Market News 30 August 2021

It was hard to be impressed last week when our government suspended parliament at such an important time and doesn't walk the talk and operate remotely, whilst all others are expected to do so.

It's good to see them back on task this week (in person, or remotely, as we are all trying to do).

INVESTMENT OPINION

Covid – A workmate made a simple point that resonated with me for a few days:

Imagine if our government tackled obesity with the same focus as Covid19?

I'll not list the scary list of regulations he suggested!

The data supplied – 3,000 die annually from obesity related illnesses and 30% of the population are obese. That's about 50% of the death ratio experienced by Sweden in their relatively loose approach to Covid restrictions, making obesity a rather serious theme too.

The population can be vaccinated and build anti bodies to respond to Covid19, but not obesity.

The point was well made; do we actually deliver good health services well in NZ? (the staff definitely do…. Its policy and budget I am talking about here).

Z Energy (ZEL) – Last week's news that ZEL received a takeover offer from Ampol Australia (previously Caltex Australia) is indeed our market's latest interesting news item and it throws up a few immediate thoughts for me:

Relief, after such a difficult year for the ZEL share price;

A reminder that value trumps price long term;

A reminder that positive cash flow matters;

A little unconvinced about the price offered;

Successful investment involves a long term view;

I'd rather not lose another major business from the NZX;

It's time to stress test fair value opinions for ZEL;

Ironic that the owner of Gull prefers to own ZEL;

Ethical values are important, but so too is necessary infrastructure;

Owning shares in Ampol won't feel the same as 'our' ZEL;

Does Ampol share ZEL's commitment to the evolution of energy for transport (EVs).

By the way, a closely related person confirms for me that Ampol does share ZEL's ambitions for the future of new energy in vehicles. I'll try and find more to support this claim.

If you are a shareholder in ZEL you do not need to rush to consider the situation; there's a lot of oil to flow through the pipes yet. (funny boy – Ed)

Importantly, you've been told that your business is worth more than you thought, and more than 51%+ of the market thought over recent months, as sellers succeeded in holding the share price at lower levels until very recently.

It's another example of the mistakes a market can talk itself into as it blends a mix of fact and fiction until it's hard to discern which silo each piece of new information belongs to, good or bad.

The market will help explain to you the likely acceptability of the offer, or rejection.

At first glance the $3.50 trading price immediately after the offer was made public implies that Ampol will succeed with their offer at the indicated price. The sign of swift rejection would have seen the ZEL share price move to $3.80.

However, I don't think the story of success is that simple.

Sellers have, thus far, been a mix of ethically challenged who were looking for a stronger market to sell their shareholding anyway plus some who are concerned that the deal won't proceed and thus a price of $3.78 may not be crystallised.

These folk are happy to sell at the $3.50 price.

However, I suspect professional investors are more confident about the deal proceeding, or being trumped by a second bidder, and they are the buyers eyeing up a potential 8% short term return (maybe a 15%+ annualised return).

If professional investors hold more than 10% of ZEL they'll need some serious convincing to exit under current business conditions. I think ACC alone holds 10% of ZEL, I might pass my proxy to them.

ZEL seem convinced that Ampol will be forced by our regulators to sell Gull. Ampol, apparently disagree with this risk. Instinctively it doesn't pass the sniff test for a single owner to control three major brands (Z, Caltex, Gull).

Maybe they'll offer to sell Gull to Mobil, or Waitomo, or maybe even to franchisees under secure supply agreements? Maybe they could sell it back to their old partner, now competitor, Chevron, who has returned to compete in Australia?

Maybe ZEL could invite a competing bid from Chevron Australia, or the EG Group who are on a fast tracked global expansion. Have a read: https://en.wikipedia.org/wiki/EG_Group

(Too many maybes – Ed). Sure, but that's precisely where we are positioned right now; a bag full of questions.

Here's another idea, maybe we should welcome the EG Group to NZ and ask them to establish a new supermarket distribution business across NZ to compete with our local duopoly!

My corporate speculations aside, it is a compliment to ZEL that Ampol declares their business to be more attractive on the NZ business landscape than Gull, almost a concession that the price-based attack by Gull has not achieved a business of greater value.

Certainly, the ZEL business model is more consistent with the strategies in Australia including deep overlap with other retailers, including the Woolworths group.

7-Eleven's purchase of 302 Mobil stations in Australia further highlights the value of non-fuel sales volumes at fuel distribution properties.

Growing its convenience retailing business is a key part of ZEL's growth strategy and store only transactions had grown significantly in ZEL's latest financial result, now representing 42% of all ZEL retail transactions.

For context, ZEL Retailer's convenience retailing revenue compares as 100% of Restaurant Brands (NZ only) and 165% of McDonalds NZ.

I had wondered what merger and acquisition (M&A) activity NZ would experience next because international media are regularly discussing the large, and growing, scale of M&A around the world as businesses with deep cash reserves, operating at declining profit margins, ponder how they expand.

Side story – Another takeover was also announced; one of the world's largest private equity investors (KKR) has agreed to buy Ritchies buses, which is a very interesting deal given my impression of how unprofitable bus services are in NZ, and few tourists are allowed into the country!

Back to the fuel industry story…

Buying the competitor that you most admire is always a choice. ZEL was the latest target. I hope we don't lose too many businesses to this next round of corporate aggression.

In theory higher pricing on share markets makes buying a business more difficult to justify, unless the buyer can cut out a lot of costs from the target company.

I don't think the takeover is about pushing for wider retail fuel margins, I'd guess it has more to do with boosting buying power from greater distribution capacity. ZEL is an admirable business model but they'll never achieve the buying power of the large and super large players globally.

Many of the world's most successful businesses are reported to now be accumulating tens of billions of dollars, that they clearly cannot yet use within their own businesses.

Investment oracles, including Warren Buffett, are accumulating some very large sums of cash as they struggle to identify value in new investment opportunities. You might take this as a clue for how you manage your own investing over the months ahead.

I don't know if Ampol has accumulated a large cash position, but they think they have found a target investment and negotiations have begun.

ZEL, including its ownership of the Caltex brand, covers about 50% of the NZ retail fuel market.

The Fuel Industry Act introduced last year has created more flexibility in wholesale arrangements and ZEL believes it opens the door for it to grow its distributor network.

It also believes that it will benefit from new pricing structures (known as Terminal Gate Pricing) and achieve better returns on its nationwide infrastructure which includes 54% of NZ's terminal storage.

It seems that the Fuel Industry Act, which followed an extensive Government study in the NZ fuel industry, might favour the large players, like ZEL, and be at the expense of the small fuel retailers. (talk about unintended consequences – Ed)

None of this will be lost on Ampol, they have experienced the same transition in Australia under the Oil Code, which influenced many of the changes to the NZ market, and they will fully understand the advantages and opportunities the new legislation presents.

Ampol is not trying to buy ZEL on a whim. They see plenty of value.

A reminder of why you can be patient. Here is a paragraph from the ZEL announcement:

The acquisition is subject to agreeing the binding transaction documentation, Board

approval by both Z and Ampol, Z shareholder approval and High Court approval.

Any transaction is expected to be subject to approval by both the New Zealand

Commerce Commission and the New Zealand Overseas Investment Office.

Retailers – I wouldn't mind betting that Christmas shopping started last week.

Given the tight restrictions with shipping and the propensity for lockdowns you cannot be sure that you'll be able to access the item you want for that loved one if you wait until December.

Judging by the number of couriers driving past my window consumers are either bored, or shopping well ahead.

It's good news for Freightways and NZ Post, and probably Mainfreight for its intercity deliveries.

It may yet prove to be good financial news for retailers who will surely not need to attach many discount stickers this season.

Company Results – There have been some good, and very good, financial results released over the past couple of weeks.

Chorus was yet another market case study for becoming overly concerned about threats that missed the wood for the trees. When the veil of concern was lifted there were no lumberjacks and value was roughly as we knew it to be previously.

Vector, the boring monopoly that some felt would be pulled to the ground by rising interest rates, reminded us that they operate in our largest and fastest growing city and new connections are difficult to keep up with.

Scales and EBOS confirmed how much we love our pets.

Poor old Sky TV, under such pressure, has delivered quite a good result and confirmed that it is still making too much money to apply for wage subsidies that were pillaged by so many others in far stronger positions.

The retirement operators tell us they are barely keeping up with demographic demand and must build at an even faster rate in future.

Heartland Bank confirms that banking is now a technology service, not a face to face one, and the leverage is helping to reduce costs (and hopefully consumer pricing). They also see that the extreme equity sums now held in property will help most of the senior generation enjoy comfortable retirements.

Freightways and Mainfreight have never delivered so many packages.

Yes, I could find you a few duds, but I wasn't in the mood for that.

EVER THE OPTIMIST

Sleepyhead has (again) secured resource consents for its planned migration to Waikato.

I admire their strategic focus, but I do not admire the resistance being put up by the Regional Council (appealing to Environment Court). They should be welcoming Sleepyhead with open arms and engaging in agreements for progress, not trying to disrupt.

ETO II – Vaccinations

Vaccination doses delivered – 5.2 billion jabs (33% Jab 1 - 25% Jab 2)

Total (recorded) Corona Virus cases – 216 million

Active Cases – 18.5 million (increase)

Daily rate of new cases – 550,000 (decline)

People in serious condition – 113,000 (increase)

Daily Deaths (Covid related) – 8,500 (slight decline)

The UK continues to lead with ideas for moving on from the past year of Covid effects. They now plan to provide antibody test kits to all who receive a positive Covid test from the PCR test and agree to the follow up testing for anti-bodies.

They are starting with a sample group of 8,000.

They want two anti-body tests from each person; one immediately and a follow up 28 days later.

In response to Covid 'we' have been learning a lot about the effects of lockdown, social distancing, tracking, selective isolation, vaccination and now natural anti bodies.

As I see it, the more we learn, from all such processes and opportunities, the better placed we will be for managing the health risk as each month passes. (as long as we put into practice what we learn – Ed).

John Ryder's latest newsletter covered the lack of immunoglobulin (IgA) resistance from vaccination alone, something which builds up naturally by the body when confronted by a virus.

I hope that the reduction in risk provided by vaccination means that the population will actually then be a net beneficiary from exposure to the virus (build IgA count).

A small irony for you – a friend's daughter has just returned from the UK, free as a bird briefly, but is now locked down again in NZ.

Investment Opportunities

ANZ Subordinated Bond – ANZ has announced an offer of new subordinated Tier 2 bonds, with a maturity of 10 years and a possible repayment after 5 years (2026).

This bond will carry a strong credit rating of A- in its own right (the bank is AA-).

Based on current market conditions we estimate an interest rate for the first 5 years in excess of 2.75% p.a. There has been a slight increase to benchmark interest rates so this interest rate may yet move a little higher.

We have a list which clients are welcome to join. We expect the deal to be formally announced shortly, for action next week.

Kevin Gloag has completed a research article and investment opinion for the Tier 2 bonds which can be found on the Client Only Page of our website for advised clients.

Oceania Healthcare – is offering a new senior bond, with a 7-year term (13 September 2028) with a minimum interest rate set at 3.20%.

We have a list for those who wish to invest and seeking a firm allocation. This list closes on Thursday this week at 5pm.

Transpower – is also offering a new senior bond, with a 5-year term (2026).

As a crown owned entity (monopoly) with a very strong credit rating (AA) the interest rate is likely to be about 2.00%, which usefully aligns with returns on bank deposits for the same term, but one gains the value of liquidity with the bond.

We have a list for those who wish to invest and seeking a firm allocation. This list closes on Thursday this week at 5pm.

2 Degrees IPO – The company has confirmed that it intends to float on the NZX before the end of this year.

TRAVEL

Not yet. (but Greg Foran says he is trying to get me back to New York!)

Michael Warrington


Market News 23 August 2021

There are many reasons to applaud Sir Michael Cullen on a life well lived, so I'll focus on two big items that involved our sector.

New Zealand will be much better off in future for the efforts he made to bring back community saving via Kiwisaver and to extend the financial discipline, introduced 35 years ago, when Sir Michael introduced the NZ Superannuation Fund to the landscape.

RIP Sir Michael.

INVESTMENT OPINION

Reserve Bank – Can somebody please buy a pair of binoculars for the Reserve Bank, have them 'deep cleaned' (spray and wipe – Ed) and couriered to No. 2 The Terrace, Wellington.

Last week's announcement of ''no change'' to the Official Cash Rate (OCR) looks too short sighted to me.

You may recall that my view was that the central bank might increase the OCR, but I thought it more likely that they would progressively reduce the influence of their other tools first (LSAP bond buying, FLP lending to banks) and then increase the OCR.

I hoped they would increase the OCR gradually, 0.25% per review, and thus take everyone along with them as the changes were digested across the economy, most notably by those with high debt levels.

Financial analysts with far stronger views than mine were outside the central bank, placards in hand, chanting for 0.50% increases immediately and 1.00% by Christmas (metaphorically speaking of course).

Market pricing had done the hard work, settling the minds of investors and borrowers to accept +0.25% and possibly more. The ANZ had already increased interest rates on its mortgages. It was logical that the central bank would gratefully deliver an OCR increase of 0.25% into an accepting marketplace.

Back when I was much younger, sitting in front of banks of screens filled with market information, operating in wholesale financial markets, we monitored a central bank that described itself as planning ahead by two years as it made decisions about current actions.

Now, I know that the world's central banks have changed from being forward looking, inflation fighting, organisations to backward looking waiting for economic reactions to hit the governors in the eye before responding, but last week's OCR decision implies that forward looking means 'tomorrow'.

The governor was clear that the RBNZ deferred its preferred change (higher interest rates clearly defined in their forecasts) as a result of the current level 4 nationwide lockdown.

This made no sense to me. They are not the health department (thank goodness – Ed). They are tasked with short, medium and long term financial foresight on our behalf and as a regulator they should strive to install slow moving, but very influential, change to our economic situation.

The most effective financial support, for those who are negatively impacted, comes from the fiscal purse (wage support, transport subsidies etc) and not from the RBNZ interest rate settings.

Most financial analysts declared we were past due an increase to the cost of money, and that is still the case today (as I write this from home unable to use my money!)

The rebuttal is no doubt – Mike, why wouldn't they exercise the free option and wait?

I understand the value of free options and the fact that they should be claimed when offered, but that's a free-market response that I should make. It is not the way a financial market regulator should behave; they should be setting the ground rules for the 'game' not exercising value presented via short term options.

The wording in the statement made it clear they'll wait until this outbreak is controlled. This is a short-term reference point and thus very modest in gross value within the economy (+0.25% for 4-12 weeks). I don't think the scale of this delay will have much influence on the greater financial/economic picture.

There's a circular irony in the RBNZ decision. Hold off on rate hikes due to Covid19, concerned about inflation from capacity pressures in employment, which is directly linked to our closed borders, which is a result of Covid19.

This all brings me back to vaccinations.

At the start of this year, I expressed my view that the two greatest influences on your investment decisions this year will be vaccinations and the cheap and plentiful money from central banks and governments.

These facts remain the case.

Locally, more vaccination in New Zealand would have altered the central bank's decision about the OCR level at their August meeting.

In the UK, their high level of vaccination is enabling longer term settings for freedom of movement and opening up of the economy.

In the US they are both vaccinating reasonably well (in the North and west – Ed) and approving trillions in spending.

Who is displaying the better long term strategic planning here?

NZX Listed – As I watch the latest round of results and announcements from the NZX listed property entities (mostly internally managed companies now, not externally managed trusts) I am reminded of the benefits of skilled managers overseeing a diverse portfolio, as distinct from unlisted single property syndications.

Last week it was Precinct's announcement that slowed me down, with a flat white in hand, to read the contents properly, rather than skim read as I must with the vast volume of information passing my screens.

PCT announced that it has secured Deloitte as the naming rights tenant for its redevelopment at One Queen Street, in the Commercial Bay precinct across from the Auckland ferries (if you can avoid all the orange cones without tripping).

PCT succeeded with encouraging Deloitte to move down toward the waterfront from its previous location up at 80 Queen Street, and to agree to its longest leasing agreement at 20 years. This displays excellent negotiating and deserving of a premium to Net Tangible Assets, witnessed by the premium always paid for Vital Heathcare units reflecting the length of tenancies in their properties.

One Queen Street will be completed in 2023. Bell Gully is the other dominant tenant, already signed up.

PCT has been very successful with their strategy of encouraging tenants to migrate down toward the Britomart Precinct, where it dominates the property area immediately in front of the city's public transport hub (rail, bus, sea) including the new inner-city loop that travels beneath them.

In 1989-1990 when I worked in Auckland the largest businesses were located further up Queen and Albert streets. When I returned in 2003 they had moved closer to the water and into the likes of Shortland Street plus the Viaduct was alive with its fantastic potential.

Today Albert Street is trying to recover from its coma and Queen Street is relatively unattractive until you get down toward Britomart.

If you had asked me to guess about the evolution of tenant preferences over the subsequent 5-10 years I could not have done so with any accuracy.

Some of the evolution is actually lead by the property owners and developers exercising some foresight for the city.

Back in 1990 I would have confidently predicted a move toward the Auckland waterfront after the fantastic buzz created by the Whitbread yacht race arrival in town (Think Steinlager 2 and Fisher & Paykel) but no, it shut down and became a ghost town until it was re-awoken by the America's Cup for 2000.

Since then, though, Auckland began to figure it out. Britomart brought the trains back into the inner city and businesses engaged with the waterfront as a very nice place to be located.

Precinct directors saw this situation evolving and progressively moved the portfolio downtown and shrewdly gained control of the entire block in front of Britomart. Their wisdom is being confirmed through the 'ease' with which they are attracting the city's best tenants to PCT properties.

The buildings left 'behind' by PCT, and other such professional managers, are often slipping from A grade in terms of demand from tenants (weaker rent negotiations) into the hands of other wealthy property owners, or into property syndication ownership.

Therein lies another point of strength for the NZX listed property entities, relative to property syndication, they use less debt. Combined with the other benefits of more diversity, more public disclosure and excellent liquidity via NZX trading it is entirely logical that the NZX listed entities sometimes have lower running yields.

Congratulations to Precinct on their latest results, and the maturing of their property strategy. PCT shareholders should be well pleased.

EVER THE OPTIMIST

NZ's latest super company (start local and take on the world), Rocket Lab, lists on the NASDAQ exchange this week.

It is hard to overstate how exciting this news is for Peter Beck and his 'little company that could', from New Zealand.

ETO II

More optimism for shareholders:

Fletcher Building appears to be back in good enough shape to help the nation with its urgent need to build more homes.

Ross Taylor (CEO) must be relieved to be moving through the unlucky events (fire, Covid) that disrupted his strategies for FBU success and he deserves a pat on the back for delivering the improved performance.

Ross says: We have a strong balance sheet, a favourable market outlook, and remain well-positioned to drive performance and growth.

FBU shareholders will be pleased to see their share price back nearer to $8 than $4!

ETO III – Vaccinations

Vaccination doses delivered – 4.90 billion jabs (unchanged looks odd)

Total (recorded) Corona Virus cases – 210 million

Active Cases – 17.4 million (increase)

Daily rate of new cases – 600,000 (stable)

People in serious condition – 107,000 (stable)

Daily Deaths (Covid related) – 8,000 (decreasing)

John Ryder's GLOBAL Newsletter sent me off on a search to discover that compulsory vaccinations have occurred in history, in the US particularly:

Jacobson v. Massachusetts, 197 U.S. 11 (1905), was a United States Supreme Court case in which the Court upheld the authority of states to enforce compulsory vaccination laws. The Court's decision articulated the view that individual liberty is not absolute and is subject to the police power of the state.

The judgment was made at the time of vaccinations for Smallpox.

Massachusetts was one of only 11 states that had compulsory vaccination laws, but I agree with the wording in the judgment:

Justice John Marshall Harlan delivered the decision for a 7–2 majority that the Massachusetts law did not violate the Fourteenth Amendment.[2] The Court held that "in every well ordered society charged with the duty of conserving the safety of its members the rights of the individual in respect of his liberty may at times, under the pressure of great dangers, be subjected to such restraint, to be enforced by reasonable regulations, as the safety of the general public may demand" and that "real liberty for all could not exist under the operation of a principle which recognizes the right of each individual person to use his own liberty, whether in respect of his person or his property, regardless of the injury that may be done to others.

Mind you, the penalty for non-compliance was…. $5 which inflation data tries to claim is the equivalent of $155 today! If I compare real estate costs it looks more like a contemporary fine of $1,000 today.

https://www.officialdata.org/us/inflation/1905?amount=5

Compulsion of vaccinations is an unwinnable argument across the whole population, but the pressure is unquestionably going to increase.

Get your vaccination done early if you want to avoid wasting mental energy on the subject.

I am underway.

Investment Opportunities

Oceania Healthcare – has announced its intention to offer another senior bond to its funding series (OCA020) being a new 7-year bond (2028).

They expect to formally 'offer' the bonds next week.

We have opened a list for investors wishing to participate (once offered).

ANZ Subordinated Bond – ANZ has announced an intention to issue a new subordinated Tier II bond, with a maturity of 10 years and a possible repayment after 5 years.

Although Penny (the Treasurer) went suspiciously quiet, probably to consider the latest Covid and Reserve Bank situation.

We have a list which clients are welcome to join.

2 Degrees IPO – The company has confirmed that it intends to float on the NZX before the end of this year.

TRAVEL

Apparently not, at this stage, and probably not for some weeks.

Michael Warrington 


Market News 16 August 2021

Regulation is coming for cryptocurrency, if you're a follower.

The US senate even tried to rush some terms into their newest legislation approving the new US$1 trillion of infrastructure spending, which gained support from both sides of the house.

The crypto wording was withdrawn when they realized it needed more thought, but it is coming people and I doubt they'll want the term 'currency' used.

Mind you, if it does become a regulated product, or service, it will increase the validation of such digital tokens within the economy.

INVESTMENT OPINION

AfterPay – The largest ever takeover has just been completed on the ASX; the A$39 billion takeover of Afterpay by digital payments platform Square Inc., led by Twitter founder Jack Dorsey, and it is another marker that defines how quickly community payment methods are evolving.

Other mega tech companies are coming to compete too, and they'll surely succeed given the massive scale of their customer bases.

Think primarily of Apple and Google because you are all carrying their payment portal in your pocket. They intend to have your consumer decision in your mind travel immediately down your arm, through your phone and into the electronic till of the retailer; done in 60 seconds.

Your bank will never know, until it's too late, and neither will 'management' at home.

Apple won't be using your bank. They have been arranging finance from investment banks like Goldman Sachs, who will in sequence bundle up your obligations (short term loans) and on sell them to professional fund managers at a return marginally higher than they can find elsewhere.

Actually, for any regulators who may naively believe that Afterpay isn't a financing arrangement, ponder how these professional investors receive a return. There's no charity in the chain.

Banks like to be the dominant providers of finance within an economy, but that financial service is no longer across the whole economy because regulatory evolution from central banks sees the banks retreating from capital intensive lending, such as unsecured personal loans for fast moving consumer goods of low value.

I understand their stance; I wouldn't even lend my kids the cash for a new set of Nike shoes or the latest mobile phone (as they hold last year's model whilst asking me the question!). Learn the lesson of saving up the cash and then make the purchase.

So, old style consumer finance had become difficult, or expensive and short term (58 days on a credit card). The 'airpoints' offered often didn't exceed the annual fee for having a credit card supplied.

Afterpay pounced on the opportunity and the large proportion of the population that love the idea of bringing a happy purchase forward by 3-4 months and spreading repayment over several pay cycles. Always buying that little bit ahead, seldom timing the purchase alongside their income.

Laybuy shopping was common for the previous generation too, but technology has helped remove the risk from the lowly capitalised retailer by shifting it firstly to the credit card operators, but now on to a cheaper and more efficient financier who is better placed to understand the risk, to price the loan (yes, it is a loan, no matter what they say), monitor the consumer and collect the payments (direct debit against your bank account).

Previously a retailer needed additional property space to retain the purchased item until the final payment was made. As I wrote this, I wondered why we consumers bothered with such a service if we couldn't take the exciting new item home with us?

Maybe product scarcity played a role then?

I can't remember. I'm pleased to say that I am too young (or having a laugh – Ed)

Today's scarcity due to shipping difficulties won't just prompt faster buying behaviours (beep, collect, leave the store) but higher prices for the producers and retailers too. No wonder all businesses are making a point of telling us about the many difficulties across the supply chain!

So, now it is 'beep' and walk away. Too simple.

As you beeped, the sequence of electronic confirmations probably flowed something like this:

Retailer -> your phone -> Afterpay -> Square Inc. -> Credit Suisse -> Vanguard (yes, the investor of ETF fame, into one of their fixed interest funds).

Or, shortly:

Retailer -> your phone -> Apple/Google -> Goldman Sachs -> Vanguard/BlackRock.

No ANZ to see here.

Did I say that Afterpay doesn't yet make profits?

There will be a wafer-thin margin soon but imagine the advertising value from that knowledge about consumer behaviours! Hello Mr Warrington, I see you just purchased a new golf club, would you like a dozen golf balls at a discount, couriered to your home shortly?

Tiger Woods uses that brand of golf club, and he recommends these V1 golf balls (commission to Tiger).

Those of you with very large holdings in bank shares, inherited from parents who were good investors, should keep your eye on that golf ball (or the method I used to pay for it – Ed).

Payment System Progress - The Bank of International Settlements is aware of the developments above and will undoubtedly want banks to provide competitive payment services within the current regulatory environment.

BIS has developed a blueprint for what they call Instant Cross Border Payments and called it NEXUS.

Singapore and India have agreed to be part of the development for actual use.

The BIS clearly hopes to have each country's Instant Payment Services (already underway) be able to communicate with each other and thus build a successful cross border payment mechanism.

I am sure that they have the skills, and the trusted SWIFT system can be used to put a functioning service in place, however, until they can provide the foreign exchange link at an ultra-fast and cheap level the facility will struggle for traction.

The BIS must show that they can save time and money across the international payments system.

The cross-currency difficulty is, in part, why Bitcoin or Facebook's coin (Diem, previously called Libra) are trying to drive internationally homogenous payment methods into the mix.

Governments of the world want payment services to be regulated, and taxes collected, so they will support the BIS efforts.

Maybe what governments will learn is that they must instruct their central banks to support the foreign exchange liquidity behind the NEXUS facility if they wish to take the settlement fight to the private crypto currencies.

Such systems will ease trade (settlement risks) and make it rather simple, and inexpensive, for you to pass a few thousand dollars to your children in another country or do your online shopping (if the item could be delivered! – Ed).

Banks – Before you worry about other payment providers ''cutting the banks lunch'' and reducing their ability to profit, take a look at their profits in the Covid+1 financial year.

There are some very strong results coming through.

Dividends are returning to higher levels and share buybacks are underway again. ANZ, for example, has advised the NZX that it has already purchased A$107 million of it’s shares back since 3 August in a programme that may run until July 2022.

It may seem odd to readers to have witnessed the banks issue more shares at lower prices, during periods of distress, to then buy shares back at higher prices when profits are more robust.

However, this is a function of how our banks are regulated, to ensure that they are always available to provide us with banking services. Customers of the banks win with service always available and investors can win on returns if they choose to support the banks when calls for additional capital, if you feel you can see through the temporary financial storms.

Name Change – Changing one's corporate brand is an enormous decision, especially when the current brand is strong and highly respected.

So much time, money and effort has gone into increasing the goodwill carried by a business in the eyes of its customers, and staff. Why make a change if you already have a good brand?

It is therefore very brave of the board of Trustpower having decided to change its name. They released this announcement to the NZX last week:

Trustpower confirms today that upon the successful completion of the

conditional sale of its retail business, the new generation business will be

called Manawa Energy Limited.

The name was selected following an extensive process of engaging with

stakeholders, inside and outside the company.

I particularly like this following element of the announcement because it displays genuine involvement with the community rather than simply finding a Maori name that appealed to the business:

We are honoured that 'Manawa' was gifted to the business by the Ngati Hangarau hapu, who hold mana whenua of the area where the company's Kaimai hydro-electric power scheme is located.

An official launch of Manawa Energy Limited will take place closer to

settlement.

I look forward to the official launch and the guidance from the Ngati Hangarau hapu as to how we should interpret the use of the term in a business sense.

It is foolish of me to guess based on a little reading, but it seems to position the energy business at the 'heart of the community' and/or as a vital central function for the community that it serves. Both are true.

I am not a brand expert so I shan't guess how the name change will be received but I roundly support the bravery of the directors in making this change within a New Zealand context.

Aramco – Here is a difficult truth for the world, especially those at the forefront of encouraging change via the reduction of energy consumption and carbon dioxide release:

The return to a high oil price, based on a return to high demand, sees Saudi Aramco return to the position of being the world's third largest company (almost US$2 Trillion).

In theory, once the world is more successful at reducing energy consumption per person and increasing the use of renewable energy within the mix, we should see a gradual decline in the value of companies in the fossil fuel sector.

It's not happening yet.

EVER THE OPTIMIST

Kiwisaver is reaching a scale ($82 billion) where fund managers are gaining confidence that they'll maintain large core sums under management (regardless of churn) and thus can begin to invest in less liquid opportunities.

Initially managers all stuck closely to very liquid (easily sold) bonds and shares, just in case clients shifted the funds to another manager.

Initially money will have been invested in NZ markets (to align with the local liability to local savers), until the scale of savings became too great and the NZ economy too small. Diversity also dictates exposure to international markets and larger populations, but it would still have been placed 100% into very liquid securities.

Now, the scale of savings, and the demographic of those increasing the savings pool, is giving confidence to Kiwisaver fund managers to look at investment in small to medium sized private businesses, in New Zealand!

Hooray, local savings being invested in local businesses.

If you'd like to read a little more, take a look at Booster's TAHI fund, specifically being used to invest in local, private businesses, which need more capital to open up to growth opportunities. They seem to be on the front of this wave seeking better value for investors just away from the spotlight of the highly priced securities markets.

This development underscores the value of an idea once promoted to allow a single investor to select more than one Kiwisaver manager to oversee different portions of their savings. I quite like the intention, and potential, of Booster's TAHI fund.

ETO II – Vaccinations

Vaccination doses delivered – 4.70 billion jabs

Total (recorded) Corona Virus cases – 206 million

Active Cases – 17.1 million (increase)

Daily rate of new cases – 600,000 (stable)

People in serious condition – 106,000 (increase)

Daily Deaths (Covid related) – 9,000 (stable)

I have learned via a client in the UK, unsurprisingly perhaps, that the Bloomberg data I have been using for doses delivered (consistent source) differs from other sources.

Bloomberg appears to report vaccinations relative to total population, whereas in the UK the government is reporting doses for those aged >18 years. There may also be modest delays between the two.

For example:

Bloomberg reports for the UK 70.6% first jab, 59.6% second jab

The UK government reports 89.1% first jab, 75.3% second jab (18 years of age or greater)

The total UK population of about 66.7 million appears to include 12-13 million <18 years of age. So, the numbers compare reasonably well because 70.6% of 68 million people is 48 million jabs and the UK reports 47 million first jabs.

Investment Opportunities

ANZ Subordinated Bond – ANZ has announced an intention to issue a new subordinated Tier II bond, with a maturity of 10 years and a possible repayment after 5 years.

Based on current market conditions we estimate an interest rate for the first 5 years in excess of 2.75% p.a. There has been a slight increase to benchmark interest rates so this interest rate may yet move a little higher.

We have a list which clients are welcome to join.

2 Degrees IPO – The company has confirmed that it intends to float on the NZX before the end of this year.

TRAVEL

Edward will be in Wellington on 26 August and in Auckland on the 23 and 24 September.

Chris will visit Auckland on 25 August.

Johnny will be in Tauranga on 26 August.

If you would like to make an appointment, please contact our office.

Michael Warrington 


Market News 9 August 2021

My compliments go to Fisher Funds for their $500,000 donation into mental health, split across Mike King's I AM HOPE (awesome effort by him) and to Youthline.

INVESTMENT OPINION

Goodman – Good investors are opportunistic; always ready for the unexpected deal that comes around the corner. Two such investors have pounced on Villa Maria's financial woes; one being another wine processor and the other a property investor.

Villa Maria's woes were a surprise for me given the view I had that they were a dominant NZ wine brand and surely sold good volumes or good wine at reliable profit margins.

But no. All is not what it seemed. In truth it seldom is.

The owners of Villa Maria dug themselves a financial hole that ultimately, they were unable to escape (note to self: don't spend more than you earn, or have saved up, or can repay).

So, the better capitalised business within the wine industry has bought the wine business, but not all of the property assets.

Goodman Property Trust (GMT) has swooped in and grabbed the Auckland based property assets, which suit the GMT strategy and sit amongst the neighbourhood and close to the major arteries for transport to come and go easily.

Are you ready for your next investment opportunity?

Last week EROAD shareholders needed a bit of spare cash to try and buy a few more shares at the discounted price of $5.58.

What might next week's unexpected surprise be?

Investment Risk – I really shouldn't launch a paragraph with these two words.

This is such a big subject; too big to pretend to cover in a paragraph. In fact, I think it would be safe to say that every Market News that I have written over the past 13 years represents a tapestry of my trying to explain the wide variety of risks that you confront.

For the statisticians out there that's 1.75 million words (and aging – Ed)

You'll also have noted that the risks evolve over time, like sand dunes with the occasional bulldozer involved. You cannot learn a rule, then set and forget when managing investments.

I am getting offtrack because this paragraph is simply drawing your attention to China as one of last week's lessons in risk assessment.

We know that the Chinese Communist Party rejects freedom of choice as a principle and that Xi Jinping is as egotistical as any political leader, however, I did not expect to learn that Xi Jinping was a horse and cart guy and not Uber or Autonomous taxis.

China is currently cracking down on, and destroying the value, of many of its greatest technology companies, which have flourished on the frontier of technology and the internet.

Maybe the CCP doesn't like the personal leverage being gained by the owners and leaders of businesses such as Alibaba and Tencent. Maybe they don't want a population of 1.4 billion to develop a perception that private enterprise and freedom of choice develop better outcomes.

Take a look at the share price charts and witness how quickly ''price'' can change when confidence does.

The frustration for me is that it wasn't an evolution of corporate performance that altered market confidence, it was politicians using finance as an international weapon, a wholly destructive concept from all perspectives.

Maybe Xi Jinping hoped to slash some of the wealth of the international owners of these Chinese businesses, corporate warfare as it were, but with the US share market setting new all-time highs in the following week it didn't work.

In fact, China's actions with enforced behaviour changes for its own technology companies may well be viewed as opening up more opportunities for the world's other dominant technology businesses to profit from. It's hard to imagine Amazon, Facebook and Ebay being disappointed by China's suppressive actions over Alibaba and Tencent.

Whatever the reason, the CCP (read Xi Jinping) decided to pull the stool out and therein lies your lesson about the now elevated investment risk with respect to attempts to gain exposure to the Chinese economy and to businesses believing they are in control of their export relationships with China.

So, amongst the hundreds of risks to consider when investing, China's behaviour is currently more influential than it was, or seemed to be years ago.

US Progress – For the first time in many years of my reading the US may be on the brink of a bi-partisan agreement in the Senate (needing 60 votes, which means 10 Republicans must vote in support) for a large new infrastructure spending plan.

The focus for the spending is roads, bridges, waterworks, broadband and the electric grid.

It looks as though US$550 billion will be approved but the democrats would like it to reach US$1 trillion.

If the US government manages to approve this new spending it may well begin to rotate its focus toward improving the US economy and away from some of the less than productive international strategies launched by the previous President.

The US does plenty of things that make me raise my eyebrows, but I otherwise agree with Warren Buffett – 'never bet against America' economically.

If you read that the new infrastructure budget is passed by the Senate you could put a little tick in the economic progress box for the US.

Interest Rates – Here in NZ we seem to have collectively relished the opportunity to pounce on the central bank and demand increases to local interest rates.

By interest rates we mean the Official Cash Rate, which is the interest rate for a single day!

Longer term interest rates have been influenced by central banks decisions to buy long term bonds and manipulate the supply/demand dynamics in capital markets.

In NZ the Reserve Bank has already announced that it stopped buying long term bonds, so our yield curve is free to move according to natural supply and demand influences.

The problem, if I may call it that, is the world's most influential central banks are still refusing to increase their interest rates and yields (interest rates) on longer term bonds are falling again.

Holding overnight interest rates (OCR) at artificially low levels, well below inflation (negative real interest rate rewards), is at the behest of the central bank, which is made up of a small number of experts, but super brains or not they cannot escape the weakness of being the few.

Long term interest rates are set by the many, and primarily in the US market (followed by others), which involves the largest universe of investors in the world.  

I think it stands to reason that a group of decision makers numbering in the thousands, handling decisions relating to trillions of dollars distills to a higher-quality conclusion than one made by a small committee.

Further, that group of thousands is adjusting its conclusion by the minute, hour, day and week. The market doesn't operate to an eight-week cycle. This of course adds volatility to the pricing, sometimes unnecessarily, but it means the conclusions are constantly on refresh.

This leads me to highlight again to you that in the midst of pages and pages of opinion about interest rates being on the rise now, long term US interest rates are falling again.

Why?

In short, they are falling because risk takers in interest rate markets are not confident about the future of economic activity and the recurrence of today's post Covid19 higher inflation data.

Markets seem to be forming a view that pricing that has been disrupted by Covid19, such as shipping logistics (and opportunism) and international travel will settle back to lower levels more consistent with plenty of supply to meet demand that will rise back to levels consistent with the large scale of the global population.

It may take five years to settle, but the market is looking much further ahead than five years.

Even this is just another person's opinion, but it is based on me pondering the conclusions being reached by the thousands.

EVER THE OPTIMIST

The Olympics was a success for both the athletes and Tokyo.

ETO II

Employment up by 1.00%, participation up to 67.6% and unemployment down to 4.00%.

Perhaps the unemployed people gather for a photo, where a wide lens would not be required.

ETO III

The government wants AML legislation to catch more criminals, and to some extent it is, but technology and data will reveal more over time, witness:

The Australian Tax Office is catching cheats by comparing declared incomes with information about luxury goods that appear to be inconsistent with that income!

ETO IV – Vaccinations

Vaccination doses delivered – 4.45 billion jabs

Daily vaccination rates had been declining but they are now rising again in concert with the rising influence of the Delta variant.

70% first jab and 60% second jab is becoming common across many of the world's most populous nations now.

Remember the early adopters, Israel? They remain stuck at about 60% vaccinated. Maybe they will end up with a new crown as having the highest ratio of anti-vaccination within a population.

The world really does now need to turn its attention to helping African nations with vaccination.

Total (recorded) Corona Virus cases – 203 million

Active Cases – 16.3 million (increase)

Daily rate of new cases – 550-650,000 (stable)

People in serious condition – 99,000 (increase)

Daily Deaths (Covid related) – 8-9,000 (stable)

Vaccine evidence is very quickly becoming a 'thing'.

In my opinion NZ should already have defined our conditions for border crossing without MIQ and when. Such movement is too important to our trading economy. Where our South Pacific isolation aided our Covid19 battle it also adds resistance to trade and we now need to do as much as possible to remove such resistance from the process.

Last week's ''vaccination conditions'' stories included the following:

Disney and Walmart (head office) are making vaccination a condition of employment (can a mouse catch a human virus? – Ed)

Investment banks, like Goldman Sachs have made disclosure of vaccination status compulsory (or security cards will not work entering their buildings). Unvaccinated are obliged to complete regular Covid19 tests, with positive results obliged to leave the building immediately.

Citibank has a similar rule and expects three tests per week from the unvaccinated.

Jeffries will only allow vaccinated into the office, with unvaccinated to operate remotely. I think the 'remote' would be naïve to think they would not be the first to be made redundant during the next downturn.

There are plenty of images and stories of food and leisure service businesses putting signs out front that restrict entry to vaccinated people only.

Then the biggest lead - President Joe Biden announced last week that all federal employees and contractors must get vaccinated or put up with weekly testing and lose privileges such as official travel.

US states are beginning to follow the federal government lead.

We need to be prepared with how we will confirm individual vaccination status, and what our NZ restrictions will be, especially for crossing the border.

None of this should feel unusual to anyone who has travelled widely. I don't recall a border crossing being conditional on a vaccination, but some were strongly recommended.

Peru, for example, does not require any immunisation for entry, but it did strongly recommend vaccination against Yellow Fever and said it was 'advisable' to have cover against Typhoid, Tetanus and Hepatitis A. Oh yeah, and Malaria, Hepatitis B and rabies shots if you plan to go bush.

Back then self-responsibility with my health ensured that I put myself forward as a pin cushion. Today I expect to see countries making more vaccinations compulsory, starting with Covid19 given its high rate of contagion.

New Zealand shouldn't be bashful about making demands upon our international arrivals, and now is the time to set the policy.

Investment Opportunities

ANZ Bond – ANZ has announced an intention to issue a new subordinated Tier II bond, with a maturity of 10 years and a possible repayment after 5 years.

Based on current market conditions we estimate an interest rate for the first 5 years in excess of 2.75% p.a.

We have started a list which clients are welcome to join.

2 Degrees IPO – The company has confirmed that it intends to float on the NZX before the end of this year.

TRAVEL

David will be in New Plymouth on 19 August.

Johnny will be in Tauranga on 26 August.

Michael will be in Hamilton and Tauranga in September.

Chris will visit Christchurch on 17 August (afternoon) and 18 August (morning) and in Auckland on 25 August.

If you would like to make an appointment, please contact our office.

Michael Warrington 


Market News 2 August 2021

I see the Commerce Commission is going to launch a new supermarket business and they are going to define acceptable pricing of 'units'.

Presumably they will soon set up their own farms, horticulture operations, food and drink producers, pharmaceutical supplies, shipping companies (yes please, because pricing has trebled – Ed), freight movers, human resources services, property investment and management teams and legal compliance units.

Good grief.

INVESTMENT OPINION

Carbon Capture & Storage (CCS) – If you had your cheque book out on the kitchen bench awaiting my thoughts on investment opportunities in carbon capture and storage you can put it away again (before the banks discover you still have a cheque book – Ed).

This concept of helping the planet, and helping myself financially, by investing in CCS is not as exciting as I thought or wanted to believe.

Some very clever people responded to my recent request for input. Thank you.

It is important to record that CCS does not remove carbon emissions from the atmosphere, it tries to stop them from joining it.

To become a Czar of CCS is to plan to be a landlord of the underground; something geologists tell me will be very difficult to be successful with.

There is no question that CCS development is happening, if for no other reason than recent law passed in the US - Carbon Capture, Utilization, and Storage Tax Credit Amendments Act of 2021 S. 986

However, the most frustrating aspect of what you will read (if you read – Ed) is that the US is already allowing later start dates and lower performance outcomes to access different types of tax credit.

This quote was telling:

Laws created eligibility standards that are not technically or economically feasible for carbon capture retrofit projects to meet.

This aligned very well with comments from a client with the following points that make it difficult:

Variable geology. Some may be good for storage with only modest leakage but most geology is poor;

If we haven't yet resolved good storage, then measuring leakage is an unreliable guess;

Good storage performance options will be a long distance from most carbon emission locations;

Ironically, depleted oil reservoirs may be the best underground locations for CCS (It's a long way from China's consumption to Saudi Arabia's CCS facilities);

There is a large energy consumption cost for CCS and we do not generate enough renewable electricity to power the CCS development with net benefit to the environment (see below); and

Widespread use of new industrial technologies has usually taken many decades, not the 10 to 20 years the world is currently rushing around promising to itself.

The more I read the more CCS felt like an industrial version of a catalytic converter added to a car's exhaust system; helpful when located near to the problem, but less effective than the reduction of fuel use through hybrid engineering.

This was also consistent with another gem from a client – (roughly put) we waste a lot of time and energy trying to solve complex downstream problems when it would have been simpler to improve the situation upstream (more hybrid, less catalytic converter).

I pondered another circular difficulty: Increasing the pricing charged under the Emissions Trading Scheme might accelerate faster moves to develop more CCS, but forcing change to unproven outcomes at a faster rate than depreciation schedules and tax deductions allow will create a financial drag on an economy and harm productivity (then employment, then wellbeing… etc.. you extrapolate). Witness the underperformance in the US.

As I often find myself concluding, good governance needs to happen at a pace that takes the majority of the population along with it, otherwise it will be ineffective.

CCS is a marginal benefit to the world. It is a benefit that we should pursue but only where it is highly effective and can be achieved within the financial parameters driven by pricing of Emissions Trading Schemes.

Given the lack of knowledge around leakage the only investors I can see for CCS schemes are the carbon emitting businesses that wish to reduce their emissions ratios and thus financial penalties.

I don't see ''us'' becoming investors in CCS but I do hope the worst emitters will do so and the ETS and tax depreciation schedules will encourage them to do so.

For the curious, I found these sites interesting on the subject:

https://www.ciel.org/issue/carbon-capture-and-storage/

https://clearpathaction.org/legislation/carbon-capture-utilization-and-storage-tax-credit-amendments-act-of-2021-s-986/

Hydrogen – I think I have also discovered there is no easy investment opportunity for ''us'' in hydrogen production either.

Most of what I read described a negative return on capital, so it looks as though hydrogen will only feature as a small part of the future landscape for energy use.

Unsurprisingly, there is no magic bullet to resolve the population's misuse of the planet and it its resources; improvement will require a tapestry of beneficial changes.

Introducing more hydrogen as a stored (carrier of) energy will be one small thread.

Everything I read from client responses (thank you) concludes that energy will be wasted in the process of producing hydrogen via electrolysis and at present the world is experiencing a shortage of energy, and a desperate shortage of renewable energy, not a surplus for wasting in conversion.

Burning 1MWh of coal to produce say 0.70MWh hydrogen (an optimistic guess about efficiency!) is not helping the planet. This is described as 'brown' hydrogen.

Using 1MWh of renewable electricity to produce 0.70MWh hydrogen (green) might make sense if this proves to be cheaper than using batteries manufactured from earth minerals for storing energy (transfer the weight of water + gravity into an energy carrying liquid/gas).

Although another article addressed that even more energy is then lost across the hydrogen supply chain during compression, delivery, leakage and finally use.

Scientists and engineers love a challenge and this one is shaping to be a large one.

Meridian Energy's concept of converting renewable power from Manapouri into hydrogen, has merit, but as two people suggested 'not for export', surely it should be used within NZ to reduce our current demand for coal and gas.

Even then we need NZ to agree to pay more for this energy because of the value loss during the journey from Manapouri to hydrogen and on to your vehicle. Maybe we could store some hydrogen in Huntly as the fast access battery that this Genesis Energy plant offers to the nation?

Better, one person said, to push Transpower harder to get Manapouri power more efficiently to Auckland consumers.

Far better, another person said, to encourage consumers to use less energy!

We are not alone in this push. Others agree with the potential of hydrogen to the extent that it is being trialed elsewhere. The largest in the world so far seems to be a collaboration between Shell and the European Union, the REFHYNE consortium (think phonetically – Ed) and its 10 megawatt PEM electrolyser (with plans to extend to 100MW).

Read more here (with thanks to a retired industry person):

https://www.shell.com/energy-and-innovation/new-energies/hydrogen.html

I am certain that the placard wavers 'outside Shell' won't believe they are trying to be part of the solution for reducing global emissions, but I think we will find that the oil industry giants will become the most effective at driving change. Their customers are demanding it and good governance will help; yelling at them from outside the fence will not.

So, I look forward to reading about progress with hydrogen use in the energy mix but I don't see us investing in the sector.

Asset Allocation – My Kiwisaver manager has communicated with me that they are changing the asset allocation being applied to the funds that are automatically managed (Age Steps adjustment funds).

I select my own, so it won't affect me, but I raise it here so you can contemplate some reasoning for why asset allocation is altered from time to time.

The macro scale changes that caught my attention were:

1.    Reducing bonds and increasing cash;

2.    Reducing shares and increasing property and infrastructure (shares); and

3.    Reducing currency hedging (less protection back to NZ dollars).

The supporting comments were:

1.    We are doing this because at this time because fixed interest assets are not providing a good enough return to justify the higher risk of investing in these assets (longer terms – Ed). We also want to reduce your exposure to increasing interest rates (shorten the average duration of a fixed interest portfolio – Ed).

2.    We are doing this to further diversify the assets that are held by the funds and because infrastructure and listed property generally perform better in periods of higher inflation.

3.    We are doing this because the New Zealand dollar tends to fall when markets become more risk adverse

Their actions are consistent with some of the headlines that are rising to the top, being inflation is coming, interest rates will rise and the present value of assets will fall, making investors more risk averse.

There are always different perspectives in financial market debate but SuperLife clearly feels the scales have tipped sufficiently past 50:50 that they made the decision to alter the asset allocation for those who entrust this decision to them.

I don't think I want to impose my view on this news but it is useful for you to read about this change because it is more than just a commentary; money is being moved, and risk is being altered. A commitment has been made.

They are adding a little more speculation to their portfolios and more leverage to the outcomes.

Shorter term fixed interest investing delivers lower running returns. They now need longer term interest rates to increase to lock in any benefits for their investors.

Property and infrastructure may well outperform other businesses if they are pushed along by inflation, but will those static assets ultimately outperform productive assets?

Would you rather own a building, a bridge or some Microsoft shares?

Lastly, they have increased the funds exposure to volatility in the value of the NZ dollar. All fund managers must make this decision as they strive to provide investors with some exposure to international economies and genuinely diversify some wealth away from NZ performance.

You may recall I recently pondered why I think NZ may be entering a period of economic underperformance, so I have some sympathy with this particular change.

However, if their first point (higher interest rates) comes true and our central bank happens to be more aggressive than others like the US and Australia, which seems likely to me, then the NZ dollar is more likely to rise!

A currency can move far faster than the variation between NZ economics and that of other nations. You may be correct about international investing but lose most of your gains by getting the currency movement wrong.

Again, I only want you to be alerted to one funds decision to make some changes to the investment rules for their funds, not to declare them right or wrong.

Keep pondering your own rules and (with bias) get some financial advice to help.

By the way, one last thought about SuperLife (and others) automated asset allocation rules; they do not appear to contemplate gross wealth.

If one's 90-year-old Nana had a home plus $500,000 in savings she may align well with the thinking of a fund manager's automated asset allocation settings (usually high in Fixed Interest assets). However, what if Nana has $10 million, lives comfortably on her National Super and is managing her wealth on behalf of the next generation?

Blockchain – Distributed Ledger Technology (DLT) continues to march forward offering impressive possibilities to simplifying legal evidence of financial truths.

The latest story to catch my attention was in Australia where a business called Lygon is partnering with IBM to deliver DLT based services for monitoring bank guarantees used to underpin hundreds of thousands of business contracts.

Where there is risk, the person exposed to that risk is very interested in ways to negate the risk. Invariably this involves party A putting up capital to protect party B and confirmed by a bank as being in place.

In the past this was predominantly done with the assistance of lawyers, bankers, lots of paper, large fees and a lot of time.

DLT should speed up the process to a point of only needing minutes from go to whoa, remove most humans from the process and thus reduce costs and improve the integrity of the register that confirms where risk is sitting at any point in time.

What's not to like?

It certainly looks like a genuine step forward in productivity, being the elusive holy grail of business success and higher pay rates or employees (unless you're a lawyer? – Ed).

I doubt the public will cry over that risk.

This new efficiency for knowing where risk is resting at any point in time would also help banks via risk reduction and thus reduce the need for additional bank capital currently held in support of guaranteeing such payments (more economic efficiency).

By extension central banks would also be happy with the development above. Having financial risks resting with either the supplier, or consumer, and not with a bank reduces the financial stability risks within an economy.

I look forward to these DLT supported facilities becoming commonplace.

Here's another electronic settlement environment you could read about that is already operational in the Australian property market: https://www.pexa.com.au/

EVER THE OPTIMIST

I have just finished reading the Douglas Myers biography.

He would be enormously impressed by Peter Beck and Rocket Lab's international perspective and success, from its genesis in little old New Zealand.

Rocket Lab's next launch (imminent) is for the US Air Force.

Rocket Lab hopes to list on the US NASDAQ exchange in September this year.

By contrast, Myers would be turning in his grave with respect to our political evolution.

ETO III – Vaccinations

Vaccination doses delivered – 4.13 billion jabs

Total (recorded) Corona Virus cases – 197 million

Active Cases – 14.3 million (increase)

Daily rate of new cases – 650,000 (increase)

People in serious condition – 86,000 (increase)

Daily Deaths (Covid related) – 9-10,000 (stable)

UK case study – Population – 68.25 million.

Total Covid19 cases 5.77 million (8.50% of the population).

70% first jab, 56% second jab. So, maybe 65-75% of the population have some level of immunity to the virus.

Elected to remove special restrictions from the population.

They currently report 1.16 million current active cases, increasing daily by about 25,000 (falling again after reaching 50,000), 848 serious cases, daily deaths reached 80-130 but are falling again, which aligns with the declining number of positive tests.

The R Factor in the UK does appear to now be below 1.0 and is falling based on immunisation passing above 65% of the population.

I look forward to Siouxsie Wiles telling me the updated R Factor for the UK as it declines and explaining when it becomes an impressive outcome and thus provide confidence to other nations about target vaccination levels.

242 million Covid tests recorded! (4 for every person in the UK)

Vaccination Passports

I think one of the best things our government can now do is build an effective vaccination passport regime, easily accessed and displayed to third parties by each citizen.

This does not change the freedom of choice for citizens who are unsure about the merits of vaccination, but it would support those organisations who plan to make vaccination a condition of participation and avoids the need for hundreds of different methods.

Remember the early days of Track & Trace in NZ before the single government facility simplified matters?

Let's not place another unnecessary financial burden on businesses by insisting they build their own.

Restaurants in New York (I assume Manhattan) are beginning to make vaccination a condition of indoor dining and I'd expect such a condition to become very widely used in future.

Such restrictions to physical participation will make good sense for many businesses, and I suspect it aligns well with NZ Health & Safety obligations too.

Investment Opportunities

2 Degrees IPO – The company has confirmed that it intends to float on the NZX before the end of this year.

TRAVEL

David will be in New Plymouth on 19 August.

Johnny will be in Tauranga on 26 August.

Michael will be in Hamilton and Tauranga in September.

If you would like to make an appointment, please contact our office.

Chris will visit Christchurch on August 17 (afternoon) and 18 (morning) and begin again to earn his keep! Clients wishing to review their portfolios are welcome to contact him now, as he is unable to extend his stay to accommodate late requests. He will undergo his second operation on 8 September and thus will not be returning to Christchurch until October.

On Wednesday 25 August he will be in Auckland, able to meet by arrangement in Ellerslie and Albany. To date, he has six available times in Ellerslie, beginning at 10am (Ellerslie International Hotel).

Michael Warrington 


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