Chris Lee & Partners Ltd

Market News 28 August 2017

Kevin Writes:

In most developed economies, including New Zealand, the top 20% of earners pay around 80% of total taxes so it wasn’t surprising that a poll last week revealed that 70% of New Zealanders favour increasing the top tax rate, perhaps from 33% to 36%.

The poll’s findings seem to reflect an attitude of ‘if it doesn’t affect me, go for your life.’

Increasing taxes, particularly targeting higher earners (savers and investors), normally has very negative long-term consequences for an economy, starting with less business investment and growth and ending with declining economic growth and rising unemployment.

Diversification in shares - is it over-rated?

The Modern Portfolio Theory preaches diversification, particularly diversifying amongst non-correlated asset classes, in order to reduce overall portfolio volatility and protect investors in times of crisis.

While this all sounds good after so much interference in global financial markets by central banks and artificially low interest rates everywhere you look, finding non-correlated assets classes has become increasingly difficult.

Equity fund managers, both active and passive, also preach diversity (spread your money spread your risk), and extol the benefits of diversification as a key marketing strategy for fund managers when promoting their products and services.

While investing in equity funds and holding a small piece of a big pie (large pool of shares or entire index) is easier and seems safer for some investors, historical data confirms that only a very small number of stocks account for the majority of wealth creation when investing in shares.

A Professor Hendrik Bassembinder has recently released research results which provide monthly returns for every stock ever listed on the New York Stock Exchange going back to 1926. There are 26,000 individual stocks so his study seems quite comprehensive.

What he learned was that the 26,000 stocks created wealth of about US$32 trillion and the median time they were listed on an exchange was just 7 years, so the window of opportunity for most stocks is not big.

However the most interesting discovery in his study was that the top performing 1,000 stocks, less than 4% of the total, accounted for all of the $32 trillion of wealth creation and half of that amount was created by just 86 stocks, less than one third of one per cent of the total.

In Bassembinder’s own words ‘’the other 25,000 stocks did squat, and maybe even lost money’’ and only 35 companies were still listed at the end of the 90-year study period.  Warren Buffet owns a bit of many of those 35 companies.

Despite the huge growth in index tracking funds, which have changed the landscape for value investing and stock picking today, it is still surprising just how few individual stocks actually do the lifting during rising markets.

While diversification, particularly buying a whole index, can still produce good results in a rising market, indiscriminate buying of the good with the bad does reduce overall returns.

Index tracking funds spread investor’s money across the whole index, weighted by market capitalisation (share price multiplied by number of shares), meaning the largest companies get the largest allocations with even the poor performing stocks still getting something.

For example, 40% of the value of NASDAQ Composite index, which is at record highs, is now driven by just five companies - Amazon, Apple, Alphabet, Facebook, and Netflix - meaning that for every $100 invested in NASDAQ index tracking funds $40 lands on these 5 stocks.

Equally as important for index trackers, the other $60 is spread across the other 2,500-odd companies that make up this index.

Needless to say, the individual returns for the five big stocks listed above far exceeds the overall return for the NASDAQ index.

The same applies for the S&P500 index which, although up an impressive 12% this year, half these gains have also come from just five stocks and 25 of the 500 companies in this index are up by more than 30% year to date.

Once again it is a small group of the largest stocks in this cap-weighted index that have produced the majority of the gains, and individual returns three to four times greater than the overall index.

Needless to say the Dow 30 index, which is also up about 12% year to date, tells the same story, with just three of the Dow 30 companies (Boeing up 50%, Apple up 39% and McDonald’s up 27%) accounting for more than 50% of the Dow’s last 2000 point increase.

A few bob placed on either Apple, Boeing or McDonald’s would have easily outperformed the index. In fact share prices for 20% of the Dow companies are negative for the year to date, which immediately weighs on the index’s overall return.

There is no disputing that index tracking funds, with their low fee structures, convenience and easy access, are appealing to a rapidly growing number of investors. The growth figures are undeniable.  The selling of the concept is bread and butter to the US financial advisory salesmen.

Globally there are now around 5000 exchange traded funds, with assets of approximately US$4 trillion, plus there are several trillion dollars more invested in mutual funds and institutions that also simply replicate indexes.

Despite their rapidly growing popularity, the predictable nature of their cap-weighted investment model, in which the large cap stocks get the biggest share of every dollar invested, has flaws in my opinion, with data clearly demonstrating that the returns from holding individual stocks will consistently exceed index returns.

The key to success of course is to be on the right stocks because although the weight of money being spread across the index by the index fund managers is now huge it still won’t be enough to support a stock’s share price if the market decides to punish a poor performer.

In this event the index fund managers won’t initiate the selling; rather they will follow it by reducing the stock’s weighting in the index in accordance with its declining share price.

If it is a major stock with a high index weighting, early selling will drop its share price, which will reduce its market cap and index weighting, which will initiate further selling, which could move into runaway mode if value investors don’t eventually step in and buy the stock and stabilise its price.

One of the biggest flaws in robot type cap weighted index investing is that the model dictates that index managers buy on the way up and sell on the way down.  This may not always be the best strategy.

If nothing else it will be interesting to see how the US markets behave during the next major market correction. There hasn’t been a significant correction since index funds established such a large and influential position in global share markets.

The use of ETFs has also grown in New Zealand but not to the point of dominating market activity like in the US.

Smartshares, a division of NZX Group, offers access to 23 global and domestic ETFs, most of which are designed to track specific indexes.

For example, the NZ Top 10 Fund (TNZ) and NZ Top 50 Fund (FNZ) track returns on the S&P/NZX10 and S&P/NZX50 indexes and are made up of NZ’s 10 and 50 largest companies, respectively.

As we know, share market investing has been very friendly over the past five or six years, so not surprisingly the three and five-year annualised returns for both funds have been very good.

However, had investors held just a small number, maybe 5, 10 or 15 of the individual stocks in these indexes, they could have easily outperformed the index.

Many people did and won’t need to be convinced.  Those who did pick likely winners did not have to rely on rocket science.

Obviously you would have needed to select the right companies but being able to leave out the obvious battlers and non-performers gives you an immediate advantage over the index funds, which have to own the lot. Many of the shoddy ones aren’t that hard to spot.

For many investors, selecting 5 or 10 or perhaps even 15 reliable long term performers would be achievable, but could they extend this number to 20 or 30 or more?  Very unlikely, I would think, and it would be a bridge too far for many so-called experts as well.

I don’t think anyone would want to be overly exposed to any one company but I do believe that diversity in share investing is over-rated, and that the more you look to diversify the more likely you are to find a dud.

Sticking to companies you know, trust and understand has worked very well for investors, even if that number of companies is small. Why try something different now?

Index tracking funds are yet to be tested in a big market selloff, when their predictable indiscriminate buying will become predictable indiscriminate selling.

When it comes, I expect individual stock owners and active fund managers will fare better than investors in index funds.

CBA woes

Commonwealth Bank (CBA) has seen its share price slump by about 8% since revelations emerged that it had breached anti-money laundering and counter terrorism laws.

It stands accused of not reporting more than 53,000 transactions that were above the legal reporting threshold of $10,000 and for allowing tens of millions of dollars in crime proceeds to be deposited with the bank, much of it then transferred overseas.

CBA is also in trouble for the way it sold consumer protection insurance to its customers over a five-year period.

CBA will refund about $10 million to more than 65,000 customers after selling them unsuitable insurance when they applied for credit cards and home loans.

CBA’s recent woes have also been noticeable on the price charts for its NZ subsidiary’s two annual reset subordinated bonds, ASBPA and ASBPB.

With CBA potentially facing fines of several billions dollars from the civil charges being laid against it, some investors, or their advisers, may have believed that the risk profile for these two securities had increased or that perhaps the likelihood of repayment any time soon may have diminished.

You may recall that ‘old-style’ subordinated banks bonds, including both ASB securities, lose all equity recognition from 1 January 2018 and understandably market expectation is for repayment, although current pricing for the ASB securities doesn’t suggest this outcome.

Many of the old style regulatory capital instruments have already been repaid, with BNZ leading the way and soon to be followed by Rabobank (RBOHA) in October, Credit Agricole in December (either repayment or a repurchase offer) and ANZ (ANBHA) in April next year (no announcement yet but repayment near certain).

Although a large fine might impact on CBA’s shareholders, the ASB securities soon offer no equity value in NZ, and only limited and diminishing equity recognition in Australia, so it seems unlikely to me that the pending civil charges will influence CBA’s thinking with regard to repayment of these two securities, if in fact that is their current intention.

Interestingly CBA recently reported a record full year profit of nearly A$10 billion, so you can’t argue with the end result.  As the proverb Latin goes ‘’He steals, but he gets things done’’.

Having previously worked in an organisation, and observed greed and no accountability destroying the company culture, I was pleased to read that CBA’s chief executive Ian Narev had his remuneration for 2017 slashed by over 50% to a meagre $5.5 million, down from $12.3 million the previous year.

At last some accountability.

 

Rising to the top

I wonder whether Fonterra’s CEO, Theo Spiering, ever reflects on his memorable statement that ‘’A2 Milk was just a marketing concept’’.

Fonterra, under his leadership, clearly had the opportunity to be a market leader in the manufacturing and marketing of A2 milk products but chose instead to concentrate on the production of whole milk powders.

A2 milk comes from cows that have only the A2 beta-casein protein, whereas other milk also contains the A1 protein which can supposedly impact the digestive system and has been linked to ailments like irritable bowel syndrome, eczema and diabetes.

A2 Milk’s sales growth has been phenomenal, particularly in its two largest markets, Australia and China, and this has seen its share price more than double over the past 12 months.

In Australia A2 is now the biggest selling fresh milk brand by value, with a retail market share of nearly 10% and its A2 Platinum infant formula commands a 30% market share.

Infant formula now accounts for 72% of A2’s gross revenue which has unsurprisingly seen it form a very close relationship with its manufacturer Synlait Milk, in which it has recently taken an 8.2% stake.

Synlait has transformed its business from a producer of bulk powders to a producer of packaged infant formula, largely for A2, and has recently purchased a new standalone blending and packaging plant in Mangere to increase its capacity and provide the milk processor with flexibility to supply more than three brands into China.

Synlait has also recently signed an agreement with New Hope Nutritional, in which it has a 25% shareholding, for production of their infant formula brands and this will see a threefold increase from current volumes over the next five years.

So the current partnership between A2, the milk marketer, and Synlait, the milk processor, is proving to be a very successful arrangement and growth forecasts for both businesses look very encouraging.

With the landed value for A2’s Platinum infant formula four times that of whole milk powder and Chinese demand for whole milk powder no greater than it was five years ago I think even Theo would have to admit that the marketing concept is working out quite well at this stage.

It was reported recently that up to 10%, or 72 million, of A2 Milk’s shares had been short sold on the Australian Stock Exchange, where A2 is also listed.

Short selling is a speculative investment strategy where shares are borrowed or rented for a fee, then sold with the hope of buying them back at a lower price within a defined period in order to return them to their owner.  Virtually all companies endure some short selling by people seeking trading gains should markets fall.

A2’s share price hasn’t looked back since passing through the $4.00 mark a month ago so I don’t expect that being short A2 Milk is a great place to be, at the moment anyway.

Disclosure: I own a few shares in both A2 Milk and Synlait Milk.

INVESTMENT OPPORTUNITIES

Heartland Bank – HBL has announced an offer of a 5-year senior bond to the market.

Heartland has announced a minimum interest rate of 4.50% p.a.

All investors are welcome to join our mail list for this offer by contacting us.

Precinct Properties - Precinct has announced an offer of up to $150 million of four year, fixed rate, subordinated convertible notes.

A minimum interest rate of 4.80% p.a. has been announced with the offer opening on 5 September 2017.

 

All investors are welcome to join our mail list for this offer by contacting us.

David Colman has published some detailed comments and financial advice on the Private Client page of our website for those who seek financial advices services from us.

 

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

Travel

Kevin will be in Invercargill on 19 October.

Chris will be in Auckland on 4 September, in Tauranga on 5 September and in Christchurch on September 26 and 27.

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

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Kevin Gloag

Chris Lee & Partners Ltd

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Market News 21 August 2017

This isn’t a headline that I would have been happy with, if I ran Uber:

‘The ride-hailing company’s board determined Xchange Leasing, a wholly owned subsidiary, is unsustainable and should be sold’

Would you like to buy an unsustainable company?

This opinion won’t stop an investment banker seeking a fee to try and sell it.

Investment Opinion

Rates Up? – I see Alan Greenspan must have been missing out on highly paid engagements on the speaking circuit lately so he recently reached out for some more media attention and offered his view on interest rates; he stands with the team forecasting higher interest rates for both short and long terms.

Not only does he predict that interest rates will rise but he declares that once they do move (a key point of uncertainty even for him) they will move fast and then he goes on to extrapolate the breadth of the impact on the values of most assets.

Greenspan stated that in his view shares are not experiencing a bubble in pricing but bonds are (is that reconcilable?) and once the bond bubble bursts share prices will feel the splatter.

Alan Greenspan was one of the longest serving governors of the US Federal Reserve, surely he knows what happens next, right?

Well, if he was that good at managing money he wouldn’t need to seek out the attention of the media and paying roles on the speaking circuit. It may be all about ego, but I’ve never thought of Greenspan as egotistical and at 91 years of age I doubt he cares what others think of him.

One problem with Greenspan’s dire warnings is that he made the same warnings last year. I don’t recall if they had reached ‘dire’ on the emotional scale at that point or not but his warning was clear; interest rates are going up.

Half of the readers will agree with him.

He might claim a slow drifting victory because the US Fed Funds rate has indeed gone up, and then with a little help from the newly elected President long term rates increased also, only to decline again ever since the Christmas peak.

In the middle of the news item there was a brief rebuttal from an investment bank economist who reminded Greenspan that he was quoted as saying he was ‘puzzled by the low rates and low inflation for decades’.

Being ‘puzzled’ doesn’t make for good press so Greenspan has decided to re-assert his position by making a decision.

Just as I did a few weeks ago, when I compared bullish and bearish comments from respected investors (Baron and Gross) there is a contemporary foil for Greenspan’s latest predictions and they come from no less eminent a person than the US Federal Reserve stable also, the current vice Chairman Stanley Fischer.

Fischer’s current view on interest rates disclosed an angst that interest rates appear stuck at historically low levels even though the Fed has been tightening monetary policy and this may well in turn signal that the growth potential of the US economy is limited.

This concern would be consistent with the various analysts who conclude that excessive debt levels suppress economic growth. Weak economic growth does not bring with it confidence about employment and incomes needed to fuel more inflation.

Again, one respected voice serves, but an equally well-respected voice responds with equal and opposite force (should we be consulting with physics professors? – Ed).

For just another moment I’ll dwell on the negative risk, being the potential for rising interest rates.

Long-time readers may recall me talking about why I don’t think NZ fixed interest investors have much to worry about from the ‘bubble pricing for bonds’ for two reasons, one of which doesn’t require my opinion on interest rate direction.

The average duration (average term) of fixed interest investment by New Zealanders, and I mean those who are getting financial advice, is very short (probably 2.5 years, or less) and thus will only incur a modest change in value during periods of rising interest rates.

The situation is even less volatile for unadvised investors for these folk hold 90% of the country’s cash in bank deposits of 12 month terms or less! Alan Greenspan’s opinion about damage to investment values from rising interest rates is irrelevant to these people, and hence the majority of our economy.

If I am correct about advised investors having a 2.5-year average life for their fixed interest portfolios then Greenspan’s prophecy will also have very little impact on these investors either (maybe a temporary 5 cents in the dollar value loss from a short sharp 1% lift in interest rates).

Visibility over thousands of investors and market experience gives me plenty of confidence with this impact statement. In fact, I think my estimated 2.5-year average life is too long.

Witness the impact of recent bond offers; Wellington Airport had little trouble filling its shorter-term bond offerings between 4.00% - 4.25% yet when they offered a longer-term bond at 5.00% it attracted only $25 million demand from the public (by contrast a professional investor bought $50 million).

Witness again the recent bond offer from Infratil with dual (and duelling – Ed) terms on offer. The 5-year term raised $100 million at 5.65%, alongside the 8 year term at 6.15%, which raised only $43 million.

Investors who chose the 5-year Infratil bond based on concerns about rising interest rates must hold the view that returns on future Infratil bonds between the years 2022 – 2025 will yield a little above 7.00%. I think that’s a bridge too far, as does the market now given that they will buy the IFT250 8-year bond at a yield of 5.50%.

NZ’s retail investors, and apparently their financial advisers, have an aversion to longer term fixed interest investing and therefore have only a modest exposure to loss of value if interest rates do rise quickly. These people will feature within the group of 50% who agree with Alan Greenspan’s warnings.

Factoring in my personal opinion (low interest rates for longer yet, being years not months) I think a focus on short term investing is delivering lower overall returns to investors.

Note to self, which I hope Google will remind me of when they introduce an automatic bring-up facility based on reading my emails; remember to re-visit the ‘Tortoise and the Hare’ calculation of short term fixed interest investment versus long term fixed interest investment next year, and the year after.

I am backing the tortoise.

Post Script (with relevance): The Reserve Bank's survey of expectations showed respondents see annual inflation at 1.77 percent in one year, down from 1.92 percent rate in the prior survey three months ago. In two years, it is seen at 2.09 percent, down from 2.17 percent. (emphasis mine)

Volatility – From time to time we have commented about the behaviour of the ‘VIX’ being the Volatility Index for trading on the S&P500 shares index in the US.

Today I am drawing to your attention to another measure of volatility, this time in US Treasuries (bonds), named ‘MOVE’ after the firm that established the measure; Merrill Lynch Option Volatility Estimate.

To be sure, we can witness volatility everywhere, across almost all data gathered and thus across all tradeable assets in financial markets. We can even measure volatility in the speed of snails across Agapanthus if we are patient enough.

The point of highlighting the ‘VIX’ and now the ‘MOVE’ indices to you is because they measure activity in the world’s largest share market and bond market and this, you’ll recall, is influential to all other financial markets around the world.

Our most recent comments drew your attention to the surprisingly constant decline in the volatility of the US share market (measured by VIX). I speculated that the rise of investment allocation to Exchange Traded Funds (ETF) may be contributing to a decline in the volatility of markets.

At the time, I also noted that the respect for Warren Buffet’s successful bet against active fund managers may have provided some influence for the trend of investors toward those ETF investments.

The MOVE volatility index displays about 30 years data. It has centred around the 100 value, which may have been the index start point, and the range is 46 to 200. I expect that by this point you have guessed that the index is at the 46 level as I write.

Just like the VIX index, MOVE has been declining in volatility since 2008 (crisis times).

Initially even the North Korean nonsense was barely visible on these volatility indices but this has finally changed and lifted following Donald Trump’s colourful responses to the North Korean behaviour.

It remains hard for me to reconcile such low market volatility but I shan’t complain because stability is better for investors, whereas volatility is better for traders who extract value from natural holders of investments.

Maybe the low cost of money (interest rates), the pursuit of low fee investment options and the ongoing good financial performance of companies is resulting in less volatility?

Regarding company performance I read this useful quote last week:

‘With 87 per cent of the companies in the S&P 500 having reported their earnings for the past quarter, a blended rate of the actual results and analysts’ forecasts indicate that earnings rose 10.1 per cent per share year-on-year, according to FactSet’.

A 10.1% year on year improvement in performance is very impressive, especially after such a long run of positive performance.

Investment News

Vital Healthcare (VHP) – within the latest update from VHP about its admirable properties and tenants there was a quote that said it all for me:

‘Vital lifted net rental income 31 percent to $89.7 million in the year, which included $13.8 million for a lease termination receipt. Expenses rose 52 percent to $22.1 million, driven primarily by management and incentive fees on the back of strong revaluations. Incentive fees totalled $12.3 million in the year.’ (my emphasis)

The sharp increase in the size of the portfolio has delivered well, for the external manager, whose incentive fees alone were one seventh of the net income of the investors’ portfolio (ie where the real risk lies).

Then, probably with a celebratory tone, the manager declared that they will maintain the VHP dividend at 8.5 cents per unit in 2018.

That is a disappointment, not something to celebrate and indicative of the impact of third party management incentives.

It also supports the advice and recommended action outlined in our recent VHP article.

Heartland Bank – HBL continues to deliver upon its growth ambitions, reporting its $60.8 million annual profit and half cent increase to its dividend for the past year.

HBL enjoyed growth in all areas of the business and now forecast a 2018 profit of $65m - $68m.

HBL’s share price has continued to lift in recognition of the ongoing performance by the bank.

Kevin Gloag has published some detailed comments and financial advice on the Private Client page of our website for those who seek financial advices services from us.

China – State entities with excessive debt have again been causing concern for local and global capital markets but unlike most markets the government has again stepped in to ‘encourage’ banks to convert bad loans to stock.

Apparently, the banks are allowed to exercise some discretion, so businesses that really should fail will be allowed to but clearly the intention is to avoid widespread failure.

Failure or converting debt to equity is a refreshing return to normality after watching decades of not allowing failure across many Western nations.

Remember how quickly Iceland recovered after acknowledging failures and writing off debts?

Index Rules – Those who define the rules for acceptance of shares into an index, such as the US S&P500 are beginning to tighten what is acceptable governance behaviour and what isn’t.

The S&P500 for example will no longer include any business that does not offer voting rights on securities.

Other indices are placing restrictions relating to responsible investment.

These are good developments with respect to improving governance standards and investors’ rights.

Credit Problem – US credit card debt has just passed it previous record high, set just before the Global Financial Crisis in 2008.

The increased use of personal debt may reflect increasing employment confidence but it also discloses the same dangerous behaviours of the past where ‘we’ are willing to bring forward spending as opposed to increasing savings for a rainy day.

Anecdotes like this contribute to my view that it is hard to see interest rates increasing because neither increased employment nor spending to excess have driven higher inflation in the US.

 

ECB – Even though many are calling on the European Central Bank (ECB) to progressively withdraw from buying bonds and injecting liquidity into EU markets they continue to do so.

Last week they purchased significant volumes of Italian bonds.

This got me thinking of an advantage that Europe has over the US in that the ECB could conceivably trend away from buying bonds in countries that are in good financial shape but continue to provide support for those who are not (Italy, Greece, Portugal).

The EU and the ECB can think about strategies for achieving desirable outcomes but the uneven nature of economic performance across Europe implies that in many cases support is not required and thus if provided it just delivers unnecessary subsidies to some.

These acorns should be retained for use elsewhere when required.

Maybe this selective approach from the ECB could be their pathway to a gradual tightening of monetary policy in Europe.

European financial markets are already tuned into this possible development witnessed by a decline in yields for Italian bonds closing in on the lower yields of German bonds (0.25% closer over the past month).

Property Rights – He who holds the property rights shall be King (or she, the Queen).

There is no doubting that the internet is helping to broaden the number of people who will deliver video content to consumers, but the only way to be on safe ground commercially is to control the content (property rights).

There is plenty of rubbish content but consumers will not pay for this.

The following is a statement from Disney:

Walt Disney Co. said it would stop selling movies to Netflix Inc. and begin offering movies and ESPN sports programming directly to consumers via two new streaming services. Shares in both companies fell more than three percent in extended trading. Disney’s chief executive officer Bob Iger said that cutting out third parties was an “opportunity to reach the consumer directly.

This is why Amazon Prime began its own production (e.g. The Grand Tour) and why Netflix must pay for its own high-quality production too, or pay even more to other producers.

Having many customers is one thing, but if those customers don’t wish to pay for content (like my kids) then it is hard to pay for third-party content or production of one’s own content.

In NZ, Sky TV has content and it has customers and is logically spending some time and money on fighting against those who would steal that content. Disney will probably have the same fight on its hands.

Mail – NZ Post is killing off FAST POST as a service. This will impact those who prefer to mail investment activity to us, such as application forms.

We have commented previously about the unreliability of mail when a delivery is urgent and this compounds that risk.

We will comment again in future weeks about how we think investors should respond to this new situation, so as to avoid missing out on investment opportunities.

Ever The Optimist – Trans-Tasman Resources received a green light from the Environmental Protection Authority to mine iron sands off the South Taranaki coast.

TTR says it will now invest at least $600 million into the commissioning of this business which is very good economic news for the Taranaki region.

TTR says it will generate 300 jobs in the immediate area and 1,600 nationwide as well as generating $400 million in annual export revenue.

Congratulations to them on the success after persistence.

Investment Opportunities

Heartland Bank – HBL has announced an offer of a 5-year senior bond to the market.

Heartland have announced the minimum interest rate is 4.50%

All investors are welcome to join our mail list for this offer by contacting us.

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

Travel

Kevin will be in Christchurch on 31 August.

Chris will be in Auckland on 4 September and in Tauranga on 5 September.

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

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Michael Warrington

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Market News 14 August 2017

Anecdote 1:

The staff at the Bank of England have gone on strike.

Surely that breaches policy as it will disrupt financial stability (offset by disinflation from no pay – Ed).

Anecdote 2:

My research trip to Central Otago was very successful.

I verified that tourist numbers are indeed higher.

The queues on the mountain were twice the length of 2016;

Restaurants must be booked if you wish to eat out; and

The local rag reports that Wanaka has enjoyed a 17% increase in economic activity, now at $500 million.

I also discovered that it is true, people can make good decisions without the need for additional government regulation; helmets now adorn 80-90% of those skiing and snowboarding.

Investment Opinion

Kiwibank – This news item is directly relevant to holders of subordinated bonds issued by Kiwibank (KCFHA, KCF010).

These subordinated bonds have been returned to the status of being recognised as regulatory capital for Kiwibank. Accordingly, they will not be repaid early, at par, as many investors and advisers feared may happen. Well, ‘not’ repaid early based on current information.

Regular readers will recall a kerfuffle in March this year started by the Reserve Bank of NZ (RBNZ) when they decided to withdraw their ‘Non-Objection’ notice relating to the equity effectiveness of Kiwibank’s subordinated securities (bonds).

After being told by the RBNZ, at the date of issuance that its subordinated bonds did qualify as regulatory capital, Kiwibank was then told mid-cycle that the central bank had changed its mind, these bonds would no longer qualify, and the bank must urgently raise new equity from its shareholders (which it did).

You don’t need to be a retired director with board experience to know some colourful language would have been used upon learning of the RBNZ’s updated view.

Recall that the respected Chair, Rob Morrison and his deputy Chair Rhoda Phillippo resigned immediately after the RBNZ interaction. This was such a wasteful and unnecessary loss for Kiwibank and leadership within the NZ banking sector.

Kiwibank responded to the RBNZ concerns about the structure of the subordinated bonds by installing independent directors to the companies that had issued them and asked the central bank to reconsider its stance.

After allowing regulatory ego to get in the way, resulting in a multi-month delay in their response, the RBNZ has agreed with the new situation and re-issued a ‘Non-Objection’ notice so the subordinated bonds are again recognised as equity on Kiwibank’s balance sheet.

Wouldn’t it be nice if that was all you (Kiwibank bond holders) needed to worry about, but wait, there’s more.

‘You’ own Kiwibank (as do RBNZ staff – Ed). The RBNZ actions have forced up the cost of capital for Kiwibank and thus the cost of doing business, pulling down relative competitiveness and profits in the process.

So, while the State of Queensland is trying to tilt economics against NZ our own central bank is also trying to tilt the playing field in favour of Australian banks.

Kiwibank now needs some rapid growth to increase returns and justify the high proportion of equity on its balance sheet. I guess they could increase their dividend pay-out for a while too.

‘Your’ second problem is that the central bank has disrupted the banking and investment environment upon which you, and we financial advisers, rely. We prefer stability in order to make more reliable investment decisions, and to avoid unexpected disturbances that turn out to be unnecessary.

Last week we complimented Rabobank on its absolute consistency of message and reliability in capital markets (now confirmed by the predictable repayment of RBOHA securities). The RBNZ has delivered the direct opposite with its own behaviour, which as I noted earlier in the year is in breach of the central bank’s own Financial Stability obligations.

I looked at NZX trading of the Kiwibank KCFHA subordinated bonds and in my opinion investors who sold their securities between March and August lost a collective, and unnecessary, $100,000 during this period. Through a different lens one might be asking if these investors had a claim against the instigators of the problem.

I’ll guess that Kiwibank and various other organisations have spent many times this amount of money to argue out the situation and then return full circle to where they started.

Such a waste of mental energy, time and money.

Coincidentally I am in the midst of reading the RBNZ proposed review of what constitutes as bank equity capital - Capital Review Paper 2: What should qualify as bank capital?

I am part way through this sleep inducing paper but promise to finish it and will offer comments one day. I’d like to find time to make a submission too.

Within this discussion paper the RBNZ proposes to simplify the type of securities that will be acceptable as equity on a bank balance sheet but it also effectively describes financial advisers as having mis-sold bank subordinated securities to the public and the credit margin (thus interest rate offered) was inappropriately low.

They don’t say how we mislead the public but my response is that I know how Rob Morrison felt in March 2017.

The RBNZ folk who drafted such mis-selling accusations are misinformed in the extreme and have made such assertions not with blinkers on but with paper bags on their heads.

They ignore the effort that the majority of financial advisers make for their clients, they ignore the regulatory obligations that financial advisers operate under and perhaps they forget that many of our clients are demonstrably more capable thinkers than the RBNZ people drafting such criticisms.

The RBNZ critics presumably are due a ‘slap’ from Rob Everett (CEO of the FMA) too because their conclusions are that the FMA and the Financial Advisers’ Code of Professional Conduct are ineffectual.

Frankly, the RBNZ’s handling of Kiwibank’s capital and its criticisms of the financial advice community has almost certainly increased the cost of bank capital in NZ but I doubt they recognise that they have become the additional risk in that equation.

(Time to get off your rocking horse – Ed).

OK.

To investors, Kiwibank is as good as it ever was. Better in fact given that their equity levels are up and you can keep your bonds.

Investment News

Repayment – Rabobank has announced the repayment of its perpetual capital securities (RBOHA) on Monday 9 October 2017.

There is no surprise for us with the content of this announcement.

It does however, validate the value of good financial advice given to those who retained, or bought more, of these securities when they were discounted to irrational pricing levels over recent years.

There is no doubt that the annual interest rate returns on RBOHA investments declined fast as the world’s short-term interest rates collapsed, but this was not Rabobank’s fault. This investment has done exactly what it defined it would do in the prospectus on day one (annual rate resets, consider repayment in 2017).

Sadly, far too many investors gave up far greater value when they were advised to exit the securities at large price discounts.

It was not just retail investors and financial advisers who made this early exit error, as recently as 2016 a professional fund manager was recommending that the public sell their RBOHA securities between 90-93 cents in the dollar. Those who accepted this advice gave up a 10-12% return over the past 12 months, in a world where it is hard to earn 5%.

This gross waste of value energised me enough to look at NZX trading statistics.

During the past three calendar years alone turnover in the RBOHA securities totals $300 million, being 33% of the securities on issue.

I know that not all sales were as a result of financial advice to exit the investment, but a lot were and the others may have been people who should have been seeking financial advice about the best way to raise cash; advice from better sources. I also know that some of the trading volume is from traders, entering and exiting the securities, but you get my point that a lot of value changed hands unnecessarily on the basis of poor advice.

If I combine unnecessary brokerage costs to this price discounting a lot of value has been wasted, in my humble opinion (not sounding humble – Ed).

I extend our compliments to Rabobank for their exemplary behaviour during the 10 years that these securities were on issue. I expect that Rabobank’s directors and senior staff will be surprised by my compliments because their response, with a pleasant Dutch accent, would surely be ‘but our behaviour has been exactly as intended from day one, why the relief?’

Fair point.

We should reserve our exceptional assessments for those organisations and people who do not behave as they would like us to believe (hence my preference for ‘show me, don’t tell me’).

Now we need $900 million of new investment opportunities to consider in October.

Monetary Policy Statement– Graeme Wheeler may have wanted for a more dynamic set of circumstances to address in his last Monetary Policy Statement today (found on www.rbnz.govt.nz) but given that Donald Trump doesn’t fall within his brief the MPS was as tame as ever.

Here are the key quotes from the summary relating to the review of the Official Cash Rate:

Annual CPI inflation eased in the June quarter, but remains within the target range.  Headline inflation is likely to decline in coming quarters as the effects of higher fuel and food prices dissipate.

Longer-term inflation expectations remain well anchored at around 2 percent.

Monetary policy will remain accommodative for a considerable period.

For fixed interest investors, this means that interest rates will hold onto the ‘lower for longer’ theme and our best hope is for a steeper yield curve and greater returns from longer term investment.

Good for Aussie – The increased elevation of the rising commitment to electric energy for vehicles will be good for our neighbour and often largest trading partner, Australia.

Western Australia, after a period in the cold for mining, must be very pleased to see the mines with access to Lithium increasing investment again in response to global moves in battery production and use.

Energy is such a critical chess piece in the political landscape that moves toward energy self-sufficiency are highly likely to be pursued, if affordable. The increased commitment to solar as a source for electrical energy is happily bringing the price down, which should accelerate uptake and continue a virtuous cycle.

The US’s success with oil extraction, to the point of being self-sufficient, may satisfy oil traders and consumers of oil seeking lower pricing but it will have undoubtedly caused political concern given the strength it adds to the US political position on the planet (even though Trump doesn’t know how to use it – Ed).

Much of Europe is a net importer of energy with Russia being a vital contributor to the oil and gas mix. The US could easily regain friendship with Europe and undermine Russia if they agreed to export some of their oil surplus to Europe.

China may well play everyone off against each other for oil supply, but they would enhance their negotiating power if they push along the scale of their solar energy generation.

It’s hard to see Europe fighting the evolution from fossil fuels to electric cars in light of their net negative energy position (oil and gas especially).

It’s awfully simplistic of me to say, but in this light, it should be unsurprising to see a European car manufacturer (Volvo) owned by the Chinese being an early and aggressive adopter of the switch away from fossil fuel cars.

Other countries are beginning to nominate target dates when it will be illegal to sell new fossil fuel vehicles.

Throw in the threat from Elon Musk’s personal ‘energy’, and that of New Zealand’s own Ian Wright of Wrightspeed, and the impetus for faster change toward electrical energy use, especially solar generated and battery stored, and it makes sense that car manufacturers are likely to accelerate the change.

Circling back, it looks likely that Australia, especially Western Australia, should again become the friend of many nations with its enormous access to earth bound resources.

It’ll be good to see them getting their economic mojo back.

Harmoney – has confirmed that borrowers are its main customers with the latest deep cuts to the interest rates being charged.

Previously the lowest rate was 9.99% and the highest 39.99%. Now the range is 6.99% to 29.99%.

The risk profiles of the borrowing public have not changed but the rewards presented to investors have.

Harmoney states that they have become much smarter about their credit measuring. I don’t doubt that they will, and should, become better at analysing data given the capacity of computers now to measure performance and behaviour but it doesn’t reduce the real risk of the pool.

In theory Harmoney’s better risk assessments should result in less ‘A’ (strong) category borrowers (such as the turkeys that defaulted on my loans!) as they learn that many A’s and B’s really aren’t that good at all.

I had to laugh at a recent ‘A’ who for ‘Reason for Loan’ provided the following ‘to enable more hunting, fishing and camping’. I hope the artificial intelligence risk monitor picks up on this sort of nonsense.

I also hope the artificial intelligence used for credit analysis also deducts respect (increases risk) for the many people who repay loans early to re-borrow up to the new higher loan ceiling offered by Harmoney (they have increased the sums they will lend to each risk category).

That’s correct, before you ask the question, to increase borrowing volumes (and thus fees to Harmoney) they have increased the risk profile by allowing larger loans to the same people and they are now reducing the rewards for risk.

The Harmoney model remains efficient to use, a feature which attracted Heartland Bank’s attention, but my participation is declining and lower returns even for the same risk imply that I will retreat further.

I wish them all the best as they move toward breakeven and hopefully profits, disclosing that my Heartland Bank shareholding makes me biased, but Harmoney will need to find a different type of lender than me to support the surge in borrowers that they seek.

Bitcoin – Supporters of Bitcoin may complain about the manipulative behaviour of central banks (regulators) but they fail to acknowledge that without regulation Bitcoin is affected by enormous manipulative forces, which have resulted in the price surging from US$835 to US$3,500 in 2017.

People who own some Bitcoin will undoubtedly be very excited about their new wealth, but this market pricing behaviour is a dagger to its own heart in terms of gaining any respect as a widely used currency.

The greatest success from Bitcoin, for the world, will be the widespread use of BlockChain technology (software) in future across many applications.

Ever The Optimist – Credit rating agency Moody’s Investor Service concludes that NZ will be one of the fastest growing ‘AAA’ rated economies in the world over the next two years.

The NZ government’s pledge to reduce debt further is a key part of achieving the ‘AAA’ rating.

High household debt levels are they only broadcast concern. Imagine our future if the public also adopted a greater focus on debt repayment.

Investment Opportunities

New Bonds – the signals are being heard again for the next bond offer.

We must leave details to be confirmed by the issuing company, once confirmed, but if it happens it will be a new name to bond investors.

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

Travel

Kevin will be in Christchurch on 31 August.

Chris will be in Auckland on 4 September and in Tauranga on 5 September.

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

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Michael Warrington

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Market News 7 August 2017

If this Market News seems a little out of date, or timeless, I apologise.

It was written early so I could take a closer look (detailed research) at the ‘very cold’ weather conditions in Central Otago.

Investment Opinion

UDC HNA– Many NZ Investors were introduced to HNA (Hainan Airlines Group of companies) as a result of having deposits in UDC, the finance business that has been conditionally sold to HNA by ANZ Bank.

At the time, I was surprised by the aggressive expansion by an airline into the finance sector globally. I remain a little surprised.

Today I read that I am not alone with the question mark that I carry; several large US banks are reported as scaling back the amount of money they are willing to lend to HNA Group.

Bank of America (the only bank who spoke to the media) confirmed they are not lending to HNA but had not dealt closely with them in the past. This BoA stance doesn’t mean they were not approached by HNA for finance, you can be sure they have been approached in the past and elected to stay at arm’s length.

The driving concern seems to be an ‘opaque ownership structure’.

HNA’s modus operandi seems to fall directly into the spotlight of concerns from Beijing (read President Xi) about ‘opaque corporate structures, excess debt and deals it sees as overly aggressive as it tries to control capital outflows and keep its economy on an even keel.’

Reported ownership has been evolving from private names (which a Chinese exile describes as being part of the Communist Party officials and families) across to 52% control by two ‘charitable foundations’.

Charitable to whom?

The CEO of HNA responded to the enquiry by saying ‘I think we are operating our company legally, we have nothing to hide, and we are fine’.

I’ll give him the benefit of the doubt as English is likely to be a second language but the response isn’t very robust in my view. The language is almost Trump-like in style.

That thought introduces another interesting twist in the HNA buy-up; one of the firms they are trying to purchase, called SkyBridge, is a hedge fund platform founded by….

Anthony Scaramucci, the new but now ex-White House communications director!

I am not trying to stir up dust here, and call me a sceptic if you wish, but HNA group remains a strategic oddity for me and I think they will feature in media headlines more often than their controllers would like in the years ahead of us.

Payments – The Bank of England has widened the access to its Real Time Gross Settlement (RTGS) payments framework and it will soon (by 2018) include non-bank entities.

This is big news, no matter how small the font of the news article was.

The examples of Non-Bank Payment Service Providers (PSP) given included VISA, which some of you will know provides a method of finance sitting behind payments that can be made using your smart phone plus many online payment options.

This introduction of competition to the banks long-term dominance is welcome.

Maybe the new RTGS invitation will enable more of the non-bank foreign exchange businesses to compete more widely with the large profit margins that banks charge on foreign exchange.

Here’s a bigger ‘maybe’ to consider; will the Bank of England next allow a digital currency product to connect with the RTGS system?

I doubt they’ll start with Bitcoin given the nefarious uses of this payment product but given the rapid uptake of BlockChain technology that supports Bitcoin there is a real chance that central banks’ themselves introduce digital currencies in the future and then link it to the RTGS payments systems.

On that point, I see that the state of Delaware (home to the majority of US incorporated businesses, including VISA) has passed legislation to recognise BlockChain in law as an acceptable process for stock trading and record-keeping.

If you focus on VISA when you consider the importance of the decisions by the State of Delaware and the Bank of England you’ll begin to understand why I think this is very big news and will undoubtedly reach all of us.

From memory, the Reserve Bank of NZ is considering updating its payments system (currently labelled ESAS). I hope the BoE and Delaware decisions hurry the change along.

Regular readers may recall me discussing RTGS and the risk reducing nature of immediate payments rather than waiting for cleared funds over many days across the banking system.

A widely used, efficient RTGS system would also remove the unacceptable excuses provided by the likes of Fletcher Building and Fonterra for delayed payment of financial obligations.

If you are short of funding to pay an obligation get an overdraft facility and pay the interest!

The US Federal Reserve has not yet made a commitment to developing its real-time payments system but I do hope the moves by Delaware and the BoE will pressure them to do so.

Wider access to RTGS and use of BlockChain technology for payment systems may well be the next ‘big thing’ (another technology driver) to boost flagging economic growth around the globe via helpful efficiency to the use of capital.

One thing you can be sure of, wide use of real time payments will arrive faster than the large-scale change to cars without fossil fuels, another process that is also finally underway with broadening international involvement.

Investment News

Neutral Rate – The Reserve Bank of Australia recently disclosed their view that a future ‘neutral’ interest rate setting might be 3.50%, although they quickly back-pedalled when defending such clarity in response to questioning.

The RBA should not have been so defensive about their new stance.

Shortly thereafter the Reserve Bank of NZ also disclosed a ‘midpoint’ conclusion that our neutral Official Cash Rate (OCR) might also be 3.50%.

In the present climate both central banks, Australian and New Zealand, may actually find that 3.50% is still too high as a neutral point and will likely find themselves lowering these targets again.

Several years after the Global Financial Crisis (GFC) the RBNZ acknowledged that estimated neutral interest rates (measured by the OCR in this case) would not be as high as we had been accustomed to and perhaps 4.50% would be the contemporary target. This was before we started cutting the OCR again.

The next marker that I recall for the RBNZ neutral interest rate was 4.00%. Now the centre-point of a widening ‘could be’ range is 3.50%.

What would an appropriate real interest rate (nominal rate minus inflation) be for an overnight deposit?

A real return of 1.50% seems attractive to me and sits alongside the real yield being offered on longer term (8 year) inflation adjusted government bonds (now at 1.75%).

Even the 18-year inflation adjusted bonds accept a real interest rate return of 2.15%, So I’ll conclude that a 1.00% real return is plenty for very short-term investing given the flexibility of access to your cash and the low volatility (chances of capital loss) from short term deposits.

If I am correct about a real return of 1.00% being acceptable and if we are struggling to reach and sustain +2.00% annual inflation then it isn’t hard for me to conclude that the accepted ‘neutral rate’ from the Reserve Bank’s in NZ and Australia is likely to slip further from the current 3.50% nominal reference.

Might ‘we’ all be wrong about the continuation of suppressed inflation?

Anything is possible, especially in financial markets, but low inflation is more likely than not at this point.

NZ inflation had been working its way back up toward the central target of +2.00%, albeit that the particular measure preferred by the central bank sits at +1.40%, but the macro-prudential tools are beginning to work, the property market is cooling, the energy markets seem stable and NZ’s most recent quarterly inflation data was +0.00%.

NZ seems to be in really good spirits economically with high employment as a proportion of the population, low unemployment and growth at nearly +3.00% p.a. but this is occurring at a time when the OCR is 1.75% (stimulatory) and none of this economic tension seems to be delivering much inflation pressure.

Maybe Kiwis have finally figured out how to save this ‘good times’ money rather than boosting their discretionary spending behaviours?

Australian professional analysts (all but one) had forecast their recent inflation to be between +0.30% to +0.80% for their most recent quarter. It came in at +0.20% surprising them all (all except St George Bank, owned by Westpac who presumably disagreed with its subsidiary).

Just like NZ, Australia’s reported inflation is weaker than expected.

I wonder if the analysts at St George Bank were young and less influenced by several decades of financial market involvement? It has taken me a while to get my view in line with today’s ultra-stable reality (and age is not on your side – Ed). 

If I normally think of inflation from a North – South perspective, an interesting perspective from the East might ponder the trade war influences of Australia trying to hold its OCR down at +1.50% and NZ roughly trying to match it. Then both countries quote the same view of a future neutral rate.

Interesting, but unconvincing at this stage.

The US Federal Reserve is slowing with its thrust to move the overnight Fed Funds rate higher and to reduce its balance sheet size (sell bonds, tighten monetary policy) but there is still a good chance that the US overnight rate will be the same as Australia and NZ by late 2017.

The US financial market does not expect the US Fed Funds rate to reach 2.00% but then again, the Australian and NZ markets do not expect us to move either until at least late 2018 and maybe 2019.

At present, what I see is struggling economies (Europe, Japan) working toward a near zero overnight interest rate and more prosperous nations (US, NZ, Australia) comfortable with 1.25% - 1.75% for overnight cash rates.

I hope that is not as good as it gets, but today’s signals are not for much improvement.

Investors, you know that we want higher returns for you and there have been a few false starts on moving longer term interest rates higher, but even with this preference, very little that I read, and distil for myself, concludes with me expecting higher interest rates for us as investors.

If we do not encounter recessions then we should enjoy a positively sloped yield curve, which delivers higher returns on longer term fixed interest investing encouraging a focus on longer term investing.

Those who read my comments last week about avoiding an excess of short term fixed interest investing, due to the low interest rates on such terms, will understand my preference for retaining a market with higher interest rates on longer terms.

The alternative doesn’t bear thinking about because a recession would bring with it lower interest rates for short, medium and long terms!

RBNZ OCR – The next OCR review occurs this week (Thursday) and there will be no change (hold at 1.75%).

The data released since the most recent OCR review doesn’t warrant a change to the rate and you’ll recall the central bank is in the middle of seeking a replacement governor, post the departure of Graeme Wheeler and Grant Spencer shortly thereafter.

Between the governor and the acting governor there is a general election.

You can rest easy on this one.

Again, I refer investors back to my comments in late July about the need to minimise cash held in call accounts to the emergency fund plus planned spending to try and increase the average returns across your portfolio.

Green Bonds – Green bonds are beginning to show up on capital markets.

They are not yet available to retail investors but it should happen if demand builds and can be proven to exist for green borrowers.

Last week a division of the World Bank (International Finance Corp) with its ‘AAA’ credit rating, issued a ‘Green Kauri’ bond to borrow $100 million for 10 years at a yield of about 3.88% p.a.

I recall listening to a World Bank spokesperson last year explaining that they will help the market by establishing tests for what projects qualify as ‘Green’ and then begin a lending programme. The World Bank’s rules are likely to be robust and without bias so hopefully they will help establish globally acceptable tests for when an entity can credibly be described as ‘green’.

Simply describing a business as ‘organic’, ‘free range’ or ‘socially responsible’, like the hundreds of products we see in a supermarket, won’t be enough.

The concept of ‘green’ bonds is to try and borrow money at a slightly lower interest rate taking advantage of the willingness of some investors to accept lower rates of return for projects deemed to be sustainable and helpful to the environment.

I have not seen any ‘green’ opportunities for retail investors yet, but hope they emerge for those wishing to invest into this category.

For now, I think the demand profile is low because most investors seek the maximum possible return for a given risk. However, I know there are some of you out there who think differently about the use of your savings, and good on you for that holistic outlook.

Circling back, this ‘green’ bond from IFC is not available to you. It is limited to wholesale investors with minimum holdings of $750,000 so this story is purely a ‘For your Information’ basis with a hope that it leads to the development of a wider market choice.

US Home prices – Do you remember when post GFC we explained that we needed to see a recovery in US home prices to be sure we were clear of net debt overhang?

We passed the point of concern some time ago but I noted a story last week that reports a new all-time high for the median price of US houses (I hope you are sitting down as you read this), now at US$263,800 (equivalent to NZ$350,000!).

Average hourly wages in the US are currently about USD$22 so not far from average wages reported in NZ of NZ$30.

If I apply this income factor then maybe an equivalent median house price in NZ could be NZ$480,000 (Purchase Power Parity) or 12% below our current level.

The message isn’t to expect a retreat in NZ house prices, albeit a credible possibility, it is more likely that US house prices rise towards ours.

I wanted to highlight that collateral for a lot of lending in the US that sparked the GFC is now much more valuable so the banking regulators will be feeling relaxed; until the next problem emerges from elsewhere in the economy.

Ever The Optimist –  According to the Insolvency & Trustee Service (ITS) of the Ministry of Business, Innovation & Employment NZ is currently at its lowest level of debt stress ever on a population-adjusted basis and close to it on an absolute basis.

Essentially the number of people being declared bankrupt, or without any assets, is at an extremely low level (49 people and small businesses for the whole of the country).

ETO II – Employment data is still robust in NZ.

Unemployment fell to 4.8%. Participation fell a fraction last quarter, albeit at a high 70%. Perhaps the most promising news was the trend from part time work to more full-time work and more gross hours worked.

I still struggle with the fact that the private sector average hourly rate is $28.04 but the public sector (your taxes) receive an average of $38.47 per hour.

Investment Opportunities

New issues – we continue to hear noises about plans for new bond offers over coming months.

This doesn’t surprise us.

Stay tuned.

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

Travel

Kevin will be in Dunedin on 18 August and Christchurch on 31 August.

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

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Michael Warrington

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