmission Gully (TG)– As we approached the opening of TG a client dared me to address it from an investment perspective.

I responded that until today I thought the announcement about opening was an April fool's joke, but I can confess that I have now driven on the road.

It is just a road, but it is new, and it does add long needed additional capacity to the network for the Wellington region and thus adds economic value.

It has helped to arbitrage property price differences between Wellington and Kapiti by making the commute from a lifestyle residence easier and combining it with the UFB internet roll out (a good long term government decision).

After 100 years of discussion about TG's potential, 40 years on political minds, 20 years of priority lobbying, 8 years to build (including 3 years of extensions) you just know that quality issues will be revealed rather too soon!

If we were Swiss I suspect we would have tunneled the largest hills instead of digging them away and then waiting for an earthquake or erosion to reveal threats to integrity. Maybe earthquakes are the reason we are reluctant to tunnel? (Any geologists out there?)

My first impression is that the road is impressive, is very effective, is safer, will reduce blocked roading arteries and it opens up new scenery for the traveler.

Over 15 years driving North I have watched the old road evolve from coping with traffic flows, until one vehicle makes an error to the point that it was no longer coping with the natural volumes of traffic departing and approaching Wellington City.

Good planning would have avoided some of the traffic problems at least 10 years sooner.

Myopic and blinkered planning, which some might say was also looking in the wrong direction, does not lead to good planning.

Arguing against the road, 20 years ago, because they'd rather I caught three buses and a train to get to work was one such blinker.

Another blinker was the fear of spending money, and the government missed a logical opportunity to make TG a toll road and let travelers decide upon the priority of their trip (toll road, or the slower but more attractive coastal road).

For the data lovers, which includes me:

The old road to work is 44km and 36 minutes (predominantly at a legal pace);

The new road to work is also about 44km but only takes 31 minutes.

Remember that I travel against the heavy traffic flow. A workmate's husband gained 30 minutes on his commute to the city.

I am not saving any fuel, nor reducing my climate influence. It is the same distance and a similar range of elevation changes.

It is either 5 minutes more sleep (healthy) or more time assisting clients (gratitude).

Has it been a good investment?

The answer is unquestionably yes. The reason we paid so much is because bureaucrats delayed the investment for so long.

It is a huge gain for emergency services and thus health outcomes.

If our health strategists now doubled the capacity and expanded the services of Keneperu Hospital it would simultaneously reduce load on Wellington Hospital and improve outcomes for those in the Kapiti – Horowhenua region.

The extension to Otaki will be completed soon and it should be clear as day that the Otaki to Levin stretch should already have started (but has not).

Climate – Putin's invasion of Ukraine has quickly and quite radically changed investor behaviour and to some extent has compromised a few of the newly formed investor ideals.

However, fear not, the central focus of improvement will remain and regulators are increasing their expectations for disclosure so that we investors can at least make comparisons based on our own preferences.

Here is the opening paragraph from an announcement by the powerful US SEC:

The Securities and Exchange Commission today proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant's greenhouse gas emissions, which have become a commonly used metric to assess a registrant's exposure to such risks.

Here is a link to the full press release if you are keen to know more detail:

https://www.sec.gov/news/press-release/2022-46

Mind you, this is indirect conflict with a world at war and a US government that proposes to penalise oil miners who sit on unused drilling leases!

ECASH – Two very interesting things happened in the digital payments space last week.

Firstly, a member of the US Federal Reserve Board of Governors, Christopher Waller, announced his view that cryptocurrencies, such as Bitcoin, are not payment instruments and that blockchain is inefficient and totally overrated as a technology.

That's a powerful statement from his position; a message that he likely shared with other members and the Chairman, Jerome Powell.

Remind yourself that the US Federal Reserve is the central bank for the US dollar, the most widely accepted method of payment in the world.

He expanded - My view is these things are just electronic gold. They're forms of storage carrying wealth across time. Look at art, look at baseball cards. Look at all of this stuff that's intrinsically useless that people pay a lot of money and hold on to because they think they can sell it later and get their money back. (bold highlight is mine)

Secondly, US lawmakers (Republicans) have introduced an ECASH Bill to the house in a push to create a digital dollar.

It is too much for me to believe this is a coincidence rather than a fully informed combination of announcements.

The difference with cryptocurrency is that ECASH would be a bearer instrument, like current physical cash, and would not be linked back to any register or bank reporting mechanism (token based, not account based).

There will be no centralised ledger (central bank) or distributed ledger (blockchain technology). ECASH would be held remotely by you, on a device or electronic card.

Initially I thought this was a surprising move away from the benefit of trying to reduce crime and increase tax collection through a reduction of cash in the system followed by increasing regulation of cryptocurrencies settled via blockchain networks (reporting obligations and perhaps tax collection obligations).

Maybe the US government has realised that nothing they do blocks criminal intent.

I happen to like New Zealand's new law for combating criminal use of proceeds – ''prove that the wealth is yours from legal method''. We don't really need to monitor methods of transferring wealth by criminals.

Then it dawned on me that ECASH is the next step from the US for ensuring that the US dollar remains the world's dominant currency.

There's no way the command-and-control economy in China would tolerate such unmonitored financial arrangements, thus making it hard to imagine the Renminbi offering an ECASH option.

Currently US cash, in physical form, is the world's most popular method of payment. All travelers know this, especially when they stray further off the beaten and developed track.

Almost all residents off the beaten track seem to have a fancy cell phone!

So, it is not a stretch to imagine the global population agreeing to make use of ECASH that will be easily stored on a digital device such as a mobile phone.

No, it doesn't disrupt crime and may even facilitate more by removing tonnes of physical cash to carry replaced by microchips. However, the US government is far more interested in the US dollar dominating the globe than being a global police officer for crime.

Ironically the world's anti money laundering legislation has made it difficult for society's disconnected citizens to open or maintain bank accounts, and access financial support, so its paradoxical that this new legislation would help such people but maintain their secrecy.

ECASH might be a partial solution to improving their lot. Imagine if our social welfare providers could credit ECASH to outlets such as shelter, food, health etc and all the beneficiaries had to show was a form of ID. A small balance could be credited to their portable device.

The more things change, the more they stay the same.

Ever The Optimist

We are on the move again. Transmission Gully is open and Air New Zealand is about to 'take off'.

Investment Opportunities

Goodman Property GMT – through their vehicle GMT Bond Issuer Ltd is offering a new 5-year senior bond this week.

The minimum interest rate has been set at 4.50%. The implied interest rate based on current conditions is above 4.50%.

Clients pay brokerage.

Clients wishing to invest should contact us with a firm allocation request by Wednesday at 5pm.

Clients are welcome to join these lists.

Travel

Johnny will be in Christchurch on Wednesday 20 April, seeing clients at the Russley Golf Club Boardroom.

Edward will be in Auckland on Thursday 28 April, seeing clients at the Ellerslie International, and on Friday 29 April seeing clients at Aristotles in Wairau Valley.

Edward will also be in Nelson on Thursday 12 May, seeing clients at Trailways Hotel, and in Blenheim on Friday 13 May, seeing clients at the Chateau Marlborough.

Chris will be in Auckland on 12 and 13 April.

Kevin will be on leave April 4 – April 29. He will visit both Christchurch and Timaru in May and will post dates in due course.

Michael Warrington

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