Market News – 24 February 2020

Presumably for the purpose of comedy, President Trump has pledged a budget surplus to the electorate, 11 years after he leaves office and quite possibly after he leaves this lifetime.


Cheap and then plentifulThe most recent testimony from the US Federal Reserve Governor (Jerome Powell) to the Senate has reinforced my current view that interest rates will remain very low for the rest of my career, and quite possibly longer than that. (why would your demise be a significant waypoint? – Ed)

Powell advised the Senate that in the event of another economic slump the central bank would cut interest rates to 0.00% but it doesn't not support the use of negative interest rates.

Thereafter they would supply as much money as the economy needed to get back on a growth trajectory again (read – printing money, via wide ranging asset purchases).

In taking this position Powell and the other US Fed board members are endorsing the Japanese method (controlled at 0.00% and buy every asset offered for sale) and rejecting the European method (negative interest rates are fine, it's just a price).

Although I note that the European Central Bank also offers to buy assets from all-comers.

Europe's test of a negative interest rate environment has been useful, but even they seem to consider it a failure and are now laying the political groundwork for a retreat from this setting. Certainly, new ECB chief Christine Lagarde believes it is a failed policy.

The banks will thank her for this because negative interest rates seem to have threatened their balance sheets and it's a fair statement that the central banks cannot tolerate this new threat given the many others at the banks doors.

Having just visited Japan I do wonder whether the US understand this country, and if they do not understand them, then they may not understand why Japanese monetary and fiscal policy will draw different outcomes that will likely be experienced in the US under similar financial settings.

There is something fundamentally wrong with central bank policy (government) when they think they can become the owner of all assets produced by the economy that are unwanted or unaffordable for others.

Unaffordable at 0.00% interest rates?

This process implies that the ballooned scale of debt globally will gradually be transferred from private hands to public hands, which implies it will be serviced by taxpayers.

These policies make it unrealistic to expect deflation. Cheap money is driving necessary assets, such as houses, well away from the average income which will feed back into a need for higher incomes, and some inflation.

Therefore, if I stick with the current 2.00% inflation targets, 0.00% interest rates deliver negative real returns when lending money, so investors are left with very strong incentives to own real, tangible and productive assets.

The investment banking community see that they can finance this investment environment knowing that a proportion of the financing will come from central government, via a central bank's money printing programmes!

It is madness really.

Governments should set good regulation and then step back from the private business arena, not finance it. (ranting? – Ed)


I do not expect government to behave the way I believe they should.

They are doing what caused to me to launch this paragraph; cutting the cost of finance and then providing excess cash to the economy if it looks less than robust, or highly paid tarot card readers predict that it will be so.

With an increasingly strong stance, it looks to me that rewards from fixed interest investing will deliver negative real returns and that is anathema to savers.

Talk to your usual financial adviser, or us, about how you should react to this.

AirBNB – has been the most successful of the 'sharing assets' platforms and they are now showing a shrewdness not understood by the likes of Facebook.

Rather than dig a deeper hole with respect to where their business is domiciled for tax, AirBNB appears to be interacting with central and local government offering value in other ways.

They are willing to add local levies to the platform and to provide user data to IRD to ensure local property businesses are reporting appropriately.

NZ may not manage to collect tax on AirBNB's slice of the revenue, but you can bet councils and central government will be pleased to have excellent regulatory oversight and revenue collection from the local users.

I was told last week by a long term accommodation provider that AirBNB had added a useful marketing tool, but it had also reduced their tenancy by 30-50% (mixture of seasons) because the number of beds on the market had increased significantly.

I understood his own concerns, but AirBNB has directed revenue to other parts of our economy in a way that simply wasn't possible in the past, which feels like good news to me.

Now, if regulation and tax collection improve from the accommodation channel it feels like a successful development.

AML effectiveness – I don't like using a flippant tone, but the latest theft of identity information by hackers (breach at a Kiwisaver provider) leaves me thinking that more crime is occurring as a result of the huge increase in retention of personal information required by the Anti Money Laundering legislation, not less.

I know it's not that simple, but the huge escalation of businesses holding copies of passports, bank accounts, IRD numbers, etc. relates directly to AML obligations.

The failure of our government to establish a central point for AML verification forced all organisations to gather the same information and it was inevitable that this resulted in a variety of security protection, which is regularly being breached.

Every month we seem to be told about another breach of security and the release of deep pools of personal identity data.

Who is the greater threat; those who try to launder money from crime, or those who are compromising personal identities?

Sorry another rant which means nothing to our obligations and your investing.

Rio and Tiwai nonsense – Not so long ago the CEO of Tiwai's aluminium smelter was courting all media outlets to trumpet his request for pricing subsidies to avoid shutting down the smelter.

Today, when challenged about cleaning up toxic waste in Southland, he cannot be reached for a response.

Which also means that he has said more than enough for us to understand what he stands for.

HSBC – Hong Kong & Shanghai Banking Corporation, now HSBC Group, but actually a British institution (started by a Scotsman according to Wiki), is to cut 35,000 employees globally.

This sounds dramatic but is 'only' 15% of the global staff roll, like a business with 100 staff trimming 15.

It is though, a big enough signal to disclose the bank's view about weaker economic and financial activity over the coming 24 months or so.

All the large investment banks have behaved this way during my career; dramatic staff cuts to reduce cost and test for inefficiencies within when storms form on the horizon.

My key message is to look for others in the sector to copy HSBC which would further validate financial concerns about performance for the 24-month period ahead of us.

Harmoney– So, peer to peer lending has failed.

Harmoney has announced that it will no longer accept retail investors as lenders on its platform to borrowers.

Lending will all be supplied by wholesale lenders, which is consistent with the changes across the no-bank sector (F&P Finance, UDC etc) but this is not what peer to peer lenders intended for their business model.

They will need to re-brand because their lending has become much the same as all others; robotise the lending (risk matrix analysis) and sell the loans to large scale lenders who seek diversity.

Heartland Bank – however, continues with its successes (including their part ownership of, and lending to, Harmoney).

If you are a shareholder in HGH you may enjoy reviewing their interim results, which are well presented and include a 1 cent per share increase in the dividend.

They spell out clearly where the business is expanding well (Home equity release, Vehicle lending, Online lending) and areas where they intend to reduce exposures (larger scale rural sector lending).

Here's a link to their reporting:

HGH is on track to meet the new Reserve Bank capital settings and given the 2% price discount on the Dividend Reinvestment Programme they may well get there through natural expansion alone.

Unless they were to buy another business… then new capital would be required.

Bank Deposits – The ANZ kindly sent me a chart last week explaining that declining use of bank deposits, in response to the lower relative returns, will likely contribute to 'economic headwinds' over the 12 months ahead because credit may be restricted (access) or restrictive (price rise).

Banks can borrow money via bonds from NZ and international investors, and they do so in large volumes, but they also need to borrow money from the public by way of deposits.

Historically, use of bank deposits might decline when yields on bonds offered higher returns so lending evolved amongst the lending product types (bonds and deposits) but the money typically remained within the fixed interest category.

This time is different.

Retail investors are baulking interest rates which now sit so close to inflation that no real return is available, and this has resulted in those investors moving some of their funds into higher risk categories (property, shares… hopefully not Bitcoin).

If you think about the circuit that money traces after a transaction, the cash removed from a bank deposit to buy shares will often make it back to the same banks, deposited by a different person, but it is likely that the average duration (term) of the money re-deposited will shorten, which is not ideal for the banks.


Rocket Lab continues to claim space in this part of Market News.

This time they have been selected by NASA as a 'provider for a small satellite mission to the same lunar orbit as Gateway, which is intended to be an outpost for astronauts to visit the moon more regularly'.

It's very cool to see New Zealand involved in such discussions.


Oceania Healthcare Bond – Oceania announced its intention to issue their first NZX listed bond issue.

The terms of the offer have not been announced yet, but we expect them to closely resemble bond issues by industry peers (senior, secured, long term).

Market yields on bonds issued by industry peers range from 2.60% - 2.85% currently.

If you would like to be added to our list of interested persons, please contact us.


David Colman will be in Palmerston North on 26 February, New Plymouth on 27 February and in Kerikeri on 6 March.

Mike will be in Auckland on 25 February, Hamilton on 26 February and Tauranga on 5 March.

Edward will be in Nelson on 3 March and in Napier in April

Johnny will be in Christchurch on 25 March.

All the best,

Mike Warrington

Market News – 17 February 2020

'Just in time' became a business preference over the past decade or so.

Businesses felt they could make better returns on capital if they tied up less of it owning properties to store inventory in.

The majority of those businesses around the world became dependent on cheap labour from China, followed by other lesser developed nations.

The temporary closure of ports (air and sea) in response to the Coronavirus outbreak (and the crumbling Auckland Airport runway – Ed) probably has a few chief executives revisiting the merit of inventory.

I wonder if we will begin to see stock thinning out on NZ shelves.


Short Squeeze – Would you like to know what a 'short squeeze' looks like, in financial markets, not fruit juice factories?

Take a look at the Tesla share price over the past year or two.

Take yourself to Google Finance and search the company by typing this into the search field: NASDAQ: TSLA

The share price change is what happens when investors who were 'short' (sold Tesla shares they did not own, hoping the share price would fall) suddenly discover they were wrong and are forced to buy those shares back.

Bear in mind that they are buying those shares back from people who are believers, and have no interest in selling their shares cheaply.

Sustaining the current share price is not all that credible in my view but it will have been fun for Elon Musk watching the naysayers fail.

CEO remuneration – This topic will never go away, and sometimes I agree that rewards are out of touch with society expectations, but at other times agreements look like great value.

Armed with the benefit of hindsight we can better judge value.

Theo Spierings was appalling value for Fonterra.

Last week's news item bugged me though.

'Greg Foran, new Air NZ CEO, receives $822,000 free Air NZ shares.'

It's accurate news, but the headline could also have read – 'Excited by the arrival of the high-quality CEO, Air NZ makes a down payment on the employment agreement with Greg Foran.'

I won't truly know what value Greg adds until after the event but you'd need to be an irretrievable pessimist not to be excited about Greg's return to NZ and him putting his hand up to lead a local company.

I'll guess that Greg Foran has made charitable donations exceeding this sum over the period of his prior employment with Walmart.

My bones tell me Foran will be a 'cheap' employee for Air NZ and of even more benefit to New Zealand.

Trusts – We have, in the past, suggested people test whether trusts still offer sufficient benefit as a vehicle for holding assets (investments etc).

Sometimes the answer is yes, but often I expect people who operate a trust will conclude no, the original purpose no longer exists.

Your solicitor and/or accountant are the ones to engage with when seeking professional opinion about ongoing use of trusts.

Trusts are no longer effective for 'deceiving' Work and Income (WINZ) with respect to a person's access to wealth or income. Large-scale gifting was ordered reversible under WINZ rules.

Court cases make more effort to pull apart trusts that have been poorly administered.

The introduction of the Anti Money Laundering legislation forced detailed enquiry of trusts by the finance industry (and then all industries), often requiring documentation at levels most found to be intolerable.

This should have prompted the initial wave of stress tests; do we gain sufficient benefit from operating the trust to involve ourselves with the escalation of administrative obligations?

Then came the new Trusts Act 2019 in New Zealand, which is effective from January 2021, increasing the obligations further with respect to trustees, the levels of administration required by them and now wider reporting to beneficiaries.

Stuff then presented an article from a senior lawyer at Perpetual Guardian who declared that by his estimation half of the trusts in NZ should be closed; this from a person employed to administer trusts!

I have included a paragraph on this subject again because I agree with the lawyer; based on my experience half of all trusts should be wound up because they no longer serve the original purpose and often are not administered as the courts would demand for effective recognition.

All of the changes increase administrative obligations and costs, and none increase potential security or returns on assets.

The NZ government missed a trick when it failed to insist that all entities (i.e. not natural persons) must be registered with the Companies Office (MBIE more broadly).

It still could make this change.

If all trusts had to join a register, with defined obligations (to the register, to IRD and for AML), the information flow would be much better and arranging business would be more efficient.

To the Minister – Kris Faafoi, it's not too late to have all entities join a register.

To the public – Review again whether or not you need a trust for holding your assets.

Coronavirus – The data I have read doesn't escalate my fears but it does have me extrapolating to potential outcomes and pondering how 'we' can react to the developing problem.

Extrapolation is seldom accurate, so I won't be making any new investment decisions but the two threads that are staying with me both relate to internal China - debt servicing and political disruption.

So much of the world's economy seems to operate at the margin now, with high debt levels so they are more exposed to being unsuccessful if small deviations occur.

Extremely low interest rates have protected that slim margin from some volatility, but health threats move too fast for regulators to control in the same way.

I'm still waiting to see if the current virus will expose a large group of businesses operating at barely credible profit margins.

With respect to political disruption the wider Chinese public are seeing very strong reasons to lose confidence in President Xi, the man who wanted them to believe he was a demi god and should be leader for life.

The majority in China seem to accept communism and to some extent governance by dictatorship but I think this period of health and economic failure will have a far larger group questioning a lack of change to the country's leadership.

A minority won't have felt good about the trade argument with the US but the majority are seeing the empty streets, and empty food shelves in major cities.

They know the virus problem started in China. It is not a trade matter or an egotistical matter of geographic control; it is a simple failure of public health.

The public typically love their doctors. The Chinese doctor who tried to raise the alarm early was silenced by the Communist party, and he has now died as a result of the virus.

This has drawn a large angry response from the public.

This follows immediately on the heels of Hong Kong's strong and long-lasting protests about central government behaviour.

Maybe government of the people, for some people, by the person will wear thin in mainland China too?

Some will be old enough to compare Deng Xiao Ping's more diverse preferences to the restrictive preferences shown by Xi Jinping.

The future of this political discontent will be hard to predict. My fear is that most dictators lash out, they don't bow and apologise.

As for debt disruption, debts in China have escalated over the years to the point that they were being described as a potential spark for some form of financial disruption.

The Chinese central bank has been pushing interest rates down and providing additional liquidity to the market to ensure financial markets were 'well lubricated', just like other central banks.

However, how does a heavily indebted business service that debt when the government says the city is locked down and sales cannot occur?

What does that set of circumstances do for investor confidence when providing funding to China?

Will the nation that has been growing two to three times faster than the rest of the developed world enter into a recession in 2020?

Too many questions, I know, but the temperature must be rising fast in Chinese politics and for the highly indebted.

China - How to react? - The local news item that made me think of this thread was 'Universities to take major financial hit from Corona virus.'

Apparently 6,500 students cannot get here to start the year.

In the current age of fibre communications technology why can these students not enrol online, be provided with soft copies of necessary study documents and connected to lectures and tutorials via video calling services?

I know one of my kids seemed to only visit the university campus when it was impossible to do something online, which he seemed to do during Chinese time zones anyway, so as to not have his NZ social time zone disrupted.

The universities are selling an educational service. Show the students you are as smart as you want them to be.

Baltic Dry Index (BDI) – As the Coronavirus stories spread, a client dropped me an email asking 'how is that Baltic Dry Index going now?'

I could see the smile hidden in between the lines.

I had introduced this, otherwise unheard of by our clients, economic indicator via Market News some years ago.

It was an excellent question.

The BDI measures shipping prices, which rise and fall based on demand and supply of freight movement.

It looks dreadful.

However, in a reminder that there are always many potential outcomes in a revolving three dimensional maze without the assistance of gravity, the very weak BDI is not being corroborated by weak share markets and falling interest rates (yet – Ed).

Another perplexing situation that I'll leave to economics specialists with PhDs in complicated stuff.


I like Inland Revenue's (IRD) new strap line – Easier for customers to comply, and harder not to.


NZ wine exports continue their march higher in the value of gross sales.

2019 exports were up 8% to $1.86 billion.

We export to 100 countries, with the US the largest market, and wine is our seventh largest export produce.


Oceania Healthcare Bond – Oceania has announced its intention to issue its first NZX-listed bond issue.

The terms of the offer have not been announced yet, but we expect them to closely resemble bond issues by industry peers (senior, secured, long term).

Market yields on bonds issued by industry peers range from 2.60% - 2.85% currently.

If you would like to be added to our list of interested persons please contact us.


David Colman will be in Lower Hutt on 19 February, Palmerston North on 26 February, and in New Plymouth on 27 February.

Mike will be in Auckland on 25 February, Hamilton on 26 February and Tauranga on 5 March.

Edward will be in Nelson on 4 March and in Auckland (Albany) on 11 March

Johnny will be in Christchurch on 25 March.

All the best,

Mike Warrington

Market News – 10 February 2020

A description from a person who lived in China for a long stretch, and has the experience to know:

One Belt and One Road is, in practice:

The politics of tightening restrictions (Belt); and

Delivering one-way traffic in China's favour (Road).

I think I witnessed that 'Road' when I saw a hydro dam being built in Northern Laos and the wires were tracking North across the border to China, whilst the villagers around us did not often have electricity.


Coronavirus – is causing an above average level of disruption, which has quickly reached financial markets, initially undermining confidence but pricing signals do not yet expect long term economic damage.

Indeed the distilled view of thousands, represented in the Dow Jones Industrial Average, which was very strong last week, currently suggests that investors are confident that the threat of the virus will be solved.

This situation should remind you how financial markets work; investors and traders urgently try to discount predictions about change and reflect those new predictions into today's pricing.

It is a healthy (pun not intended) reminder that risk and price changes come from largely unpredictable directions and one's portfolio must always factor this expectation into their investment rules and financial management.

The World Health Organisation (WHO) was very quick to describe the Coronavirus as a health crisis. Do they not have intermediate steps to describe the developing situation prior to reaching 'crisis'?

The health matter here is serious, but given the scale of it thus far I do wonder whether the WHO, and various governments, are using this outbreak as an opportunity to widely test readiness for responding to such threats in future.

Fair enough. I'd rather know that 'we' have a plan and can actually roll it out, off the whiteboard strategy sessions, and into practice effectively.

To the credit of the Chinese they are making the rest of us look bureaucratic in our response. China bans movement, then builds hospitals in days!

Only in a dictatorship I guess, but it should highlight to our central and local government just how bogged down we have become in the tentacles of our own democracy.

As one friend pointed out to me; with all due respect, thank goodness this virus outbreak occurred in China and not a developing nation with little or no capacity to react with any influence.

It is a point of interest though that two or three of the recent virus threats reaching global discussion have been sourced to China.

Why is that?

According to Dr Wikipedia this virus has a 70% genetic similarity to the SARS strain (which killed 10% of those infected) and scientists developed a vaccination for SARS so I’ll back them to do the same here.

The mortality ratio is lower for this virus, but it has been more contagious.

It was nice to hear that China was very quick to share the virus information globally and to have scientists describe how developing vaccinations is getting ever faster based on constant improvements in technology.

The chemist lady who I listened to described testing cycles of only days now, which likely means proven vaccinations within months, not years as it has been in the past.

For the sake of comparison, the US describes approximately 36,000 deaths per annum from 200,000 hospitalisations as a result of 'seasonal flu' so I hope we can keep this current threat both in perspective and get it under control shortly.

One useful outcome from the restricted movement, particularly in China, is that it forces the 'population' to test the potential for work from remote locations (typically home).

Uber and AirBNB are the poster children for shared resources but health risks may be the trigger for wider disaster recovery planning involving the use of private property for business.

Should a person be paid for the use of this private resource, or will it merely become a function of keeping your job and income flowing?

My conclusion, at this point (good on you, a bob each way – Ed), is that the virus will not disrupt long term economics and is proving to be a good test of readiness around the developed world. It would be nice if the new knowledge is shared with the less developed nations of the world too.

Post Script – I learnt that this virus is yet to be officially named, with H (Hemagglutinin) and N (Neuraminidase) measures. Corona, is Latin for crown, which is visually what these virus types (influenza) look like under a very powerful microscope).

THL – Tourism Holdings were very quick out of the blocks to advise the market that the Coronavirus will contribute to a 14% decline in profits.

The FMA and NZX would describe this is an efficient example of continuous disclosure.

I might describe it as an awfully convenient reason to release an update on weaker financial performance that was probably due anyway.

You may recall that after the company lost ground from its US expansion, and then armed with the newly raised capital, THL expanded into…. China.

THL board and management are probably working seven-day weeks at present.

Meanwhile – Infratil is expanding into Europe, Switzerland to be specific, and I have offered to answer the door and make tea if they are on a staff drive.

IFT has invested (40% of capital) alongside some of its impressive investment partners (NZ Super, Commonwealth Super and a Morrison & Co fund) in Galileo Green Energy LLC with a purpose of developing wind and solar energy.

It's an interesting name choice and implies that Europeans love their historical giants of science and connect the 'green' label to genuine efforts in the area of climate management (unlike the sceptics in NZ – Ed).

It is consistent with IFT asset targets for the decade ahead, appears to have appointed a very experienced Chief Executive and aligns with the energy preferences of Europe.

Side story – IFT's investment is aligned with political preferences in Europe (and globally). In Germany renewable energy became a focus in 1997 but become the sole focus once they declared a retreat from nuclear energy.

Renewable energy in Germany has increased to about 46% of supply and they are surely on a pathway to remove the 20% delivered by Brown Coal. (Nuclear is 14%, Hard Coal and Gas are 20% combined).

Infratil wants to participate in the renewable energy development across Europe and must believe that other European nations will follow Germany's active lead in this area.

Investors may be a little anxious as they consider prior IFT investments in Europe but this feels different, and I'd certainly rather be an investor in this project than a legacy investor in the coal sector.

Secondary note on IFT – Microsoft reported higher than expected earnings from its cloud services, and from memory MS is a customer of the Canberra Data Centre.

Even if I am wrong on this MS / CDC client memory, it is becoming as clear as day that data is becoming almost as important as oxygen in the world of client service and legal proof, so it can only expand from here.

I once pondered whether CDC was a specialist property investment, offering a longer term tenancy than the average given the difficulty of relocation.

How wrong was that estimation!

The nature of CDC's business, within the wider data storage space, means that it is securing Australia's largest (government) and some of the world's most influential businesses as customers.

Data is more important than gold and this is being reflected in the rapid increases in the value of CDC in the current business and regulatory landscape.

I am pleased that I have an investment exposure.

Davos Influences – The two threads of discussion that I hung on to from reading about the heads of government meeting in Davos were climate change and negative interest rates.

As ever, I am keen to remain alert to things that change tidal movement for investment risks and these two stand out currently.

Read what you can on these items for a while and consider their influence on investing.

Digital Currency – Until the Coronavirus hit the headlines I had thought I'd comment on the digital payment debate.

I may yet in coming weeks because the subject made it onto the agenda at the Davos leaders meeting.

In abbreviated form the points of interest were:

The concept of payment via digital 'tokens' is considered real by central banks, and now the Bank for International Settlements, and thus government leaders;

Central banks will, unsurprisingly, want to control methods of payment within an economy. Even though this may upset George Orwell I think centralised control of payment delivers the stability we all prefer;

If control means a service provided by central government, then trust means a digital 'token' backed by a credible 'asset' (US dollars, government bonds, etc);

If the central banks get this right then the likes of Bitcoin will be consigned to the criminal and speculative and foreign exchange profits enjoyed by banks will be slashed.

QE Forever – Another subject bouncing around in my head for ongoing debate is that with central banks lobbying central government to boost fiscal spending to assist the economy it suggests that the former is concerned about the future potential (threat) of Quantitative Easing (printing money) is now limited.

My concern, amongst others, is that no government will ever boost taxpayer spending sufficiently to allow central banks to reduce their inflated balance sheets following many years of QE!

I cannot yet see how the most indebted are going to escape the corner they find themselves in.

Fletcher Building Notes – FBU has contacted holders of the FBI140 Capital Notes, which reach their Election Date on 15 March 2020, to offer a reinvestment option.

The new offer is five years at 3.90% (FBI190).

Investors would, as ever, be wise to seek financial advice prior to making their final decision. Holders must provide a response (Election Notice) to Fletcher Building.

If you do not respond your investment will automatically be rolled into the new investment even if this is not your preference.

Following a helpful pattern started a couple of years ago, FBU has already announced that where a person elects to convert their Capital Notes into FBU shares the company will repay the Notes in cash (no shares will be issued).

So, 'Conversion' is the pathway to 'Repayment'.

Following the sale of FBU businesses in the US (principally Laminex) the company is in a cash rich position, which enables them well for presenting this new offer.

They are indifferent whether Note holders roll the investment or ask to be repaid.

Intueri – Shareholders of Intueri, the failed education provider, should read the content available to them via this website link:

Armed with funding assistance from the LPF Group (no win, no fee) a class action is being proposed to seek compensation for shareholders of the now-worthless Intueri Education Group.

It appears that Intueri was dependent on the government sourced funding for students, which was removed once the government discovered the facility was being misused.

The class action will allege misstatements and failing to make proper disclosures.

If they happen to take, and win, a case it would make the FMA and the Serious Fraud Office feel uncomfortable because the latter are reported as reviewing the offer documents and finding nothing misleading, no findings of illegal practice and no misstatements in the prospectus.

It's useful for investors to see that beyond our regulators there are private interests that are more willing to stress test corporate behaviour too.


Donald Trump won his case against impeachment. (you're having a laugh – Ed)

Yes, I am.

We all should, as often as possible.


Oceania Healthcare Bond – Oceania announced its intention to issue their first NZX listed bond issue.

The terms of the offer have not been announced yet, but we expect them to closely resemble bond issues by industry peers (senior, secured, long term).

Market yields on bonds issued by industry peers range from 2.60% - 2.85% currently.

If you would like to be added to our list of interested persons please contact us.


Chris will be in Christchurch on February 18 (pm) and February 19 (am).

David Colman will be in Lower Hutt on 19 February, Palmerston North on 26 February, New Plymouth on 27 February and in Kerikeri on 6 March.

Mike will be in Auckland on 25 February, Hamilton on 26 February and Tauranga on 5 March.

Edward will be in Nelson on 4 March, in Auckland (Albany) on 11 March and Auckland (Mt Wellington) on 12 March.

Johnny will be in Christchurch on 25 March.

All the best,

Mike Warrington

Market News – 3 February 2020

Interesting anecdotes from conversations I had last week:


A friend in Queenstown has for years been offered plenty of work via a second job in the hospitality industry. She was on call, but the high volume of work offered was constant, until recently.

She now has plenty of time off, beyond her main job.

Less tourists? $20 minimum wage?

Remember this is in a town that struggled to find employees because it was too expensive for people to live there (housing).


A client who grows maize to sell as feed has sold his crop every year for as long as he can remember, but not this year.

He is surrounded by cows and the milk price is up.

Too much palm kernel? Insufficient bank funding?


In 2018 a car dealer told us there was no room, and no need, to discount a vehicle price. 

Today he asked if $10,000 discount was sufficient to win the transaction. (maybe the government's new roads will boost sales – Ed)

Three cards don't make a full deck, but it does seem possible that the dealer's hand is changing.


General Election – The announcement of our 2020 election date generated less interest for me as an investor than I expected. 

I read the headline and didn't bother with the supporting story.

I do not look forward to the 'he said', 'she said'.

I do not wish to read about wasteful short-term promises.

I am not interested in our politicians following the world in its use of fake news via social media.

As a guess I don't think either Labour or National will gain a majority at the election.

I want the impossible – major parties to agree on certain 20-year objectives that are demonstrably good for the nation. Thereafter they can argue at the margin about their other social or business friendly proposals. 

Perhaps they could define for me (enact) that the 'margin' cannot exceed 10% of the government's annual budget round, which is approximately $4.5 billion; surely this amount is sufficient for pet projects in a single year.

No, I do not think you (investors) need to keep your eye on our election.

There are far greater influences on your portfolio elsewhere, such as:

The US Presidential election;

Chinese and Russian dictatorships;

China's economic growth rate (sub story – Coronavirus, Hong Kong);

Central bank policies globally;

The impetus being gained by the global climate lobby;

The management of the unmanageable – gross global debt levels;

Banking regulation in response to the above point;

Declining investment incomes alongside rising spending requirements.

If our politicians were honest about the modest influence they have over such matters they would focus more on what they could truly deliver to our population.

I am not holding my breath and thus hope not to burn too much energy on NZ election matters.

Bank Strength – After all the gnashing of teeth, typically aimed at our Reserve Bank governor's neck, after the demand for increased equity on bank balance sheets, maybe the 'angry' would like to reflect on the alternative.

Six banks in Europe (of 109) have failed to meet the much weaker equity (and risk weighting) demands over there.

All but one bank met the test levels last year, which rather confirms that the negative interest rate environment has made it more difficult for banks to make money.

From memory European banks are also experiencing increased levels of bad debt in Europe, something that is difficult to reconcile alongside the plummeting interest rate costs for borrowers.

An obvious consequence of the world’s excessive use of debt is that one day, when the fat lady sings (defaults increase well above longer term averages), the banking sector will not be able to escape a large share of the losses.

In many jurisdictions such losses will remove relatively large proportions of the equity held by the banks forcing them to raise new equity at the wrong time with respect to market confidence.

This seems highly unlikely in NZ, and Australia, given our higher levels of equity and more robust risk measurement settings (you may recall some of Kevin Gloag's analysis on Risk Weightings for lending in NZ).

The European banks hardly drew a satisfied response form the regulator. You be the judge of his statement:

The ECB's top supervisor Andrea Enria said he was 'broadly satisfied' with the results but emphasized concerns about banks' business models, internal governance, operational risks and money-laundering failures.

The only subjects left out here are employment matters and the food in the cafeteria, so he must have found it very difficult to include the term 'satisfied' in the statement.

Weak capital, poor governance, weak management (business models), poor operational process and regulatory failures with money laundering.

'Unsatisfactory' surely.

Therefore, I think we should applaud the Reserve Bank of NZ, and Governor Adrian Orr, for the improvements made to our banking, deposit taking and insurance environment and make a note to thank him again when NZ is barely disrupted by the next rounds of problems in global finance. 

Monetary Policy V3.0 – Many new threads of focus came out of the recent heads of government meeting at Davos. 

I think I'll comment on others in the weeks ahead, but today, linked to the thoughts in the paragraph above, the relevant one is the European Central Bank's statement on monetary policy.

The ECB has launched a review of its strategy, the first since 2003 and is expected to spend the next year evaluating the tools it uses to maintain stable prices, including interest rates and bond purchases. It will also examine how it can take climate change into account.

The first thing I noted was that the ECB claims it did not review its strategy during, and in the aftermath of, the Global Financial Crisis of 2008 and early 2009. 

This statement isn't credible.

I can think of three significant changes:

2008's massive interest rate reductions and flooding the financial system with liquidity to try and ensure lending occurred, and at cheap pricing.

Printing money, apology, Quantitative Easing where the central bank buys assets it does not need (EUR 20 billion per month at present) to inject additional cash into the system; and then

Introduce negative interest rate environments.

The ECB cannot convince, even without the eye patch, that they considered these three actions 'a normal part of strategy conceived in 2003'.


Maybe because these actions actually happened they weren't 'strategy'.

If they are genuinely launching their first strategic review in 17 years (it sounds silly – Ed) then it's clear that the pressure from the Davos attendants against negative interest rates is greater than the ECB is willing to admit.

Denmark’s central bank has moved interest rates up, from negative settings, back to 0.00%.

The ECB warns it may not follow…. but then again… it might. The main street banks were clearly venting their anger about the impact of negative interest rates on their business models, and the central bank clearly cares about the financial stability of the banking system.

So, expect to see a retreat from the negative interest rate environment, which may prove to be good for banks, but will not be enjoyed by bond funds as they suffer bond valuation losses.

The ECB will be using the strategic review to delay change, but change is a coming.

Listed Property Entities (LPT) – Market conditions continue to press share price of the property investment companies and trusts higher.

Most of the prices, and relative measures, are now beyond what aging investment analysts are familiar with. Then again, today's conditions are unfamiliar.

For our customers receiving financial advice Kevin Gloag has updated our research article on the sector and placed it on the Private Client page of our website.

We encourage LPT investors to read it.

Oceania (OCA) – within the residential property sector Macquarie interests elected to exit their investment in OCA last week removing an overhang (i.e. shorter term investor and thus a potential seller) from the share register.

Macquarie sold 251 million shares (41% of the register) at a price of $1.20.

The more widely held share register will help market liquidity and may now encourage more participation from other investors.

It was a useful opportunity for investors in the sector who are about to be approached with a takeover offer at $7.00 for their Metlifecare shares. If the takeover is successful MET would frustratingly be another major investment entity to depart the NZX.

The supply of NZ$300 million shares doesn't look so difficult to digest when you contemplate the potential departure of NZ$1.5 billion if the Metlifecare takeover is successful.

Some senior family members of mine are reaching the point of making use of this service sector so I am gaining useful insights into the level of service (very good) and the pricing (good if you are an investor!)

To some extent residents of the sector should be investors in the sector for the natural hedging that it provides to their wealth!

Augusta (AUG) – It was also nice to see additional OCA shares offered to the market (above) just two days after it looked probable that we would lose another property company from the NZX.

Australian company Centuria Capital has made a surprisingly strong bid at $2.00 per share to takeover Augusta's business, being approximately NZ$175 million in value.

The NZX will not be pleased to lose two listings and turnover from $1.675 billion in return for no new listings and increased turnover from only $300 million.

Property Taxes – The government's new tax expectations from property investors are now in place, as they try to remove what they considered to be unfair tax opportunities from investment in the market.

Essentially tax credits from depreciation can now only be applied to property investment and not cross credited against other forms of income.

This does remove one of the elements of return from property investment and government tax revenue should therefore rise, but property values will not decline.

Until we over-supply the property market prices will not decline from the current high levels (relative to personal incomes).

The private sector will not over-supply the market. We need government (Housing NZ) and councils to deliver the excess to the market and given the lack of co-ordination and available building resources at present over-supply seems unlikely in the five years ahead of us.

Australian impact on insurance – New Zealand's earthquakes and weather event damage provided the insurance sector with the opportunity to quickly increase prices.

Next, the insured were reminded that declining investment returns would also result in higher insurance premiums because insurance companies invest vast sums, so a large proportion of their annual income is linked to investment returns.

Now, the damage wrought in Australia by the fires, especially on rural sector businesses, will unquestionably result in another round of premium increases.

Before you note we don't suffer the same fire risk, remind yourself that most of our insurance is provided by Australian insurance companies (before on-selling risks to international reinsurers). 

We will become tangled up in the new pricing influences from Australia.

The only way to avoid such a price change is to demand ever more granular risk assessment, but the further down this road we travel the more uninsurable things we will discover.

I ponder when regulators will become involved in defining minimum insurance provision settings; namely risks that the sector must accept.


The local economy is very good; Whittakers chocolate is expanding production!


Japan has left its official interest rate unchanged and some are debating the potential for increasing it, which would be good news for validating new growth in their economy.

Establishing stronger growth in an economy with a declining population would be an impressive feat.


Infratil Bond – If you are planning to invest in IFT's bond (6 years at 3.35%) you must act immediately.

This offer closes next week.

Please contact us for assistance.

Oceania Healthcare Bond – Oceania announced its intention to issue their first NZX listed bond issue. 

The terms of the offer have not been announced yet, but we expect them to closely resemble bond issues by industry peers (senior, secured, long term).

Market yields on bonds issued by industry peers range from 2.60% - 2.85% currently.

If you would like to be added to our list of interested persons please contact us.


Chris will be in Christchurch on February 18 (pm) and February 19 (am).

David Colman will be in Lower Hutt on 19 February, Palmerston North on 26 February, New Plymouth on 27 February and in Kerikeri on 6 March.

Mike will be in Auckland on 25 February, Hamilton on 26 February and Tauranga on 5 March.

Edward will be in Nelson on 4 March, in Auckland (Albany) on 11 March and Auckland (Mt Wellington) on 12 March.

Johnny will be in Christchurch on 25 March.

Mike Warrington 

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