Chris Lee & Partners Ltd

Market News 29 June 2020

A description being frequently used at present with respect to investment decisions is that it is becoming more difficult.

With all due respect I disagree, it is neither harder, nor easier than before. We still balance the risks and rewards on offer before applying our savings to longer term investment.

I accept that today's conditions are new to most; the risks are up simultaneously with returns being down, which is an unusual and unpleasant combination for investors to contemplate.

We are taught that if risks rise so too should rewards.

Risks very clearly rose following the Covid19 disruption experienced in March, so why have returns declined?

Kevin Gloag covers some of the 'why', being a seismic shift in the relationship between risk and reward, in his thoughts below.

INVESTMENT OPINION

Kevin Gloag writes:

Like stocks, if you get the selection part wrong, you are probably not going to get the right results.

Although you try to be totally impartial and objective when selecting players, you know who you want to pick, regardless of other opinions, and like financial markets you'll see what you want to see in players or stocks.

When you watch a player you want to select you'll go away remembering the good things they did, whereas the player you want to leave at home it will be their mistakes that will conveniently fix in your mind.

Changing your views and opinions is a hard thing to do and it is not in some people's DNA.

With investing people can abandon individual stocks but they find it very difficult to abandon their ideas and as we've witnessed over the past decade if you chose a perspective that was different from the perspective of the market you probably didn't do very well.

If you have an idea it is very difficult to declare it dead and move onto the next idea – especially if it opposite to what you believe.

The recent share market correction and subsequent recovery has a lot of people puzzled, particularly the strength and speed of the recovery into what seems like an abyss of economic doom and uncertainty.

The world is plagued by over-indebtedness, rising unemployment, trade wars, geopolitical tensions, and a global pandemic, yet share markets indices and investor confidence suggest something quite different.

Certainly there was some panic selling a few months ago, as many companies lost half their market value in a matter of days, but already many investors have either re-entered or are preparing to re-enter the market.

Following the 1987 share market crash, technically quite different but very similar in terms of the fear factor, many investors never returned to share investing, so what has changed?

Despite all the current market gloom today's share market investors are probably more focussed on the lack of desirable alternatives with interest rates near zero and likely to remain so for a very long time.

They probably also believe that monetary and fiscal stimulus is going to keep coming in whatever quantities are required to keep the show going despite already unrepayable debt levels in many developed economies.

When investors stand back and watch the US running trillion-dollar deficits, the European Central Bank providing life support for its region's banks, double digit unemployment rates combining with high levels of household debt, zombie companies being kept alive by Government backed loan facilities and Central Banks creating money out of thin air to swamp banks with liquidity and keep interest rate low, they could be excused for thinking the financial markets game is rigged.

They then need to decide whether to follow their long-held beliefs and make investment decisions based on what they think should happen next or switch sides and make decisions based on current market conditions and different drivers.

In the current environment I think investors need to be much more intellectually flexible and let go of views and ideas attached to a perfect world scenario, regardless how logical they may seem.

Investors probably need to ask themselves whether they think governments and global central banks have painted themselves into a corner and have no choice but to continue with very accommodative fiscal and monetary policies, and then decide where this easy money might land and what assets might benefit.

Investors can still benefit from things they don't agree with and I think in today's wonky world investors need to be ready to switch sides at a moment's notice.

Electricity – Last week Kevin also published a research item on the Private Page of our website for clients receiving financial advice who are curious about how the electricity market operates and the businesses within it.

Many of you have investments in the sector so I encourage you to read it if you haven't already.

I was reminded of the report's relevance for investors as I read about the failure of yet another electricity retailer (Energy Club NZ).

Energy Club had no generation assets so it bought electricity from the wholesale market to deliver to its customers (consumers), a requirement that became very uncomfortable in 2018 and 2019 as wholesale electricity prices rose sharply.

In an attempt to deliver stable electricity pricing to customers Energy Club was required to become expert in managing electricity purchasing for its collective customer base, well into the future, without truly knowing customer demand or probable changes to market pricing!

This would be the equivalent of one of my children (artists, not business people) offering to protect our suburb's residents against petrol price changes for their fuel needs during the year ahead.

Z Energy could easily provide this fuel price protection given its deep role in that sector and vast knowledge about supply and pricing, but my children cannot because they don't have sufficient financial backing, market knowledge or sufficient skill to manage these risk types.

Within the electricity sector our generators can easily protect themselves against changes in the electricity price and extract profits regardless of the subsequent price movement, but as you can see, this does not help competition.

Kevin Gloag points out the impact this has for investors in the sector.

Interestingly Z Energy is also an electricity retailer through its controlling interest in Flick Electric (a quest to migrate toward renewable fuels) and I for one look forward to the day when they add some horsepower to this electricity retailer to provide sustainable price competition for consumers.

The 'retail only' businesses have been trying to inject genuine price competition for consumers because very large price margins developed between wholesale electricity pricing and the price being paid by retail consumers.

When the wholesale generation price lifted sharply in 2018 due to changes in fuel availability and network maintenance projects the gentailers were happy to see these high prices last just long enough to kill off smaller competitors via commercial suffocation.

Contact Energy 'generously' bought the 11,600 customers released by Energy Club. (How kind of them – Ed).

This 'story' continues to have an impact for investors, consumers and regulators.

Not an independent investor? – I received a call from a rightly disgruntled Infratil investor last week.

Mr X & Mrs Y own some Infratil shares, jointly and separately.

Mrs Y owns some Infratil shares relating to inheritance money that she wished to manage separately.

Both 'investors' wished to buy a few more IFT shares in the Share Purchase Plan.

However, when the applications arrived Link Market Services (LMS) rejected Mrs Y's application declaring she was investing via the joint name and thus could not invest in her own name.

There is no criticism here for LMS as they are only following the rules defined in the offer.

I doubt that IFT pushed for such rules because their objective is to raise capital at a price, not participate in the decision making of each unique investor on their register.

So, it seems to me that lawyers or investment bankers have determined that a rule was required to block certain risk takers from attempting to accept risk on offer from capital markets.

Mrs Y should be (is – Ed) incensed that capital markets think she cannot be an investor in isolation to her partner.

Mr X should feel aggrieved that if LMS had accepted Mrs Y's application first (faster with the technology) then 'he' would have missed out on pursuing an investment that carried his name.

Given that companies are finding reasons not to do pro-rata rights issues when they raise new capital, they have been gradually improving the allocations to show some respect to proportionality relative to the register.

It makes one ask yet again, why not simply do pro-rata Rights issues to raise new capital?

Whatever the clever thinking in the background it is an inappropriate decision to try and reach into a residential address, or a family name, and decide new ways to distort allocations in capital raising offers brought to market.

After telling Mrs Y that she cannot participate in the IFT Share Purchase Plan LMS continues to issue emails to her asking her to hurry up before she misses out!

Allied Farmers – It's nice to see some bold, prompt, decision making in business.

ALF has learnt from its rural customers that banks are retreating from lending in this sector so they have decided to step in and again provide this essential service in support of their wider relationships.

This is good business.

Maybe ALF will find a way to present investors with prudently secured bonds to provide the group financing that they'll pass on to farmers.

This is how commerce should work.

The last thing we need to see is Adrian Orr in gumboots with a cheque book at the farm gate.

Kiwibank risk – Like me, you may have thought that the government managed to pass some Kiwibank investment risk to ACC and the NZ superannuation Fund when they each took a shareholding in the bank three years ago.

Mais non.

In a recent announcement about a grand new parcel handling centre for NZ Post there was a tiny sentence about a $15 million payment to ACC and NZ Super relating to their combined purchase of 47% of Kiwibank.

It appears that equity risk of Kiwibank has remained with the government and possibly not passed to ACC and NZ Super when the shareholding changed.

Now I am curious to read the terms of the agreement when this slight of hand change was made to the 'ownership' register for Kiwibank.

It is beginning to look like ACC and NZ Super were offered an assured return on their investment in Kiwibank. Nice for some but it is a shame the public weren't invited to participate in such an offer.

Politics, so unsurprising.

Dominant Retailers – Some of our major retailers, such as the Warehouse, must have taken a slither of confidence from the recent announcement that Walmart has increased its revenue forecast based on the shopping behaviour during and post Covid19 lock downs.

I am unsurprised that consumers splashed extra cash in the month after 'release' but for Walmart to already be announcing stronger forecasts whilst looking into the mist is an impressive show of confidence, data knowledge, or both (remember the 'no guidance' status being adopted in NZ).

I am very concerned for our small single store specialist retailers but early information, post the initial Covid19 shock, is looking a little better than I expected.

List an empty company – I read an interesting article from New York last week about a well known investor planning to list a company on the NYSE which at the point of listing will own nothing, simply holding the $1.5 billion raised in cash.

They call it a Special Purpose Acquisition Company (or Blank Cheque Company for fun).

At the point of launch the entity simply looks like a hungry shark, circling, looking at the opportunities within the ocean. (cue Jaws theme music).

'Give us your cash and we will see what we can find'.

Investors know the expert launching the company and choose to pay handsomely backing his/her investment skills with more of their savings.

It makes the offer document look unusual (no idea what business you will end up owning) but in fairness it is precisely the same as the strategy offered by an active fund manager who collects cash and then heads out hunting.

With the investment vehicle already listed on the NYSE it can act quickly with investment decisions, not having to ask new investors what they think under an offer document.

Trading on the NYSE can immediately present perceived value of the entity, and the expanded entity if they buy another business or merge with it. The market immediately provides liquidity for trading shares and if things go well the investment vehicle can easily be sold to a corporate raider who may decide they like the new business even more and wish to take it over.

The NZX may well see this as another method for expanding the population on our local bourse but I do not think I'd like investing in a 'question mark' and the skill of a single person.

It is fascinating though to constantly witness financial markets capacity for finding new ways to bake and cut the same cake.

EVER THE OPTIMIST

Air NZ's return to Shanghai again surely confirms good news about the scale of trade that continues between NZ and China.

It's hard to imagine they sell many seats to customers, which reinforces the value of trade occurring that it can support the costs of air deliveries without the incremental value of passengers.

I probably look a little desperate (AIR shareholder), and relieved at economic progress, as I cheer each plane that flies over my house in the suburbs of Wellington.

ETO II

While others debate the long-term success or failure of the US dollar, the Euro and the Chinese Yuan, it is nice to see major financiers still issuing bonds to raise money in NZ dollar terms.

Last week the Nordic Investment Bank issued bonds in NZ dollars (labelled 'Kauri bonds') as part of their global funding programme.

Our stable governance and financial regulation framework helps encourage these entities to borrow via the NZ dollar market.

If you are curious about NIB you can read about their member countries and economic role here: https://www.nib.int/

ETO III

Fonterra offering financial rewards for desirable environmental behaviour is admirable and presumably reflects increased customer requests for reporting on the matter.

Although, I suspect this additional payment comes at the expense of returns to shareholders.

Investment Opportunities

Infratil – Share Purchase Plan closed oversubscribed, as one likes to orchestrate and announce.

We now look forward to discovering how the new capital will be applied to the portfolio.

Sky City – Share Purchase Plan (SPP), offering new shares at $2.50, is now open for SKC shareholders wishing to invest in some additional shares.

Applications are completed online via the website presented in the offer email.

The offer closes on 3 July.

We typically broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group, if the public can participate.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL

David Colman will be in Palmerston North on July 22

Edward will be in Auckland (Remuera) on July 27 and Albany on July 28

Please let us know now if you would like an appointment in your town.

 

Thank you.

Mike Warrington

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Market News 22 June 2020

The government enjoyed getting up on stage each day to broadcast Covid19 data and the pathway to health control. (not so much now – Ed)

Now, I'd like to see Grant Robertson, and maybe Stuart Nash, get up each day and alert us to progress being made for business and revenue; presenting a pathway to economic control.

Grant could speak to approvals for progress such as the arrival of the Avatar group, Rocket Lab employees, Americas Cup teams, foreign students, consents for irrigation schemes etc.

Stuart could report increases in revenue from GST flows, PAYE collection, or transport revenue (having just hiked my Road User Charges again!).

I hope they're not still designing the plan for how to succeed.

INVESTMENT OPINION

RMA – Introducing a special Bill to parliament to 'speed up consenting' of 11 infrastructure projects reminds us that our government, over many years, doesn't yet have the principles of good governance in place for the development of our nation.

I agree with Business NZ CEO Kirk Hope that the Resource Management Act (RMA) is not fit for purpose, both for the environment and our economy.

David Parker says his RMA review will be completed before the 2020 election but this is hard to believe from this government unless it is to only acknowledge deep failings and an election pledge to simplify the Act and make it far more effective during the next term of government.

At this point the accelerated projects are 11 from government agencies but there are 1800 other projects still being considered by the Infrastructure Industry Reference Group, chaired by Mark Binns.

That's one project for every 150 square kilometres in New Zealand so there must be a few thrown into the process out of desperation for cash flow rather than importance to our economy and community.

Mark Binns has the experience and skill to sort the wheat from the chaff and the fortitude to make strong recommendations. If the government is true to its word about initiating development projects and is not applying empty rhetoric then 2021 could be a good year for our country's next period of progress.

I hope many on the list are projects of true progress. Progress that one director once told me could be measured as $1.00 down and greater than $1.00 of value returned, as opposed to 10 cents value which will be the case if too many pipe dreams reach the point of being financed by the government.

Frustratingly the election is going to get in the way and you will not be seeing Shane Jones leaning on a 'functioning shovel' this side of Christmas. Electioneering is underway and it will be all talk from now until September.

While we wait, the reference from David Parker that appeals to me the most from his 'RMA short circuit law' is the concept of a 'self-repealing law'. I think we need more of these.

The last one I can remember was the Auckland Harbour Bridge Act, which had a self-repealing clause temporarily allowing tolls to be collected until the bridge was repaid.

Our legal framework seems to be deeply cluttered with excessive law and regulation. I remember wanting to vote for the person, or party, that once claimed they would strive to finish their next term in parliament with a reduced number of Acts and regulations.

Maybe the use of self-repealing law could help with other desirable outcomes?

The new SkyPath on Auckland Harbour Bridge could charge 50 cents per crossing via AT Hop cards until this facility has been repaid too?

Certain imposed charges (such as ACC premiums on motorcycles) lapse if desirable ratios are achieved. Put incentives in place for the public to respond to.

Cannabis law reform could be self-repealing based on certain performance targets.

Wouldn't this be the ultimate 'governance of the people for the people' because you'd be placing the power to make change in 'our' hands?

Yield Curves – You might wonder why we bother to have a marketplace for setting interest rates any longer because central banks are increasingly defining what they want short and long term interest rates to be, and the default risks that will be tolerated.

When I was a young lad, and it was inappropriate for me to start a sentence that way, central banks set the overnight interest rate only.

Actually, when I was a very young lad the central bank tried to target a $20m cash balance between the overnight settlement activities of all banks with interest pricing as the reward or penalty for balance and imbalance.

In today's light $20m is an absurdly low amount to target!

Then New Zealand dabbled with a process called the Monetary Conditions Index (MCI) for a while but it was a double fulcrum monster (interest rates and currency volatility) and was wisely put into retirement in the 1990's.

Actually, we traders were disappointed by the retirement because the excessive volatility created by this tool presented constant opportunities for us to profit from.

After these experiments NZ settled into setting the overnight cash rate (OCR) and expecting free markets to determine the interest rates that should apply to longer terms; risk free as the base curve and additional interest rate margins for additional default risk there-above.

This method worked very well for the past 20 years, with a little special assistance required in 2008 for the Global Financial Crisis. Supply and demand worked most of the time even in a micro scale market like NZ.

However, after 2008 something happened in the larger markets, especially Japan from the earliest stages; central bankers determined that interest rates needed to fall to rescue us from every business and economic error we might make.

We kept making errors, so they kept cutting the interest rates, rather than have us accept some self-responsibility and suffer some consequences for our actions.

When we reached the point that free markets were uncomfortable cutting longer term interest rates any longer, preferring to factor in some of the real risks on the playing field, central bankers accused bankers of refusing to 'help' the economy as if this was a banking principle.

So, now, central bankers lend to the economy directly. They buy bonds from all manner of entities from governments to very high-risk companies (including HERTZ in bankruptcy protection). It looks like madness to anybody over the age of 35 years of age.

Not only do central banks lend but they aggressively, and intentionally, lend so much money that they force the long-term interest rates that they define as agreeable with 0.25% becoming a target for the likes of Japan, the US, Australia and we aren't far behind.

It is a falsehood.

However, I'd counsel you against standing face to wind as you relieve yourself of such an opinion of falsehood because this market condition is surely staying with us for many years now.

One long standing piece of financial market advice that still holds true today is: Don't fight the Fed.

What the US Federal Reserve wants to do, it will do.

If a yield curve starting at 0.00% for overnight interest rates, rising to 0.25% and staying at that price for all terms out to 10 years is what they desire, it is what they shall have.

This unstoppable force (central bank), driving a Fire Service scale hose of government supplied cash (upgraded from a garden hose for regular social welfare) is the main reason you are looking at confusing share market pricing right now.

When you think about your home finances you know that you can't spend what you don't have and there are pricing consequences for spending another person’s money.

Stay true to those facts and pass them on to the next generation.

However, these are not the facts at play for the financial arrangements in our economy and financial markets at present, or for many years ahead of us.

Because the current rules feel so wrong, the greatest protection you can teach to the next generation is to save more and be in control of your own destiny because surely something is going to backfire from the financial excess of the early part of this century.

This is speculative on my part and I have no idea when financial outcomes will deteriorate.

For now, I repeat, don't fight the Fed.

Interest rates will be 0.00% - 0.25% for a long time.

Investors are being forced to take more risk just to find some returns, and with a dose of professional bias, those investors should seek financial advice to help make such decisions about this additional risk.

Eroad – In the face of many businesses explaining why sales are, or will be, worse post Covid19, it was a pleasure to read ERD's latest annual report.

It disclosed the company's latest year of growth, wider revenue margins and expectations that sales will grow again in the year ahead.

Sales progress has been a little slower than ERD wished when the company listed on the NZX but the company is unquestionably growing and is quietly becoming another successful NZ export story.

Disclosure: I own a few ERD.

Asset Plus – shareholders of APL will be perplexed by the outcome delivered under Augusta management over the past year:

Net Tangible Assets fell 18% (valuation losses);

Weighted Average Lease term fell from 5.5 years to 3.6 years (sold a jewel?);

Debt ratio increased to 34% (from excessively low 8%);

A $100 million capital raising offer (for a $61 million business) was cancelled;

$1 million spent on due diligence for property purchases that did not proceed;

The latest dividend was cancelled, and others remain under review.

APL and Augusta might say it is a sign of the times. I might say it is a sign of insignificant scale and management decisions.

EVER THE OPTIMIST

Our inability to hire workers from overseas should be leading to a surge in training programmes for locals, which should logically help to keep our unemployment numbers lower than some of the darkest forecasts imply.

Perhaps we could learn from the NZ Fire Service here who move assets around to ensure sufficient temporary coverage under all scenarios.

Thinking of harvest time on the land, the most skilled should take on the most difficult tasks (even if it's not their preference) and bring in the new trainees to the simplest tasks, until skill levels rise widely.

Investment Opportunities

Sky City – was last week's business raising new equity capital, offering $180 million new shares to institutional investors and shortly thereafter offering $50 million to its retail investors via a Share Purchase Plan (SPP).

The SPP details will be sent soon, with the offer opening on 22 June and closing on 3 July at a share price of $2.50 (or lower if the market price falls in the meantime).

SKC shareholders should scan their emails closely over coming days for Entitlement Notices.

We typically broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group, if the public can participate.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite ‘Yes’ and an ‘Amount’.

We will explain other details within each broadcast.

Thank you.

TRAVEL

Chris will be in Nelson on Tuesday, July 7.

Please let us know now if you would like an appointment in your town.

 

Thank you.

Mike Warrington

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Market News 15 June 2020

I was very interested to read that people with type 'O' blood (most common) have been measured as 9-18% less likely to test positive for Covid19; and

That the World Health Organisation now believes asymptomatic people are far less likely to pass on the virus to others.

This science led knowledge is far more useful than the political opinions being expressed by the hour.

INVESTMENT OPINION

Tax - Forgive me touching on tax policy, but the talk about GST holidays must stop.

If I am offered a 15% discount for a short period of time I will buy in advance all non-perishable things that I may need; I can afford to do so.

My opportunity cost is maybe 2.00% per annum (7.5 years of finance cost for the 15% discount).

The wider public, whom the government may claim to be assisting, do not have this advantage, ipso facto, a GST policy assists the 'haves' in society.

GST is our simplest and most effective tax. To ensure we can afford the next crisis event, leave GST alone.

Second Chance– With share markets back near pre Covid19 highs (less Friday's decline – Ed), have you been remembering your 'I wish I had changed X' thoughts from 23 March?

Second chances, such as the current one, are uncommon.

Air NZ (AIR) – 12 months ago the NZ share market determined that a fair price for a 'full noise' Air NZ business was approximately $2.85. It was a little higher in 2018 ($3.00) with dividends at 20 cents per share.

I present these figures to you because Greg Foran (CEO) now tells us that he hopes to rebuild the airline to become 70% of its former scale by August 2022.

Side bar: The government could learn from Foran by setting defined goals and explaining how they plan to achieve them as we try to accelerate our economy.

They could also remove political lobbying at Foran's office and consider preparing to just say 'thank you' if he manages to 'save' the local airline both for our population's use and for the value of the government's 51% shareholding.

The 26 months between now and August 2022 is a relatively short period for investors to discount value loss prior to reaching the defined new optimum scale for the business.

If Greg Foran does his job well the area under the 'triangle', from the February 2020 optimum performance to the new August 2022 optimum including the March 2020 Covid19 low point, can be calculated by Pythagoras.

So, we can remove this 'amount' from the present value of the company.

70% of the old 'happy' share price is $2.00.

In yet another display of surprisingly strong market conditions AIR reached $1.94 last week in full knowledge there will be no dividends prior to August 2022 and they are unlikely until 2023 in my view.

Such a share price for AIR is either a display of enormous respect for Greg Foran and the Air New Zealanders working for the airline, or it reflects the opportunity cost of very low interest rates (1-2% per annum).

There's probably a bit of both, truth be known.

You know of my respect for Greg Foran and that I think AIR was lucky to have him join as CEO immediately before the distressing changes caused by Covid19 conditions, however, in conflict with this respect is an idea that selling AIR shares is a logical hedge to my preferred post Covid19 lifestyle.

If I 'lose' money through a rising AIR share price (shares I theoretically chose not to own) then it's likely my ability to travel and enjoy myself has improved; neutral outcome.

If I 'make' (save) money through a falling AIR share price it offsets how my life is becoming more restricted and less fun; neutral outcome.

(Your mind works funny – Ed)

Perhaps, but for me Air NZ is becoming a very interesting barometer for economic conditions, for monitoring investor behaviour and as a case study for what I hope is executive excellence.

I am looking forward to each monthly update from AIR.

FMA the AFA – The Financial Markets Authority does on occasion position itself as an Authorised Financial Adviser (AFA).

30 seconds after you read this I'll be expecting a call from them denying the allegation but they can't come out in public questioning the behaviour of unadvised retail investors buying up shares and not think it looks like 'an opinion, or recommendation to buy, sell or not do so'.

NZX data confirms there has been a significant increase in share market activity by smaller (retail) investors but this does not imply a significant increase in incompetent participation; this is a silly assumption.

There has been a rising volume of commentary about the surge in share market activity from 'retail investors' during 2020, including in the white heat of March, amid Covid19 intensity.

One article described the 'never-seen-before interest in punting on shares'.

This story was obviously written by someone much younger than me because they clearly missed the 1980's. They also assume that the public haven't been punting on shares every month of every year since the 1980's.

Financial Adviser regulation was born out of some of these past era's when it was felt that the public were being poorly represented and financial losses always seemed to the reach the door of the retail investor.

In a variety of cases this accusation was true but our new regulations have improved standards, but as you can see it has not changed people's desire to make their own decisions and to take risk in the pursuit of reward, which is a natural financial desire.

The FMA may have felt a bit flummoxed as they stood proudly alongside their new legal framework and then watched the public dramatically reduce risk in Kiwisaver accounts yet charge headlong into buying shares during a period of extreme volatility.

Talk about confusing signals, but it is not the FMA's job to ponder why investors were behaving this way and then try to offer public guidance.

How would they handle conversations with these two retail investors:

Number #1 – bought Air NZ shares at 85 cents on 31 March

Number #2 – sold Tourism Holdings at $1.09 on 31 March.

The FMA concern related to Number #1 yet this person made financial gains. Number #2 took the opposite action, yet this person missed out on gains.

The FMA had no knowledge of the circumstances of each, or the herd, so they were unwise to offer comment.

The public has access to financial advice. We have laws, regulations, codes, and inferences in place.

There is no purpose for the FMA, as regulator, to offer a view about how the public choose to apply savings. To do so is to play with a double-edged sword which will inevitably cut them at least 50% of the time.

In a related opinion, it is also silly for the media to criticise the public for daring to open share broking accounts and trade shares. Unlike the FMA the media are free to voice their opinions, but they too shall be cut by the double-edged sword.

There would be far more value if the media discovered and presented why so many people chose to get further involved in share market investing under the intense spotlight of highly volatile conditions in March and April.

Could it be that they saw value?

Z Energy (ZEL) – Speaking of value; it is either good marketing, or a good sense of value to see most of the senior management at ZEL investing in more shares via the recent placement.

Electricity – The Electricity Authority's determination about changes to who should pay for Transpower expenses (operating the national electricity grid), and how it is measured, looks likely to result in proportional changes across most users.

Tiwai Point might gain traction with its claim that it should be paying tens of millions less in lines charges, which, if successful, would contribute to a 'stay' decision for the business.

In turn, this development would lift confidence in the long-term price for electricity and therefore the reliability of stable revenue for electricity generators.

Tiwai Point's potential closure (reduced electricity demand) has been a negative influence on the relative share prices of the generators as investors pondered the cost of reallocating Manapouri's electricity supply, so the opposite may now be true.

What we thought we knew appears to have changed.

A sequence of dominoes launched by Transpower, travelling via the regulators, then Benmore, Haywards and Otahuhu and finishing in your pocket, if you are an investor in the electricity generators.

On this very subject, clients receiving financial advice from us are invited to review Kevin Gloag's recently published research article on the electricity sector; it can be found on the Private Client page of our website.

Questions are welcome.

EVER THE OPTIMIST

Precinct and Fletcher Building will be pleased.

Auckland's newest high-rise building, Commercial Bay, is finally complete and open for business.

A 'brick of healing' in our post Covid19 economy.

Investment Opportunities

Infratil – was the latest company to offer a placement of ordinary shares to raise $300 million of new capital at a discounted price of $4.76.

The timing of the capital raise so soon after IFT's annual results adds some spy novel intrigue; what happens next?

There seemed to be no threat from financiers, so the logical assumption is to prepare for news about additional investment opportunities.

The wholesale portion of the placement was very successful judging by the very small allocations (Heavy scaling).

Retail IFT shareholders have been invited to purchase additional shares via a placement offer, which is open now and closes on Friday 25 June.

Again, the retail investors gain a small advantage over the wholesale placement through pricing set as the lower of $4.76 or a discount to the average of market pricing between 20 to 25 June.

As is now the convenient norm, applications are made online with payment via Direct Debit.

* * * * * * * *

We expect more businesses to approach the market seeking investors willing to buy new shares and perhaps new bond offers.

Share offers usually offer price discounts compared to recent prices on the NZX.

These offers will be fast moving and thus may have been and gone by the time you read the next Market News. The days of printed offer documents has surely ended.

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL

Chris will be in Auckland (Albany) on Tuesday June 23, Whangarei on June 24, and in Mt Wellington on Thursday, June 25.

Chris will be in Nelson on Tuesday, July 7 and Blenheim on Wednesday, July 8.

Chris will be in Christchurch on Tuesday, July 14 and Wednesday 15.

Please let us know now if you would like an appointment in your town.

 

Thank you.

Mike Warrington

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Market News 8 June 2020

It's been a constant stream of surprises lately; how about that US employment number for May?

Historically good numbers were +200,000 additional people employed for a month, but last month was +2.5 million!

Sure, it comes on the heels of 20-30 million being cut from jobs, and much more employment is required, but a quick turnaround like this was not anticipated.

The mathematical difference between the rapid V shaped share market recovery and the slower U shaped economic recovery is the extraordinarily low cost of money.

You may recall at the end of 2019 that on the basis of negative real interest rates (interest rates below inflation) I decided to predict lower interest and higher share prices by the end of 2020.

By March my share price prediction looked absurd and reminded me why I don't like such guesswork.

Today, interest rates are indeed lower and portions of the share market are now higher (technology focused NASDAQ) than at the start of the year.

Never say never in financial markets.

Over recent years we have also encouraged investors to run a stress test over their portfolios, contemplating declines of 25% over Property and Shares asset types. In March you experienced a real life example; I hope you are reflecting on how it impacted you and its influence on your future investment decisions.

This situation (the rich getting richer) will be very frustrating for many political leaders because only the 'haves' can borrow cheap money whilst 20% of the 'have nots' cannot find work to generate any money.

INVESTMENT OPINION

Peak Purchase – Was 2019 the year of 'peak purchase' as a percentage of discretionary income?

There is no show of 2020 spending matching 2019 and I doubt 2021 will either.

Put differently, will savings rates increase over the decade ahead of us followed by a plateauing of population growth, removing another of the ongoing economic growth engines?

The Covid19 pandemic has removed a small fraction of the global population but its consequences have alerted billions of people to how quickly our income can be threatened. 

It is neither possible, nor desirable, for governments to constantly underwrite income gaps for individuals or businesses so the logical reaction of the wider population is to increase its savings rate (storing acorns).

The importance of learning self-reliance should mean the majority of us don't want to line up and ask the head squirrel (Jacinda) for acorns every winter. (don't say it – Ed)

Beyond Covid19 there is another longer-term problem too, global leadership is deteriorating, and I'd expect the typical reaction to this problem to also be increasing one's personal savings as a buffer against an increase in unknown threats to stability.

Side bar – Maybe the US share market is rising as a consequence of Donald Trump losing popularity in the opinion polls? I can certainly see him trying to take credit before realising the actual driver of the stronger market is his possible demise.

So, keep an eye on discretionary spending data and savings rates over the next 12-36 months. They may explain why some investments 'never' reach back to old high valuations even if interest rates fall to zero percent and stay there, because 2019 was 'peak purchase'.

Just a random astrological scale thought.

UDC Sold – ANZ has finally negotiated a sale agreement with a new buyer for UDC Finance and it is nice to see that it's not a global airline buying the business.

The buyer is Shinsei Bank of Japan.

It's nice to see a return of Japanese business interests, which were far more common than Chinese activity in the early stages of my career.

I am a renewed 'fan boy' of Japan after my recent research trip last year.

The price to be paid for UDC is $762 million which comfortably exceeds the previous offer of $660 million. 

This higher price probably reflects the 'new' lower interest rate environment used to value the future UDC revenue streams and still looks quite good value to a Japanese investor where their central bank is buying everything else on the market at high prices and low returns.

From a global context I can understand why investor strategies, in nations where central banks are buying everything, would be to 'sell local stuff to the central bank and buy international stuff at cheaper prices'.

This arbitrage of course drives up prices for such 'stuff' in markets like NZ and Australia where our central banks aren't buying everything (yet – Ed).

No, I don't think the Reserve Bank of NZ will reach the point of buying subordinated bonds, Exchange Traded Funds and shares. There should be no need here and it would simply confirm the failure of capital markets, a conclusion that should be embarrassing to reach.

The price agreed for the UDC sale was also reported as being 1.2x the Net Tangible Assets of the business. This is a good price given that our bank shares are trading at lower multiples, yet they have better opportunities for expansion. Recall that ANZ elected to sell UDC to pursue 'better' alternatives for its capital.

Maybe bank share prices are too conservative, reflecting too much concern?

Maybe Shinsei Bank was too excited about the opportunity?

Whatever the reasons and relative values ANZ should be congratulated for its patience relating to the strategic sale of its UDC business.

Borrowers will still be encouraged to retain a relationship with UDC but the sale confirms the end of the very long relationship once held with investors.

Housing – NZ has struggled to create a meaningful boost to our house building numbers, but maybe the Australian government will lead the way and become a better friend for the sector with the announcement of its New Homebuyer Grant.

The FBU share price was finding new comfort over the past week, so something good is definitely happening in the sector.

Another anecdote of good news for the sector shows up on Massey University's GDP Live monitor where, amongst a sea of negative data, Construction displays a +3.5% growth prediction for the year ahead.

By the way, this GDP Live sight is proving to be very accurate when compared to Statistics NZ data which is delivered three months later! Yet as I understand it Massey is struggling to find a minor sponsor to help finance the ongoing costs of the site.

It would be crazy if Massey was forced to shut down such an impressive resource. Economists are justifiably crying out for more up to date data to make current decisions from, which is near critical in light of today’s rate of change.

In this world flooded with masses of live data its unacceptable for our government department to be 90 days out of date.

If a commercial sponsor cannot be found to support Massey then Statistics NZ should come to an agreement to buy the Intellectual Property from them and agree to run it as a lead indicator, audited by the normal manual data collection methods.

There are only two other sectors expected to grow in the year ahead, Utilities (electricity, gas, water, waste) and Public administration and Safety (let's call that orange vests and health people).

Take a look; it's an impressive service: http://gdplive.net/Dashboard

If you are an investor in New Zealand, the information has a direct relationship to your decision making.

Retail sales – Online has been a saviour for some, and icing for others, during lockdown, but the population is clearly relieved to be allowed out to actually visit real shops judging by the data and what you can see with your own eyes.

I am frequently reading reports that foot traffic is back up to a healthy 70-80% of prior norms, up from 40-50% numbers for April, although it's presumably worse for those businesses deemed non-essential.

Instinctively reaching 80% makes sense to me as the balance of people take a little longer to gain confidence before they head out.

I'd also be surprised if sales volumes sustainably exceed 80% of prior data given higher unemployment levels and as people 'save' a little more of their discretionary funds until they are certain they can be spent.

Then again, GDP Live doesn't like me guessing wildly based on a few shopping expeditions and a little reading; it predicts only -5.8% for the retail sector.

Covid19 – I think the wider global population is about to be introduced to a new market; the blood plasma market.

I know plasma donation is a thing to help the treatment for a variety of illnesses, but apparently it is only common to be paid for the 'donation' in the US. 

Biotechnology firms have been paying people as much as US$50 for 'normal' donations and up to US$70 for those who can provide plasma after recovering from targeted illnesses.

Come to the forefront Covid19.

Covid19 survivors can currently expect free Uber transport to and from the clinic and as much as US$400 for a month if they donate regularly.

This feels like an obvious win:win:win to me provider (paid), processor (profits) and the unwell (treatment).

Which leaves me pondering why do other nations ban payment for plasma donations when the need is so obvious, and this time so great?

Dear Dr Bloomfield…..

EVER THE OPTIMIST

The first wine industry report that caught my attention was Foley Wines with a harvest barely impacted by the Covid19 disruption and with a grape quality described as 'some of the best in recent years'.

We have heard that global markets are very happy to buy NZ wine product so they should have no trouble selling it all.

Investment Opportunities

New Capital Raising Offers

We expect more businesses to approach the market seeking investors willing to buy new shares and perhaps new bond offers.

Share offers usually offer price discounts compared to recent prices on the NZX. 

These offers will be fast moving and thus may have been and gone by the time you read the next Market News. The days of printed offer documents has surely ended.

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL 

An imminent move to Level 1 supports us travelling to see clients again.

Kevin will be in Christchurch on 2 July.

Please let us know now if you'd like an appointment in your town.

Thank you.

Mike Warrington 

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Market News 1 June 2020

The NZ economy is a business.

It is now important that we take advantage of our excellent health status and try to extract financial gains for the economy and our population.

The world is very aware of our success.

There has been a large increase in the times I read about NZ in the international media. Beyond the already known beauty of our country the observers now discuss the quality of our leadership (blue and red).

I agree with the local commentators calling for business related guests to be welcomed back to NZ with strict self-funded obligations (14-day isolation, legal agreement to Track & Trace behavior, meet own health costs, an ACC bond in case of accident costs, etc.).

International students, America's Cup sailors, specialist employees; anyone who can show they are here for an extended period of time and can justify the 14-day isolation costs into their plans.

I doubt that any will complain about the elevated costs because they know they will benefit from the opportunity and they can see it is a safer location than many other choices they might make. I'll bet international students don't relish the idea of heading to Hong Kong, New York, Italy or the UK at present.

Our health advantage may be short in duration so the sooner we act on pursuing more business the longer we have to cement NZ back into their minds as a desirable target location.

We could make travel on Air NZ a condition of entry, which implies they would be given a date, time and price for their travel so as to deliver some much-needed efficiency to the 'charter' of Air NZ aircraft.

Aircraft used to take our exports to the world can bring these folk back as 'approved imports'.

Too much?

I don't think so. We currently have a highly desirable product and I think we would be mad not to capitalize on the commitment we have all made during the past nine weeks.

INVESTMENT OPINION

Politics – leadership is deteriorating globally, and the behavior I observe seems highly likely to damage the rate and scale of global trade, which ultimately will be more damaging to economic growth rates than the temporary influence of Covid19.

Covid19 can be seen and understood by the entire population, so everyone can quickly get on board with plans to tackle the problem. Everyone wants the same outcome.

However, this is not the case for the global political struggles where selfish interests sit at the top of the agenda, even if written with invisible ink.

Often the most power hungry and greedy leaders represented the smallest economies and therefore had less impact on the flow of global trade.

When Vladimir Putin joined the list of such leaders he became one of the more influential people to be concerned about but now we have the leaders of the world's two largest economies behaving very poorly (US and China).

Interestingly from diametrically opposed viewpoints (restricted speech and free speech) they are both trying to instruct others on how they want them to behave.

The US President, this time supported by the House of Representatives, has hastily passed a law than enables the delisting of companies from US capital markets if they do not adhere to US audit obligations.

The law requires that foreign companies let the Public Company Accounting Oversight Board oversee the auditing of their financial records if they want to raise money by selling stocks or bonds to the American public. All U.S. companies and most foreign firms already work with the PCAOB in this way, but Chinese firms do not.

The President's personal battle with Huawei was politically disruptive but passing a law to allow delisting of any business accused of poor audit standards is upping the ante, even though it has a sound basis.

Covid19 treatment will now become another political pawn.

If China proves successful first at developing successful treatments and perhaps a vaccine, which it jolly well should as it is the source of the virus, will Donald Trump try to demand that NZ not buy from China?

China has huge incentives to win the race on Covid19 treatment.

Do we place health choices ahead of disliked mobile phone companies (Huawei) when considering who our international friends are?

The answer is we don't stoop to the same low standards being set by others, both the Chinese and US governments, we negotiate each new scenario with integrity and with good foundation for our position.

However, we are smaller than a ball boy on the global playing field so my idealistic view of how things 'should' play out is as naïve as it is optimistic. 

The escalation of selfishness by the US and China will surely harm global trade, which I can only hope their populations spot and react to before too much damage is done.

Debt – Debt is becoming very cheap but too much debt, or other forms of financial leverage can still suffocate you and force you to sell assets at inopportune times.

Once you are forced to sell assets the transaction costs will likely cost you more than the interest costs now, so don't get caught out by mismanaging to a strategy of excessive debt use.

I could label it as the HERTZ problem; killed off by debt. Theirs is but one example of how extra use of cheap debt was NOT the answer for achieving future success.

Debt use is always a double-edged sword, where one side of the blade delivers advantage and the other causes self-harm, and the wise will always ensure they have methods to minimize the harm and to avoid losing control to a third party.

Central banks have tried to restrain volatility (a risk measure) over the past decade with ever cheaper interest rates and now they have doubled down by agreeing to the be the lender, and owner, if required.

Believing that ultra-low interest rates is the solution to all economic ills is a nonsense and it is progressively being found out across the market (witness HERTZ failure).

It was absurd to learn that the US Federal Reserve now owns some bonds issued by HERTZ, which may soon become a verb (no longer a brand name) for taxpayers.

As an investor we suggest that you keep an eye on the debt levels of investment opportunities and avoid those with high debt ratios.

As a parent, or grandparent, your tutorial to the next generation remains the same now at 2.75% as it was when interest rates were 10%.

Herd Mentality – One of the more interesting articles that I read last week described how the majority of the share market pricing is currently moving in lockstep; described as the 'realised correlation of 80%'.

The share price movements of the major stocks within the US S&P500, in relation to one another, were very similar (80% correlation) regardless of the business specific news, touching 85% in March amidst peak Covid19 financial fears.

The statistical norm prior to Covid19 was tracking nearer 20% correlation.

The first interesting observation for me was that in a 2019 world where Exchange Traded Fund (ETF) use had become enormous the stock price correlations were quite low.

The next useful observation was that some quite good investment opportunities will still be available as a result of Covid19 market reactions. 

March threw up some 'cheap' investment opportunities, but if the market is still trading the 'good' and the 'bad' within 80% of each other (generalized assessments of value) then there must be some good opportunities for investors to simultaneously reduce risk and increase potential reward for the future.

I don't know the equivalent statistics for the NZ market sorry, and we are so small maybe the opportunities are few, but we do behave like a herd each more when we check 'how did the US market behave overnight'so opportunities will exist.

This data analysis confirms for you that no matter how clever one thinks the distilled market opinion is it continuously makes mistakes so try not to think the current share price is a fair equilibrium point at any given moment.

If you discover a 'like' and a 'dislike' from an investment perspective don't talk yourself out of making change to your portfolio. I'd suggest accessing a little financial advice to add to the process too.

Step back from the herd and consider where the lions may be hiding and where the water holes might be.

Environment – Covid19 delivered a temporary lift to air quality as large proportions of the global population were asked to stay home. Fossil fuel use slumped from both ground and air travel.

Progressive governments were slowly moving toward carbon emission taxes to try and restrain, then reduce, the exhaust that impacts the environment. 

Too much debt, in this case for Air France, has opened the door for another method of reducing emissions; the French government has agreed to guarantee loans for the airline in return for cuts to its domestic flight schedules.

Most of the major destinations are well served by trains and the government wants the duplication reduced, mostly by the high emission airlines.

I'm sure flight will still be an option for the time constrained, but the price will be higher for a service of reduced frequency.

Typically shareholders and directors would reject such a strategy, preferring to compete with rail for customer attention, but the directors lost this opportunity when they allowed their debts to rise too far.

This example has placed an interesting twist on ways for government to achieve its environmental objectives.

0.00% Term Deposits – I see the Deputy Governor of the Reserve Bank is singing from the same sheet as we have been for a while; it's possible that interest rates will fall well below inflation (perhaps 0.00%) and investors will need to consider more productive investment options.

What we've said for quite some time is we expect interest rates to be very low for quite a period of time. There's not just a short dip and we suddenly see interest rates go up. We think in the circumstances it'll be quite a while for real growth to pick up, let alone inflation to pick up. There'll be quite a lot of surplus capacity in the economy, unemployment, other resources not fully utilised, capital that could be sitting a bit idle.

The Covid19 experience saw the largest monthly gain in bank term deposits ever (almost double the GFC high!), understandably, but now investors will need to begin the process of assessing the most productive use of their investment portfolio relative to their own risk settings.

With considerable bias I encourage people to seek financial advice as they pursue a journey of increased risk.

EVER THE OPTIMIST

There's a lot to not like about China's political regime, but you have to admire their ability to Covid test seven million people in 12 days to monitor the development of a second wave.

I'd like to see NZ get a better grasp of tracking and tracing.

Then I'd like to see a global effort to accelerate sharing antibodies provided by those who have thus far been unfortunate to experience Covid19. Let's pay them for their donations!

ETO II

Maybe it was because none of us could go shopping, but imports were down last month yet exports kept moving, delivering a much-needed trade surplus of $1.3 billion.

If you can all keep your shopping down at the same level for say, 40 more months, then we might be able to finance the government's new debt obligations locally!

Seriously

HERTZ paid a $700,000 bonus to its CEO in the days prior to filing for bankruptcy protection.

Do they have so little confidence in being able to retain that person, or find another competent person that they would waste desperately needed cash this way?

A credible CEO would have rejected the proposal.

Investment Opportunities

New Capital Raising Offers

We expect more businesses to approach the market seeking investors willing to buy new shares and perhaps new bond offers.

Share offers usually offer price discounts compared to recent prices on the NZX. 

These offers will be fast moving and thus may have been and gone by the time you read the next Market News. The days of printed offer documents has surely ended.

We will broadcast news of these offers by email to our INVESTMENT OPPORTUNITIES group.

If you are not already on this list, and wish to be, please add yourself via this link: https://www.chrislee.co.nz/newsletters

Be sure to check the 'Investment Opportunities' box is ticked.

If company ABC invites new investment, we will email the offer to the Investment Opportunities group asking that if they wish to invest please respond promptly with a definite 'Yes' and an 'Amount'.

We will explain other details within each broadcast.

Thank you.

TRAVEL 

The Level 2 sees us operating from our offices again.

Please do not visit the offices without calling to make an appointment.

We will maintain a visitor register for the purposes of assisting the Ministry of Health with any tracking and tracing subsequently required.

We will greet people with smiles, but not the old method of handshakes and hugs.

Serving customer needs by phone and email has been very effective so we would encourage this as your primary method for communicating with us.

Would the addition of video calling be of interest to you?

Please let us know now if you'd like an appointment in your town, once we can travel again; we will hold on to such notes and get back to you.

Thank you.

Mike Warrington 

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