Market News 10 December 2018

The media headlines are running out of extreme nouns to use as they try to attract readership and really, it’s beginning to have the opposite effect for me.

Analytical journalists who use genuine research must be frustrated when they are crowded out by such headlines.

A rising market invariably brings with it terms such as ‘surge, charge, burst and relentless’.

A falling market brings terms like ‘collapse, battered and plunge’.

Interestingly, after 345 days of such headlines the US share market is roughly unchanged, as is the oil price, as we approach the end of the calendar year.

Speaking of which, I’ll use next Monday for my usual annual review and sheepish predictions for 2019.

Investment Opinion

Criticism – Regular readers of financial media will know that some of NZ’s largest investors are criticising the managers of Vital Healthcare Property Trust (VHP).

The criticisms are justified, and the current behaviour of the manager makes VHP an unattractive vehicle for investment in commercial property in my opinion. (Not a commentary about the quality of the assets or tenants).

I would like to add to the criticism with respect to the voting process at VHP meetings, which in my view reinforces the opinion about poor form by the manager.

VHP do not offer online voting, which in today’s market and technological environment is unacceptable and it supports an opinion that the entity is trying to minimise participation, and thus influence, of VHP investors at those meetings.

VHP has also consciously chosen December 20th for it’s meeting date, all but Christmas eve. Motivation?

Of more interest is the fact that VHP has been calling smaller shareholders at home to encourage them to submit proxy votes for their preferred person. It would seem that they are more anxious about the situation than I realised.

So VHP is willing to make personal calls to shareholders, telling them the calls are being recorded, to probe them for responses about the actions shareholders are taking with their votes but VHP is not willing to offer online voting.

Very interesting indeed.

It doesn’t sound to me as if investors are being treated with primary importance by VHP representatives in this saga!

If you are a VHP investor who doesn’t usually vote, can I encourage you to do so on this occasion, and if you share the discontent of the professional fund managers then choose the ‘Proxy Discretion’ voting option and appoint one of the fund managers to be your proxy at the meeting.

I happen to know that ACC will be sending representatives, so you might name Guy Elliffe of Wellington ‘or failing him’ Blair Cooper of Wellington as your proxy to attend the VHP meeting on 20 December and they’ll be happy to represent you.

Note that you’ll need to do this now as the voting form needs to be returned (email, mail or fax) to Computershare promptly.

Sometimes voting is of modest importance to you, but on this occasion, I think you should view it as very important.

Trump vs China – Presidents Trump and Xi are reported as having agreed during their G20 meeting to cease hostilities for Christmas.

They both need a break.

Beyond that I am not a believer that they have reached a trade agreement; it is just another step in a trade negotiation that is likely to last years, not months.

Market pricing responded by leaping back into an optimistic stance, but again, in my view such optimism should be tempered. I am not changing my overall investment strategy of taking more care and moderating risk tolerance.

There are clues for investors to take more care in the continuation of higher volatility in the market pricing of various products (shares, bonds, commodities).

Oil Again – Speaking of commodities, two useful pieces of information about the oil market passed within my reach last week:

First – Mike Bennetts (CEO of Z Energy) told a group of ZEL shareholders that most of the oil producers have been basing long term investment strategies off an oil price between US$40-$50 per barrel; and

Second – Qatar has decided to leave its brethren (OPEC) and forge its own path with its oil exports.

Knowing the oil industries conservative estimate of the future oil price is useful to provide confidence that supply will continue and increasingly so as the price ventures as high as it did two months ago (US$80).

Mind you, given Qatar’s contribution to the possible unraveling of OPEC influence (remember Venezuela is a basket case) it’s possible that Saudi prince Mohammad Bin Salman could easily decide to temporarily flood the oil market to suppress the price and slow the search for competing supply.

Then again, it might be too late for this because US and Russian oil supplies are now large enough that they could ignore such a temporary threat and it might just inspire other OPEC members to break ranks and supply China directly (the other global economic powerhouse).

Qatar only supplies 2% of OPEC’s oil supplies but the symbolism of their departure is of far greater political influence and is another reminder to me that the increased volatility of global politics will map across to more volatile pricing across markets.

Just look at the 1-2% daily swings in the US share market when Presidents Trump and Xi toss around new declarations, often immediately contradictory to those of the previous week.

I smile at my windscreen every time I hear NZ politicians telling me over the radio how they are going to sort out the NZ oil supply market and its pricing; they have no influence other than taxes.

Interest Rate Indicators – During 2018 you may have read several commentaries about moves in the US interest rate market that are hinting at the possibility of a recession for the world’s largest economy.

A ‘normal’ yield curve offers higher interest rate rewards for longer periods of time, predicting that higher interest rates will be required to cool a more inflationary economy (plus some extra reward for time risk).

A ‘negative’ yield curve does the opposite, predicting that lower interest rates will be required to aid a weak economy and to avoid disinflation (or stagnation) in the years ahead.

Remember that an interest rate is a construct of inflation plus a real return, so long term interest rates factor in probable movements for inflation and real yield expectations.

Last week the interest rate difference between US 3 and 5 year Treasuries turned negative (-0.01% at 2.83% vs 2.82%).

At this stage it is only a tiny difference, but the crossover amplifies the attention being paid to the behaviour of the US yield curve and its predictive qualities for the US economy.

This very small starting point heightens interest for analysts in the more influential difference between 2 - 10-year Treasuries (currently +0.12%), and 10 - 30 years (currently +0.26%).

A large proportion of the lift in long term US interest rates over the past 12 months (+0.75% for 10-30 year Treasuries) has been unwound with a -0.25% interest rate decline over the past month for these longer terms.

The 2-year interest rates though have not declined, still up +1.00% resulting in a flatter yield curve, which leads to the current debate about a move to a negative shape and the prediction of a US recession thereafter.

There’s no escaping the nervous signals from the interest rate market about the potential for a recession in the US 18-36 months from now.

Not only is this news going to be frustrating for bullish share market investors as they learn about the potential for lower earnings in the companies they own, but it will also be frustrating for fixed interest investors who can only conclude that they may have witnessed the near-term high for interest rate rewards!

Yes, I can hear your; ‘there has been almost no increase to interest rates for investors’.

It is possible that the ongoing low interest rate environment could lead to higher dividends from well performing companies (without earnings increases) because several declare that they would use cash surpluses from maintaining target debt ratios (low interest rates incentivise this) to continue with share buybacks.

Share buybacks have the potential to spread the same corporate profit across fewer shares (more cents per share in dividend).

So, a recession in the US would likely result in lower share pricing to reflect earnings risks, but it may not result in lower dividends for owners (of the best businesses).

Batteries – A brief anecdotal thought.

China seems to be gaining the upper hand in control of the cobalt market supply chain, which is so important to the manufacture of batteries.

Batteries are a vital part of the planet’s desires to generate more electricity from natural resources to manage the mismatch in timing between generation and use of electricity.

More New Zealanders have become opposed to hydro dams for various environmental and resource reasons, but to minimise the impact of a controlled global cobalt market, and highly priced batteries, NZ may need to revisit installation of our own local battery resources, in the form of more hydro dams.

Dams are not portable, and battery use is inescapable, but minimising their cost on our economy may be important in our future.

Investment News

NZX – Investors should be pleased with the success of one new policy from the NZX, that of insisting that all trades $50,000 or less be done in sequence on the market and not hidden within the confines of in-house trading by the larger broking firms.

This policy has resulted in more transactions being completed on the NZX trading bourse with wider access to risk and price on offer.

This is a good result for developing wider participation in the market.

PPP – Investors in the NZ Social Infrastructure Fund will be pleased by the latest report.

NZSIF was established by Craigs to co-invest alongside the NZ Super Fund in a Morrison & Co Public Private Partnership.

NZSIF reports that all projects have passed into full operation and thus a more constant stream of dividends will likely be paid each quarter, with an order of magnitude of 6-7 cents per share per annum.

While the projects have been slower to complete than intended the portfolio of investments is a desirable collection of essential services, supported by government bodies between New Zealand and Australia making the cash flows robust in nature

Part of the overall return to investors can also be seen in the rising Net Tangible Asset value, now at NZ$1.32 (relative to retained capital contributions of NZ$0.964).

It’s nice to see this fund reach maturity, albeit disappointing that it was a little slow to get there, which is partly the failure of the NZ government to get on with the PPP that they promised would become a government strategy for progress.

Trade Me – is back in the spotlight, or rather it now has two spot lights directed upon it following a second approach from a potential buyer of the business.

The new buyer, probably for semantic reasons, expressed a possible buy price of $6.45 (5 cents higher than Apax’s offer two weeks ago). They want to be seen as serious about being in the game to buy TME.

The new offer should remind TME shareholders of the merit of patience with this investment given the presence of two competing interests endorsing the value of the company as somewhere well above $6.00.

After the initial offer from Apax some TME shareholders placed a low probability on the takeover and chose to sell shares at a price below $6.00 unable to restrain the profit taking urge of the 20% lift in the share price.

The directors need to present their view on value now, which won’t appear until the new year so don’t let it disrupt your mind during the Xmas break.

Crypto Currencies – Those of you dabbling in this space would benefit from reading the latest intentions following the G20 meeting in Argentina where the stated intention is to drive for universal coordination between nations (central banks) as the only way to legitimise digital payment methods and that there is a need for a tax on such transactions.

If you combine the political influence of the G20 and the balance sheets required to intermediate financial risk (such as the banks) then it seems highly likely that crypto-currencies won’t become the success the designers aspire to without agreeing to join the world of the regulated.

Ever The Optimist – I liked the recent story about the Kiwi (Paul Barron) who pursued an idea for including wool in surfboard manufacture and was pleased to see that he has now secured a sales contract with one of the world’s biggest surfboard companies.

The wool is used to replace the role of fibreglass.

This places Barron alongside Icebreaker (Jeremy Moon) and Allbirds (Tim Brown) as export winners determined to find new and more valuable ways to sell a commodity that NZ is very good at producing.

If I was a sheep, I’d be pleased to know that I’d become even more value to New Zealand’s balance of trade. (of course you would – Ed)

Barron’s success should also inspire other youngsters to know that with brains, hard work and a little risk they can succeed for NZ and themselves whilst wearing a T-shirt, jandals and sunglasses and not require a business suit.

ETO II – Recent headlines have reported rising volumes and margins for NZ’s horticulture sector so it was nice to see tangible evidence with Scales announcement that it will increase its interim dividend and may yet exceed the annual earnings forecast.

ETO III – There shouldn’t be any serious doubt about the financial strength of the NZ domiciled banks, but it was nice to see credit rating agency Fitch Ratings raise the outlook for the sector to ‘stable’ from ‘negative’.

Fitch made specific mention about the stabilising of household debt (as did the Reserve Bank, hence easing of LVR tension last week) and the slowing house price growth as significant drivers.

It is appropriate however to note that Fitch still describe NZ household debt as being high relative to global peers.

Fitch will have been pleased to see the RBNZ declaration that more homogenous risk calculations will be required from the banks, which will likely result in higher capital contributions from the big four banks.

Fitch specifically noted that the big four banks have ‘an extremely high propensity and ability for support if needed’ (from their Australian parents).

So, you can rest easy about the low risk attached to your term deposits in banks, although this does not resolve your discontent with the interest rates now offered by them!



NZ Refining – is offering a new subordinated bond to the public.

It has a legal life of 15 years, with 5 yearly rate resets and the option of repayment at each reset.

The interest rate for the first 5 years has been set at 5.10%.

The offer closes this week on 12 December so if you were wishing to invest it is now urgent that you act (submit an application form to our offices).

The offer document is available on the Current Investments page of our website.

NZR is paying the brokerage costs for this offer.

Napier Port – Hawke’s Bay residents are indeed a progressive bunch with 57% of those who responded to a survey expressing support for the Hawke’s Bay Regional Council proposal to sell 45% of the port and list the company on the NZX.

If this happens in 2019 it will be a good opportunity for investors to gain a little more diverse exposure to the country’s critical infrastructure.

The deal seems a little more likely given that local discussion has moved to jockeying for preferential position to access shares, and not arguing against the proposed offer.


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


Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a free meeting.


Our last day in the office will be Wednesday 19 December, returning on Monday 7 January.

Compliments of the festive season from us to you all.

Michael Warrington

Chris Lee & Partners

Market News 3 December 2018

Brexit versus Y2K.

I clearly remember the fuss that brewed in the lead up to 1 January 2000 as government and corporate entities alike worried about the potential for catastrophe if computers didn’t understand the date sequence for the new millennia.

The instigators of this thought, probably tech sales people, were very successful in achieving widespread anxiety, but ultimately it was just another Saturday and on Monday morning the computers and businesses were fine.

We had all spent vast sums of money on worry though.

So, my question is, have ‘we’ again brewed Brexit into an elephant that it is not?

Business and trade will undoubtedly continue, evolving based on new trade agreements, but this is little different to Pacific nations agreeing to move on with trade after the US pulled out of our ‘local’ agreement.

The UK unceremoniously dumped NZ and Australia as trade partners in the 1970’s when they joined the European Union. It was uncomfortable for a time, but we moved on to trade with others as required.

I shan’t be burning too much mental energy on Brexit this summer.


Investment Opinion

Plan for market disruption – Ray Dalio, founder of the world’s largest hedge fund Bridgewater reported as delivering the best returns of all such funds, explaining (through a Bloomberg interview) that he sees many uncomfortable parallels between today’s economic conditions and those leading into the depression of the 1930s.

His response to early investment failure in his career was to become hugely focused on data and meritocracy debate where everything was to be stress tested, without fear or favour regardless of seniority amongst employees.

He described labels – ‘Radical Honesty’ and ‘Radical Transparency’ as delivering behaviour that stands a better chance of delivering better outcomes.

Ray is wealthy, and Bridgewater is hugely successful. They have no need to throw up headline grabbing opinions to find additional clients, so I think his opinion is worth considering.

Indeed, Ray said during the interview that he is in ‘stage III’ of his life when he intends to spend more time sharing his views with younger generations and hopes to enjoy seeing them succeed. (stage I was to learn, stage II was to try to succeed).

So, Ray is a very credible commentator and is currently very concerned about the scale of debt in the world economy and the rising economic conflict between the US and China and believes these may be a trigger for a period of serious economic disruption.

There have been plenty of analysts commenting on extreme market conditions and issuing dire warnings so to some extent this is just another one, but Ray’s feels a little more credible than the majority of others.

I don’t want this to instill investor fear.

I want to again remind people that the appropriate response to news like this is to invest based on investment rules that suit you, so that no investment outcome will disrupt your ability to meet financial obligations and hopefully not disrupt your discretionary spending preferences.

Trump – Among the recurring, and flood depth, media criticisms of President Trump a recent item presented a photograph of the President during a negotiation, and there in the immediate background was New Zealander Chris Liddell.

Regular readers will recall my compliments about Chris and I can’t let go of the fact that if he is still willing to be part of the Trump Whitehouse then some things of value must be occurring.

Chris is no fool, quite the opposite, and he would not waste time working in a circus.

I would rather that Chris was still a director of Xero, but maybe he is angling for a bigger patriotic prize, such as future NZ ambassador to the US?

Oil – Over a very short time frame, predominantly while I was away on holiday, the oil price (West Texas Intermediate market) fell by 30%.

This sort of volatility is unwelcome, as it is in any market pricing, other than for traders who love volatility and profit from it by trading against underlying users.

The oil price market of late is a great example of judging people by their actions and not their words.

If you waded through the oil headlines of the past few months, you’d see various headlines from politicians of influence in the largest oil exporting countries. The statements presented were a mixture intended to pacify upset sensed from consumers or from rival political forces.

They say nice things, but the oil trading behaviour is clearly anything but nice.

The story surrounding the death of Jamal Khashoggi and Saudi Arabia is an example of the difference between words and actions.

Oil exporting nations want a high oil price, but not so high as to disrupt the long-term economics of the consumer nations. A high oil price places a nice ‘tax’ on importer nations economic performance paid out to the oil exporter nation.

Oil exporters will say nice things about increasing supply to stabilise a sharply rising oil price, but in reality, most are very happy to see an increase in their revenue, with some desperate for it (Venezuela, Iran, Russia etc).

The US tries to use its influence over the US dollar as a reserve currency to limit the actions of some nations, and I’m sure this has some impact, but I’m also certain that the ‘dog box’ nations like Iran find arbitrage payment methods for remaining in business.

A client recently explained to me how simple it was to settle financial obligations in Cuba; payments that would otherwise have been made by a US Owned booking agency (USD base settlement process) were re-routed via a nation who agreed to do business in Cuba (Canada).

We can continue our environmental debate about a preference to move away from fossil fuel for energy, but for the time being (decades) control of oil is power.

As I have touched on before that political power is shifting around the globe as the US has been very successful with its shale oil mining and is now self-sufficient with oil and looks very likely to become a net exporter of the resource.

The best thing you and I, and New Zealand, can do to minimise the impact of volatile oil prices on NZ is to progressively reduce our use of oil as an energy source. This implies a strategic intent to increase our supply of electricity from all sources – hydro, solar and wind.

Although, judging by the rising volatility of electricity pricing in NZ we are struggling to do this (increase supply) and thus our electricity providers are manipulating the local electricity prices in the same way that oil exporting nations are influencing oil prices.

It’s nice to be able to fill the car’s fuel tank a little more cheaply this week, but as with all things, operate on a show me, don’t tell me basis and you’ll end up better off.

Are We There Yet? – Apparently we are.

Both the US Federal Reserve and the Reserve Bank of NZ have indicated that it is time to remove some of the tension of monetary policy from the economy.

The Fed reigned in tightening sentiment by simply stating that ‘we are very close to neutral interest rates for monetary policy.

If that’s true they should have little difficulty in selling some proportion of the trillions in bonds held on their balance sheet.

The RBNZ used more than words; they eased the tension in the Loan to Value Ratio settings for bank lending on mortgages.

From a global perspective the US Fed words are far more ‘valuable’ than the RBNZ action.

None of this will be music to the ears of our investors who haven’t yet experienced any increase in interest rate returns on fixed interest investment, but it is consistent with our view that interest rate returns are not going to rise for many years yet.

It would seem that US Fed Funds rate may come to a rest at about 2.50%.

It’s possible that New Zealand’s Official Cash Rate (OCR) will remain at 1.75% until 2021, but for caution let’s price in a move to 2.00% being neutral (zero real return) relative to our country’s inflation target.

That might be it.

How exciting (not).

Investment News

Financial Stability – The Reserve Bank has released its latest Financial Stability report which is useful for the curious investor who likes detail.

The main point being highlighted on this occasion is the easing of the Loan to Value Ratio rules for property buyers (both residents and investors).

This easing seemed a little early in the piece to me as property pricing has not weakened yet and I didn’t view the LVR settings as all that restrictive frankly.

However, it does show a willingness by the central bank to actively use its macro-prudential tools and this should in turn ensure more stability to the Official Cash Rate.

Any investors long hoping for a dramatic lift in the OCR to 4% or 5% should not hold their breath, or too much cash, in my opinion. You might see a return to the 2% environment, but I even think the 3% environment is too much to expect in the foreseeable future (years).

Related to financial stability, the RBNZ is placing increasing pressure on the big banks to report their risk profile related to the same standards as the country’s smaller banks, and not just their specialised internal risk modeling.

We think this is an excellent idea for a clearer understanding of risk across the NZ banking sector.

The RBNZ was able to highlight the huge variation between the banks ‘internal risk models’ by simply asking them all to define the risk of a hypothetical dairy loan portfolio defined by the central bank. The responses varied by 40% on the amount of risk and thus equity that would be required for these loans.

The small NZ banks will have smiled and said ‘told you the playing field wasn’t level’.

The big banks would have been silently shocked that they varied so much from their closest peers. (who has messed up??)

All the major banks have the same very strong credit ratings, and for the most part they offer the same interest rates (rewards) on term deposits, but, the RBNZ has revealed that they are not the same risk!

It is possible that even the credit rating agencies don’t understand the major banks internal credit assessment modeling.

Lastly on this subject, I’d still like to see the RBNZ introduce a Debt To Income (DTI) tool both because it is a logical financial stability influence and to further enhance the stability of New Zealand’s interest rates, which in turn should help with longer-term stability for our currency (export/import benefits).

For local investors, the Financial Stability Report should remind you of the benefit to increase long term investment decisions and minimise holdings of short-term cash to emergency need and short-term liabilities (spending).

Italy – I think resolving Italy’s economic woes is more important to Europe than the EU’s debate with the UK over Brexit.

The effect of politics on market pricing was witnessed last week when pricing of risk improved (share prices up and interest rates down) following Italian acceptance that a softer line will be required on their budget setting than the initial negotiation stance.

This retreat from the initial aggressive stance is useful, but it doesn’t change Italy’s very weak financial position.

Linking back to Ray Dalio (above) when questioned on where economic stress might be felt the most, he replied ‘in Europe because they have disagreement within countries and disagreement between countries, which will make sound financial management very difficult’.

Trade – New Zealanders may develop a better understanding of President Trump’s perspective when they look at our latest trade figures; a $1.3 billion deficit for the month of October ($5.8 billion deficit year to date).

Free trade agreements are unquestionably a good basis for negotiating trade, but it is a reasonable expectation that the trade be as closely balanced as possible.

New Zealand likes to think that our primary produce gives us a desirable status in trade relationships, and it does, but for the longest time we have bought more goods internationally than we have sold.

Ever The Optimist – Relating to the trade item above, it was nice to read that tourism now exceeds dairy as our number one export (diversely spread form of income across NZ) and that Kiwifruit continues to be surprisingly strong.

It’s important that other industries dilute the relative scale of dairy to the wider success of our economy.



NZ Refining – is offering a new subordinated bond to the public.

It has a legal life of 15 years, with 5 yearly rate resets with the option of repayment at each reset.

The interest rate for the first 5 years has been set at 5.10%.

The offer which is open now and closes on 12 December involves submitting an application form to our offices.

We have a little allocation left if you are still contemplating investment but missed the bidding process last week, but please be prompt as it is only a modest sum.

The offer document is available on the Current Investments page of our website.

Clients receiving financial advice from us can find a research article for this offer loaded to the Private Client Page of our website.

NZR is paying the brokerage costs for this offer.

Napier Port – Hawke’s Bay residents are indeed a progressive bunch with 57% of those who responded to a survey expressing support for the Hawke’s Bay Regional Council proposal to sell 45% of the port and list the company on the NZX.

If this happens in 2019 it will be a good opportunity for investors to gain a little more diverse exposure to the country’s critical infrastructure.


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


Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a free meeting.


Even though the decorations went up in our house during November, snuck up in breach of Dad’s rules (while he was out of the country), it is now December, so I’ll touch on Christmas hours at Chris Lee & Partners.

Our last day in the office will be Wednesday 19 December, returning on Monday 7 January.

Market News on 10 December will be the last of the normal format and I’ll use 17 December to do my usual assessment of 2018 relative to expectations and then try to set some expectations for 2019.

Compliments of the festive season from us to you all.

Michael Warrington

Chris Lee & Partners

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