Chris Lee & Partners Ltd

Market News 31 January 2022

Amongst all the other things that one can worry about, Fonterra's announcement that they expect a payment in excess of $9.00 per kgMS for dairy farmers (and Synlait targeting $9.25) is outstanding news for the farmers, their communities and for New Zealand.

The weaker NZ dollar is restricting some of our consumer impulses (think about fuel prices) but it is adding icing to genuine productivity for our primary industries.

INVESTMENT OPINION

 

Self-Perpetuating – Do you remember me saying last year that two of an investor's greatest risks were confirmation bias and extrapolation?

Last year's periods of total optimism, and stream of justification news items, are being found out in the early weeks of 2022.

Mind you, now there is a growing stream of ideas and theories to predict that the share market will decline constantly, and interest rates rise all year.

Commentators are making the same mistake, just in a new direction.

For the media, I guess this is their job, to continuously present you with reading material to reflect the current market behaviour, and by current I only mean today!

Tomorrow will be different.

However, it is true that the longer-term outlook for investors is changing, especially with central banks finally agreeing to tighten monetary conditions.

The need for a tightening of monetary policy has been obvious to many for some time now, certainly through all of 2021 as the world proved it was coping amidst the effects of Covid19, yet tightening wasn't happening in 2021.

Now it is.

Mind you even the term 'now' is a bit vague because last week the US Federal Reserve again acknowledged the need to begin increasing interest rates (Fed Funds rate for them) but declined to do so immediately!

Long term investors (which means everyone) should be pleased about the strategic development because rising interest rates sets a more appropriate economic foundation for business to operate upon.

From a politically agnostic perspective nominal interest rates should typically exceed reported inflation so as to provide a real return for the risk involved in lending money, even to a risk-free borrower such as the government.

Traders don't mind questionable financial settings with respect to the wider economy because they prefer volatility, but they get plenty of opportunities to trade and do not need inappropriate monetary policy settings to ride financial waves.

I am now reading plenty of news items that are trying to justify the January share market declines, such as being Putin's fault (Ukraine war risks), Xi's fault (trade barriers and artificial political settings), Covid's fault (more credible than pointing the finger at politicians) but far and away the largest driver for declining asset values is pending increases to interest rates.

Recall: absent any other financial influences, when interest rates rise the present value of future cash flows declines.

All investors, traders and analysts are trying to factor in a higher cost of funds, and opportunity cost, into their models for fair value of all assets, both tangible and intangible.

When interest rates were 0.00% (or lower) the opportunity cost was nil and we debated how long this state might last because the number of years waiting at 0.00% played a significant role in valuing your investments today.

Investors began to adopt a belief of ''There Is No Alternative (TINA)'' to asset selection buying anything other than interest rate investments at close to 0.00%.

TINA has been removed from the lexicon for credible financial analysts.

There is always an alternative. In fact there are usually many.

Bitcoin's journey from USD$69,000 to USD$35,000 will have been partly linked to more nations challenging its existence within their jurisdiction (China, Pakistan, maybe India etc) but again the driver that I think shattered confidence the most was a rising opportunity cost.

I think the next largest negative influence on Bitcoin is it insatiable consumption of clearly very precious energy resources at a time when we are trying to be serious about reducing energy use (because we are not going to hit renewable energy replacement targets in time!)

I'll wager that many of the early fortunes made during the rise in the price of Bitcoin have already been partially secured by sale to later investors and those proceeds have been placed into US dollars, still the world's dominant currency of choice.

Note how the value of the US dollar increased during January as investors worried about the declining value of other investments.

You may recall this from my end of year ''predictions'' about asset values:

If I am to go out on a limb (yes thanks – Ed) I'll say that I expect share market indices to be lower by the end of 2022 than late December 2021, across most economies.

This decline is happening as a variety of previous confidence builders are being removed.

Whilst rising interest rates is the ''here and now'' pressure being placed upon asset values, this theme will only last a year or two and perhaps frustratingly I don't think it will actually lift interest rates above inflation so the drag will be modest in real terms for business.

You may have noticed that the yield (interest rate return) on the benchmark 10-year US Treasury (bond) is finding it hard to increase even in the face of constant claims that interest rates will increase all year (the overnight cash rate).

Monetary policy tension (higher overnight interest rates, and no money printing) are indeed required, but the market is unconvinced that those interest rates will exceed 1.75% in the US over a period of many years.

So, if interest rates aren't to become punishing, what else is the market concerned about?

What else is damaging confidence?

The longer-term negative influence on asset values will be the cost of our efforts to improve the environment. You may also recall my Lorax Moment reference last year and this conclusion:

The world's focus on the Truffula trees (environment) the folly of the Once-ler (industry abuse of resources) and the foresight of the Lorax (David Attenborough) is becoming ever sharper and will add expenses to both business and taxpayers simultaneously.

We will either experience this development through lower profit margins, more price inflation, or most likely both.

I think this environmental influence will reduce corporate profits more than rising interest rates and once the costs are locked in, they'll stay, whereas interest rates can fall again in future years.

I see I have started this paragraph by warning against putting too much weight on the headlines used to justify the market condition (trying to decline) but finished it by saying I think higher interest rates and greater environmental action will sponsor a decline!

Just one man's view amongst thousands.

Travel Data – You still have to feel for airline and airport owners when you review flight data over 2020 and 2021.

I read a few summaries for 2021 (relative to 2019 pre Covid):

Hong Kong – flights down 10%, passengers down 85%, cargo up 8.60%

Sydney – flights down about 50% (increasing fast again), passengers down 86.7%, cargo appears to be down about 25%

Heathrow – flights down about 35% passengers down 50%, cargo unchanged.

The International Air Transport Association (IATA) doesn't expect a return to pre Covid volumes until 2025 (seems a fair guess).

Yet with all these difficult facts and uncertain years professional investors were willing to pay the equivalent of the all-time high share price to take over Sydney Airport!

I admire their far-sightedness, and their investor confidence and I draw investor attention to the respect that should be shown for high quality businesses even in times of temporary uncertainty.

Scams – Institutions are becoming much better at making public comments about scams where their business brand has been used to deceive the public.

The latest one that I saw was a helpful note from Westpac Bank.

Scammers are producing credible looking offer documents inviting the public to invest and typically promised unrealistic risk and return marketing statements.

The italicised words above should always be an immediate prompt for deleting the material being presented.

The solution is to always contact a financial adviser.

Yes, that seems like a biased thing to say but nobody will place funds in such an investment scam if they involve a competent financial adviser in the process.

The action to take with scams not linked to the investment world is to openly discuss them with friends, family or anyone that you judge to have good common sense.

By doing so you will typically reveal the nonsensical nature of the offer.

Offers of riches are always scams, you know this.

NFT – Non-Fungible Tokens are an interesting concept in the scarcity assets space, but a French surgeon may have undermined the credibility of this developing market by trying to sell an X-ray image of an injured patient.

I know, morally bankrupt trying to profit from someone else's suffering!

The NFT market has expanded upon the modern technology platforms, especially Blockchain based networks, the ease of storage and unrestricted locations for presentation (for show).

Scarcity is easily confirmed (tick), ease of transfer to ownership adds liquidity to the asset (tick) and being able to display your scarce object so easily to the market should ensure that this marketplace continues to develop.

However, is a digital NFT the 'gold' and the technology and transaction agents where the recurring profits lie? Would you rather have hunted for gold in Central Otago or owned the pub?

To make financial gains from scarcity assets one needs either or all of the following:

Sustainable economic growth so that some people become richer and thus agree to pay more tomorrow than you paid yesterday;

Wider acceptance of the scarcity value (competition); or

The greater fool theory to occur.

In my view you only purchase scarcity assets with money you are not reliant on for productive returns.

If you have such money, test yourself, which would you buy from this list:

Gold;

Mona Lisa quality art;

Rare Ferrari;

Bitcoin; or

NFT of an injured person's skeleton?

I'll take the 1964 Ferrari 250 GTO :)

Ever The Optimist

New Zealanders seem to be getting the bug for planting more, hopefully as part of a contribution to improved air quality.

Plants aren't something that we import, yet even available supplies of seedlings are beginning to look like shelves at supermarkets!

I hope this means employment at Minginui's plant nursery is on the rise.

It's clearly a great time to be in the plant nursery business.

Investment Opportunities

Nothing announced so far.

Travel

Edward will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and Friday 18 February (Porters, Havelock North).

Michael will be in Hamilton (Cambridge) on 3 March.

Michael Warrington

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Market News 24 January 2022

I am reluctant to put the boot into regulators (no you’re not – Ed), but the investment message here is to acknowledge that decision making always involves iterative changes and one must avoid any dogmatic commitment to yesterday’s thinking.

The boot:

How credible does the blinkered view of ‘public transport above all else’ look based on the following influences:

Insufficient drivers for the bus fleet;

Poor management of service provision (witness Auckland’s latest lack of buses on the circuit during January); and

Covid related recommendations to avoid groups of people.

It’s not surprising that the public revert to their more flexible transport alternatives.

INVESTMENT OPINION

CCCFA – The poor legislation that is the Credit Contracts and Consumer Finance Act has placed an unwanted handbrake on the New Zealand economy at precisely the worst moment and whilst a large proportion are living on government subsidies.

It would have been cheaper and more effective for everyone if the government provided access to free financial advice for all who were considering consumer finance.

Was it so hard to simply legislate that anyone who lends money (via commercial written agreements) must be licensed to do so and then for those not regulated by the Reserve Bank to be obligated to report loan items to the Banking Ombudsman (with a widened brief) for monitoring?

This legislation is yet another example of why the minority of minds in parliament do not know what is best for the majority.

Inflation – German 10-year bond yields finally moved back above 0.00% with a brief moment at 0.021%, after a journey to the depths of negative 0.90% (March 2020) and has been in ‘submarine’ mode since 2019 (pre Covid you’ll note).

At the time of writing the yield is back below 0.00% at -0.014% but the European markets share global concerns about inflation risks and aren’t all that confident about the European Central Bank’s claims that interest rate hikes are not necessary yet.

There is a growing separation of central bank policy around the world with the US, maybe the UK (and little old NZ) in rate hike mode but others like Europe, Japan and Australia claiming hikes are not appropriate at this stage.

I actually think the separation in monetary policy is a good thing and should again begin to reflect localised economic performances. The ‘’all for one and all to 0.00%’’ over the past two years felt false and I think it proved to be in the stark changes in many asset prices.

You could argue that the world was more global until 2021, delivering many common price points, but this force is diminishing at present as political tensions rise and freight movement logistics are restricted.

Turkey very clearly is experiencing uncontrolled inflation.

Japan is not.

Some inflation is controlled, by the private industries supplying scarce products, such as energy. This is most visible in Europe but also for many other nations in the new headlong rush to remove fossil fuels before we have sufficient alternatives.

We should see more of the independence of central banks this year and next and it will drive more currency movement.

Deflation – It’s not a one way bet that everything is now inflationary.

In response to my question last week about where deflationary forces might come from, Frank Pearson kindly directed me to some content that reminds us just how quickly technology replaces manual production and thus suppresses pricing.

This has been true for a long time now and the potential of technology is changing faster than most of us can keep up with.

I now also ponder whether the S from ESG is deflationary.

Environmental, Social and Governance criteria for decision making are gaining traction. Investors providing the capital for private investment are increasingly demanding measurement on these criteria and beginning to form positions on acceptable performance.

The Social item is not just about good form with employees, it also sets expectations about behaviour with business partners, communities and consumers.

It is no longer a given that a business should sell a product or service at ‘a price we can get away with’ so the S may offer some price suppression within the wider economy.

Then, you can factor in the deflationary effect of central bank removal of stimulation and central government increasing their tax take from your pocket!

After all those thoughts it’s no wonder that we find it hard keeping a positive financial balance in our discretionary spending account.

Property – There’s plenty of hope yet for real buildings to be full of tenants again.

They of the ‘all things technological’, GOOGLE, has reaffirmed its commitment to having staff in central office spaces by expanding its UK capacity by 50% and by purchasing the buildings.

You could even argue that demand for property will increase based on their second statement; ‘The strategy is to provide more space and be less densely populated, including more leisure spaces’.

Remember the adage – land, they’re not making any more of it.

Speaking of property investment, Wellington owners of Precinct Property shares must smile as they drive along the motorway into the city and observe the third and fourth buildings being developed on the Bowen Street campus behind parliament.

They are both an impressive use of space and intelligent positioning with respect to target tenants (the government) and public transport networks (Bus and train hubs in Wellington).

Environment – Australia is not in Serbia’s good books at present.

Not only have they sent one of their favourite son’s home early (Djokovic) but Rio Tinto’s plans to develop a lithium mine are ‘drawing a crowd’ of unhappy environmentalists.

Serbian activists have blocked several main roads to express their anger at Serbian government plans to advance more mining in their country, a country which doesn’t yet meet the environmental standards set by the European Union.

Serbia has applied to join the EU but cannot until it improves its environmental performance (and presumably many other indicators), so it would seem that the protestors have a point.

Maybe the current Serbian government isn’t serious about EU membership?

However, the public, the world over, is becoming more serious about its expectations that governance pay more attention to delivering better environmental outcomes.

You can see another piece of anecdotal evidence regarding public environmental preferences in peoples’ collective investment selections; managed funds that filter for good ‘ESG’ behaviour are the ones attracting more money.

I am sure there is more evidence of this in global data, but simply using local data from NZX Smart Shares you can observe that far and away the fastest growing fund (proportion) over the past three months (+700% +$142m) was the Global ESG fund (code ESG).

I’ll not debate whether the companies invested in will be the best financial performers (profit etc) but they will unquestionably find it the easiest to attract investment capital to run their businesses.

Rio Tinto may well argue that lithium is required for the many batteries being sought by the rapidly expanding Electric Vehicle (EV) market, but they’ll clearly need to re-design their mining strategy if they wish to avoid civil disruptions in Serbia.

From your perspective, as an investor, it seems likely that if you are invested in companies with good ESG performance then market demand from investors will provide some support for the value of your investment entity (or fund).

Post Script: The Serbian government is backing away from the planned lithium mine. (elections are due soon!)

Harmoney – I hope Harmoney’s latest financial report is not repeated for long otherwise it is cause for economic concern in New Zealand.

They describe curbed activity in New Zealand, probably as a result of both Covid and CCCFA law influences but ‘Australian growth charged ahead’.

Our government should be interested in many data points, but this is one that I would prioritise.

EBOS – should be very pleased with the well oversubscribed support for its latest capital raise to finance the purchase of LifeHealthcare.

Good corporate performance deserves such support from the owners.

It is also a reminder to unlisted businesses of the benefit (rapid access to capital) of being listed on the stock exchange. I hope we see more company listings during 2022.

Crypto – Continues to polarise as Pakistan proposes a ban on them and India is discussing doing the same thing.

Pakistan’s main concern seems to be that the populations increasing use of crypto currencies is depleting that nation’s foreign reserves (they are using ‘real’ money, such as US dollars, to buy the crypto currencies).

You have been witnessing the trouble Turkey is in as its foreign reserves plummet.

India’s Cryptocurrency and Regulation of Official Digital Currency Bill aims to establish a framework for an official digital currency to be issued by the Reserve Bank of India so they are concerned about foreign reserves and control!

China’s behaviour is like India’s although I suspect China also shared my main concern that in a world that is (should be) trying to reduce per capita energy use, mining Bitcoin and settling crypto currency transactions consumes enormous amounts of energy without aiding global productivity.

No, sorry, I really don’t have a recommendation for you about participation in crypto currencies, other than to be very careful and to only use ‘real money’ that you can afford to lose.

However, one thing you will need to become familiar with is how to make payments across technology platforms because this will unquestionably be necessary in developed nations in the not too distant future.

Ever The Optimist

The most recent Global Dairy Auction set new price highs and is progressing toward affirming a new high payout to dairy farmers (above $8.50/KgMS).

Whilst too much regulatory change is being proposed too quickly elsewhere in the NZ economy the rural sector is simply getting on the job and delivering real value to NZ.

Thank you.

Investment Opportunities

Nothing announced so far.

Travel

Michael will be in Tauranga (4 March) and Hamilton (3 March).

Edward also plans to visit Auckland on Thursday 3 February (Remuera area) and Friday 4 February (Albany area). He will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and Friday 18 February (Porters, Havelock North).

Michael Warrington

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Market News 17 January 2022

Yes, for those who are wondering, it takes a moment to re-energise one's focus back onto professional matters after such a lengthy research trip.

Through one lens it is almost disappointing to see how little has changed in the major themes, but through another there are subtle wind shifts occurring and they need to be watched.

Keep trimming the sails.

INVESTMENT OPINION

 

Inflation – One of 2022's central themes was reinforced by the latest US data at +7.00% in December (year on year comparison with December 2020) and this rate of change will have put the US Federal Reserve on the back foot.

I like Bloomberg's description: The most inflation since we were watching The Fonz on Happy Days.

You can bet that central bankers will be hoping that this rate of change is short lived even if they don't call it 'transitional' any longer.

To be fair to them, there have been other swings for inflation of this magnitude in the past and the data has settled back into the 2-4% range, so mean reverting is, at this point, probable.

However, where 2% inflation has been the middle ground for the past 10-15 years it seems an unlikely average for the 3-5 years ahead because I suspect it will take that long for economies to settle into new post Covid routines, prior to claiming control of underlying inflation.

I actually wonder whether borders open (remember that walls were coming down) and population counts rising (percentage of age group pursuing employment) had as much to do with downward pressure on inflation as monetary policy tension from central banks.

How will inflation retreat during the next cycle?

Real estate, food and energy are 'our' three largest household expenses, and these are the items that have increased in price the most. It's very hard for me to imagine any of these items now becoming cheaper.

I can see many drivers that will reduce discretionary spending from the many, and thus reduce consumer tension, but this is hardly a wise political strategy.

The European Central Bank (ECB) said, presumably with a straight face, that they see inflation falling back below the 2% in 2023 and 2024.

That is an implausible prediction to make in my view, unless they are expecting another deep recession across all of Europe; which they really do not need.

It's beginning to feel as though many of the thinkers on the 'bridge' of the good ship HMS Central Bank aren't old enough to have experienced inflation behaviours from previous eras and thus are making up announcements as they go along and then looking across at the political masters for satisfied facial expressions.

If central bank independence has been stealthily undermined by both financial markets and politicians, as they seem to have been, we are in a spot of bother.

Where the central bank interference is more overt, such as in Turkey, the ramifications are immediate and already obvious, but the outcomes may ultimately be the same for 'us' if 'we' are not careful.

By us, I mean the US, Europe and the UK who still have a significant impact on financial pricing in smaller nations such as Australia and New Zealand.

You'll recall that many central banks changed their strategies from pre-empting potential inflation with monetary tension to now saying they'll wait until they actually experience inflation.

Well it's here! Sooner than they thought.

Yet now they don't seem very willing to take on the inflation fight.

The US Federal Reserve is debating with angst the difference between three moves to 0.75% or, cringe, four moves to 1.00% for the Fed Funds rate.

There's something very wrong about the US Fed's anxiety if they don't think the world's largest economy can cope with a margin of 0.25% or a nominal interest cost of 1.00%.

Is this the year where we question central banks and politicians every month until December when we wake up and realise that they actually wanted a little inflation all along to suppress the proportionate scale of the world's massive debt levels? (Nominal debt sums stand still whilst the scale of economies rise in value).

Side Script – nominal debt will not be standing still, and a change in price driven by inflation is not 'value'.

Buckle in and position yourself with a portfolio that suits your needs.

Don't try and out-guess this inflation versus monetary policy debate.

Tax – A tax by any other name.

We all knew that central governments couldn't spend at the rate they were (and still are – Ed) without the piper calling in the dues.

Debt repayment by a government only happens through tax collection (other revenues are small and sector specific), of sufficient scale to leave a fiscal surplus. Typically, governments aren't very good at the surplus part.

Asking the next few generations to repay today's debts, that filled the pockets of the current generation won't go down well; tax collection for debt repayment needs to start soon.

Some of these taxes will not be described to you as a tax though.

The item that prompted this rising tax risk was the state of Quebec breaking the ice on new subject specific charges responding to public behaviours with its plans to introduce an additional financial cost labelled a 'health contribution' for unvaccinated people (who don't have exemption status).

This is not an additional fee when you arrive unwell at a hospital, to assist with the costs of the unnecessary marginal workload for that hospital, it is a fee to all unvaccinated citizens.

It is thus a targeted tax directed at citizens deemed to be adding avoidable costs to the health system, passing those costs across the total population.

Greece has one too; $100 per month (> 60 years of age). Austria plans a one off fine of $3,600 for unvaccinated over 14 years of age.

It rather makes New Zealand vaccine mandates look tame, especially if ours are temporary (2022 only?) as they should be.

Even though such taxes do not meet the preferred principles of an efficient tax system (broad, shallow, fair, efficient to collect) they do in fact broaden the ways in which tax is collected.

This isn't the first behavioural tax. We direct specific taxes at tobacco and alcohol based on the harm and thus incremental impact on our health system.

Taxing an absence of vaccination for a specific health threat feels more difficult to justify and creates a slippery slope toward autocracy, but right now I suspect the 90% (vaccinated) will support such governments attempts to press the minority in this health battle.

Maybe the 90% will one day vote the government out when they try to tax people for wearing unusually bright shoes ('visual pollution they said')?

Don't think it won't happen here. The New Zealand government introduces such taxes too, having recently added a 'visitor tax' (didn't raise much – Ed) and a 'waste tax'.

As I say, it's a slippery and undesirable slope for politicians.

We have danced around adding complications and inconsistencies to taxes in the property sector, when it would have been so simple to broaden the tax base through a small levy on all property plus a deemed return on investment property (taxable) as recommended by the 2009 Tax Working Group.

This would have led to more tax from those who own the most, and lower taxes on the earnings of the many.

Given that governments don't seem to have the confidence to explain broad tax changes you can be sure that more targeted taxes are coming, and the lexicon of tax names will expand and I think your net income will decline.

In linking this to investment thinking, it's an unusual way to keep discretionary spending, and thus inflation pressures down, but I think we can be certain that it will happen.

Discretionary money that was flooded into the economy over the past two years needs to be removed.

Rationality – To a large extent managing investments and financial risks is a mathematical process and thus is logical.

Decision making, for the most part, needs to be rational.

One of our greatest risks is therefore irrational decision makers, of which the world has many and some of them are in highly influential roles.

An example that caught my attention last week was Kazakhstan's decision to shut down the internet (!!) to try and disrupt the mass protests that were occurring.

This feels like a Donald Trump move although Kazakhstan might counter that they wish to block the nonsense that Capitol Hill experienced in Washington with protest movements coordinated via social media.

The protests are centred around sharp increases in energy costs, which won't be helped by Kazakhstan's tolerance of Bitcoin mining (a huge energy user).

With the internet down Bitcoin mining stopped too.

In a world that is struggling to reduce energy consumption yet wants to do so for the benefit of the environment, I remained surprised by 'our' tolerance of Bitcoin mining (with the exception of China who banned them).

The world is struggling both with supplying enough gross energy units for total demand and with increasing renewable energy supply fast enough to replace fossil fuel based energy that we say we want rid of.

Regardless of the side show of stopping Bitcoin mining, shutting down the internet is a hugely irrational move and will badly affect their economy, and some international businesses who deal with them.

What other irrational influences are possible, or probable, during 2022 that would disrupt investment outcomes?

Maybe commercial interests successfully lobby politicians to interfere with the independence of central banks, as far up the food chain as the US? (Turkey is already there – Ed)

The US population votes Donald Trump back into office in 2024?

The US population elects someone even older than Trump and Biden as President in 2024!

Taiwan shoots first? (North Korea follows…)

Some nations give up on democracy?

I think I have begun to dig a hole that is difficult to clamber out of. The list of potential irrational actions in 2022 alone is probably longer than 365 lines.

I'll stop while I am able to.

These moments of irrationality fall into the warning to 'expect the unexpected' with your investment decisions.

Crypto – There's a battle brewing between the regulated 'West' and the 'Rest' again.

Witness Iran's decision to permit the use of crypto currencies for international settlements.

I don't think the move into crypto currencies has gone very well for Venezuela (yet? – Ed) but what seems to be happening is nations who feel suppressed by, or affronted by the likes of the US, Europe etc are rebelling by accepting concepts being rejected by them.

In the same week, the House of Lords warned the Bank of England against even having its own digital currency, declaring 'Britcoin' a threat to the stability of its banks!

The Lords clearly have very little confidence in their own regulations, the Bank of England's governance of monetary matters and looks more than a little anti-competitive.

I think the Lords would find, if they asked, that the public would be quite enthusiastic about competition for the banks.

I think the Lords are a little regressive in their thinking whereas Iran looks progressive.

I'd rather not see a East – West divide open up again.

I'd like our governors to indeed use their experience and be wise with decision making but I'd also like them to look out the windscreen and not the rear-view mirror.

I'd like to pursue a research trip to Iran. I think we are misled by Western headlines.

Inefficient Regulations – This item falls under the 'be careful what you wish for' subject.

The government's recently passed changes to the Credit Contracts and Consumer Finance Act have had the effect of suppressing all lending to the public.

It would seem that the law passes too many new risks on to lenders, including the banks.

As I understand it the government was concerned about the usurious lenders who destroy the finances of society's poorest communities, but the CCCFA changes mean that many with high incomes are now being rejected by the banks for housing mortgages.

Now I am curious about whether or not the select committee listened to submissions from lenders with open ears.

Maybe this government would benefit from a tutorial session with their one-time leader, Prime Minister and legislative expert Sir Geoffrey Palmer.

What's That About – stores full of vinyl (records) and printed books are reporting sales are at their highest level in a decade even though they cost a lot more than digital files available under your thumb on a smart device.

The ageing empire strikes back.

Cool.

Irrational or Rational?

Real.

Ever The Optimist

NZ diagnostic biotech company Pictor has developed a world-leading antibody test for Covid19.

The Pictor test simultaneously detects the presence of both anti-Spike Antigen (SP) antibody and anti-Nucleocapsid antigen (NP) antibody in a single test.

https://pictordx.com/

One, other or both NP and SP can contribute to immunity between 82-96% and this knowledge will be helpful (necessary) crossing borders in future.

Novak Djokovic should have called Pictor.

I'll place a buy order for my future travel plans.

Awesome to see NZ business at the forefront of Covid19 responses.

Investment Opportunities

Nothing announced so far.

Travel

Michael has an opportunity to be in Christchurch on Tuesday 15 February. Please sing out promptly if you'd like to meet and he'll arrange flights to suit.

Michael will make trips to Auckland in late February and then Tauranga and Hamilton in early March. Again, please let us know if you'd like to arrange a meeting and we'll get back to you once dates and places are booked.

Edward will be in Auckland on Thursday 3 February (Mount Richmond Hotel, Mt Wellington) and on Friday 4 February (Fairview Events Centre, Wairau Valley).

Edward will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and on Friday 18 February (Porters, Havelock North).

Please contact us by email if you would like to arrange an appointment for any of these dates

Michael Warrington

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Market News 10 January 2022

Happy New Year.

I have news for the new year.

I shall be finishing up at Chris Lee & Partners in September.

As a reminder of just how fast time travels, I have been here 14 years, which is creeping up toward the length of time that I spent in wholesale financial markets from where I drew my experiences to share with you.

It has been a pleasure helping the public to understand the 'playing field' that they confront when investing their savings, the rules to try and follow, investment product risks, market risks and how the other 'players' operate.

The highlight of my time has been how open clients have been with me, literally involving me in their personal stories and making me feel like a member of their family or close community.

Of all the things that I'll miss, this will be biggest influence. It made each relationship very real, and thus very important to me.

I feel more than a little bit of guilt as a result of these 'dis'connections because such relationships are not simple 'East – West' associations that one can simply switch on and off; they have more dimensions than that.

I intend to hand the gyroscope carefully to others to try and minimise the change that you experience.

Immediately after joining Chris Lee, the Global Financial Crisis (GFC) of 2008-2009 arrived; it was a very challenging time for all, but I recall being very comfortable with that period because I had seen large financial disruptions previously and I felt well prepared for explaining the situation to our clients.

Some of you, with robust memories, will remember a refrain from that period: Strong, Long and Liquid.

Nonetheless, the GFC removed value from investor portfolios, which is always a difficult experience for both investors and advisers, so it wasn't the starting point one would plan for a 'new' career but that is typical of the way of financial markets function; expect the unexpected.

From that point onward (post GFC) I feel as fortunate as our investors must, to have ridden the longest sustained period of investment optimism and value gains in a lifetime.

It is an easy and pleasant experience to watch client wealth rising.

It would serve my ego well to think I played a role in some of the value gains but the reality is that I was merely helping clients to understand whether they should swim in the shallows or the deep end; I had no impact on the temperature of the pool.

As I have said a couple of times recently, we must be due for another difficult period when portfolio values decline or rewards are lower, or both, but you'll not convince me to predict when, why and by how much. I think the only assurance I can give is that it will be different to your previous experiences and the trigger will be a surprise to the majority.

Please don't jump to conclusions that this potentially more difficult period for investment has anything to do with the timing of my departure. I genuinely wish you another luxurious decade of good investment returns; I just don't think it is likely!

Like you, I'll need to navigate the period of lower returns that I expect, but the investment principles remain the same so don't hunt for any new magic beans or accept offers of snake oil from passing salesmen. (people – Ed)

The main driver for my change is a hope to add more leisure time to my diary, a euphemism for more travel, (research trips – Ed). I don't think it is appropriate for me to serve such a wide audience, requiring a constant service level, through part time attendance.

The counter argument may be that the whole world has become part time over the past two years, and we have coped. True enough, but at this point I think investors deserve full time service from their professional advisers.

I am confident that clients receiving a financial advice service from us have been learning the investment process well enough, which aids independence, that armed with advice from the others here you will maintain good investment portfolios.

'Your' generation has typically been very good at saving and budgeting, so combined with reasonable investment practices I am confident that you will enjoy good financial control.

To help I'll write an evergreen item reminding people about the importance of asset allocation, investment rules and some steps to follow, a flowchart of sorts, and publish it on the Private Client login page of our website.

One thing I shall not miss about this industry is the elevated level of regulatory imposition.

I am a supporter of the recent (2012) legal requirement to have a license to provide financial advice to the public, which raised the standard across the industry, but not some of the subsequent over-reach by the Financial Markets Authority.

If the FMA had sufficient budget, I'm sure they would install an observer in every business such is the level of influence they seem to aspire to now.

Rather than regularly issuing public criticisms I'd prefer that the FMA developed a more cooperative model with the financial community, so the regulator gained more confidence to steer the public toward use of the financial advice industry.

The advised public are unquestionably better served than the unadvised.

I'll also not miss other resistors introduced by central government, such as FATCA (foreign tax declaration), Common Reporting Standards and the many obligations attached to Anti Money Laundering law (AML).

At its most basic AML has improved knowledge of clients, which is good for servicing, but its depth of obligation has added countless unproductive hours of work and thus more unrewarding expense to the public.

But I digress. Nothing I say about regulatory matters will alter them, neither my situation nor your future investment activities!

If you'd like something from me, you have plenty of time.

Thank you for involving me in your affairs during the past.

Invitation - Who would like my chair?

If you are a financial adviser with a focus on investment, and you would like the opportunity to work at Chris Lee & Partners, then you are encouraged to make contact with us.

I'll not define conditions for applicants, just put your hand up as being interested and we'll respond in more detail.

INVESTMENT OPINION

 

Markets – I have done my best to avoid news over summer, especially the constant chatter about Covid and the rehashed stories about financial threads whilst the media waits for genuinely new information to analyse.

My first impression having re-opened the 'window to the world' is the more that things change, the more they stay the same.

My starter pack is made up of:

The US Federal Reserve may tighten monetary conditions a little faster than last year's rhetoric, but change will still be glacial (measurable but insignificant);

The evolved Covid situation is not damaging economic confidence. The world is moving on;

Share markets (some of) are setting new index highs, which is often a reason for confidence in the immediate future, but I'm less confident about this item;

Shipping and freight logistics remain extremely expensive, but are showing signs of normalising (increased effectiveness, pricing decline) later in 2022;

Employment seems to be very strong, but I haven't seen any reports on Full Time Equivalency and I ponder if the same work is being shared more widely and the population is becoming more aligned with the mix part time and remote working solutions;

Too many politicians around the globe are behaving in selfish and centralised ways which cannot succeed relative to the devolved alternative for large populations (NZ is guilty of this too); and

A lot more tax needs to be collected to at least stop the trend of rapidly escalating public debts.

As I said, same same, but different.

Difficult – You know how difficult investment decision making is, so you'll be relieved to read that one of America's recent investment 'heroines' (Cathie Wood and her ARK fund) forecast gains of 20% for her investors in 2021, but she delivered losses of 21%.

Remember these stories as you read tomorrow's investment marketing material.

Fiordland – my December research trip saw me taking notes in Te Anau, Doubtful Sound and the Hollyford Valley.

I know New Zealand has outstanding natural spaces, but it is always excellent to get out into those spaces. They are truly outstanding. I need to get back to Dusky Sound and Resolution Inlet one day, and do another couple of the great walks down there.

Te Anau is a very nice place, in such a beautiful location, but there is a moment of reckoning coming for them, especially the accommodation sector given the low number of travellers. I hope most of the owners have plenty of equity. Councils may need to consider rates relief because they can be sure that the bankers will run as soon as they become too scared about financial risks.

If you are a Te Anau business person finding it a little difficult, get in touch with Chris Adams, the new owner of Fiordland Jet, he is your passionate local and is clearly determined to make sure that the area succeeds.

If you acknowledge that you're all in this together, and function together, then you'll come out the other side together.

Maybe the local businesses should find a way to establish a 'Heli Uber' from Queenstown airport to ease the connection issues?

Wishing you all the best to Te Anau, as you are surrounded by some of New Zealand's best features.

Ever The Optimist

I don't wish this to become a 'book club' section but I read Chris Finlayson's book (He Kupu Taurangi) over summer and if you are interested in the Treaty settlement process it gives an excellent foundation for understanding.

There are some reasons for optimism in Finlayson's hopes that various iwi now become some of New Zealand's most successful regional businesses (and environmental guardians) something that several early settlers (pun intended) have already achieved.

Here's an interesting question: how would you all feel about bonds issued by Ngai Tahu Holdings Corporation Ltd?

All the best for the new year.

Michael Warrington

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