Chris Lee & Partners Ltd

Market News 27 February 2017

If I were a child in Auckland who reads the news and understands the Time Value of Money I’d be hugging my Mum every night, mowing lawns, washing cars and doing the dishes daily.

The Auckland media reports a need to spend $2 million to buy a home in zone for the ‘best’ public schools.

The alternative is for Mum and Dad to retain their $1 million home, invest the other $1 million and use the income to send their child to a fabulous private school in, say, Wanganui.

INVESTMENT OPINION

Sky TV – I wonder if the NZ Rugby Union is cursing in their boardroom right now and drawing new lines on a whiteboard about a need for additional revenue from non-broadcasting channels.

The Commerce Commission decision to not allow Sky TV to join with another business is by definition likely to reduce the price paid for such content (possible forced redistribution of content to hold prices in check) and this must reduce the potential revenue for the sports selling their broadcast rights.

Winston Peters will see this as half a step toward his naïve preference for free to air sport.

I think the ComCom decision also sees them positioned perilously close to trying to install the Chinese model for corporate governance in NZ where some greater power exercises the final right of veto of all major commercial decisions and I am not sure I like that development especially when it involves a luxury discretionary spend product or service.

A business, such as Sky TV, that is regularly put in the competitive spotlight to purchase broadcasting rights has now been told that a regulator will play a part in how they distribute the temporary and competitively priced business product.

Sky TV seem to have been told they cannot connect their limited shelf life product to a multiple, but single ownership, distribution pathway (the new merged business), even though this is the business model Sky TV has operated since their inception under their own distribution channel.

Arguably the widened relationship between Vodafone and Sky TV reduced net consumer spending across the combined telecommunication, data and video content services on offer, a prospect that the ComCom accepted in its comments.

Of further interest on this matter is the imminent purchase by Time Warner Inc. of rights to broadcast European football’s Champions League, a change from 21st Century Fox which confirms there is no monopoly held by broadcasters. Ironically, the only suggestion made by the sporting body (not the regulator) was that Time Warner should look to diversify the channels used to distribute the content (Come in Vodafone, Facebook, etc).

The ComCom, through Chairman Mark Berry, confirmed their error (my opinion) when they stated that ‘had the merger not included all premium sports content we would likely have cleared this merger’. These sports contracts all have a limited shelf life and are always part of a competitive supply tender by the sports bodies; there is no monopoly control here.

Maybe ComCom should be talking to sports bodies about allowable methods for selling sports rights? (Again, the rugby union would hate this enforced increased downstream competition, as it will reduce pricing). It's long-term controller of the sports rights (i.e. the sporting body) that holds consumer value; the channel used to observe the sports has but a fleeting commercial moment.

The ComCom described the sports suite at Sky TV as ‘must have’ sports viewing. This is utter nonsense as a large proportion of NZ consumers of televised content confirm by not using Sky TV and by pursuing sports entertainment across many sports and many methods of participation.

Another reference – The main concern was a single telecommunications company dominating ownership of premium sports content. This sentence lacks the word ‘temporary’ between ‘dominating’ and ‘ownership’. In fact the use of the word ‘ownership’ is tenuous. The NZ Rugby Union owns the rights to its product, so what Sky TV has is a lease.

All tenders of such content provide a temporary dominant business position. The government assigning of its vehicle supply contract to BMW has given BMW a temporary dominant position over the supply of Crown vehicles; should that be banned? Perhaps the government should buy one vehicle at a time through continuously competitive tendering.

Good grief.

Another quote – ‘the Commission has not been able to exclude the real chance that the merger would substantially lessen competition’ (again I insert the word temporarily), yet ComCom was OK with Z Energy buying Caltex (permanent change) and it observes the insurance sector consolidating to the point that it now declines to offer cover during times of duress.

A combination of distribution channel (Vodafone online plus Sky TV satellites) and product (Sports rights etc) does not imply a timeless monopoly anymore than it did when Coliseum Sports Media secured the rights to deliver English Premier League (EPL) football content in the past.

Where is Coliseum now?

Next in line to buy the rights to the EPL was Al Jezeera’s beIN Sports and they are not yet re-distributing the EPL to any NZ viewers! Distribution in NZ wasn’t even part of the business plan for winning the Australasian distribution rights.

Surely that is at the ludicrous end of the delivery spectrum scenarios but in that case our ComCom has no influence on the corporate distribution choices.

Will Sky TV need to move to the Cayman islands and deliver its content via the internet to avoid unreasonable regulation or will the highest bidder in the next auction of rights by NZ Rugby be Al Jezeera’s beIN Sports because they will be able to set distribution methods pricing to suit themselves?

There is a lot of water to flow under the bridge yet with the world of content and distribution methods and I suspect there is a lot of potential change for the Sky TV business yet but I am now carrying a few concerns about the basis upon which our Commerce Commission is reaching some of its decisions.

Sports selling broadcast rights have been forced to contemplate the revenue side of their business model.

Disclosure – I own a few SKT shares and my comments are not sour grapes. I don’t like to see the shares fall 20% in price in a single day, nor do I like to see the excessive volatility, which is frustratingly inspired by regulators and not business performance, but I accept that this is precisely what investment risk is all about.

Interestingly the share price decline confirms that the market concludes that the value is in the distribution method and not the content, which is the opposite conclusion of ComCom who place the value in the asset (rights to broadcast sport), an asset that Sky TV still currently has.

I’d counsel people against making short-term decisions about a long-term business sector even if the prospects look challenging.

Revert back to your own investment policy drivers to make specific decisions for yourself.

INVESTMENT NEWS

Climate Risk – The Australian Prudential Regulatory Authority (APRA), they who regulate Australia’s banks, and by extension many of ours, have used the rostrum to warn us all of the foreseeable risks that climate change brings.

They are involved in the debate because they believe that climate change may threaten the stability of the entire financial system, which is their domain to regulate.

APRA explains their concern that ‘While climate risks have been broadly recognised, they have often been seen as a future problem or a non-financial problem’.

In their view ‘Many of these risks are foreseeable, material and actionable now.’

APRA is a serious regulator with influence over the largest sector of the economy (banking) and this robust speech will send reverberations around businesses well outside the banking sector.

APRA is clearly reinforcing a speech by the governor of the Bank of England (Mark Carney) two years ago when he described climate change as ‘the tragedy on the horizon’, but APRA is going one further by saying if it is on the horizon it can be seen and thus managed.

The Bank of England defined the key risks as:

- Physical risk around the effects of climate change

- Transition risk from the shift towards a zero net emissions economy

- Liability risk for company directors, trustees, and insurer

APRA has put the banks on notice that it will begin monitoring for organisational and systemic resilience with respect to the risk of adverse shocks connected to climate change. Having an environmental scientist on the board of directors or sponsoring Greenpeace won’t be enough, banks will need to show that they can cope with massive short term changes to the economy linked to climate change.

It will be hard to prove it was linked to long-term climate change but the very short-term change in the weather in South Australia last year saw the entire electricity system fail which very clearly compromised the state’s economy and will result in enormous expense to reduce the risk of similar events in future.

The irony here is that the failure related to a dependence on renewable energy supply.

The net impact from yours and my perspective is that the additional focus and regulatory impost must add expense to doing business whether you are a bank or a corporation making widgets.

Bankers will not treat this new APR focus lightly.

Profits – The first profit announcements of the current season from NZ companies have been at the ‘good’ end of the range thus far which is a ‘nice to see’ confirmation of the oft discussed strong NZ economy and rising population.

Many share prices are already trading at optimistic levels so based on profits and dividends confirmed theoretically share prices should not change much, unless there is a tidal change in underlying market confidence (led by the US market) or pricing ratios (Price/Earnings multiples).

As I write I would expect the optimistic state of the market to remain because local performance is being validated for many businesses and the US market continues to carry an optimistic tone.

We always encourage investors to review company announcements about performance and to regularly review the scale of each investment relative to their personal investment policy (strategies); if an investment has become over-proportioned as a result of good company performance there is no harm in considering profit taking (partial sale) to reduce that over-exposure.

Chinese Money – I think wealthy Chinese people (resident in China) are still concerned about the potential for the value of the currency (Yuan) to decline and perhaps there are still many trying to send some funds offshore to ‘hide’ even though President Xi is clamping down.

One little anecdote that fits well with my theory is HSBC Bank in NZ offering an 18-month mortgage rate to borrow money at 3.99%.

The other NZ banks offer to pay about 3.75% p.a. on 18-month deposits so they are not about to lend money at 3.99% for a 0.24% profit (Bank’s overall net interest margins are about 2.20% at present).

This implies to me that HSBC is paying a much lower interest rate on 18-month deposits than 3.75%, deposits that I suspect they have many of from their base in Hong Kong.

HSBC is likely to have a relationship with these depositors already so Anti Money Laundering obligations have been completed (or have they? – Ed). NZ based banks would run a mile today if they were approached by many such international customers asking to become clients with deposit funds such is the value lost in time required to complete and sustain the AML process.

Local banks would prefer to raise money by selling a wholesale issue of bonds to HSBC to carve up amongst their clients for a profit.

So the AML regulations have created a cross border arbitrage opportunity for banks to exploit, in this case with HSBC probably paying much lower interest rates on its NZ dollar deposits for non-residents and then on-lending those funds at very competitive interest rates locally to lock in their profit margin.

If I am correct, that an across border banking arbitrage is developing, it is a negative scenario for global liquidity, which for the past 8 years has been well lubricated by near zero percent interest rates.

It will take a while before we understand how this scenario will play out for the NZ economy and NZ dollar investments.

Heartland Bank – It is becoming boring to say, but Heartland Bank’s half year result announced last week continues the theme of delivering upon its strategies (which differ from the big banks) and has presented a profit toward the upward end of expectations (forecasts).

Boring is good.

The half year profit was $29.1m (+14% on previous year) and they announced an interim dividend of 3.5 cents per share (same as 2016) and acknowledged a preference to deliver a larger final dividend, if possible, once the full year result was in.

HBL expects the full year profit to come in close to the top end of expectations, being about $60 million.

The core operation of the bank is being managed very well, and is thus operating well, and it supports the growth ambitions that were explained by HBL. 

Growth is confirmed by the current call for additional capital from shareholders through the placement that is on its way to you, which offers an opportunity to apply for up to $15,000 worth of additional shares at what is likely to be a price of $1.46 per share.

Kevin Gloag has loaded an article about the HBL placement, including financial advice, onto the login page of our website for those who request a financial advice service from us. It will be of interest to HBL shareholders.

HBL is now pushing headlong into ‘growth through the leverage of online systems’, as opposed to needing branches everywhere, and they are enjoying early success with this strategy. 

The strategy does bring another sharp edge to it though, developing a strong understanding of a borrower’s ability to repay when armed only with data sourced through the online medium. The data gathered helps populate a ‘scorecard’ and the bank’s intention is the same as my hope for them that they progressively improve the quality of the scorecard and be sure that it aligns with actual human behaviour.

Aspects of these new growth strategies imply to me that future performance is likely to be ‘less boring’; naturally I hope that management skill will deliver excitement rather than disappointment.

If we can’t have ‘boring and reliable’ then clearly we all prefer exciting as the alternative.

Greece – I hold the opinion that the various financial backers for Greece will turn up again and offer assistance, but public confidence is weak because the volume of cash being withdrawn from the banks is rising again.

Ever The Optimist – I know this should carry at least a vague connection to investment but this week I am going with ‘one consistently warm and relatively calm week in the Wellington region’.

Investment Opportunities

Meridian Energy – proposes to issue a new seven-year senior bond shortly.

We’ll guess that it will need a return of around 4.75% p.a. to be competitive and that it will be issued quickly, via contract notes. It is not yet clear who will pay the brokerage expense.

We have established a deal list and investors wishing to purchase this new bond are welcome to join it.

Transpower – has also announced an intention to issue a new 5+ year senior bond.

It is likely to offer a yield between 3.85% - 4.00% p.a., is likely to be issued via contract notes and is likely to result in the purchaser paying the brokerage expense.

We have established a deal list and investors wishing to purchase this new bond are welcome to join it.

Bond yields ≥ 4.70% from the secondary market - 

KPG020 – Kiwi Property Group, 4.00% coupon rate, 7 September 2023 maturity, 4.80% market yield;

SKC040 – Sky City Entertainment, 4.65% coupon rate, 28 September 2022 maturity, 4.70% market yield;

TPW150 – Trustpower Ltd, 4.01% coupon rate, 15 December 2022 maturity, 4.75% market yield;

WIA040 – Wellington International Airport Ltd, 4.00% coupon rate, 5 August 2024 maturity, 4.70% market yield;

ZEL050 – Z Energy Ltd, 4.32% coupon rate, 15 November 2023 maturity date, 4.75% market yield.

WIA050 – Wellington International Airport Ltd, 5.00% coupon rate, 16 June 2025 maturity, 4.90% market yield;

Please contact us if you wish to purchase any of these bonds.

To exceed 5.00% returns from fixed interest one might consider subordinated bank bonds or various Infratil bonds. Subordinated bonds should offer yields higher again than a senior bond. 

We also present a subset of various bonds on the Current Investments page of this website.

Travel 

Michael will be in Auckland (North Shore) on 28 February (tomorrow) with a couple of spare time slots. He tentatively plans to make a trip through Hawke’s Bay and Tauranga during the school holidays in April.

Chris will be in Christchurch this Tuesday 28 February and Wednesday 1 March and will be in Auckland on Monday 20 March.

Kevin will be available in Christchurch this Friday 3 March.

David will be in Palmerston North and Wanganui on Wednesday 29 March and New Plymouth on Thursday 30 March.

Anyone wanting to make an appointment should contact us.

Michael Warrington

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Market News 20 February 2017

It’s a sad day to learn that the closest thing we have to Willy Wonka’s Chocolate Factory is closing (Cadbury’s in Dunedin).

INVESTMENT OPINION

 

Some of you may be relieved to find no opinion from me this week.

Instead I have allotted the space to answering a question in the Education Corner for a person, which was good to share more widely.

EDUCATION CORNER

I have received a few questions thank you, which I answered in email form but I do plan to transfer across into Market News to share when space and wider distribution makes sense.

You are welcome to continue your questions on into the future.

Questions about ‘what is a bond’, ‘how does it work’ etc. come up reasonably frequently so today I have brought across much of a response offered to a person last week.

Bonds

What is a bond?

The term 'Bond' does not offer any knowledge about risk (other than being a fixed interest asset, not an ownership asset like a share) just as the term 'car' doesn't tell you enough about what you will be driving.

At its simplest a bond is a label for a loan to a business. 

A senior bond issued by a bank behaves in a near identical way to a bank deposit with the same bank in that the bank accepts the loan (bond or deposit) and agrees to pay interest and repay the loan at maturity.

In this example the bond and the deposit rank alongside each other for repayment should the bank go out of business.

The bond differs from the deposit by being transferable and this supports a marketplace for buying and selling such bonds.

Ranking

How do I sort the various terms senior, subordinated, secured, unsecured etc.?

When assessing a fixed interest investment the considerations, in order of importance, are:

Default Risk (will the borrower meet their financial obligations);

Terms & Conditions (senior, subordinated, complex conditions etc.);

Duration (Maturity, if any)

Liquidity (saleable or not); and lastly

Yield (am I being paid enough given all the inputs above?).

Too many investors place 'Yield' at the top of the list of considerations.

Reference to 'secured' and 'unsecured' simply defines if the loan has been connected to some form of tangible collateral or a guarantee from an unquestionably strong entity. 

I don't place too much emphasis on this when making investment decisions other than to understand the situation because most things are unsecured. An unsecured bank deposit is a lower risk than a loan to a weak business (say my son's lemonade stand) secured by low value assets (a beer crate and his mother's plastic jug). The strength of the lemonade stand loan would improve immeasurably if it is guaranteed by his... mother who wants her jug back. Under this example you can see that the guarantee would trump the presence of the term 'secured' in reducing the default risk of the loan.

An unsecured deposit with a bank is a lower risk than the secured loan to a lemonade stand business and a mother's guarantee.

After assessing the likelihood of default of a borrower the next most important item is to understand where do I stand for possible repayment in the event of default of the borrower. This relates to your question about senior and subordinated ranking.

Try to imagine the borrower as a layer cake. 

Bank example (five layers): 

The top layer, being the first to be repaid in the event of default (failure) by a bank, sees payments to IRD, and any lender who has gained a position of priority (such as 'covered bonds' issued by banks) and staff;

The second layer down captures senior bonds and bank deposits;

The third layer down captures 'Tier II' subordinated securities, which rank above;

The fourth layer down capturing 'Tier I' subordinated securities; and finally

The fifth layer, the shareholders who are always last in line. 

From this example you can see that 'subordinated' is as defined in the dictionary (lower rank or position) however you can also see that the specific terms and conditions of lending to banks establishes two different ranks of subordination.

Company example (four layers):

The top layer, being the first to be repaid in the event of default (failure), IRD, lenders with defined priority and staff;

The second layer down captures senior bonds and bank deposits;

The third layer down captures subordinated debt securities; and

The fourth layer, the shareholders who are always last in line (or should be, unless you are Blue Star Print or another dodgy restructure attempt!).

Return

Defining the return?

The return offered, whether a newly issued investment or being traded in the secondary market, should increase with the risk being presented. (Oddly I was once acting as an expert witness in a case where the other team disputed this premise).

Reverting to the points above, any weakening of these should result in a higher return being presented.

Default Risk - the higher the risk of the borrower the higher the return should be (banks versus lemonade retailer);

Terms & Conditions - the more concessions an investor must accept the higher the return must be (good security, unsecured but senior ranking, subordinated with simple definitions, subordinated with complex definitions);

Duration - typically the longer the term of a loan the higher the return should be (positively shaped yield curve); and

Liquidity - the harder the investment is to exit mid-life the higher the return available should be.

Setting an acceptable return on a newly issued investment involves input from many industry professionals. There is sufficient tension to set a fair price/return to ensure that the deal is successful. It is clearly a failure if a company/bank tries to borrow, say $100 million, but the market of investors only supplies $20 million because the pricing was incorrect.

Setting prices/returns in the secondary market is a function of ongoing tension between buyers (demand) and sellers (supply) with reference to all risk inputs and competing alternative investments (this is part of the reason the US and Australian markets have so much influence on the NZ market).

The Marketplace

How does the secondary market work?

When a person, or many persons (natural person and corporate entities), own assets they benefit from an ability to buy or sell those assets. Circumstances change and thus flexibility is a valuable option to have.

Liquidity adds value to an asset. If one had the choice of a five year bank bond at 4.00% and a five year bank deposit at 4.00% (same interest payment frequency) that person should always choose the bond.

Pricing of an asset in a market will be set by competitive tension between buyers and sellers. This is no different from any other asset. However, trading in bonds and shares is typically a reasonably deep market so the price difference between buyers and sellers is usually very small (unlike buying/selling a house).

So, my reference to 'Market Yield' intends to help readers understand that the 'Yield to Maturity' (return between now and repayment) is established between buyers and sellers in a market place.

To be more specific for you, the term 'Yield' needs a little more definition depending on the situation.

'Running Yield' describes the return at present from an asset. For example the 'Running Yield' on the Infratil perpetual bond is 5.50% p.a. at present (3.63% interest payment divided by $0.66 purchase price). However, the interest rate will change in November (every year) and there is no maturity date so I cannot offer you a 'Yield to Maturity'.

I need all the return (interest rate, market yield, maturity date, and maturing amount) parameters to be boxed in by a maturity date to present you with a 'Yield to Maturity'.

A person uses a broker (like Chris Lee & Partners) to arrange purchases and sales on the market (bonds and shares alike). Once transacted the deal is confirmed by contract note and the person incurs a brokerage expense (service fee) for each transaction.

A purchase results in the person paying the defined amount into the broker's trust account and the broker transfers ownership of the investment to the person (which is confirmed by the registries - predominantly Computershare and Link Market Services)

A sale results in the broker paying money out to the person and removing the asset from the person's ownership at the registry.

A key element of a transition is the broker’s guarantee that both parties will be satisfied. Brokers need capital to offer this guarantee.

Expenses

Does one deduct brokerage or fees to understand the net return?

Unquestionably the answer is yes.

Any form of one time brokerage or annual fee reduces the net return being received by an investor. (Queue soap box)

High industry fees, especially the recurring annual fees, have an unreasonably negative impact on investors in today's low returns environment.

This is why Chris Lee & Partners prefers the low annual fee, one time transaction brokerage model to deliver lower annualised cost structures to clients.

Here is one example, as sought:

Person buys a five and a half year bond via a broker, such as the new bond from Contact Energy, with a (my guess) return of 4.70% interest rate (yield at point of issue) and pays say 1.00% brokerage. The implied 'Yield to Maturity', after expenses, for this investor would be 4.50% p.a. (pre-tax)

The term of the investment plays a role in amortising the brokerage costs. 1.00% brokerage only reduces the 'Yield to Maturity' of a 10 year bond by 0.12% per annum (4.70% becomes 4.58%).

If the same person buys the same bond from a broker operating under the annualised fee method, with a fee of say 1.00% per annum, the implied Yield to Maturity, after expenses, is 3.70% p.a. (pre-tax).

Choices

How should all this information affect one's investment choices?

I'll keep this bit brief.

1. Investors should have reasonably well defined investment policies for how they will invest. What jig-saw pieces shall be allowed in to make up the puzzle? 

2. A shameless plug for financial advisers. This is why we exist and how we earn our fees/brokerages by adding value to the process of migrating from 100% cash in a bank call account out to a well-reasoned investment portfolio. We help with defining investment policy and we help by ensuring that investments chosen are consistent with that set of rules.

Thanks for asking.

INVESTMENT NEWS

UK resolve – Thank goodness for the Bank of England showing some spine, especially when there are far more important issues to spend time on.

You may recall that the BoE was criticised in the Twitter-sphere (social media) for allowing tallow to be used in the UK’s new five-pound notes. The leverage provided by social media enabled the anonymous to assemble 130,000 people willing to say they were upset about this situation.

The BoE wasted (in my view) some additional time considering the protest but has now responded with ‘thanks for the concern but there will be no change’, or through similar but politically correct wording.

Politically correct wording or not the message was clear and reinforced by some evidence; the tallow required for the entire volume of five-pound notes would be less than that sourced from two cows, whilst you all eat 2.6 million cattle each year (notes will last many years).

The BoE didn’t say this, but I will; for those who for religious or other reasons wish to avoid handling animal products and feel the risk of touching a five pound note is too high (100 parts per million) then please use the alternative of electronic banking to arrange payments (or a larger paper note for the next few years – Ed).

The BoE will not mind a gradual reduction in the use of notes in the payment system.

Europe - My favourite quote from last week was:

‘Calling the latest Greek deal a sticking plaster does disrespect to the Elastoplast’

Greece seems keen to beat Italy to the crisis alter.

At this stage it is only Greek 2 year bonds rising in yield (to about 10% again) so perhaps the immediate fear is near term creditors will be ‘asked’ to extend their loans for much longer terms?

Whatever they call it, deferring value through overpriced agreements is a default on debt obligations in my language.

Gold – When you read commentary about gold you invariably comes across passionate debate across the trenches about the merits of ownership, or lack thereof.

I view it as a product for traders as there is no income, other than renting it out to those with short positions (hoping the price will fall) although this rental stream rather defeats the purpose of holding gold as an emergency asset. If the short seller (borrowing the gold) fails or North Korea do something incredibly stupid the gold owner may well lose control of the gold they have loaned out!

But I digress.

Whatever the passionate views are it is clear that gold is still considered a credible store of value because many central banks of the world choose to still hold vast sums in the commodity.

The example I was reading recently centred on Germany which has accelerated the retrieval of a large proportion of their gold back to German territory from France and the US in particular.

I don’t know why so much of Germany’s gold was located elsewhere on the planet, especially so long after the end of the gold standard currency measure in 1971, but it seems logical to me that it related to post war agreements and a display of commitment and trust to other nations from Germany plus accumulated holdings from ongoing trade.

Now Germany is bringing at least half of its gold back to the homeland.  

One or two stories implied a level of distrust in the audit of gold actually held in third party locations. This seems unlikely to me as it should be easy to prove; perhaps these rumours were spread by those who love gold and wanted the market to believe much needed to be purchased to square the ‘hole’ in the storage facility.

I think diversity of location is a more logical reason, including some now in the homeland.

Whatever the driver is the fact there is some tension around the decision discloses the ongoing value of the asset.

More interestingly, bringing more gold back to Europe seems to dispute the often-discussed threat that Russia may represent to Europe; another reason that gold was originally sent abroad.

This isn’t a message to invest in gold, more an important anecdote about the prevalence and ever-changing nature of political tensions, something that does impact on our investment decisions.

Ever The Optimist – I hadn’t been all that excited about the upcoming America’s Cup. The politics, which never mix well with sport, became a drag.

That quickly changed when Emirates Team NZ’s clever designers resolved to switch grinding from arm power to leg power.

This is an exciting development and I hope we have found a way to protect our knowledge after breaking cover and disclosing this point of difference to the competitors.

Even in a little country we should never underestimate the value of the brain to solve problems.

Our once broad-shouldered grinders may quickly become redundant (sorry lads), replaced by the likes of cyclists Julian Dean (Tour de France) Ethan Mitchell, Sam Webster and Eddie Dawkins (world champion sprinters).

ETO II – Apples pricing surges to $6 per kilogram in super markets.

This is great news for our horticulture sector (and dentists – Ed).

The crop has been delayed by confused weather gods so supply will soon emerge but the early price escalation is evidence of good demand for apples.

I have another view about our best apples, which won’t sit all that well with local consumers; they need to pay premium prices for apples locally or accept that they will be sold offshore. We need more export success in NZ so selling the best product at the highest price should mean the majority of that product goes offshore.

This ‘quality problem’ was witnessed in the wine industry recently too when callers to Fair Go complained about NZ wine labels selling wine ‘grown in Australia’.

I was surprised when only one winemaker was brave enough to explain the facts to Fair Go; ‘We can make more money selling our respected wines overseas. Kiwis want to spend less and we can meet that market too with cheaper grape supply from Australia’

This is good news because the local wine business is winning, local consumers are satisfied and the country’s trading result is a net surplus (for this modest example).

Meanwhile, back to apples, investors in Scales and Turners & Growers should, in theory, learn about elevated profits in the next reporting season.

Investment Opportunities

Contact Energy (CEN040) – launched a new senior bond last week (same, same but different).

It has a term of five years and nine months maturing on 15 November 2022 and the interest rate was set at 4.63%.

They elected to arrange the offer via a fast moving, booked by contract note, investor pays the brokerage method, so the deal was completed last Friday.

The will soon begin trading on the market for those who wish to buy them and add to a portfolio.

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

ASB Bank – is next up to offer a new bond, which they have done today.

The propose to issue a new fiver year bond and the indicative credit margin implies an interest rate set between 4.10% - 4.20% p.a. (paid semi-annually)

It is a fast moving offer (we need to hear from interested investors with firm requests by tomorrow at 5pm), and will be booked by contract note with clients paying brokerage costs.

Bond yields ≥ 4.70% from the secondary market -

KPG020 – Kiwi Property Group, 4.00% coupon rate, 7 September 2023 maturity, 4.80% market yield;

SKC040 – Sky City Entertainment, 4.65% coupon rate, 28 September 2022 maturity, 4.75% market yield;

TPW150 – Trustpower Ltd, 4.01% coupon rate, 15 December 2022 maturity, 4.70% market yield;

WIA040 – Wellington International Airport Ltd, 4.00% coupon rate, 5 August 2024 maturity, 4.75% market yield;

ZEL050 – Z Energy Ltd, 4.32% coupon rate, 15 November 2023 maturity date, 4.80% market yield.

Please contact us if you wish to purchase any of these bonds.

To exceed 5.00% returns from fixed interest one might consider subordinated bank bonds or various Infratil bonds.

We also publish a subset of various bonds on the Current Investments page of this website.

Subordinated bonds should offer yields higher again than a senior bond.

Travel

Kevin will be available in Queenstown on 24 February and in Christchurch on 3 March.

Michael will be in Auckland (North Shore) on 28 February. I tentatively plan to make a trip through Hawke’s Bay and Tauranga during the school holidays in April.

Anyone wanting to make an appointment should contact us.

Michael Warrington

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Market News 13 February 2017

The Financial Markets Authority continues to wave its flag by taking underperformers to task; 12 firms were criticised last week for failing to meet obligations under the Anti Money Laundering law.

Our requests for required client information will be an ever-present part of the relationship.

From time to time competitors read our newsletters.

If you are one of these and are sensitive to your position relative to compliance obligations I have good news for you. One of New Zealand’s most impressive compliance people is now operating an independent consultancy and would be pleased to help you align processes with obligations.

If you wish to make contact with this person you are welcome to get in touch with me for their contact details.

INVESTMENT OPINION

 

Thoughts from Another - A quote from last week’s reading that captured my attention, and thus I read it twice and decided to share it with you:

‘the fundamental analytical mistake has been to model the economy as an understandable and controllable machine rather than as a complex, adaptive system’ (Michael Lewitt)

Maybe we should be engaging with David Attenborough as often as we do with our financial advisers?

The follow up quote was worth repeating too:

‘As a result, the decision to solve a debt crisis by printing tens of trillions of dollars more debt means that the situation we face in late 2016, both in the advanced economics (AMEs) and the emerging market economies (EMEs ), is arguably more fraught with danger than was the case when the crisis first began’

And another quote that I like, and have used myself when writing for you:

‘one characteristic of complex systems is that precise forecasting is literally impossible’

Beware the salespeople with bold predictions.

Lastly, the quote that made me smile, amongst a wide collection of warnings, related to where is the next crisis coming from and how will I see it; the answer used was:

‘we are reminded every time we look in the mirror of our automobile, objects are closer than they appear’.

It was a cautious article that sits comfortably with my cautious approach to investment.

 

Inflation – A recent headline asked ‘what will the Reserve Bank of NZ do in the face of higher inflation expectations?’ hinting that surely they will need to do something, such as lift interest rates.

I know exactly what they’ll do, sit back in their chairs relieved at the turn back toward the 2.00% central target and away from a downward trend toward 1.00% inflation expectations.

Regular readers may recall us commenting after a revealing presentation from the RBNZ about the acute focus on the inflation expectations and in particular the heightened focus on the longer term results of 5 and 10 year periods, noting at the time that having seen the 10 year expectations fall below 2.00% was more than a little disconcerting.

They had learnt that it was harder than they thought trying to control the 12-24 month expectations but it was vital that they guided the population to expect the central target as a long term norm.

Interestingly the RBNZ does not appear to publish longer-term inflation expectation data points.

The previous 10 year inflation data that was used at the presentation I attended was 1.90% and on a declining trend.

However, having seen in this recent data that the two years ahead expectation increase from 1.68% inflation to 1.92% inflation it isn’t credible that the same cohort would not have guessed an inflation number of 2.00%, or a little higher, over a 10 year time frame.

So, as I say, the current governors and inflation monitoring team will be pleased and justifiably able to take a full lunch hour for a change rather than spending an extra 50 minutes a day fretting over data.

From an investor’s perspective I think this inflation news is ‘neutral’ and not disruptive to one’s fixed interest investment strategy.

Governor– The governor of the Reserve Bank of NZ, Graeme Wheeler, has announced that he will be stepping down after his five year term finishes in September.

To bridge a six month period post General Election results the deputy governor Grant Spencer, also retiring, has agreed to extend his time at the RBNZ in a role of acting governor until March 2018 when a permanent new appointment will be made.

I have enjoyed Graeme Wheeler’s time at the helm of the RBNZ, aside from some wasted energy pleading with markets to behave a certain way, and I applaud him for the introduction of macro prudential regulatory controls to the central bank’s armory.

The media article that I read ran a sentence along the lines of never achieving the 2% inflation mid-point during his tenure in office as if Wheeler was some type of puppeteer when in truth on most days Wheeler will have felt like the puppet on a global stage under a complex combination of strings.

It is an unfortunate situation to lose two such competent minds within a six month period from the central bank but it implies to me that 2017 will be reasonably stable from a strategic perspective at the RBNZ.

Residential property investors may get to breathe a temporary sigh of relief as loan to income ratios and higher risk weightings on their debts (at the banks) may not feature until a new governor is appointed.

I was unimpressed when the property investor lobbyists (Property Institute) immediately jumped up and started demanding that the government renegotiate its agreement with the RBNZ to include a ‘Housing Supply’ clause and that various macro prudential tools be shelved.

This is nonsensical. The RBNZ is tasked with price stability and stability of the financial system, they are not Housing NZ.

I was equally unimpressed when Steven Joyce suggested (politics at work) that the loan to income ratio won’t be pursued for now. He wants a ‘good governance’ cost benefit analysis to be completed on the proposal. This makes no sense to me because the regulatory cost is nil and the benefit is additional tools for financial stability when the RBNZ feels this is at risk.

Joyce was curious about the impact it may have on first home buyers.

Firstly it would alert such people of the scale of risk that is taken when borrowing large sums with little or no equity. If the gap between equity of the young, average incomes and average housing prices is unreasonably wide (making banking uncomfortable) then perhaps the government should look at launching an equity guarantee scheme to bridge the temporary equity gap whilst the young add to their savings pool.

Joyce then promptly changed hats and warned borrowers to factor in the probability of higher interest rate expenses in his presentation to the Finance and Expenditure Committee. So on one hand Joyce knows that borrowers need to measure the affordability of a loan but on the other hand he doesn’t see such a measure as a necessary risk management regulation for the banking sector.

Maybe Mr Joyce wants a few borrowers to fail and have their properties returned to market as more aggressive sellers in a new supply strategy for cooling property prices?

Steven Joyce is a better operator than this and he should get back to good governance and back away from good politics.

If I was a lobbyist I would be urging a new RBNZ governor to roll out additional banking regulations for loan to income ratios (more equity required for more risk) and to define property investors as business loans and thus require high levels of equity from the banks also.

Donald Trump may wish to revisit the less regulated era for banking but we certainly should not given the higher levels of debt that exist today relative to 2008.

I don’t think the changeover of the RBNZ governor will have any other impact on the way you manage your investment portfolio.

 

On Politics though – I have a left-field idea to boost the economic activity in Northland; invite the US to establish a large naval base there.

Within some of the Geo-political material that I read there are frequent references to the strategies for control in the Pacific and unwritten tension between the US and China specifically.

The US only has one territory in the West of the Pacific, being Guam, and they combine this with various regional friendships/allies to create their net of influence (Hawaii and American Samoa to the East).

China has clearly been trying to extend its influence both by building new islands (!) and offering financial support to various Pacific islands.

Until Donald Trump’s offensive phone call with Malcolm Turnbull the US had a good relationship with Australia but it would surely offer additional geographic benefit if the US was able to settle some forces in another country on the perimeter of the Pacific.

Northland in NZ provides the best location for naval departure (time and distance) and they might be able to construct a port on the headland opposite Marsden Point, just outside the harbour entry which looks a bit shallow.

I am sure we could extract a good economic agreement in return for adding to the US strategic advantage.

Investment News

Monetary Policy – The RBNZ left New Zealand’s Official Cash Rate at 1.75% (unsurprising to markets) and issued a sentence within its latest statement that was consistent with my view of no change this calendar year; ‘Monetary policy will remain accommodative for a considerable period’ (this tone was a little weaker than the market expected).

Holding a little extra cash at present in preparation for the many potential bond offers and in hope of a retreat in share market pricing makes sense, but it does incur a tangible running cost with short term interest rates sitting well below long term interest rates.

Team Talk – Spark has made an offer to buy 100% of TeamTalk (TTK) at 80 cents per share.

The TTK directors have asked shareholders to wait for their advice following an independent review of value.

However, the directors also unwisely commented on an expectation of more value from Spark.

Given the poor performance at TTK in recent years (they have been destroying value) I am dubious about the directors’ ability to recognise the value that they want Spark to respect.

Tower – was also approached with a takeover offer, from Fairfax Financial Holdings (Canada), at a price ($1.17) 48% higher than recent trading of the shares on the NZX.

In contrast to TTK the directors of TWR have already recommended acceptance of the offer (once received) and noted that some of the largest holders of TWR shares have already indicated to Fairfax that they will be accepting the offer.

Apparently the takeover price reflects all of the value that the directors believe existed when they addressed splitting up the business prior to this takeover offer.

Ever The Optimist – I may have discovered a silver lining to the rubbish summer weather, farmers have sufficient summer feed to manage livestock slaughter and avoid over-supplying the market.

By being able to hold back a little supply (25% lower apparently) they receive better prices on sales and can further improve the quality of the livestock held back which should improve future sales too.

I doubt many ‘townies’ appreciate this as they pay an extra dollar per kilogram for their Sunday roast!

ETO II – Pip fruit production is estimated to reach 21.5 million cartons this year (up from 16 million five years ago) delivering an export revenue of about $800 million.

The industry has brought forward to 2022 its expectation of achieving $1 billion in sales revenue.

The reports suggest a 10% increase in the number of people being employed and this must grow if they are to be successful with their volume targets in the years ahead.

Investment Opportunities

Wellington Airport – offer of senior, unsecured, bond maturing on 16 June 2025 closes tomorrow.

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

Contact Energy (CEN04) – has launched a new (same, same but different) senior bond. It has a term of five years and nine months maturing on 15 November 2022.

The interest rate will be set off a credit margin between 1.50% - 1.65% which implies about 4.50% based on today’s market conditions (interest paid quarterly). It could be a little better/worse by the time the interest rate is set this Friday.

The offer is a fast moving deal arranged via contract note (not application forms).

If you wish to invest in this offer please urgently (no later than 5pm Thursday 16 Feb) advise us of your interest to do so.

Investors will be required to pay brokerage (CEN is not paying brokerage).

Investors can easily align the merit of the offer with other opportunities from the secondary market.

Bond yields ≥ 4.750% from the secondary market -

KPG020 – Kiwi Property Group, 4.00% coupon rate, 7 September 2023 maturity, 4.80% market yield;

SKC040 – Sky City Entertainment, 4.65% coupon rate, 28 September 2022 maturity, 4.75% market yield;

TPW150 – Trustpower Ltd, 4.01% coupon rate, 15 December 2022 maturity, 4.75% market yield;

WIA040 – Wellington International Airport Ltd, 4.00% coupon rate, 5 August 2024 maturity, 4.75% market yield;

ZEL050 – Z Energy Ltd, 4.32% coupon rate, 15 November 2023 maturity date, 4.75% market yield.

Please contact us if you wish to purchase any of these bonds.

To exceed 5.00% returns from fixed interest one might consider subordinated bank bonds or various Infratil bonds.

We also have a subset of various bonds on the Current Investments page of this website.

Subordinated bonds should offer yields higher again than a senior bond.

Travel

Kevin will be available in Queenstown on 24 February and in Christchurch on 3 March.

Michael will be in Auckland (North Shore) on 28 February. I tentatively plan to make a trip through Hawke’s Bay and Tauranga during the school holidays in April.

Anyone wanting to make an appointment should contact us.

Michael Warrington

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Market News 6 February 2017

How interesting.

In a landscape that includes Trump versus Mexico the next head of the Bank for International Settlements will be the current head of the central bank in Mexico.

Zen.

INVESTMENT OPINION

 

Volatility – It looks likely to be a long while before every media headline doesn’t begin with, or include, the name Trump.

The media won’t be shy about repetitive use of grand and emotional headlines relating to Donald Trump if they see it increasing sales (papers and advertisements). It’s a little like the weather forecasts, which in my view are now also consistently exaggerated ; play it up to get attention.

It is interesting how emotive the protestors and the media content relating to Trump have been given that broadly speaking Donald Trump has been doing exactly what he said he would do when asking for Americans’ votes.

25% of Americans have a right for their discontent to be listened to but the 50% who didn’t vote have very little leverage now, in my view, and the 25% who voted for Trump are unlikely to be protesting against him. The non-voters should be taking a long look at themselves before heading out with placards.

I wish I could say at this point that ‘we don’t govern anything by anonymous feedback on social media’ but the US President has set a precedent of actively using social media! (fool – Ed)

Regardless of the fact that Trump is doing what he promised, the approach the President is taking is disruptive and it will take some time to learn whether or not this disruption is beneficial economically and with respect to investment performance.

We also know that whilst many people do not like change at all, change needs to happen, but to initiate too much change too quickly is disruptive to all and this is an unwise strategy.

As a result of the current politically motivated changes I think investors can be patient during the first quarter of 2017 as they make each new investment decision.

Try not to get tangled up in the heightened volatility which is inevitable from the current political landscape. Use your personal investment policies along with patience to determine your investment decisions (as you always should).

Quality Problem – It seems to me that many of many subjects being raised as points of public tension are actually symptoms of growing pains for our economy, which is surely a high quality problem to be confronted with.

The surge in exports for the horticulture sector is placing pressure on employment (debate about immigration) and will soon refocus on the need for NZ to continue to improve its water catchment (competitive advantage) and distribution systems.

Hawke’s Bay has a water focus as I write, but for all the wrong reasons (E.coli in potable water). I would far prefer to see them resolving the impasse with catchment and irrigation for commerce.

The growth in farming has put unacceptable pressure on downstream water quality. Let’s resolve the water management issue, not demand reductions in productivity.

Extra-ordinary congestion on roads of major tourist destinations certainly frustrated me in recent locations. Great, let’s celebrate the need to invest in our road network with more capacity and let’s expand our public transport framework. Everyone will benefit from this investment.

Too much immigration?

Apparently not, because our unemployment statistics remain very low so the majority of new residents and citizens must be adding value to the economy. If we are shrewd with selection of long-term immigrants we should be able to leverage our export sector further.

The sectors that these immigrants are finding work in should be directing the Ministry of Education and Universities toward the training focus for the current cohort of secondary aged school children.

Side issue, and microscopic in its immigration focus – I don’t think just having plenty of money should be a driver of permanent residency because to some extent this just drives up asset values but in the case of Peter Thiel he has demonstrably supported NZ businesses by investing capital in newly developing businesses.

The slowness of the NZX ‘NXT’ bourse to establish a presence confirms that NZ is not good at investing to ‘help’ business start-ups (although it is improving with various Angel clubs now assisting about 20 start ups last year) so the wealth and skills brought by the likes of Peter Thiel should be welcomed.

Successful businesses (New Zealand Limited) welcome their customers with a smile, open arms and an EFTPOS machine. Certainly this is how Air New Zealand Limited acts and as a tax-paying shareholder I am pleased with their approach.

As a shareholder of and lender to various airports I doubt they will fail to meet their financial obligations to me in the foreseeable future based on the tensions in the travel sector (although I think I have spent more on airport parking than I received in dividends!)

Investor Capability – the regulators, and in our field that means the Financial Markets Authority (and the Commissioner with the really long and ever-changing name), are concerned that the public has a poor understanding of basic investment concepts.

I wanted to believe this FMA view was incorrect with respect to our clients, but, the assessment leads me to invite any readers of this website to contact us with questions about anything to do with investment.

We will use the questions to deliver more tutorial content in future newsletters. This service has always been available but it seemed to me that a reminder would be useful.

Answers will not disclose identity or demographics of those who ask questions.

Getting help from financial advisers makes sense, and a greater proportion of New Zealanders should engage with a financial adviser, but improving one’s own financial literacy improves confidence with respect to personal decision-making, which in turn should reduce your costs with respect to managing an investment portfolio.

If you can reduce your costs you are simultaneously increasing the net return for risk that you will achieve.

No question is a silly question.

US – The US Federal Reserve has patiently looked past weak GDP from the fourth quarter of 2016 (Q4 16) and points the market’s focus toward reasonably robust employment (averaging around 200,000 new jobs per month) and the prospect for increased fiscal spending by President Trump.

The Fed Funds rate was left unchanged but the Chairperson, Janet Yellen, tried to hold our attention by declaring that they still expect to increase the rate three times during 2017.

It is logical, in my view, for the Fed to wait and observe the President’s first 100 days in Office (early May) before taking much action on lifting the Fed Fund rate in the US.

The Fed currently targets an overnight lending rate (range) of 0.50% - 0.75% and movements of more than 0.25% are highly unlikely so the picture being painted by Yellen is that US people will be financing their Xmas presents off a 1.25% - 1.50% base.

Reserve Bank of NZ governor Graeme Wheeler will surely be hoping that this happens because it might put a little control bank into his hands with respect to the NZ dollar which has always had upward tendencies given the higher real interest rates offered in NZ.

If the US Fed Funds roughly aligns with the NZ Official Cash Rate (OCR) and if the RBNZ has developed a new pressure on property with its macro-prudential tools (Loan to Value, Risk Weighting capital allocation, Loan to Income) then there is a slim chance the NZD could weaken a little and trade more closely to our economic performance than interest rate differentials.

If I am correct then our OCR won’t move above 1.75% during 2017.

While my mind is moving in this direction, this will reinforce one or two of my comments in recent weeks where I encouraged investors to continue using longer term fixed interest investments to hold their average income up. If the OCR remains at 1.75% then returns on your call accounts and short-term deposits will remain low.

President Trump can declare he’ll do many things and actually do a subset of those things but he cannot control the NZ central bank.

If the RBNZ is one of the first central banks to successfully ‘reduce inflation risks, reduce credit growth and improve financial stability’ via use of tools other than interest rate policy settings then we may be able to enter a period of relatively low interest rate settings (global perspective).

Interestingly, markets may already have been discounting some of this because the interest rate differential between US and NZ government bonds has been declining over the past year to new lows. At +0.90% the spread is well below its 20-year average and the trend implies a chance to fall toward US interest rate levels and perhaps below.

As a consequence this should help hold the currency down and thus help NZ exporters, no matter what Trump seeks from the US trade balance with the world (US Congress suggestion that they add a 20% tariff to all imports!).

We could be assured of this competitive advantage if New Zealander’s made a better effort to reduce private debt levels, rather than increasing them as they are currently.

I have drifted off topic a little and painted a few large tidal shift images but the point was to say that even if the US increases their cash rate three times in 2017 it is not safe to assume the RBNZ will follow and lift our OCR and thus short term interest rates are likely to remain disappointing for investors.

Investment News

Small – How small is NZ in a global context?

In NZ our total personal consumer debts are NZD $245 billion (100% of GDP, which is a disturbing situation).

Apple Inc.’s current holding of cash and liquid investments (probably hidden in Ireland – Ed) is also $245 billion but theirs are US Dollars (NZD $340 billion).

That’s perspective for you.

Heartland Bank – If you are a HBL lender (deposits) or shareholder I would encourage you to continue reading their press releases and presentations because they are in the midst of a reasonably dynamic second stage of their business strategy.

Their primary stage was the consolidation of the building societies and finance companies post the Global Financial Crisis and to identify their longer-term point of difference to mainstream banking.

This was done when they elected not to grow into the traditional residential mortgage-lending sector but to focus on the wider margin lending (typically involving more risk) and the poorly serviced borrowers (neglected by the major banks with less flexibility).

At first glance the new relationship with ‘Spotcap’ from Germany may seem odd, but I find it consistent with HBL’s interest to expand in Australia beyond Home Equity lending and to enhance its lending opportunities across fast moving online platforms.

Spotcap was only set up in 2014 but has its sights on being an effective lender globally to Small and Medium Enterprises (SME) and already operates in six countries (Germany, Spain, the UK, the Netherlands, Australia and New Zealand).

Less than two years ago HBL invested in Harmoney (shares and loan facilities), which also uses online technology to manage its lending business. Harmoney has moved quickly above $400 million worth of loans arranged and is proving to be an accepted method of borrowing within the current technological climate.

Spotcap focuses on different borrower types but otherwise it also relies on fast and inexpensive technology based processes for loan establishment.

HBL has been establishing some of its own in-house ‘online’ technologies for lending, with early success, and it will do them no harm to have tie-ups with businesses like Harmoney and Spotcap both for lending HBL money and for placing external competitive pressure on internal ambitions.

To be successful in business one needs a point of difference and people capable and willing to make a difference and HBL seems to have all these boxes well ticked.

Keep reading the releases and enjoying the content that I expect you to find.

Blockchain – When I first read this headline – ‘ECB mulls using blockchain technology for pan-European securities issuance service’ I thought, every month now we are reading about serious entities and regulators acknowledging that Blockchain technology will play a large part in the next tidal shift in the way we use technology.

However, on re-reading the headline the words that jumped out were ‘pan-European securities issuance’.

Rather than type my own words I’ll copy a few quotes from them:

‘The European Central Bank (ECB) is considering creating an integrated European financial market, particularly in the areas of securities issuance and instant payment settlement.’

‘I still see gaps that are in the way of our achieving a truly integrated European financial market. The first area is securities issuance, the second instant payment settlement’.

Market News readers may recall me discussing the potential for live settlement of all banking and the rapid retirement of cheques and minimal use of cash if this Blockchain (Distributed Ledger) technology is taken up by banks and central banks.

‘Current legal fragmentation is an area that calls for action. It may be worth exploring the establishment of a truly European issuance service – at least for some supranational debt instruments. We could even think about the ECB/Eurosystem playing an active role in setting up such an issuance service. And we could consider whether and to what extent new technologies, like distributed ledger technology (DLT), can be used in that process.’ (emphasis mine)

‘Pan European’ and ‘ECB active role in issuance’ implies to me that the rapid arrival of Blockchain and the departure of the UK from the European Union may hasten an agreement to centralise the issuance and guarantee of European government debt.

The ECB plans to make a decision about this Blockchain technology use for settlement by June 2017. That is fast, given that the current centralised settlement system (T2S) started discussions in 2008 and only began use in 2015).

In my view this technology is likely to arrive faster than you and I have appreciated until this point and the potential collapse of the European Union may be overstated if they get agreement on centralising debts. (Heartland Bank would do well to employ a Blockchain expert or two – Ed)

Ever The Optimist – I am never sure whether vehicle sales are a sign of good economics because vehicles are a depreciating asset, which is, on balance, bad for our Trading Account.

However, rising sales in January with +14% private use and +23% in commercial vehicles must imply increased consumer confidence and increased business activity, which is surely linked to the income confidence of each group.

Every month of the past 36 months seems to have set a ‘new all time record’.

Immigration will have played a part but the breadth of vehicle types confirms confidence in most sectors.

Interestingly Toyota managed to hold top spot in NZ, unlike some other markets where the public has already forgiven VW for their anti-consumer behaviour (mislead and deceive the client!) and sales of VW are back at ‘largest in the world’ status.

Money trumps morals it seems. (Trump and moral in the same sentence? – Ed)

Investment Opportunities

Wellington Airport – offer of senior, unsecured, bond maturing on 16 June 2025 paying interest at 5.00% per annum remains open (due to close on 14 February).

We have an allocation, which we are distributing to investors on a first come first served basis.

If you would like to invest please contact us to secure an allocation before delivering an application form to us (scanned and emailed, or hard copy, are acceptable).

The offer document (pdf form only) is available on the Current Investments page of our website.

Bond yields ≥ 4.750% - With many bond yields having reached back above 4.75%, now well above the interest rates on bank term deposits, I thought it would be useful to highlight some senior bonds which meet this condition, other than the WIAL offer above (WIA050).

KPG020 – Kiwi Property Group, 4.00% coupon rate, 7 September 2023 maturity, 5.00% market yield;

SKC040 – Sky City Entertainment, 4.65% coupon rate, 28 September 2022 maturity, 4.90% market yield;

TPW150 – Trustpower Ltd, 4.01% coupon rate, 15 December 2022 maturity, 4.80% market yield;

WIA040 – Wellington International Airport Ltd, 4.00% coupon rate, 5 August 2024 maturity, 4.85% market yield;

ZEL050 – Z Energy Ltd, 4.32% coupon rate, 15 November 2023 maturity date, 5.10% market yield.

The price on all of these examples is now at a discount (below $100 per $100 capital value) because the market yield exceeds the coupon rate interest paid out.

Please contact us if you wish to purchase any of these bonds.

To exceed 5.00% returns from fixed interest one might consider subordinated bank bonds or various Infratil bonds.

We also a subset of various bonds on the Current Investments page of this website.

Subordinated bonds should offer yields higher again than a senior bond.

Travel

Edward will be available in Auckland (Remuera) on 17 February.

Kevin will be available in Queenstown on 24 February and in Christchurch on 3 March.

Michael will be in Auckland later in February (dates to be confirmed). I tentatively plan to make a trip through Hawke’s Bay and Tauranga during the school holidays in April.

Anyone wanting to make an appointment should contact us.

Michael Warrington

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