Market News 25 January 2021

I love the earnest revelation in many headlines:

''Joe Biden's got a big job ahead of him''.

No kidding, having just been elected President of the United States of America.

When isn't that a big job?

INVESTMENT OPINION

Keep Calm and Carry On - Poor old Air NZ topped the 'most complained about company' table in a recent survey.

This almost sits in the realm of bullying in my view; join the peer group and pick on someone when they're down.

The respondents presumably thought it appropriate to also complain about their local pub not arranging home deliveries during lock down level 4.

There appears to be no perspective in this survey result, and it displays a deep lack of awareness about how much has changed for some businesses as the world responds to Covid19 and just how a business is run.

Respondents clearly expect a perfect and perpetual service, at an impossible price on an imperfect playing field.

I am pleased not to be on the distribution list for this survey and its results.

The world of social media has provided an excess of scope to complain about anything.

I guess having this right is better than living under the alternative – think Chinese rule.

To Greg Foran,

Keep up the good work. We appreciate it.

Over Anxious– Speaking of social media platforms, our regulators seem to now be worried about investors sharing information about investing, linked to the surge in new investors using the online trading services with smaller sums.

I think the FMA should have better things to do with its time.

They certainly have no show of influencing peoples' use of social media for communication on the subject of investment, nor managing the conversations arranged by retired folk in the community, who do not use social media (Listening devices in retirement villages? - Ed)

There's this little thing called self-responsibility, which should enable the FMA to burn a little less mental energy.

If they want it, all investors have access to good quality financial advice in NZ, from licensed operators (like us).

If financial advice is not wanted then these people should be left to accept responsibility for their successes and failures without some 'big brother' worrying about them.

The participation in the market by this new 'breed' of investors has been great, adding depth and breadth to activity, which is an improvement on market activity only two years ago.

I hope they save, and create, enough wealth that the volatility of it steers them toward the financial advice community when the stakes become too high to simply guess or rely on what they read in an unregulated public space.

Until then I'll not worry about them and nor should the FMA.

Governance– This is a brief reminder that good governance is important and is not just a game of popularity.

Most of you will have read, or heard about the scrapping going on at the Tauranga City Council, the resignation of the Mayor and a commissioner being appointed to help.

Well the financial consequence of the poor governance was having credit rating agency Standard & Poors lower the council's credit rating of the city from 'AA-' to 'A+'.

This will have a direct impact on the cost to borrow money, which in turn reaches rate payers pockets.

I doubt any of the councillors stood for poor governance and bad financial outcomes last election, but that's what they have delivered so far.

Markets – As an investor there are times when you can sweep aside the thousands of strands of information demanding your attention and look at a few key market prices to understand the immediate impetus.

Immediately post the inauguration of the latest US President the following market signals are:

US Share market – breaking up into new, all time high pricing levels. These are bullish signs for the market, no matter what one thinks of ''fair'' value.

Dow Jones – 31,188

S&P 500 – 3,851

Nasdaq – 13,457

In the rear view mirror the Covid19 crash of March 2020 is beginning to look like a 'crashette'.

I borrowed this paragraph from a John Ryder newsletter:

Equity markets are clearly vulnerable to a pullback, as valuations are stretched. However, bear markets are rare. Over the past 75 years, bear markets have occurred only 18 per cent of the time, meaning returns on average were positive 82 per cent of the time. Expensive valuations alone are not necessarily a signal not to buy equities.

As one observes the share market price rise and the surge in pricing for the likes of Bitcoin I wonder if the Oxford Concise Dictionary will evolve the spelling of the word ''greed'' to become FOMO?

Regardless of the headlines from contrary thinkers interest rates are not increasing with any momentum:

US 10 year – 1.09%

US 30 year – 1.82%

NZ 10 year – 1.02%

Australian 10 year – 1.07%

At least none of these are negative, as is more common in Europe.

The price of oil is up, and enables corporate profitability again – Brent Crude is US$56 and West Texas Intermediate is US $53.

The price of gold appears relatively stable again – US$1,868 (drifting lower at present).

Prices for raw materials such as iron, copper, zinc, wood, and food (dairy in our case) are rising again.

Next, it would be nice to see a decline in the pricing of freight movement for exporters and economies could begin to beath a little more freely.

At this brief moment in time, financial markets are declaring themselves to be 'comfortable'; I wonder how long that will last?

By now I imagine you can guess my next sentence;

Don't let markets make your next investment decision, make it according to your own plan for managing your wealth and your pending financial requirements.

Debt – The world has, as you know, accepted enormous increases in the scale of private and public debt.

The larger and more mature markets have long spread that debt across long periods with 30 year bonds being normal (issued in a range of 5-30 years typically).

The NZ debt market remains relatively immature in that regard having only recently moved to issued bonds with terms greater than 10 years.

The scale of world debt has now become so large, and interest rates so low, that the new US Treasury Secretary (Janet Yellen) has announced that she is likely to return to issuing 50 year bonds (US Treasuries) as part of regular issuance programmes to help fund the nation.

She has her President's support, witness this quote: “With interest rates at historic lows, we cannot afford inaction,”. Borrow and spend large sums is the game plan.

Very long-term bonds have been issued in the past, but they were, as I understand it, project specific, funding the likes of the Panama Canal, rail network expansion in the US and for World War II recover programmes. Maybe this last point is the closest parallel to today's situation?

My children will be Joe Biden's age by the time these bonds are repaid, and by then I expect repayment will have been arranged via the issuance of 100-year bonds!

The US is not alone in issuing more very long-term bonds to borrow money; the following central or state governments have borrowed for 50 or 100 year terms: Peru, Israel, France, Mexico, Indonesia and North Rhine Westphalia. More will follow with the UK a very likely contender to finance its dramatic recent disruptions (geographic and health).

If it isn't already, it should now be very clear to you that the world's enormous gross and net debt position will not be resolved (reduced) within the remainder of your, or my, lifetimes.

Vaccination – One my new favourite data series to follow throughout 2021 is the Bloomberg Vaccine Tracker. If you search online I'm sure you could find dozens of sources. Here's one:

https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/

This information, and its subsequent effectiveness are so important to what 2022 will look like socially and economically.

Check out the advances being made by Israel (37% complete!) and the United Arab Emirates (20%).

I know NZ has the luxury of being able to data watch for a little longer than many others I am beginning to be disappointed that we haven't defined our start date.

Between now and our start date I'd quite like it for the government, and preferably under the control of our armed forces, explain exactly how our vaccine roll out will occur.

Technology should make coordination into a useful database relatively easy.

I'd like to believe me having a vaccination can be recorded both against my passport record and my medical records. It's a great opportunity to launch this link because we will surely be obliged to display such evidence with many future border crossings.

The idea of vaccination conditions for crossing a border isn't unusual because I had to carry a vaccination passport (yellow book) when I visited South America in the past (Peru, Brazil).

The world 'struck gold' late in 2020 with the development and approval of the vaccines and 2021 is the year of sharing that 'wealth' (health measure) as widely and as quickly as possible.

Logical Reactions – It was a funny survey to read about but it must have given banks confidence that they will soon be able to reduce the scale of funds set aside for bad debt preparations post Covid19.

The survey declared that Australians were more focused on their financial goals than love.

I told you it was an odd data series but it probably helps to partially explain the ongoing rise in the banks' share prices as the fear of bad debts declines.

Building Demand – Maybe the latest crisis (Covid19) and its political reactions will finally be one with a silver lining for Fletcher Building after most of the recent events caused them financial grief.

New Zealand is clearly trying to open all spigots to enable more building, at faster rates.

The obvious rebuttal is that we have talked about doing this every year, and are clearly failing to deliver, but it seems that all regulators are now on the same page for trying to enable more property development.

Even our Prime Minister says 'she' will build 18,000 homes. Down from 100,000 but we need every one that she can build.

In Australia too, Fletcher Building's (FBU) other major market the $2 billion HomeBuilder scheme ($25,000 per project) is said to have supported $18 billion of home building (80% of projects) and major home improvement.

The Australian projects are so many that the once feared increase in unemployment for the sector has turned into hot demand and a shortage of construction workers.

Australia is now expecting unemployment to decline. It certainly will in the construction sector.

So FBU is surrounded by governments trying to turbo charge activity in their industry.

There's definitely no room for new excuses from them for any underwhelming financial performance, should that occur.

If you see Ross Taylor (FBU CEO) walking to work, listen in to see if he is whistling a happy tune and has a spring in his step. It might be all the research you need on this company.

EVER THE OPTIMIST

It's nice to see dairy prices on the rise, this time for five months in sequence.

Analysts who monitor the dairy sector closely are beginning to increase the possible pay-out ratios to farmers, now proposing $7.50 per kilogram of milk solids for the current year and $7.25 in 2022.

Alert farmers will be using diary derivates on the NZX to protect some of their sales pricing well into 2022.

People need to eat.

 

Investment Opportunities

Infratil Bond – The 6-year bond offer yielding 3.00% remains open to investors.

 

TRAVEL

Kevin will be in Christchurch on 28 January and in Timaru on 12 February.

Edward Lee will be in Auckland on 28 and 29 January, in Nelson on 3 February and in Napier on 11 and 12 February.

Johnny Lee will be in Christchurch on 4 February.

Chris will be in Albany on 9 February and in Christchurch on 16 and 17 February

David Colman will be in Lower Hutt on 2 February.

Michael might 'sail' up to Auckland on dates that coincide with other reasons for being in your fair city…. Thursday 4 March appears to be a gap in my diary. J

Michael is also gathering appointments for a circuit through Hamilton and Tauranga probably in the second half of February.

Please contact our office for an appointment.

Thank you.

Mike Warrington


Market News 18 January 2021

Tiwai Point Aluminium Smelter's agreement (life) has been extended.

Imagine my surprise, and to some extent disappointment.

Having subsidised the Australian business for yet another period my disappointment would increase exponentially if Transpower does not display good strategic planning and use the additional time to increase the capacity of its network between Roxburgh and Benmore to bring Manapouri's power North.

Winners, other than Rio Tinto?

Shareholders of electricity generation companies, not New Zealand or New Zealanders (other than the current employees).

INVESTMENT OPINION

During the Break– In most years, the period between Christmas and the second week of January is very quiet, with investors not wishing to participate much in capital markets.

This situation should be especially true in a Covid-free NZ where we were able to get out and enjoy summer in summerly locations without restriction.

Professional investors are interested in the valuations on the last day of the month/quarter/year but that's about all.

This year was very different though when one of the world's largest investors chose week one of 2021 to launch its buying 'assault' on shares in Contact Energy and Meridian Energy.

I understand these two companies were added to an investment index that includes renewable electricity generators and this opened up a need for related funds to own shares in these two NZ companies.

There’s nothing new about this circumstance, with changes to indices resulting in changes to shares certain investors agree to hold, but the way the fund manager went about making progress looked a bit naive on this occasion.

I expect the fund manager would push back at me and remind me that to invest to rule is exactly that and to occasionally allow human intervention would be inconsistent with the offering that has made them one of the largest investors in the world.

Being the largest fund manager, by definition, implies they satisfy the largest proportion of the investment community globally.

I'll touch on the 'green' aspect of this situation further down in this Market News.

Here in NZ, clients that sought financial advice and were thus willing to allow some human interaction were presented with the opportunity to extract some value from this rules driven event.

In the first week of January, which included only three days of trading, the share price of Meridian Energy (MEL) jumped from $7.50 to $9.50 (and all points in between). The share price chart actually implies that the funds may have started buying on Christmas Eve when the share price was about $6.50.

A +26% share price movement on such a business over three days is highly unusual. So unusual it prompted NZX enquiries.

The same behaviour was experienced by Contact Energy (CEN) and its share price jumped from $9.00 to $11.00 having been about $8.00 on Christmas Eve.

Please don't read any disappointment into my notes; this development has joyously added many millions of dollars of wealth to NZ investors and indirectly to the NZ taxpayers via MEL.

It has not however delivered more profit or more dividends to those folk on the capital they have invested.

Bitcoin and Tesla constantly reminded investors during 2020 that sometimes a price has nothing to do with profitability, which will always be a strange thing to acknowledge, but it’s true.

Now MEL and CEN share prices have temporarily been disconnected from their profit performances.

Therein lies the value of connecting with a financial adviser. Armed with smart phones and laptops a growing number of investors reacted quickly to the new market dynamic and made changes to portfolios based on one's own investment rules.

Well done to all concerned.

mRNA – You would serve your mind well by putting down the general media, or social media, for a day or two and reading about messenger RNA (Ribonucleic Acid), the progress being made here for human health and then hugging a scientist.

Wikipedia is ever-helpful as a starting point:

https://en.wikipedia.org/wiki/Messenger_RNA

The scientists who understand the body to this level of cellular detail are of real value to the global population.

They deserve to earn a lot of money, but I suspect what they really want is far larger budgets to continuously expand their knowledge and delivery rates for the benefit of the world’s population.

2021 is the year of the Covid19 vaccine roll out. It appears as though it will take until 2022 until the world will have regained control over the impact of Covid19 on our preferred freedom of movement.

The progress of vaccine delivery is the most important news item for the year and it 'waterfalls' into all manner of other important outcomes.

The job is underway. It will expand and increase in speed and it is all good news.

Its presence has arrived far faster than many could have hoped; another reason to hug a scientist.

Israel has already provided vaccinations to 23% of its population! The United Arab Emirates is up to 15% but the rest are below 5% and will benefit exponentially by accelerating the delivery.

Yes, there is an exponential curve in the benefits of vaccine delivery because every dose provided to the most exposed and health compromised people delivers a multiplied benefit to the health systems of a country.

It is our health systems that could not cope with the rapid contagion of Covid19, not its impact on gross population levels around the world.

Getting the vaccine distributed sooner is both more effective and cheaper than discussing increases to the scale of the health system; hence, 2021 is all about the success of the vaccine rollout.

There may be some supply constraints but BioNTech expects to now be able to produce two billion doses of its Covid19 vaccine during 2021 and this looks to be greater than the rate of delivery so far.

By March the data from Israel should begin to reinforce the importance of urgent, enormous scale, roll out of the vaccine. Keep an eye on their rates of infection, death and demand for health services.

Yes, New Zealand enjoys a position of widespread health at present, restricting Covid19 access to our shores, but to the extent that we can access the vaccine we should also be immediately delivering it to people following our defined order of priority.

To not do this could be to compromise our hard-won economic advantage.

For investors, the presence of the vaccine and the short time frame (24 months) for its effective rollout should add confidence to one's view about investment prospects (declining volatility from this particular influence).

Green– In the past use of the term 'green' was more to do with marketing; semantics if you will. Now it is becoming more serious and its impact on investment returns is on the rise.

Regulators are beginning to define measurement obligations in the environmentally sustainable space, bankers are beginning to apply limitations on related lending and investors are making more demands about how their capital can be used.

Green has already moved well beyond its original marketing angle to being one of obligation and those obligations will become more widespread.

This is a good development for the planet, and its population, and investors will need to factor it in to understanding returns on capital when investing.

The acronym ESG (Environmental Social and Governance) is settling in as the label for headlining performance in this area so keep an eye out for its expanded use.

Indeed, evidence of rising demand in the ESG performing businesses can be seen via the fact that the NZX has already introduced five ESG Smartshares funds which will only invest in businesses that meet a defined ESG hurdle.

For a while a business not meeting new ESG expectations may well be more profitable than an ESG competitor but over time I'd expect increased regulatory obligations (more cost) and less access to investor capital (thus more expensive) to have a negative impact on the returns of such a business.

If you are wondering if there are any local examples to consider and understand the impact look at the item above (impact on share prices for Contact Energy and Meridian Energy) and consider also the approaches being made by third parties trying to buy business assets from Infratil.

Tilt Renewables is clearly benefiting from Australia's willingness to subsidise the construction of renewable electricity generation.

Longroad was benefiting from past subsidies in the construction of renewable energy and President Elect Joe Biden says he will increase this push, after Trump spent his years mining for coal (and other depths – Ed).

You do not need to rush to change but be alert to the impact ESG will have on your options as we look ahead.

Bitcoin – Over summer the price of Bitcoin was even more volatile than the Meridian share price, as was Tesla!

The concept of non-fiat money remains interesting, and the distributed ledger technology good, but the item itself still seems to me to be more a measure of greed and crime than economic productivity or future payment units.

Greed, because surges in value are greeted with enthusiasm and self-serving promotion but declines in price with examples of stark fear; and

Crime, because a large proportion of the scams at play demand that you pay them with Bitcoin.

Some financial market behaviour implies that it thinks internal combustion, fiat money and banking are dead, but this seems unlikely to me.

Central banks are trying to make progress on how cryptocurrencies can play a role in an economy and I look forward to their conclusions.

What the regulators will tolerate is more important in the long run than the distorted perspectives of Bitcoin traders.

Economics – we might all be feeling better about business activity, and here in NZ we have many reasons to be, but it looks like a year of hard graft at this point.

For 2021 global economics look awful and even with our 'free of Covid' blinkers on locally I observe that Massey University's 'GDP LIVE' facility expects our local GDP to be -3.60% for the current quarter.

 

As proposed in our Christmas Eve Market News, keep it simple this year.

EVER THE OPTIMIST

Rolls Royce and the UK space agency think they can deliver humans to Mars using nuclear powered engines.

I think Albert Einstein would be impressed with this use of energy and for its purpose of greater discovery of the cosmos.

Investment Opportunities

Infratil Bond – The 6-year bond offer yielding 3.00% remains open to investors.

 

TRAVEL

Kevin will be in Christchurch on 28 January and in Timaru on 12 February.

Edward Lee will be in Auckland on 28 and 29 January, in Nelson on 3 February and in Napier on 11 and 12 February.

David Colman will be in Lower Hutt on 2 February.

Please contact our office for an appointment.

Thank you.

Mike Warrington


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