Market News – 15 July 2019

There is always plenty of ‘energy’ in the excited headlines about Bitcoin, but energy is surely part of the reason it cannot succeed.

In a world where consumers and regulators are striving for energy cleanliness and efficiency the news that Bitcoin’s processes (mining and blockchain reporting) use the same amount of energy as the entire country of Switzerland (58.4 TeraWatt hours) undermine its long-term credibility.

Actually, speaking of electricity, our government has quickly moved on from encouraging us all to make better use of public transport and cycle ways and now wants to subsidise our next car purchase, as long as we choose an electric one.

Subsidies distort markets and are not money well spent.

NZ is too small to tip the global demand scales and encourage manufacturers to accelerate production volumes to the point of price declines. This needs China, the US and Europe to change.

I guess it adds value to electricity generation businesses, which most of you own.

INVESTMENT OPINION

Kiwibank – Dear Jacinda,

I see you have made your first move toward selling some shares in Kiwibank to investors (Mixed Ownership Model).

The government has launched legal proceedings against Westpac Bank, the government’s current banker.

Presumably this will be followed by a strategic move of the government’s banking services to Kiwibank, which in turn will be followed by a share float.

Nice work.

Continuing regards.

Escalation – Just two weeks after suffering a legitimate democratic kick in the pants Turkish President Erdogan has responded with an unnecessary power play and removed the governor of Turkey’s central bank because he refused to lower interest rates and then refused to resign.

The principle of Erdogan’s behaviour is dangerous in its dictatorship method within a country that has demonstrated they wish to be democratic.

Of concern to all should be the error for Erdogan in believing that reducing interest rates is good for the economy and good for politics. There are now plenty of economies around the world proving that lower interest rates are not delivering better economic outcomes.

Alongside this weak economic theory, we are being delivered political leaders such as Trump, Xi, Boris Johnson, Putin, Matteo Salvini, Marine Le Pen, Mohammed bin Salman and Erdogan himself. Hardly a roll call for the successful for setting rules based on what a single person believes to be appropriate.

Diplomacy – The UK ambassador to the US was wrong to describe the Trump administration, in writing, of being ‘dysfunctional’, ‘inept’ and ‘incompetent’.

He may have had evidence of them being ‘insecure’ with data; I assume he wasn’t alleging the US of being on a fragile footing.

The rebuttal for ‘dysfunctional’ is simply that the ambassador does not understand the method that Donald Trump is choosing to function by. This is part of the strategy so the ambassador’s summary will please Trump.

The rebuttal to ‘inept’ and ‘incompetent’ is one that all parents teach their children; If you haven’t got something nice (constructive) to say, don’t say anything at all’.

Lastly, Mr Ambassador, don’t write this stuff down.

This scenario reminds us how unsettled international politics really is, and probably always will be.

Bond funds – A bond fund manages a diverse collection of fixed interest investments (bonds and deposits) for investors but they account for their returns in a different way to a person who manages their own fixed interest investing.

Bond funds are obliged to capitalise gains, and losses, whereas a self-managed investor focuses on the collective cash flows of the bonds and deposits.

If you buy a single 10-year bond yielding 1.56% now, and the borrowing entity doesn’t default, you can be assured that your return will be 1.56% per annum.

The current yield tells you what you will earn over that future period. On most bond issues the ‘yield’ is the same as the ‘interest rate’ on the day the bonds are issued.

A yield of 1.56% isn’t a great outcome if you believe inflation will average around 2.00%.

So why do people invest in bond funds?

Reported performance, typically sitting above current interest rates because of capitalised gains from falling interest rates, will have something to do with it, but this is misleading as it compares backward looking information against forward looking information.

Looking back in time bond funds have been publishing very good returns; returns that are driven by falling interest rates and an accrual accounting (IFRS) obligation to always report current valuations to you, and movements in those valuations.

A typical investor simply looks at the average of the interest rate returns within their portfolio and gains a very good understanding of the true return on their savings. They see that this return is evolving (lower, sadly) based on the current interest rate market.

A bond value starts at a cost of $1.00 and 99% of the time will have terms that see it end at $1.00 however, during the life of the bond its ‘Present Value’ changes to reflect current market interest rates and residual time until repayment.

A bond issued with a 10.00% interest rate for 10 years, costing $1.00, would migrate to a temporary market value of approximately $1.25 if interest rates were 5.00% at the mid-point (year 5). Roughly speaking, 5 residual years multiplied by the 5.00% interest rate ‘win’ equates to the $0.25 valuation premium.

Students of the previous two paragraphs will know that this bond value will return to $1.00 when it is repaid in five further years, after continuing to pay out interest at 10.00%.

At year five a bond fund with only this bond in their portfolio would be reporting annualised returns over the past five years of approximately 15% per annum (5 years at 10% plus the $0.25 market value gain divided by the 5 years that have passed).

There’s a chance that an investor (let’s call them Neighbour 1) in this bond fund will be telling his/her neighbour (being Neighbour 2) that their bond fund has outperformed Neighbour 2’s 10% bond, even though the bond fund owns exactly the same asset.

‘My bond fund has delivered returns of 15% p.a. while your self invested bond has only returned 10% p.a.’

At this point (year five) Neighbour 2 knows that his/her bond will continue to pay 10% cash flow for the next five years until repayment at maturity.

If Neighbour 1’s bond fund also keeps the bond until maturity*, as they usually should, the return over the next five years for the bond fund will only be 5.00% (the market yield used to revalue the bond in the fund).

Neighbour 1’s bond fund will continue to receive the 10% interest rate but the fund value will retreat from $1.25 back down to $1.00 at the point of repayment. This $0.25 decline in the bond fund value is thus deducted from the 10% interest payment received over the remaining 5 year period (ie. 25 divided by 5).

*I say that the bond fund manager should keep the bond to maturity because the fund is always likely to have money tasked with investment in bonds and trading bonds adds transaction costs and additional market risk (speculative decision making about market conditions) which doesn’t occur in my simplistic math example.

Bond fund managers are experts on interest rate markets, but trading is predominantly linked to strategic evolution, such as buying long term bonds when expecting interest rates to fall, and not trying to beat micro movements in markets.

What you may now be seeing is that during a long era of falling interest rates bond funds are, most of the time, reporting annual returns that appear to exceed contemporary interest rates.

This situation will continue if interest rates continue their decline, as seems likely to us. This will be true if we reach 0.00% market yields and then continue on down to -0.50% as many government bonds display in Europe.

However, the stark truth is that the reliable returns between today and the future maturity of the bonds in a bond is the current market yield (0.00% if we reach that point and revalue all our bonds at that market yield).

Without predicting how a fund manager will perform as a professional manager of value, the bond yield that I opened this paragraph with (Italian 10-year government bond) only deliver a return of 1.56% pre-tax and inflation for the next 10 years.

I once read a headline that described investors in bond funds as ‘riding the wave of falling yields’ but this is misleading because waves come in a sequence, and there is unquestionably not another winning wave coming in behind the current one (three decades long at present).

A more accurate analogy would be riding in a soap box derby because the fun will absolutely stop once we reach the bottom of the hill.

I wonder if any derby kart was ever named ‘The Interest Rate’?

As interest rates continue to decline our view is that investors should continue to invest in long terms to protect their future income (assumes our view about interest rates is correct).

If interest rates continue their decline bond funds will continue to present relatively good annual performance figures, even if interest rates move from 1.00% to 0.00%, and heaven forbid, below that.

However, once we get ‘there’, being the bottom of the soap box hill, what will we do next with our savings that are allocated to fixed interest investment?

At that point a bond fund is like its metaphor, the soap box kart sitting at the bottom of the hill, devoid of potential energy and in my opinion kinetic energy too (until you believe interest rates rise again? – Ed).

It takes a bold, or worried, investor to accept long term fixed interest investments if interest rates head below inflation, and a very bold one when interest rates become negative.

For the most part bond fund managers have done a good job for their clients, albeit with fees that are increasingly difficult to justify as nominal and real interest rates collapse, but in the medium term I think they are moving into the final lanes of a maze without an exit.

Pension – Cameron Bagrie is correct, as are the others with the view that the age for reaching New Zealand’s pension must increase.

The sooner we tell people, such as my 25-year-old son the better. It will give them time to better prepare. In simple terms a move to 70 years of age would require my son to save an additional $1,250 per annum for 45 years.

The current era of government has another advantage that they would be foolish to miss; the baby boomer generation has been better at saving than the past two generations. They were brought up by people who experienced the depression and know how to cut their cloth to suit and how to save money.

This has left a large proportion of them with savings, and rapidly rising equity in their homes, that they are willing to pass down to children in difficult positions and to grandchildren coming up against education and property expenses that are far greater than the grandparents experienced.

Making a change to the start age for National Super doesn’t not breach any moral agreement with the population as the previous National government clearly believed. I recall quite liking Peter Dunne’s suggestion for a reduced payment if it was claimed earlier, and more paid of accepted later, which was a nice way to acknowledge the variable health status of the population.

If we move the National Superannuation age to 70 years of age (progressively) I think we should leave the ‘earliest’ Kiwisaver exit point at 65 years of age to allow the successful savers the opportunity to access cash flow sooner.

Where a person has built up a reasonable amount of equity in a property, they will also have the choice of home equity release loans to bridge age gaps between say 60 years of age and 65 years of age when they can access Kiwisaver.

Generational gifts and inheritances from the hard saving folk of the prior generations will prove invaluable with the young, answering question marks in the long-term budgets for how they were going to cope.

All of these risks and cash flow objectives can be easily managed by the population if you give them sufficient time to plan ahead.

There’s another reason the government must give my son a prod on the shoulder to save more money, returns on investment will unquestionably be lower for his time as a saver than they were for his grandparents, and until now for his parents.

The ‘magic’ of compound earnings is a little less magical under today’s conditions. 40 years of 1-2% interest rates and 3-5% dividend returns will not bring David Copperfield to the show. It’s more likely to deliver a card shark with confusing expectations.

This subject is a classic example of the need for long term thinking by our politicians and not to focus on three-year electoral cycles.

By the way, whilst I am on things politics and long-term planning, may I say, I liked the government’s current review asking whether or not they should provide free public transport to the population holding a Community Services card. I hope the answer is yes.

Nobody likes taxes, but speaking solely for myself (that’s all you’ve got – Ed) I’d be happy to learn that some of the massive taxes collected from my fuel use went to paying for free public transport for others with less opportunity than I have been blessed with.

Dear Jacinda,

I apologise for taking up your time with my second letter in two weeks.

If you drag National Super up a little at the top end (age), my wife and I will give our kids a shove from the bottom end, and we’ll all be fine.

Regards, etc.

EVER THE OPTIMIST

 

Two of the fastest growing economies in Europe at present are Spain and Greece, the one-time runts of the litter.

A little bit of reform and refocus can do wonders.

Infratil – will be pleased to have received Commerce Commission approval for their participation in the Vodafone NZ purchase.

As we said previously, all Infratil staff leave will have been cancelled so they can settle the elevated corporate activity into place; all of which are good strategic developments in our view.

INVESTMENT OPPORTUNITIES

Trustpower bond (TPW180) – All Exchange offer application forms should now be in.

Thank you to those who submitted these and included Chris Lee & Partners as the Broker on their form.

Napier Port – Pre-registration for locals has now closed.

The Product Disclosure Statement was presented to the market today.

We will participate in the process once invited and communicate directly with the people on our list, which is now closed.

TRAVEL

Kevin will be in Christchurch on 24 July and in Queenstown on 23 August.

 

 

Mike Warrington


Market News – 8 July 2019

It’s funny headline time again:

‘US Federal Reserve investing in Facebook’s Libra coin’.

I am not an editor’s paper boy, but I’ll wager that the US Fed will be investigating.

INVESTMENT OPINION

Kiwibank – Dear Jacinda,

It’s time for you to sell 49% of Kiwibank to the public and to list the bank on the NZX.

I know this goes against the grain for many politicians around you but once you think it through you will realise the partial sale of Kiwibank would be a display of good governance.

You may have missed the last time I spoke about this matter in Market News (apology accepted – Ed) when I explained that the partial sale of Kiwibank would immediately, and helpfully, extinguish the public perception that a government guarantee exists for this bank.

Removing this contingent liability would be wise.

Hon. Grant Robertson’s offer to enact a regime of government guarantees over bank term deposits (up to $50,000) gives further reason to remove any perception of a full guarantee over the entire Kiwibank business.

Kiwibank has explained to the market, and to the Reserve Bank, that its current shareholders may not be willing to invest more equity in the bank to meet the new capital demands, which would by definition result in Kiwibank having to reduce its lending volumes.

This is not what the directors of Kiwibank really want. They want to expand and claim more market share from the other major banks, especially the Australians.

A Kiwibank retreat from the banking front line is not what the government wants.

Kiwibank is after all a product of political desire.

Let a fresh collection of public investors join the Kiwibank share register. Kiwibank can then ask those shareholders to also inject fresh capital and Kiwibank will surge into the next iteration of its growth, for the benefit of all New Zealanders.

In your role as Prime Minister you recently expressed dissatisfaction with the behaviour of the major banks so now would be an ideal time to unleash greater potential from Kiwibank.

ANZ has muttered under its breath that it may withdraw from NZ banking activities if the more robust equity requirements are passed by the central bank. This was a very naïve position for the bank to take and the local response should simply be ‘farewell’.

If this threat was approved by the Australian board of ANZ directors it discloses serious weaknesses in governance, which are consistent with the recent debacle surrounding the departure of ANZ’s CEO in NZ.

Let the Reserve Bank respond to the weak governance of a bank.

The appropriate rebuttal to the ANZ’s foolish veiled threats is for your government to unleash far greater potential for Kiwibank.

Minster Robertson could also ask that the Reserve Bank allow Perpetual Preference Shares as equity for smaller banks who do not have public shareholders (such as TSB, Co-operative Bank, SBS) so they too can join the competition to replace the departure of Australian banks from the NZ economy.

If you’ll forgive the ‘stretch request’; you could also look at shifting the government’s banking from Westpac across to Kiwibank!

Within your busy schedule, keep one eye on the upcoming partial float of Napier Port to the public. Pay particular attention to the wide invitation to invest being presented to Napier Port staff, local iwi and Hawke’s Bay residents and do note the huge enthusiasm to invest being shown by both those local people alongside many others across NZ.

You’d best not forget about money in Kiwisaver funds, the collection of people being urged to save for retirement ($60 billion and rising) because they collectively need places to invest that money and I’ll bet they’re dead keen to support good local businesses too.

In case you missed the briefing, those same investors are less than impressed with the interest rate rewards now on offer.

Which introduces an interesting question Jacinda; is your Kiwisaver in the Conservative, Balanced or Growth fund?

Yes, yes, your time is short. Sorry. Hold that question for when we share lunch one day.

Napier Port.

New capital is going to inject new life into Napier Port’s business and ambitions to help that region grow. Employers will benefit, employees will benefit and investors will benefit. I am struggling to see who won’t.

Kiwibank’s situation is much the same.

Set them free.

The more I write the more convincing I sound, right? (She’s thinking the less you write the more she’ll listen – Ed).

In summary, the central bank’s capital review, and increased capital requirements for Kiwibank is the ideal time to invite other investors in to partial ownership of the bank.

Pounce on that opportunity. It should only take 30 minutes at your next Cabinet meeting.

All the best.

Humble servant etc etc.

Slack IPO 2 – Last week I briefly covered a new share float in the US where the company didn’t offer any shares to investors prior to listing on the exchange.

The company is called Slack, which is an interesting name for a company with a work efficiency focus; it sounds more like a gathering of male teenagers than a company trying to enhance productivity.

Slack shares began trading immediately, and as far as I can see the register of ownership has been progressively changing, as has the share price, which is a partial definition of a healthy marketplace for ownership of the Slack business.

So, Slack is up and running on the wider capital markets without the need to pay expenses to bankers, investment bankers or brokers. They probably still incurred legal costs.

Locally, I see the best organised NZ companies delivering excellent communication to ‘their’ investors on the register to the extent that I ponder a strategic intent to arrange future transactions directly with those people (unaided by the broking and banking community).

Today this thought may seem a little too cloak and dagger, but the latest bond offer from Trustpower and the provision of nicely pre-populated application forms to current Trustpower investors was only missing a request to ‘read this, tick here, sign there and return to the registry’ to move large sums of money to the company.

Bankers who lead such capital raising deals would have been disappointed, although fees at the top end of deals are getting rather slim.

Brokers would scream that the company had ‘stolen’ their client, but there isn’t a client in the land who would feel owned by their broker, and neither should they. Indeed, as a part owner of, or lender to, a company there is a mutual benefit for the company and its owners/lenders to be interacting directly with each other.

I am not promoting this idea by the way. It is a little troubling to consider being cut out of a transaction when we add value to that transaction (advice, transfer of risk from capital user to capital supplier), but I can see where things may be trending.

Companies could talk to the investors on their register first before contacting the market to pay fees if they need help discovering new investors to raise additional money.

It doesn’t feel a stretch to me, but then again maybe I am writing this too late at night with too little coffee?

The value of advice is high now in my view, and one benefit for us of the behaviour I describe above is that the value of advice would increase further if products and risk questions start coming at investors from multiple directions (various companies).

As the revenue from brokerage within the industry declines the price of financial advice will need to rise so the lights can stay on to help investors, but this development seems a while off yet, thankfully.

Side note: I do applaud the huge improvements that have been occurring with company communications to share holders and bond holders.

Allied Farmers – ALF has completed its buyback of small share holdings (less than 2,000 shares) and now plans to consolidate its remaining shares at a ratio of 1:10.

If you have 5,000 shares now, you will have 500 in future.

If the share price is 7 cents now, it ‘should’ be 70 cents the day of the consolidation.

ALF should be applauded for the slow, successful, rebuild of the company after a very difficult period post 2008.

ECB – The European Central Bank has selected one-time French Presidential aspirant as their new head, Christine Lagarde.

Lagarde has spent the past eight years as head of the International Monetary Fund and prior to that was a senior minister in the French government, including the finance portfolio.

As a French Minister she was part of the group who were critical of the overspending European states, but her role in the IMF saw her handing out funding to the needy.

I suspect it is her more recent role that will have the most influence on her as the new head of the ECB and thus it seems most likely to me that she will be a proponent of the cheap money theory of monetary policy currently pervading Europe, and the rest of the world.

Lagarde may well be looking forward to becoming Europe’s largest bond investor.

It’s possible that European markets fear she will be a bit tough, advancing recession risks, because many European bonds are again sinking further into the territory of negative yields.

I look forward to hearing from Chris after his holiday over there about what ‘locals’ believe about the situation.

Not great news, but – Being told that business confidence has fallen to the same level as 12 months after the Global Financial Crisis lacks credibility in my opinion, or discloses how flippant or shallow people are willing to be with responses to surveys.

I get that people are contemplating some of the less than business-like actions from the government and the probable reduction in lending from the bank sector (at a higher price) but current business activity looks quite reasonable and in 2008-2009 things were far more distressing.

If businesses really are that concerned I hope to see more of them reducing debt ratios and leading public debate about why employees should be reducing debt levels too.

Beyond that it’s head down and work even harder to ensure that production and employment levels are sustained. (spend less time answering surveys – Ed)

EVER THE OPTIMIST

 

Vector and Australian company Relectrify are looking into the potential for reassigning used batteries from electric vehicles as storage for homes (notably those generating some of their own electricity from solar or wind sources).

Apparently these batteries lose effectiveness for the energy required by a car when they fall below 80% storage but this still provides plenty of capacity for use in the home over one or two evenings.

This type of business thinking deserves applause.

INVESTMENT OPPORTUNITIES

Trustpower bond (TPW180) – the offer of a new 7-year bond from TPW was completed last week, with the interest rate set at 3.35% and firm allocations being made, albeit very small allocations.

The small allocations were a function of only a small amount of bonds being offered for new investors ($50m) and the huge level of retail and institutional demand for the bond offer.

Holders of soon to mature TPW160 bonds are invited to rollover their investments via a different pool of the same bonds, held for exchange under the ‘Investor Pool’.

If you are a holder of TPW160 bonds and wish to reinvest in the new TPW180 bond you are encouraged to immediately complete your application form and submit it to the registry (Computershare). We would be grateful if you record ‘Chris Lee & Partners Ltd’ name in the Broker Field (TPW is paying 0.50% brokerage).

The offer closes on 19 July for TPW160 submitting rollover application forms.

As a supplementary comment, the huge demand for the bond offer appears to confirm that investors are sitting on an unusually large amount of cash at present.

When investors are holding excessive amounts of cash in a portfolio it is because they either expect interest rates to rise (better returns) or share prices to fall (better future returns thereafter).

I suspect that those investors are losing patience with waiting, and only earning 1-2% on in short term savings accounts (call accounts 0.10%!). Maybe they are also paying large fees, which further erodes the returns from sitting in short term deposit accounts.

Holding too much money in short term interest rate accounts is like an unwanted sea anchor on a racing yacht and when you have felt the drag for too long frustration mounts and surges of investment occur as investors concede that interest rates may well be heading lower (our view) and share prices may be heading higher (a challenging thought).

The huge demand to invest in the new bond offer from Trustpower is indicative of some investors pulling up the sea anchor and charting a new course.

Napier Port - has reaffirmed its intention to bring the Initial Public Offer of shares (up to 45% of the company) to market during July. 45% of the company is approximately $181 million, with which they plan to reduce debt and expand the port facilities.

We can already see that the share float will be a success, such is the demand.

The port has described the following date sequence:

Pre-registration for shares for staff, residents and iwi closes on July 12, with the port aiming to publish a product disclosure statement July 15.

The priority offer will open on July 23 and close Aug. 5. Final pricing and share allocations are expected on Aug. 7 with the port expecting to have its shares trading on the NZX from Aug. 20.

The Port Company is making it very clear that port staff, local residents and local Iwi will be given priority access to shares. After one then acknowledges the advantage also given to the lead managers of the share float it is likely that only very small numbers of shares will reach ‘other’ investors.

Once the offer details are formalised we will make contact with the clients on our list of interested persons.

Hawke’s Bay folk wishing to invest in the share offer are strongly encouraged to pre-register with the Port via this website for local residents:

https://www.napierportshareoffer.co.nz/Country-Validation/

TRAVEL

Kevin & Johnny will be in Christchurch on 24 July

Kevin will be in Queenstown on 23 August.

 

 

Mike Warrington


Market News – 1 July 2019

The Turkish citizens have spoken out (voted) against President Erdogan in a regional election.

Good on them.

I hope they aren’t now attacked for their democratic opinions.

Erdogan’s departure would do a lot for the future of Turkey, and the world if this result was repeated in other parts of the world.

INVESTMENT OPINION

Deposit Protection – I’d best open this paragraph with my conclusion; I am not a fan of the newly announced Deposit Protection Scheme (DPS).

I think it is in conflict with a principle of the Hippocratic oath, which I am happy finance should abide by also, ‘first do no harm’.

The government has announced it will introduce a DPS covering deposit amounts of between $30-50,000 (yet to be defined), which means that a government guarantee will come into place over these sums, per person, where those funds are held by a bank.

The government is already out selling the scheme by broadly describing how many people will be protected by the scheme (‘90% of individual bank accounts’). Statisticians say it will cover about 40% of deposits, but this number will drift up as the public spread their deposits across more banks.

‘Cloak and Dagger’ moment – maybe the government is introducing the DPS to ensure liquidity is always guided into the hands of the NZ owned banks at the same ratio as Australian owned banks?

Too cynical? (assumptions squared – Ed)

The government intends to collect a levy (insurance premium) from each bank to support the guarantee, hoping that this insurance fund will build to be $2-3 billion in size after a decade of accumulation (then what? – Ed). The scheme will always carry the government’s guarantee regardless of the amount collected in levies.

Guess who really pays that levy.

Yes, you.

You are benefiting from the insurance so you will pay for the insurance.

Is it insurance that you wanted?

More importantly, is it insurance that you needed?

One takes on insurance to protect against the cost of things they cannot afford to replace themselves, at a price that reflects the risk of that loss happening.

Therefore, each of you should be asking; What is the risk of a NZ bank failing to the extent of you losing money from a bank account or bank term deposit (or senior bond)?

Regular readers will know that our central bank has a view on that matter and is making changes to reduce these risks.

That point raises an interesting question for me to clarify; it is a ‘Deposit guarantee scheme’, not a debt obligation guarantee scheme so even though senior bonds issued by banks rank pari passu with bank deposits the bonds may become second class citizens under this scheme.

I expect a politician’s answer to this inconsistency will be that bond investors make use of financial advice and thus can take steps to moderate their own risks. This would be a nonsensical answer as people using bank term deposits can get advice too; the risks here is the same (bond or deposit), namely, shall I lend this money to that bank on those terms?

The Financial Markets Authority has been working reasonably hard (as have we) to make sure the public know they have access to trustworthy financial advice, so it would be a slap in the face for the government to tell the FMA and licensed financial advisers that the public needs another layer of protection. It is an afront to the competence of the financial advice community.

That isn’t why I dislike the DPS though.

The DPS is an unnecessary insurance cost to place on the economy.

The guarantee places a liability on all New Zealanders for the benefit of the minority, being those who happen to have cash and investments of up to $50,000 per bank.

Our economy needs investment, it does not need us to transfer an additional proportion of our assets (rising to be billions) into the government’s consolidated fund so that it can offer a guarantee of deposits in a robust banking system.

Currently New Zealand’s banks are strong, or very strong, in the eyes of the credit rating agencies as they assess the default risks of each. Those banks are well regulated and despite recent noise the banks are well governed and well managed.

The Reserve Bank is, as you have read, seeking to reduce the risks within our banking sector by increasing the equity on a bank balance sheet and by simplifying the capital that will be recognised as equity.

Beyond these stronger equity settings, in a global setting, NZ already has very conservative Risk Weightings, which calculate the amount of equity a bank must hold when it makes each new loan. (mortgages are less risk than, say, livestock loans).

We also have regulations about managing bank liquidity (recall how you need to provide your bank with 32 days’ notice of withdrawal now?) and regulations for ensuring banks continue to operate immediately after any event of distress (Open Bank Resolution).

Seeking perfection comes at a price and I am not convinced that our economy is successful enough to pay for such perfection.

Banks lobbying against the new equity demands are presenting similar thoughts, along with threats of reduced lending. Presumably the banks think the economy cannot afford this proposed DPS either.

It is true that some of the costs of the increased equity demanded by the central bank will also reach investors (depositors) and borrowers, but some will also reach the shareholders of the bank. The deposit guarantee scheme costs will not reach bank shareholders, no matter what the Minister of Finance tells you.

If you read Market News last week and despaired at my view of ongoing interest rate declines and the potential for paying to leave money in bank call accounts, then consider the following list that are dragging your returns lower:

Global inflation and interest rate market conditions (interest rates lower);

Increased equity obligations for banks (deposit rates lower, lending rates higher); and

Deposit Guarantee scheme (deposit rates lower).

The DPS has reinforced my view that we may soon be paying fees to the banks to hold cash in very short-term call accounts at the banks.

Those of you receiving 0.15% interest on your bank call accounts whilst the Official Cash Rate was at 1.75%, and tentatively holding with an OCR at 1.50%, will surely wonder what will happen once the OCR reaches 1.00%, or lower, and this before the costs of the DPS are applied.

The government surely could not have thought of a worse time to introduce a DPS than as we enter a negative real yield environment. They are to tariff the economy even more just when it needs the direct opposite to happen.

One of the pointless arguments presented by the government for introducing one is ‘we are one of the few not to have one’. Understanding why others have a DPS is necessary but copying them is not.

What is it one says about following Lemmings of cliffs?

No, I am not a fan of the intended Deposit Guarantee Scheme. It will do you, and our economy, more harm than good.

OCR Talk – New Zealand’s Official Cash Rate has been held at 1.50% again but the supporting statement made it clear that the next move is likely to be lower.

Here’s a link to the statement released by the RBNZ: https://www.rbnz.govt.nz/news/2019/06/official-cash-rate-unchanged-at-1-5-percent

Financial markets are predicting a 0.25% cut in the OCR by August and then another 0.25% cut by the end of this year.

Somewhat optimistically the central bank predicted that inflation was likely to rise back up to the 2.00% level. I assume this means the governor had only just finished reviewing his 2019 council rates and home insurance invoices.

The probability of a lower OCR, and the fears I have of 0% interest rates and fees being charged on cash in short term bank accounts, were reinforced by the central bank’s new preparations for how they might deliver quantitative easing (temporary money printing by buying bonds from the market) if we reach a point where it is necessary.

I am pleased about the preparation but realistic about the fact that it confirms our concern for the future of interest rate rewards for NZ investors.

Another developing concern relates to the ineffectiveness of the OCR lever within the economic mix. I think the central bank is right to be alerting the government to the importance of increased (and decreased – Ed) fiscal activity from them in response to the ‘breathing’ of our economy.

This of course should remind the current government of the importance of pushing its debt below 20% of GDP during times of economic comfort, such as we have under near full employment.

The government ‘cheque book’ achieved a lot when it was opened in response to the Global Financial Crisis and the Canterbury earthquakes. It would do well to have a list of ‘nice to have’ projects that it could bring forward in response to a period of higher unemployment and financial distress.

Actually, our councils’ could follow a similar financial pattern rather than thinking ratepayers are a bottomless pit of funding for egotistical desires.

Aussies – There you go, the Treasury has appointed an Australian (Dr Caralee McLeish) to its most senior role. The appointment also adds another female to the growing ranks in New Zealand’s most senior roles, which is a very good thing.

So, I revisit my prior question, why didn’t the Reserve Bank of NZ look to include Australian expertise when it considered new board members recently?

Our economies are intertwined, and our trading partners are similar so the foundational knowledge would be immediately useful as would the different perspective.

Slack IPO– A handful of new listings of companies on the US share market have decided against using the standard method of appointing a lead broker to round up demand by inviting other brokers who in turn invite their clients to participate.

In simplistic terms the businesses, such as ‘Slack’ (a communications coordination application), didn’t offer shares via brokers to new investors, they simply listed the company on the exchange and shares started trading.

For this to make sense there needed to be some intention from original shareholders to sell some of their shares on the market as investors approached wishing to buy shares, or an intention from the company directors to offer some new shares to raise new funds for the business.

Yes, it sounds as simple as regular trading on the market.

If you were to watch trading in say Auckland Airport shares at the open on the NZX you would see a ladder of investors willing to buy AIA shares at a variety of prices (top to bottom) and on the other side of the screen you would see a ladder of people willing to sell AIA shares at a variety of prices (bottom to top). Trading begins where the prices overlap.

This is how Slack began trading on its first day and how new investors arrived on the register of the company. Over the subsequent weeks the register of Slack will evolve from those who wish to reduce ownership to those wishing to increase ownership.

The share price will immediately represent the value judgements of the many people on both sides of the market place.

Slack will have met tight financial disclosure obligations set by market regulators aimed at ensuring people are fully informed.

I quite like this idea. Not just because Slack may have saved many millions in investment banker fees but because it also appears to mean that very small investors with broking accounts can be assured of participation. Placing allocations in the hands of the few leading broking firms leaves plenty of scope for… ‘managed outcomes’.

I think market regulators should endorse this development.

I wonder if Napier Port would have been up for such a listing method if they’d planned their float just six months later than they did?

Fletcher Building – corporate reporting, and access to it, continues to improve significantly given the benefits of the internet.

Investors holding FBU shares should have been invited to view an online video for an Investor Day presentation and I would encourage those people to do so.

Here is the link repeated: https://edge.media-server.com/m6/p/vibdmjmj

Standing Proxy voting – If you haven’t already done so we strongly encourage retail investors to appoint the NZ Shareholders Association to act as your Standing Proxy at company Annual Meetings.

It saves you considering each vote and means that your vote becomes more influential.

We have the blank forms here, and examples of how to complete them, and are happy to email them out to anyone who asks for them (by email please).

EVER THE OPTIMIST

 

Hooray, another trade surplus ($300 million), albeit for a single month. I’ll take it because many singles make a century.

The exporting record was driven by dairy products to China. Our overall exports to China were up 29% relative to May 2018 and 22% for the year to May. (Trump must be having a fit – Ed).

INVESTMENT OPPORTUNITIES

Mercury Energy bond – All application forms for the new bond offer from Mercury should now be received by our offices.

Thank you to all who participated in this offer with us.

Trustpower – has announced that it intends to offer a new 7-year bond to the market and has announced a minimum interest rate of 3.35% p.a.

The bonds will be listed on the NZX under the code TPW180.

We have a list for investors wishing to participate in this offer. If you wish to invest please contact us to request a firm allocation by 5pm this Thursday 4 July.

Napier Port - has reaffirmed its intention to bring the Initial Public Offer of shares (up to 45% of the company) to market during July. 45% of the company is approximately $181 million, with which they plan to reduce debt and expand the port facilities.

We can already see that the share float will be a success, such is the demand.

The port has described the following date sequence:

Pre-registration for shares for staff, residents and iwi closes on July 12, with the port aiming to publish a product disclosure statement July 15.

The priority offer will open on July 23 and close Aug. 5. Final pricing and share allocations are expected on Aug. 7 with the port expecting to have its shares trading on the NZX from Aug. 20.

The Port Company is making it very clear that port staff, local residents and local Iwi will be given priority access to shares. After one then acknowledges the advantage also given to the lead managers of the share float it is likely that only very small numbers of shares will reach ‘other’ investors.

Once the offer details are formalised we will make contact with the clients on our list of interested persons.

TRAVEL

Edward will be in Auckland (Remuera) July 9, Albany July 10 and in Wellington  July 12.

Kevin will be in Christchurch on 24 July and in Queenstown on 23 August.

 

 

Mike Warrington


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