Chris Lee & Partners Ltd

Market News 26 July 2021

Are these the words of a discontented politician?

'The cryptocurrency industry leverages a network of shady business connections, bought influencers and pay-for-play media outlets to perpetuate a cult-like ''get rich quick'' funnel designed to extract new money from the financially desperate and naive.

Cryptocurrency is like taking the worst parts of today's capitalist system (eg. corruption, fraud, inequality) and using software to technically limit the use of interventions (eg. audits, regulation, taxation) which serve as protections or safety nets for the average person'

Or….

A person who established a cryptocurrency?

Clue: Pick the latter.

The European Union agrees and plans to legislate those businesses accepting cryptocurrency for payments, or receipts, requiring them to report the details of the counterparties.

INVESTMENT OPINION

Scam Warning – We all know scams are out there, every day, in every way, but this paragraph is as a result of a client telling me about being scammed out of a few dollars.

I hope it will turn into an education of modest cost once it is shared widely amongst their various contacts, and I shall do so here also.

The scam accessed these people via the phone.

Spark offers a very useful list for avoiding scams here: https://www.spark.co.nz/help/scams-safety/avoiding-scams

But I'll tell you my simplified thoughts also.

Lesson #1 – nobody ever calls you out of the blue to offer an unexpected service and then expects you to make impromptu payments outward; Nobody. Don’t waste your time even having the conversation with the caller.

If they call again, leave the line open and place the phone on the kitchen bench and go back to what you were doing, even if it means you were heading out for the day! Do not talk to them.

If you talk to them, you become exposed to their fraudulent verbal effort to draw you into a scam. They are experts at manipulating what you believe is happening. It is always deception.

Lesson #2 - If a person calls and claims to be from a service type, such as Spark, offering a service you did not request, simply ask them to contact you in the normal way and then hang up.

If you were inclined to believe the caller was from a real business, ask for a number to call them back on and still hang up. Then proactively compare that phone number to ones you can look up publicly for the real business and make contact with that business yourself (phone out, or email outward).

If a person has convinced you they were real, and the actions seemed to be necessary and they involve you arranging access to your computer or making a payment, STOP, hang up.

Make it a personal rule that you will never make such access or payments without talking to someone outside your household. Call your kids, your neighbour, your friends, us, anybody, and ask them to review what is happening; make this your own personal 'two factor authentication'.

Don't make a payment!

Don't provide access to your computer!

Most legitimate services expect you to call them, or for you to login to their service and ask for assistance. They do not call you and offer special assistance.

If by chance you do owe a business some money, it will become very obvious once they become distressed about non-payment! (2nd invoice, two reminders, threatening letters, debt collectors, etc) and you will have had plenty of opportunities to call them.

Lesson #3 – it is better to make a real business unhappy through late payment than make a payment to a scammer, which you will never get back.

It is very sad to conclude that you can no longer start from a position of trust with strangers, but it is the truth when it comes to those reaching into your world via the phone or email.

Email scams are different, but the simplest instructions are:

Don't touch links in emails you did not expect to receive;

Delete emails that you did not expect and have no interest in;

If you are tempted by some marketing in an email, delete it and access the service yourself by approaching them via a public option such as their website, or telephone.

You are not alone. Talk to others.

No, No and thrice No!

Public websites to consider if you'd like to read more about handling scams in NZ:

https://www.consumerprotection.govt.nz/general-help/scamwatch/report-a-scam/

https://www.netsafe.org.nz/advice/scams/

Politics – Positioned appropriately under my item about scams.

Sadly, we'll never escape the misleading and deceptive behaviour of politicians, all around the world, making it more than a little ironic that there are laws against it for the rest of us.

However, I had to laugh at China's recent political claim that Australia is profiteering from the large increase in commodity pricing right now.

China, being the one who decided to launch political attacks aimed at Australia by restricting trade but they are now upset that Australia is making more money than before on its exports.

To the governments of the world, let's have more focus on things that matter and a little less selfishness thanks very much.

Water – Down here in the 'real world' when one approaches the council for permission to do anything with nature's water, they demand a perfected design for attenuation of water on your land to control its departure onto the land of others or into the storm water system, and out to the natural waterways.

That makes good sense.

So, on the heels of the recent flooding events around New Zealand, why are we constantly rejecting water attenuation strategies (let's call them dams shall we) that come with the additional benefits of renewable energy generation and managed irrigation (once things dry out too much)?

Take a look at the lake levels of our major generators and unsurprisingly you'll discover that they are doing their job reasonably well with attenuation then generation, with water levels managed within high and low limits (it could be better – Ed).

You can review some of the data via these links:

Meridian Energy - https://www.meridianenergy.co.nz/who-we-are/our-power-stations/lake-levels

Mercury Energy - https://www.mercury.co.nz/lakelevels

Lake Dunstan (not published by Contact Energy for some reason) - https://www.orc.govt.nz/managing-our-environment/water/water-monitoring-and-alerts/upper-clutha/lake-dunstan-at-cromwell

I then throw into the mix the political desire to inject some new competition to the electricity landscape you can understand why the ghosts of Muldoon's past can be heard with respect to thinking a little bigger and pondering the need to plan for some new government initiated hydro generation assets. (and water attenuation – Ed).

Yes, I know there is a long list of reasons to criticise Sir Robert Muldoon but allow me a little myopia, focusing on the benefits of long-term planning.

If 'we' (the government) build it, 'they' will come. Meaning, we can use the energy supplied, we will benefit from the water control, and we will easily be able to sell the new generation assets once they are operational so the government can recycle the capital used to launch the development.

Yes, I hear you; the government has an appalling record at using taxpayer money to build businesses and it should be left to private enterprises, but in this case those businesses benefit from a shortage of electricity generation so there is no incentive for them to oversupply the market (revenue risk). It's a little like to the housing market, scarcity rewards the developers.

So, the reward for injecting taxpayer equity to oversupply some products and services may well deliver lower pricing for most taxpayers.

Side story – I suggest that you also read about the proposals for using Manapouri electricity to power hydrogen electrolysis plant in Southland. The cheaper the electricity supply, the cheaper the hydrogen supply and the greater the update of this climate friendly fuel for transport industry (and export – Ed). It's maddening that we subsidise Rio Tinto instead of accelerating alternative proposals such as this one.

Market watchers will acknowledge how successful Trustpower (TPW) was when it launched Tilt Renewables (TLT) to be a greenfield developer of new electricity generation assets (elevated risks) which were only sold once the development was complete and risks were reduced. TLT, TPW and Infratil (IFT) were handsomely rewarded for their foresight, risk acceptance and good management.

I am not keen on decisions made between dinner on a Friday and breakfast on a Monday to build the likes of billion dollar cycle bridges, far more planning is required. My hope is that better planning would direct such billions to much better projects.

David Parker is the '3 waters' guy. He should be tearing up wasteful proposals such as a cycle bridge in Auckland, and changing water governance and calling for new, local, hydro management proposals in our largest catchments close to agriculture and horticulture locations.

Once they have been identified, and government equity is committed, maybe then the government could assign such schemes to Public Private Partnerships to manage the build.

Can someone please dust off the Ruataniwha Water Storage Scheme in Hawke's Bay before a damaging rain event occurs in their region.

The small earth dam at a low point in our suburb of Wellington did an excellent job of protecting others downstream. (It only lack s an electricity generator – Ed)

Electricity – Following on from the water item above, which spilled into electricity, this is not really a good story for NZ but it seems to imply higher profits for a while for the major electricity generators:

Flick Electric and Electric Kiwi are no longer accepting new customers and have removed themselves from the free marketing channel provided by the government – https://www.powerswitch.org.nz/whatsmynumber

No business removes itself from free, effective, marketing unless it has become impossible to serve customers.

Owners of shares in the major electricity companies may feel good about their investment, but they should be even more concerned about the absence of genuine price competition for all consumers (private and commercial).

It will be pointless promoting electric vehicles and asking industrial businesses to switch away from other energy sources such as gas and coal if we cannot supply sufficient electricity at constantly competitive pricing.

For goodness sake, it was only two short years ago that our government fell on its sword and subsidised Rio Tinto to keep the Aluminium Smelter operating.

It would have been better if they had shown them the door and immediately started to increase the Transpower grid capacity to move electricity North.

Water and energy are two highly important elements and anecdotally we seem to be moving in the wrong direction at the moment with respect to outcomes.

ASB Concedes – and appoints BlackRock as delegated fund manager for its clients' managed funds.

Presumably ASB is acknowledging the value of pushing diversity up and bringing costs for investors down; not to mention lower costs and possibly less capital commitment for the bank.

NZX, with its Smart Shares funds must be happy about this development at ASB and highlighting the value of diversity and lower costs. Maybe now's the time for the NZX to start cutting its own fees to try and attract more money away from other actively managed funds?

Are you paying too much in fees for the management of your wealth?

EVER THE OPTIMIST

It's excellent to see business leaders considering long term plans in Southland to make use of some of Manapouri's electricity supply, by proposing a hydrogen electrolysis plant.

I hope this inspires NZ Refining to consider doing so in the North and inspires our government to support the development of new electricity generation schemes!

Saudi Arabia surfed its natural advantage with oil; maybe NZ should be making more effort to surf our natural advantage with hydro generation and converting it into exportable hydrogen fuel.

ETO II – Vaccinations

Vaccination doses delivered – 3.85 billion jabs (many large nations are now passing above 70% first jab)

Total (recorded) Corona Virus cases – 194 million

Active Cases – 13.8 million (increase)

Daily rate of new cases – 500,000

People in serious condition – 84,000 (increase)

Daily Deaths (Covid related) – 7-8,000 (stable)

Investment Opportunities

Net Cash – 2021 has been an experience of more bonds being repaid, than new ones being issued, and this theme continues all the way through until Christmas.

One of the banks kindly sent me a list of details and the total maturing across the year, from all borrowers in NZ dollars, was $16 billion.

Even though we expect some new bond offers in coming months, I don't think the imbalance between repayments and new borrowings will change so a shortage of reinvestment options seems assured.

Access to investments via the secondary market remains available to you, with our help, and it might improve now that the central bank is reducing its meddling with supply and demand. It would be even better if the RBNZ agreed to sell some bonds from its inventory.

It is July, but we already know that Westpac will repay (at the early date) it WBC010 subordinated bonds in September. ASB will surely do the same in December (ABB050).

Other maturities by month, of bonds that I know 'you' own:

August – Kiwi Property Group (KPG010);

September – Westpac (WBC010), Precinct Properties (PCTHA - convert to shares), Turners (TRA100);

October – Christchurch Airport (CIA1021), Fonterra (FCG030);

November – Contact Energy (CEN030) and in Z Energy's latest quarterly results announcement (which was good by the way) they remind us that they will repay (not rollover) the $150 million ZEL040 bond on 15 November.

December – ASB Bank (ABB050), Trustpower (TPW140), Precinct (PCT010).

All the while, you also collectively have many tens of millions maturing in bank term deposits and some senior bonds from the banks.

What iss frustrating, from a 'speed of time' (a constant – Ed) point of view, is that I can still remember clearly when most of these bonds were issued!

TRAVEL

Kevin will be in Timaru on 5-6 August and Christchurch on 11 August.

Chris will be in Christchurch on August 17 (p.m.) and 18 (a.m.) then in Auckland on 25 August (Ellerslie) a.m. and (Albany) p.m..

David will be in New Plymouth on 19 August.

Johnny will be in Tauranga on 26 August.

Michael plans to be in Auckland during August then Hamilton and Tauranga in September.

If you would like to make an appointment, please contact our office.

Michael Warrington 

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Market News 19 July 2021

'Banks look to increase term deposit interest rates from 0.80% to 1.20%'

I'll bet you're all energized by last week's exciting announcement.

INVESTMENT OPINION

RBNZ Says – Last week was the latest meeting of the Monetary Policy Committee. It was not for a full Monetary Policy Statement but an interim review, and the following major decisions were made:

Hold the OCR at 0.25 percent;

Discontinue Large Scale Asset Purchase (LSAP) purchases by 23 July 2021; and

Maintain the existing Funding for Lending Programme (FLP) conditions.

The LSAP programme is the facility for buying bonds from the market with money that wasn't previously ''in'' the economy (printing money). It's good to see this removed from current use as it is not necessary with the economy running so strongly and too much cash is indeed sitting idle (recall the massive demand for the recent bond offer from Kiwi Property Group).

The FLP scheme is offered to provide lower cost debt when banks have borrowers to lend the money to. You may have noticed the recent 1.69% mortgage rates offered by ASB Bank, funded from this FLP scheme. It doesn't directly leave surplus cash in the marketplace in the way the LSAP does because this money reaches its purpose (such as a personal borrower for a home).

The OCR remained at 0.25% but economists are energetically predicting it will increase very soon with some moving from November predictions to August; Yes, this August.

I didn't read that level of tightening policy into the statement at all.

If you're keen to form your own view here is the link to the statement: https://www.rbnz.govt.nz/news/2021/07/monetary-stimulus-reduced

The RBNZ unquestionably explains that economic conditions are better than they had been expecting, and they are on the tightening path, but the next most obvious tone expressed is led by the ''however'' elements of the statement, including:

the need to reinstate COVID-19 containment measures in some regions highlights the ongoing global health and economic risks posed by the virus;

factors that are either one-off in nature, such as high oil prices, or expected to be temporary in duration;

uncertainties remain as to the pace and magnitude of any pass-through of costs onto medium term inflation, especially given reported underutilisation of labour, modest wage growth, and well anchored inflation expectations;

medium-term inflation and employment would likely remain below its Remit objectives in the absence of some ongoing monetary support; and

some of the factors supporting the ongoing house price increases have eased.

As another under-vaccinated country, Australia is showing just how quickly we can lose control of our economic progress.

China has decided to move in the opposite direction and is easing their monetary conditions. This may just be a political move related to weakening their currency for trade purposes but this reminds us that we also need to be careful about monetary policy impacts on our own trading (value of the NZD).

The RBNZ should be relieved that the NZ dollar hasn't increased all that far even in the face of the market aggressively discounting the need for an interest rate increase in August.

The RBNZ describes the OCR as their preferred tool for managing monetary policy, thereby viewing it as having the most leverage on the market. The FLP programme adds leverage to this being priced directly off the OCR so removal of the FLP programme surely comes next.

Accordingly I'd expect the central bank will hold its biggest gun (OCR) until they have a longer term view that there is a risk of failing to meet their remit with inflation sustainably above the range and high levels of churn in employment data as people jump around for higher incomes.

The difficulty of the new remit to ensure full employment is that the current pressure on employment comes as a result of another government policy - closed borders and no immigration flexibility. The OCR might be the biggest gun but it doesn't set government policy.

Why not have the RBNZ begin to sell some of its 1-5 year bonds back into the market (LSAP balance sheet reductions), thereby pressuring those interest rates higher, which would transmit through to higher fixed rate mortgage costs.

Then remove access to the FLP funding programme to remove the lowest cost floating rate mortgages from the market.

Then, and only if conditions remain a threat to longer term inflation, begin to increase the OCR rate.

Our clients are investors, so they'll be more than a little excited about the prospects for higher interest rates, it's just that I don't think they are needed this year, and once they happen, they won't excite investors.

My guess isn't as good as those from the more highly skilled economic analysts, so take it with a grain of salt.

EROAD – Well that was news to me; NZ has two telematics businesses paving a road of success in the US, Australia and NZ – Eroad and Coretex.

The two of them have clearly been watching each other closely. Each was getting its nose in front in different ways, and each was finding it difficult in other ways.

They have obviously both climbed onto the bridge and met in the middle for a meeting of minds to discuss why 1+1 can equal 3. The share market reaction seems to think this outcome is a chance (up 10% since the announcement).

It doesn't appear to be an ego driven transaction where 1+1 might equal 1.75 tomorrow.

As an ERD investor (disclosure) my initial observation was that Coretex had been more successful at achieving some of ERD's goals, such as gaining scale with large enterprise customers in the US and refrigerated trailer units. ERD has been more effective with Small and Medium Businesses (SMB) in the US.

At face value it looks as though this ERD led 'merger' represents two good wheels being attached to a waiting bicycle frame. The unicycles are being retired.

That Coretex accepted part payment in ERD shares valued at $6.00 is also a nice public endorsement of current value, and belief in tomorrow's potential.

I certainly hope the combined businesses become even more successful on the world stage than they already have been on their own.

Remember to vote on the proposal if you are an ERD shareholder. They have emailed out invitations. They'd appreciate your involvement.

Health – The Reserve Bank (as above) is always an important reference point for investors, but during your search for useful information about investment themes did you read about the recent data on health spending in Kiwibank's analysis of customer spending?

In a classic example of confirmation bias, I certainly read it and smiled.

I am certain that the world will be willing to spend much more on health products and services as a result of the Covid19 experience.

We have just had a reminder about the importance of good health and how fast it can be compromised.

Governments will want to avoid the painful lockdown experiences, both for the economy and for their fiscal position so they will increase health budgets.

Citizens who are more susceptible to health threats will make more effort to improve their health and reduce the risk of harm from the next germ.

Last week, Kiwibank provided more evidence confirming this new paradigm. They indexed prior health spending to a base of 100 as at March 2020 and tracked the change in spending thereafter.

The resulting changes are huge:

Doctor - 400% increase

Dentist - 400% increase

Chiropractor - 500% increase (post too much exercise?)

Massage/Physio - 300% increase (post exercise?)

Drugs/Pharmacy – 250% increase

Gym Membership – 220% increase

Judging by the increase in physio and chiropractors the newly energetic may well put more pressure on the country’s health services than Covid19 has.

Nonetheless the theme appears to be validating my view that over the 10 years ahead of us the public and governments globally will be supportive of greater spending on health products and services than they were in the past decade.

This is a significant wind change event.

It doesn't mean all 'boats' will succeed but it does look like they'll all have the opportunity of a tail wind if they know how to set their sails.

Shortage – It seems that oil industry executives are correct when they say that the world does not yet have sufficient alternative energy sources to make large reductions to the use of oil, or coal for that matter.

If we did, the price of oil wouldn't be rising as fast as it is, and the volume of coal being used wouldn't be increasing.

Steering energy demand in the preferred direction is good governance but insisting on too much haste is not.

Housing – The retirement village operators are again showing that they should be respected as an effective supplier of housing to New Zealand.

Summerset has reported a new record for half year sales (new units and resales) at 545 units.

Part of this record reflects their ability to deliver reasonably high volumes of newly built properties and I suspect the other driver is respect from the community about the way our retirement village operators handle health threats to the residents.

Given the volume of people in the retired demographic I don't see why the largest retirement village operators won't grow to the points of turnover in the thousands each year.

Certainly JLL property services think they'll need to build more and questions whether the sector is yet building enough to cope with likely demand.

As I have said before, retirement village operators are a valuable part of our nation's attempt to build more homes. Rather than talk about the subject, as most politicians do, the likes of Ryman and Summerset are getting on and getting the job done.

Every person, or couple, that moves into a retirement village setting release a family home back into the community.

In fairness to Housing NZ (Kainga Ora), we know their chief quite well and they too are making big strides in the strategy of adding to and improving the NZ housing stock.

It would be quite nice if Housing NZ started publishing some statistics about houses built, people moved in with assistance, people moved out when they can afford their own dwelling, or who successfully purchased a home from HNZ with equity support from the government.

Summerset shareholders would enjoy reading the latest half year report.

Carbon Capture – Do we have any carbon capture scientists out there who can steer me toward useful information on the subject?

Carbon capture and utilisation (CCU) is the process of capturing carbon dioxide (CO2) to be recycled for further usage. Carbon capture and utilization will offer part of the response to the global challenge of significantly reducing greenhouse gas emissions, especially from major stationary (industrial) emitters.

Development of carbon capture and utilisation (CCU) is going to be an important part of improving our maintenance of the planet. As I understand it, we don’t have enough land to plant the volume of trees to have mother nature do the cleanup, so we need to create some leverage (less land for more carbon extraction).

Through the cost impost set by Emissions Trading Schemes for those expelling carbon (a benefit to those who extract carbon) there should be sufficient return on capital for private investment into CCU facilities.

Effective CCU would be bolted on to the businesses emitting the most carbon into the atmosphere, but they could also be leased to businesses emitting a lot of carbon now but successfully reducing their own emissions in other ways (switching from coal use to gas, or renewable electricity).

If there is an economic return from planting a million trees on a large tract of land then there should be a greater return for a facility that can extract the same amount of carbon from a smaller land area.

Forestry only offers carbon credits once. Hopefully a CCU unit could generate annual credits for its owners.

Some CCU units would have the benefit of mobility and thus could service a variety of customers throughout a mechanical lifetime.

At face value it feels like an area that could be attractive for investment of capital under private ownership, but I'd like to learn more about the potential, hence the opening question.

Don't Do It – [item removed]

EVER THE OPTIMIST

Ryan Air is back recruiting additional pilots (+2,000) and has placed orders for 200 new planes, 50 of which arrive this summer (Northern Hemisphere).

ETO II

The G20 has endorsed proposals to roll out global tax agreement for a minimum corporate tax rate.

The supplementary agreement is that global businesses will be liable to pay tax in the jurisdiction where than obtain the revenue, even if they have no physical presence there.

The European Union has not yet signed because at this point Ireland and Hungary have not agreed and the EU requires unanimous agreement.

If for some reason they selfishly do not agree they can surely expect the pressure to increase significantly from the other major nations.

Ireland would do well to remember the financial support provided to them by the International Monetary Fund during the Global Financial Crisis.

The G20 hopes to ratify the new agreement at their October 2021 meeting.

ETO III – Vaccinations

Here's a quote from the central bank's latest monetary policy statement: Rising vaccination rates across many countries are providing further economic impetus, which is why I considered vaccinations and the US Financial Support packages to be the greatest influence on your investments for 2021.

By extension, it is why I have kept this section running for monitoring global progress.

Vaccination doses delivered – 3.60 billion jabs (China claims to be 1.4 billion of these)

Total (recorded) Corona Virus cases – 191 million

Active Cases – 12.9 million (increase)

Daily rate of new cases – 500,000 (increase)

People in serious condition – 80,000 (increase)

Daily Deaths (Covid related) – 6-8,000 (stable)

Investment Opportunities

Next? – We haven't heard about the next confirmed bond offer or share IPO but EROAD shareholders have access to the placement of new shares this week ($5.58 per share).

TRAVEL

Edward will be in Auckland on 21 July (North Shore), 22 July (Remuera – FULL) and Auckland CBD on 23 July.

Johnny will be in Christchurch on 22 July and is in Tauranga on 26 August.

Kevin will be in Timaru on 5-6 August and Christchurch on 11 August.

Michael plans to be in Auckland during August then Hamilton and Tauranga in September.

If you would like to make an appointment, please contact our office.

Michael Warrington 

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Market News 12 July 2021

How's this for a confused world, without commenting on whether either is correct:

Two US states are adopting opposing settings with respect to fossil fuels.

Maine has ordered that its public pension fund must jettison investments in fossil fuel related businesses over the next 4 years.

Meanwhile…

Texas has signed into law a ban on its pension fund from investing in any business that cuts ties with the oil industry!

Logic suggests both states will run into problems with fiduciary duties regarding how governors of such funds must manage them with respect to risk and reward.

INVESTMENT OPINION

Relativities – I have been forming the view that NZ is likely to underperform international peers, economically speaking, in the years ahead.

Performance relativities will show up via share market measures, which display long term financial performance within an economy.

Last week I found myself staring for a few moments at the Aspiring Newsletter, the ''past 12 months'' performance data in particular:

NZ share market index +10.51%

Australian Share market index +30.84%

World Share Market Index +28.10%

Note the huge outperformance over recent history, a period when we were patting ourselves on the back politically for Covid management, and I believe this outperformance will continue (hopefully with smaller relative differences!).

New Zealand is typically a market made up of high cash flow businesses, reliable margins and paying out good dividends, so our share prices benefited (increased) a lot from the era of sharp declines in real interest rates (pushing up the Present Value of business profits).

The conditions have changed. The future for interest rates is not lower, even if they hover around 0-2% for a long time.

Many shares around the world may also have good cash flow but it is more typical that this cash is retained and reinvested for the growth of the business. Their prospects for growth are greater, surrounded by larger populations and thus suffering less impact from current freight logistics disruptions.

Then comes the developing problem with insufficient skilled employees required to keep productive economies functioning. As nations surge out of their 2020 Covid restraint, in search of their future economic mean, they are hunting for employees.

NZ doesn't seem to be hunting. In fact, we appear to be doing the opposite and are restricting access for employees.

By contrast, others are hunting. The Queensland State government is advertising in NZ to employ our nurses and move them to Australia for more pay (that's a poor trade for NZ – 501's in, nurses out – Ed).

With the ''interest rates lower'' theme now over, share prices should more closely reflect the actual performance of a business, and collectively the economies they operate within, and I am beginning to think the collective ''they'' will do better than ''us''.

Another interesting observation is of share market index price charts over the past two, five, 10 and 20 year periods.

After a decade of rising share market pricing the dip for share markets during the Global Financial Crisis (GFC) is now harder to see, even though the weakness lasted many months while regulators fought to get economies back onto stable footings.

Last year's collapse in pricing amidst Covid lockdowns was the steepest on record and had sufficient scale to be very visible on the price charts of the day. However, as you all now know, share market pricing recovered immediately (months) and it has now charged on to new highs and is making the scale of the Covid crevasse shrink relative to the widening data series.

Take a look at a 40 year chart of the US S&P500 index.

I can barely make out the 1987 crash. The deflation of the late 1990's tech boom took years and stands out. Given the dominance of the current technology boom makes it laughable that we thought the sector as booming in 1999.

The GFC, which had its source in 2007, exploded in late 2008 to become the most serious threat to financial stability in my career, before 'we' finally gained control of the risk in 2009 and began a rebuild which took four years.

30 to 40 years from now, inexperienced financial markets employees may well look at the Covid blip on the chart and wonder what happened that was bad enough to fall so far, but then not bad enough to stop an immediate recovery?

So interesting.

Back to where I started, being long term share market performance.

Covid19 is history; and

I am concerned that NZ will underperform its global peers.

Everything is For Sale – Private Equity (PE) funds, and Hedge Funds (HF), have been roaming the world for many years now, hunting for opportunities to extract value.

KKR (Kohlberg Kravis & Roberts), one of the largest PE firms, has been around since long before I joined financial markets but came to my attention in the late 1980's when they bought into a tobacco giant in a fight that led to a movie (Barbarians at the Gate).

In the 1990's the most prevalent PE and HF funds of any scale, on my radar, were active in bond markets and foreign exchange markets; some taking huge bets on the direction of markets whilst others established enormous offsetting positions that they hoped left profit margins down the middle.

The most famous in the latter group was Long Term Capital Management (LTCM) who famously failed when the highly improbable happened (a lesson for all investors). Google Roger Lowenstein – 'When Genius Failed' if you'd like to discover more.

Ironing out imperfections in markets is no longer the prevalent focus for these funds because the margins on lower risk trading are paper thin, dominated by automated computer trading models.

The current stories are, and over recent years have been, all about PE buying shares and trying to gain control of some very large businesses. The most common attribute of the target businesses are reliable cash flows and profit margins.

The unspoken intentions following these takeovers are to cut costs and attempt to push higher sales. Cost cutting in today's world includes robotics and automation, which might be a good thing in a world struggling to find enough employees.

The story that prompted this line of thought was seeing a PE firm trying to buy into supermarkets in the UK. I hadn't thought of supermarkets as targets, or even being available from the tightly controlled ownership of the past.

It takes a long time to build a supermarket chain, so why not try to buy someone else's?

Have we begun to forget about the reason goodwill exists as an asset on a business balance sheet?

As Johnny pointed out last week, new investors think the current owners are undervaluing the long-term potential of Sydney Airport and are willing to pay a share price even higher than the highs of 2019 (pre-Covid impacts).

How long before this sort of aggressive buying happens in NZ?

With a little bias, given that I own a few shares, I ask is the Sydney Airport takeover offer yet more evidence that the market undervalues Infratil and its assets?

I Just re-read this section and had to ask myself what my point was!

Don't rush to sell your good businesses, even when the price you are offered appears attractive.

Interest Rates – The various bank economists are quickly becoming ever more animated about their expectations for the Reserve Bank to increase the Official Cash Rate, and to do it soon.

It's beginning to look like a game of leap-frog with each wanting to put their forecast for timing just in front of the latest prediction; they've quickly moved from first rate hikes in late 2022 to now being November 2021.

Some of the economic data emerging is indeed more inflationary than expected but I just can't help but think central banks don't like to turn on a dime in the way we financial markets participants like to do.

After such a stark period of retraction in 2020, under lockdowns, surely it isn't surprising that we will experience a more aggressive and unpredictable bounce-back until we finally settle at some new mean level?

Navigating that bounce-back will feel like governing a central bank on Mars, having been trained on Earth.

I wonder if we market analysts are amidst a period of confirmation bias on this subject based on our many years of training with central bank watching (on Earth - Ed).

Remember that we have been told by all central banks that the rules have changed. They plan to be reactive, not proactive with respect to inflation.

I'd guess that the Reserve Bank is more concerned about our immigration policies and the impact a shortage of employees is having on wages (upward) and productivity (a sea-anchor) plus the influence of international pricing (oil, freight, machinery etc).

Interest rate increases won't change these influences and excessive increases to our interest rates (i.e. faster than trading partners) will result in a stronger currency and increase the local pricing even further.

The Reserve Bank may be happy with the low unemployment situation, but they will be concerned about their other focus of economic growth which will struggle under the weight of higher logistics costs and a shortage of employees.

2020 created seismic disruptions to economic activity and financial settings so I think it's going to take 2 to 3 years for the waves from this 'pebble in the water' to disperse and settle.

We cannot sit still waiting for three years to pass, we must make new decisions every day and I am certain that those standing on the bow, in the sea spray, will make the most progress during this period of uncertainty.

As a closing thought:

If increasing short term interest rates (OCR) is the correct action, why are long term interest rates falling again? (US 10yr yield has fallen from 1.70% to 1.26% over the past two months)

Inflation - Oil price increases have become the greatest current threat to stable inflation, yes greater than Wellington City Council increases to my rates costs.

The price of oil has moved quickly from US$50 to US$75.

The problem is that nothing the central bank does will change the market price of oil (or housing – Ed).

As Bloomberg said, 'the central bank can't print oil'.

There is another inflation driver that is looming, border lock downs. When labour cannot move to the location of greatest need, the local pay rates will rise quickly for those in the undersupplied skill grouping.

I feel certain the NZ nurses will win their current pay negotiations because the government themselves are blocking access to additional nurses from immigrating to NZ to help us, and Australia is pinching those willing to leave.

If they don't agree to a proper pay increase for the nurses, the government itself may become a greater threat to our health system than Covid19!

Trade as a weapon – China continues to show the world that it will use trade as a weapon, although they are not alone in using this strategy, it is becoming disappointingly common.

You'll have read about the fisticuffs between China and Australia.

Last week China called for a boycott of Hong Kong sourced product Vitasoy because a staff member had been involved in recent political protests.

Russia is demanding that Champagne be re-labelled 'Sparkling Wine' if they wish to make it into their market. It seems to be part of Russian efforts to promote 'Shampanskoye' wines!

Political aggression is hardly a good foundation for mutual trade activities.

Proxy Time – I see opportunities to vote are appearing in my INBOX again. It's that time of the year again for some companies.

I hope you have all appointed the NZ Shareholders Association as your Standing Proxy to ensure that your right to vote is exercised.

Using the NZSA as your proxy relieves you of the obligation to analyse the options but means you know that the value is exercised on your behalf.

EVER THE OPTIMIST

I was so keen to write about England winning the Euro Football tournament here, but alas it wasn't to be.

Italy wins, and the 'Remainiacs' will be unbearable.

ETO II – Vaccinations

Vaccination doses delivered – 3.41 billion jabs

Total (recorded) Corona Virus cases – 187 million

Active Cases – 12.0 million (increase)

Daily rate of new cases – 400,000-450,000

People in serious condition – 78,000 (lower)

Daily Deaths (Covid related) – 6,000-8,000 (stable)

The Israel example remains interesting. Deaths early in the pandemic were 9-10% of infection, which fell quickly because of social distancing (2%), and now post 60% vaccination sits at 0.76%.

Months ago an expert told me that ''below 1%'' was the likely result once we had longer term data to work with, and heavily skewed to the most fragile of the population.

https://www.worldometers.info/coronavirus/country/israel/

Investment Opportunities

Kiwi Property Group – Thank you to all who participated in this bond offer with us last week. The final interest rate was set at 2.85%.

The deep level of scaling on this issue reflects the excess of cash that central banks are leaving lying around the marketplace, which is now struggling to find homes.

Westpac – For those of you holding the WBC010 subordinated bond issued by Westpac Bank, they have announced repayment on 1 September 2021, being the first call date for early repayment.

The legal maturity was 1 September 2026.

This repayment is unsurprising, and Covid disruptions aside this is the behaviour that investors should typically expect from Tier II subordinated bonds issue by NZ banks.

Now that the Reserve Bank has settled on its latest update of regulations for bank capital we hope the banks will return to more frequent issues of these bonds.

TRAVEL

Edward will also be in Auckland in July, 21st (North Shore), 22nd (Remuera) and 23rd (CBD).

Johnny will be in Christchurch on 22 July and in Tauranga on 26 August.

Kevin will be in Timaru on 5-6 August and Christchurch in mid-August, dates still to be confirmed.

If you would like to make an appointment, please contact our office.

Mike Warrington

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Market News 5 July 2021

The evidence of too much cash having been injected into the ‘system’ continues, with central banks receiving ever-increasing sums back from banks, when unused in daily business operations.

Cash being returned to the US Federal Reserve overnight, each day, is about to breach US$1 trillion.

This was once a sum that we middle-aged market participants (middle? – Ed) thought as enormous, but more recently became the common unit for assistance being provided to an economy and now it is the scale of the funds being returned unwanted!

INVESTMENT OPINION

Debt Use – maybe the world’s evolution to an increased willingness for debt use is more evidence that ‘we’ have moved on from the generations that were taught to save before they spend, and to then pass on equity to the next generation.

The younger generation now seem to be a cohort that is willing to try and finish one’s life by leaving the last invoice on the kitchen bench for their children (cool plan if you could make it happen).

I have an affinity with the save first, then spend approach, and to build spare equity (savings) before taking on greater financial risks because my parents were brought up by those with a direct experience of the 1930s' depression.

That training was unrelated to interest rates because when I was born they were low, when I was at school they were frozen (by our last Prime Minister who thought he should be a dictator) and when I was first employed interest rates were 22%.

The philosophy remained the same.

So, claiming that we should all adjust our principles as a result of low interest rates cannot be correct, in my view anyway.

I admire the previous generations, who are widely represented within our client list, because they are now discovering that their savings rate is giving them choices, even when under the duress of Covid19 conditions (and the Global Financial Crisis in the past).

I like the self-insurance that these savers installed for themselves. Remember that what an insurance company does is gather in sufficient annual premiums, plus earnings on investments (savings), to pay out the obligations to those making insurance claims.

Sometimes our clients, and I’ll guess many New Zealand savers, are discovering that they may well have saved up more than they required (good form).

For many, you’d think this might lead to an increase in the spending rate to enjoy a little more consumerism, but no, in most cases this cohort of the best trained savers also display some of the best principles and they are beginning to look more closely at charity, both in the community and passing equity (money – Ed) down the family tree.

I feel certain that the ‘have nots’ and more than a few parliamentarians will view this as yet another luxury situation for the beneficiaries of the ‘haves’, but the cold hard truth of it is that they are witnessing the benefits of hard work and good long-term strategising by the older generation.

I would hope that it prompted today’s young to alter strategies toward greater levels of saving!

Not one of our retired clients would have forecast that their grandchildren would need to pay $1 million to buy a home, or perhaps be asked to pay such high prices for their commitments to education. However, they know conditions change and they knew additional savings would help to insulate against the ‘cold’ (winter is coming – Ed).

The conditions calling upon those savings are here.

If you’ll excuse the obvious clash between today’s date and me declaring that ‘winter’ is not here, at least not when it’s a metaphor, but other than the price of accommodation the lifestyle available to grandchildren is actually quite good.

I don’t agree with the next generation spending a lot, to escalate consumer based debts, and hoping grandma and grandad will pay it off.

However, I do enjoy seeing that the hard work and savings rate of the past are now providing those grandparents with the opportunity to pass some of that financial strength to the next two generations whilst they are still alive to enjoy the process.

Yes, two generations. The children sometimes need help for a variety of reasons that most of you will understand. Sometimes life isn’t fair (I was taught this maxim from a young age). Then grandchildren, who grandparents worry about with enormous student loans, enormous house prices and generally incomes that barely cope with the financial pressures.

In synchronicity with this generosity some of the retired are indeed discovering a willingness to spend capital too, acknowledging that they cannot use the money after D Day!

Maybe the next generation is working to this philosophy more than the last?

Pay off a house, build Kiwisaver (hopefully – Ed) to the point of financing 25 years of capital spending (aim for $0 on the unknowable D Day) and enjoy the balance of one’s income on a fun lifestyle now?

I know I prefer the saving strategy of my parents’ generation, but I acknowledge that my children are unlikely to enjoy that opportunity given the housing costs of today relative to incomes.

This thread leads into the next, where I had been keen to discuss, again, the importance of liquidity in an investment portfolio.

Liquidity – An increasing number of you are approaching us to discuss the potential for selling part, or all, of the securities held in your portfolios.

As I covered in the comments above, the larger sums involve those who are beginning to help their children and grandchildren with financial support for a variety of life’s expenses, where property purchases and student loans are the most common.

The next most common reason is asset allocation changes within a portfolio.

Both drivers appeal to me; the first because it displays the care shown within great family units and reinforces the value of their savings ethic in the past, and the second because it displays a growing awareness of the importance of asset allocation (investment rules) decisions and adjusting a portfolio to follow those rules.

Clients receiving a financial advice service from us have their liquidity reported to them in our portfolio reports, giving them an understanding of how much money they can raise, and how easily. When this data was first presented some wondered about the value, but it is well understood now, and usually arrives with a criticism of their bank’s rejections after they ask about accessing money held on deposit.

One of the biggest changes to investor liquidity has been the understandable changes by the banks as the Reserve Bank (RBNZ) demanded more stability from them with respect to their funding certainty.

The RBNZ logically insisted that banks increase the reliability of their funding, which included no longer willingly breaking bank term deposits mid-term and pressing the public to hold cash in Notice Saver accounts that give the banks a 32-day warning (or more) about withdrawal (met new RBNZ threshold for Core Funding Ratio measurements).

In essence, as the banks increased their liquidity management controls, public access to liquidity declined.

Historically the public felt that they could break any bank term deposit if they needed cash and banks unwisely supported this notion by agreeing. Now banks reject all advances to break term deposits and if they finally relent the penalties are steep, as they should be. It’s not the bank's job to be the provider of additional liquidity at the expense of their own interest rate matching obligations.

Banks find it hard enough to manage their obligations without guessing what the changing liquidity requirements of the public might be!

Now investors must adjust their investing choices to ensure they can access immediate liquidity (generally a modest sum in a bank call account) and then be able to access larger sums over short periods (days) by holding a reasonable proportion of their wealth in liquid (saleable) investments.

Shares do indeed provide liquidity within a portfolio but they also carry price volatility of 10-20% and sometimes 30%+ and the largest moves are usually down, and these are synchronous with the time you, or your family, are most likely to be under financial pressure i.e. the worst possible time to call on this portal of liquidity.

Bonds are a much better target for your liquidity requirements with a reasonably reliable price (close to $1.00).

It is easy for me to generalise and say that ‘bonds are liquid’, and this is true, but this is a little like me saying that all four-legged horses can race; the performance varies.

The stronger a borrower (lower default risk) the bigger the universe of potential investors, and the greater the liquidity for selling such a bond.

All investors can buy government bonds and local government bonds, including the Reserve Bank, ensuring that an investor can sell such bonds ‘in their sleep’ and do so immediately.

The more risk one progressively takes with bonds, the lower the depth of the marketplace and the more limited the liquidity, but they all remain saleable and transferable.

Investors should never require a 100% liquidity ratio for their investment portfolio. A ratio covering possible capital spending and the generosity of family gifting should be sufficient, plus a margin for the unknown.

Liquidity offers no additional return to an investment portfolio but it does deliver value.

It is true that one of the most common questions about liquidity is ‘will my portfolio be easy to sell or transfer when I am gone?’ implying access to 100% liquidity.

The answer to this estate management question needs to be yes, and will be if you have used banks for short term fixed interest investing, and bonds, shares and NZX listed units for the balance of the portfolio.

Actually, sidebar: Any legal firms which find the sale of estate investments difficult as a result of Anti Money Laundering (AML) obligations are invited to contact us; we have a straight-forward process to help you.

So, if you have developed a good understanding of the value of liquidity, well done.

If you are using it to occasionally evolve the mix of investments in your portfolio, congratulations, you are reaching an impressive point with respect to understanding the management of your savings.

If you are using liquidity to make gifts to your family whilst you are here to enjoy them, bless you. You are part of the reason we will all be fine, regardless of the noisy headlines that surround us.

Justice – I enjoyed reading about a judgment in the US where the Judge rejected allegations from the Federal Trade Commission (FTC) and 45 states who jumped on the bandwagon to claim that Facebook was stifling competition simply because with the benefit of hindsight they were accruing profits from old transactions.

Facebook purchased Instagram in 2012 and WhatsApp in 2014.

The FTC lodged its allegation in 2021.

The Judge found that there was no reason the allegations couldn’t have been brought forward at the time of purchase, that the case lacked facts and was ‘legally insufficient’.

‘It is almost as if the agency expects the court to simply nod to the conventional wisdom that Facebook is a monopolist.’

‘The FTC's complaint says almost nothing concrete on the key question of how much power Facebook actually had, and still has, in a properly defined anti-trust product market.’

The key terms there for me are ‘properly defined anti-trust product market’. Get the regulation right and avoid retrospective criticism just because a business is successful.

I immediately thought about New Zealand’s recent attempts to criticise the local retirement village businesses based on backward looking financial performance.

The FTC certainly should be monitoring dominant businesses, and testing that anti-trust regulations stop monopolistic behaviours, but forming opinions about how successful a business should be allowed to become is inappropriate.

Postscript: In a more appropriate action, German regulators instructed government organisations to close their Facebook accounts on the basis that the company had failed to meet privacy standards set by German and European policy makers.

EVER THE OPTIMIST

Rolls Royce (RR) and Shell have partnered to develop Sustainable Aviation Fuels (SAF) and RR plans to have all its new engines run on SAF by 2023.

SAF aims to reduce carbon emissions by up to 70%.

Both companies share the world’s net zero emissions goal by 2050.

ETO II – Vaccinations

This remains such an important driver for global economic progress.

Vaccination doses delivered – 3.20 billion jabs

Of the major nations, the UK, Canada and Chile have reached 66% 1st jab (55% trailing 2nd jab) and are now well past Israel which has struggled to get their population far past 60%.

The US (average of states) has reached 55% first jab and the recorded infection rate has declined to 36 people per million population. The state of Vermont has reached 72% vaccinated! Hawaii is within two weeks of breaching its 70% target before re-opening to normal travel and community movement.

Those at greatest risk are described as ‘done’, mass vaccination centres are closing and now anyone can approach a pharmacy and be vaccinated with little or no delay (hopefully we’ll see this ease of access show up through movement much higher in the vaccinated numbers).

Business confidence is rising fast – witness United Airlines ordering 270 new aircraft!

Most European nations are between 45-55% for the first jab.

China (source of the virus) doesn’t publish many splits, but report 1.3 billion doses, which when compared to the US (doses versus population) implies either about 50% 2nd jab, or maybe 60% 1st jab and 50% 2nd jab. They probably stand a good chance (by dictatorship) of vaccinating well over 85% of their population.

With gratitude to John Ryder’s Global Newsletter – of 18,000 recent deaths related to Covid19 only 150 were for people who had been vaccinated, presenting more evidence about the effectiveness of vaccination in this health fight (as if we needed it – Ed).

Total (recorded) Corona Virus cases – 183 million

Active Cases – 11.4 million

Daily rate of new cases – 380-400,000

People in serious condition – 79,000

Daily Deaths (Covid related) – 6-8,000

Investment Opportunities

Kiwi Property Group – KPG offer of a new 7-year bond (‘green’), opens this week. Requests for an allocation must be wish us by 10am on Friday 9 July.

It is a fast-moving transaction, booked by contract note.

They have set the minimum interest rate at 2.85%.

We expect the bond to be essentially the same structure as other KPG bonds (senior, secured, semiannual interest).

We have a list open for investors wishing to participate in this pending offer.

TRAVEL

Edward will be in Wellington tomorrow, July 6 and in Nelson on July 8 and July 9.

Edward will also be in Auckland on 21 July (North Shore), 22 July (Remuera) & 23 July (CBD).

Johnny will be in Christchurch on 22 July and is planning a trip to Tauranga in August.

Kevin will be in Timaru and Christchurch in August, dates to be announced.

If you would like to make an appointment, please contact our office.

Mike Warrington 

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