Chris Lee & Partners Ltd

Market News 27 March 2017

I was away last week on a ‘research trip’ (to check that Central Otago wasn’t badly damaged by the previous week’s rain), so, Kevin Gloag has kindly written much of this Market News.

Investment Opinion

Bank Rules continue to evolve

The Reserve Bank will soon undertake a review of the regulatory framework for setting capital requirements for New Zealand’s banks.

While many countries are still phasing in new global standards for bank capital adequacy, liquidity and funding stability, known as the Basel III standards, New Zealand has moved well ahead of the Basel timetable and our bank regulator is already looking to further strengthen the minimum capital requirements for NZ banks.

This is great news for investors and the NZ economy.

The objective of the Capital Review is to improve the soundness of the financial system and reduce the likelihood of bank failures and will examine three key components of the regulatory capital regime; the definition of eligible capital instruments, the risk weights attached to credit exposures and the minimum capital ratios and buffers.

When we held our seminars on the new Tier 1 and Tier 2 capital instruments two years ago we made the point that there was no standardised global model or approach for risk weighting credit exposures which made it impossible to compare bank capital ratios, and therefore relative bank strength, in different countries.

Capital ratios are a measure of a bank’s capital expressed as a % of its risk weighted assets (different loan types are recognised as having different risk profiles).

Banks apply risk weightings across all of their credit exposures to establish total risk weighted assets and then calculate capital ratios for each category of regulatory capital against that figure; Common Equity Tier I, Additional Tier I and Total Capital.

As we explained at our seminars while NZ uses very conservative risk modelling this is not the case in many other jurisdictions, a point that Reserve Bank Deputy Governor Grant Spencer highlighted in his recent presentation.

He used housing risk weights for selected countries (large banks) to illustrate his point and we were not surprised by the results of the comparisons he presented.

Housing loans account for about 60% of total lending by the major trading banks in NZ and Australia.

For regulatory capital purposes NZ uses residential mortgage risk weights of between 30% - 35% and over the past year the Australian regulator, APRA, has increased risk weights for housing loans for its banks from 16% to 25%.

Thus, NZ and Australian banks use amongst the highest (high as in good/conservative) risk weightings employed by any global bank.

The examples Spencer presented illustrate just how different the playing field is around the world in terms of regulatory capital interpretation and enforcement by authorities in different jurisdictions:

Housing risk weights in:

 Canada      - 7.2% (recall Mike’s comments alerting us to risk concerns in Canada)

 Denmark   - 13.9%

 Sweden      - 6.8%

 UK              - 11.7%

We understand that using housing risk weights of about 10% is common in the Northern Hemisphere which begs the question of how their banking systems will cope when the next recession in house prices arrives, as it surely will.

Because there are only two components to calculating bank capital ratios, the amount of regulatory capital and the total of risk weighted assets, the only way a bank can improve its capital ratios is to either increase its capital or reduce its risk weighted assets.

Australia has recently demonstrated the former.

In readiness for APRA increasing risk weights on home loans last year the major banks in Australia raised $23 million in new common equity, largely through rights issues, and also issued significant quantities of Tier I and Tier 2 capital securities.

European and UK banks have also issued large quantities of the new Basel III compliant loss absorbing bonds, referred to over there as “bail-in” bonds, but European regulators are not keen on the Basel Committee’s recommendation to adopt a standardised approach to measurement of risk weighted exposures.

Because of the perilous state of much of Europe’s banking sector you can understand their resistance to change as it would likely expose their banks as seriously under-capitalised although their reluctance to apply more realistic risk weightings, and test the true strength of their banks, seems likely to trip them up at some future point.

In addition to applying very conservative risk weightings for housing loans the Reserve Bank of NZ has introduced tighter standards for other lending categories including farm lending where it has raised the average risk weight by around 20-30 percentage points compared to the usual implementation of the Basel framework.

The cautious approach to risk management adopted by regulators in both NZ and Australia is cause for optimism in the soundness of our banking systems should difficulties re-emerge in global financial markets.

Not only are our risk weightings conservative but our banks also deduct certain items from capital that are permissible under Basel III standards so on a like-for-like basis NZ and Australia’s relative capital positions should be higher than their headline ratios suggest.

APRA estimates that the major Australian banks’ CET1 capital ratios would be 3.5 percentage points higher if calculated on a more internationally comparable basis and the Reserve Bank estimates that CET1 ratios for NZ banks would improve by 1 to 2 percentage points under the same scenario which positions both countries’ banks very favourably amongst global peers.

This sadly also discloses illusory aspects of bank strength reporting globally.

On a more cautious note and despite our conservative approach to risk modelling, relative to Basel standards, the Reserve Bank is cognisant of the fact that NZ’s economy and financial system has risk characteristics that set us apart from other countries and it is these domestic risk characteristics that will ultimately shape their regulatory approach.

These risks include our banks heavy exposure to residential mortgage lending and commodity export industries, which can be subject to considerable price volatility, and also our heavy reliance on external funding.

NZ is a net debtor country having run current account deficits for the past 40 years, with half the country’s gross external debt issued by our banks. (This is why Mike harps on about the need to achieve trade surpluses one day)

The Reserve Banks believes that reliance on external funding is an important vulnerability of the NZ system as demonstrated during the GFC when funding through oversea wholesale markets became very difficult to access.

(The resulting liquidity squeeze prompted the Reserve Bank to introduce Core Funding Ratio legislation which moved banks away from reliance on short term wholesale markets towards more stable sources of funding like retail deposits and long term wholesale debt).

With NZ’s house prices now officially the most expensive in the world, measured against what we earn and rental prices, the Reserve Bank’s concerns might be justified.

Either way the RBNZ is about to embark on an extensive review of the capital framework for our banking sector and consistent with its non-interventionist approach to banking supervision the Reserve Bank will be guided by principles that broadly promote conservatism and simplicity.

Spencer noted that while higher ratios are good for the soundness of the financial system they also increase the cost of funding the system so it is a matter of finding a balance in terms of economic efficiency.

Higher capital ratios would almost certainly mean more issuance of Tier 1 and Tier 2 bank bonds by NZ’s banks which could be good news for income investors with repayment of  ‘old style’ subordinated bank bonds by Rabobank, ANZ and ASB seeming likely over the next year or so, in my opinion.

On the other side of the ledger higher capital requirements should equal higher borrowing costs which couldn’t be a bad thing in today’s red hot property market.

Reminiscing times of good service

I suspect that at some point many of our readers will have experienced some form of selling behaviour from front line bank staff.

Westpac in Australia is currently facing allegation by the Australian Securities and Investment Commission that it breached its duty to act in the best interests of customers when it recommended they join the bank’s poorly performing BT Financial superannuation fund.

The bank’s chief executive offered up a feeble attempt to defend the action saying it was only “general advice” and therefore basically shouldn’t be taken seriously. ‘Don’t take our advice seriously’ – is that the message the bank wants us to hear?

The Aussie banks have had a tough time of it lately with all four big banks recently being fined for inappropriate behaviour in their wholesale foreign exchange businesses which included disclosing specific confidential details of customer orders to external third party traders. (Flash Boys anyone?)

ASIC has also filed proceedings against ANZ over the lender’s involvement in setting the bank bill swap rate and it seems the list goes on with investigations currently underway for several other suspected wrongdoings.

Disappointing but hardly surprising, let’s hope it stays across the ditch, although I understand the NZ Banking Ombudsman is always kept busy.

Bank culture in New Zealand has changed dramatically from several decades ago when banks were very customer focussed and were basically service providers ahead of balance sheet managers.

Making big profits wasn’t their key focus, as the BNZ demonstrated so well in the late 80’s when it almost failed under Crown ownership. Clearly a shift in the balance was required but the see-saw is looking tilted again, this time away from the customer.

Strategies like poaching other bank’s clients were unheard of 30 years ago and regarded as unethical or even foul play.

I worked for the BNZ for 6 years after I left school. In my day when you left school you either went to University or you got a job in a bank or a stock firm. (A true Mainlander)

The BNZ building where I started work is situated no more than 30 metres from where I work today and is now being converted into private accommodation and commercial rental space.

The building was home to over 60 fulltime staff when I was there in the late 70s, much bigger than they require today.

Back then the BNZ ran an agency, two days a week, in the small rural town of Fairlie and operated a full-time agency in Timaru, in addition to the main branch.

I did the twice weekly Fairlie run for a year or so and it was more like a community service than a money making exercise for the bank.  The main focus was on servicing the needs of people and businesses and we accepted transactions for all of the banks, not just BNZ customers. This shared service may need revisiting under the branch closing thrust that we are witnessing today.

It was in the days when most things were paid for with cash so we had to carry a lot of money with us to cash wages cheques for businesses and individuals and provide small notes and change for businesses. We carted the money around in a big leather bag in the boot of the bank car. (This is beginning to sound a bit ‘horse and cart, gold mining days’ – Mike)

There were no other banks in Fairlie at that time so we cashed everyone’s cheques and provided other bank’s clients with the same level of service as our own.

It provided a great service to a small community and wasn’t about profits, although you might argue that while it demonstrated excellent client first behaviour, 10 year later the BNZ was broke.

The Fairlie model wouldn’t pass any of the business viability tests today, particularly security and ’orange vest’ safety standards, but more importantly it wouldn’t be entertained because, in the case of our Australian owned banks at least, bank priority today seems to be more about sales,  profits and shareholder returns than customer service.

Certainly by global comparison New Zealand’s major trading banks are very well behaved although the demands and influences of their Australian owners have been rather negative for their cultures and client service in my opinion.

Anecdotal evidence would suggest that the same deterioration in client service, in favour of pleasing shareholders, is evident in our insurance industry with State, AMI and NZI, now all owned by Australian multinational IAG, the most obvious examples. (A client reports that AMI are forcing costs for methamphetamine lab risks on to her for the home she lives in?)

Greed breeds corruption and corruption, proven not just alleged, has become standard practice in many of the world’s major investment banks and the regularity of their cheating is disgraceful.

What is even more disgraceful is that they just pay the fines and move on as if nothing happened; no-one seems to get sacked or go to jail, they’re just straight back to the business of making money for themselves and their shareholders with only a modicum of attention paid to client service.

Keep your eye open for a sales focus at the bank next time you visit them for service (if you still have a branch!).

Old style ‘customer focussed’ banking is well and truly dead and buried. (But it still exists in the financial advice arena – Mike)

Tax – Michael writes:

Gareth Morgan’s (The Opportunities Party) discussion about tax and the Universal Base Income (UBI) got me thinking, which is what he’d like us all to do. I’d encourage everyone to react to Gareth in this way, join in the debate rather than pretending the subjects don’t exist.

You don’t have to like Gareth, or cover your cat’s ears, to participate in debate about how your country is governed.

My thinking was extended by a good article on the subject by Laura Pennacchi in the Social Journal (Europe).

Last week Andrew Little called for a new review of the tax system. My immediate reaction, only heard by the windscreen of my car, was ‘for goodness sake we have only just had a major review’ (The Tax Working Group in 2012).

However, on reflection I think the TWG left the matter of tax on capital unanswered and the potential for ensuring a minimum cash flow for all adult citizens demands that we address how we would collect more tax from those with ‘more money than they could possibly need’.

I am a fan of providing incentives for good behaviour, meaning the chance to win if you behave in a desirable way and not excessive cash subsidies to have you move in remote control. So, a UBI plus a right to keep income above that should encourage 95-97% of the able population to be productive.

Every single able bodied person willing to be productive should be able to receive more cash flow than an able bodied person who always asks Work & Income NZ to finance their lives.

The Pennacchi article described how Milton Friedman had once described the potential for a negative tax rate for the first layer of tax assessment (marginal tax rate), thus she argued, being similar to a UBI. It was this information that brought me to agree with the appropriateness of Andrew Little’s call for another review of the tax framework.

Arguably our ‘Working For Families’ structure is a similar tax reducing mechanism at lower income levels for those who are working and not sitting on the couch. This was introduced by a Labour government so I think the Labour Party should be careful before criticising Gareth Morgan’s debating (on all subjects) out-of-hand.

Lower tax on the initial marginal tax rate, perhaps even to zero, benefits the majority but this means it benefits me, which Gareth doesn’t want. A UBI gets the initial $10,000 into the hands of the young and yet to be employed, or employed on modest incomes and observing my 23 year old son I (occasionally) feel sympathy for him as he confronts relatively high expenses at a time of relatively low income.

A lower tax rate helps me and my son, but an agreeable UBI structure probably collects more tax from me and gives it to my son (something that is happening in-house anyway – Ed).

I am not a tax adviser, nor have I read enough on the matter the reach conclusions, but I like the presence of the debate and hope to see Andrew Little, Bill English and Gareth Morgan in a televised debate on the matter pre-election.

Investment News

RBNZ MPS – Last week’s Monetary Policy statement by the Reserve Bank was all very predictable and broadly unchanged from the one it delivered in February.

The RBNZ shrugged off recent soft GDP data and a slight uptick in inflation as “due to one-off effects” and maintained its neutral tone repeating that “monetary policy will remain accommodative for a considerable period.”

No surprises here with the RBNZ also noting a slight decline in the value of the $NZ, but as usual stated that it needs to fall further, and acknowledged the recent slowdown in house price growth but, like the rest of us, is uncertain whether it will be sustained.

Travel

Michael will be in Tauranga on 18 April (morning).

Kevin will be available in Christchurch on 30 March.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

David is visiting Palmerston North and Whanganui on Wednesday 29 March and New Plymouth on Thursday 30 March.

Anyone wanting to make an appointment should contact us.

Kevin Gloag

Chris Lee & Partners

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Market News 20 March 2017

Martin Hawes wrote a comment recently about the dollar saved being more influential than the return on that dollar saved.

I agree.

This is why I commented last week that in my view the government is doing the right thing with long lead times, especially on superannuation policy.

A 20 year lead time for a forty five year old gives them sufficient time to save enough cash to self-finance the two years between 65 and 67 years of age. Roughly speaking two years at $19,000 (single person’s National Super pension) implies additional savings required of $36.50 per week.

Maybe the possible tax cuts (bracket creep) will provide a proportion of this $36.50?

The government’s decision to allow access to Kiwisaver from 65 years of age was appropriate in my view, as opposed to the defined term ‘retirement’.

45 year old’s with Kiwisaver still have options to retire at 65 years of age. 45 year olds have powerful incentives to still join Kiwisaver because a person earning 45,000 or more will capture at least $36.50 per week from the contributions made to them by the government and their employer.

Children the age of mine have no excuse and no reason to complain about the policy change.

Learning the science of saving is far more important than the art of investing.

INVESTMENT OPINION

Debt – The fear of the next crisis is appropriately linked to excessive debt.

We in the financial advice community talk about it often and it makes complete sense to all of you.

It makes sense because you have been savers of money, which you manage into investments with our help and this provides either recurring income or a battery pack of financial support for your future, or both.

So, this latest item will not surprise you; The Bank for International Settlements has announced that it is concerned that the next banking related crisis will come from Canada.

Yes, that moderate nation that Kiwi’s typically feel an affinity with.

The BIS declares that ‘Canada’s addiction to real estate speculation has driven Canadian consumers to record amounts of debt’.

Does that sound familiar?

It should because many New Zealanders have behaved the same way and in response our central bank has progressively introduced new regulations to try and curb these undesirable behaviours.

The Reserve Bank of NZ has copped criticism for its actions but in my opinion, and I suspect that of the BIS, they are doing the right thing by trying to influence excessive and unproductive debt use in our economy.

The ratio monitored by the BIS, which Canada has triggered, is credit growth 10% faster than the economy over a sustained three-year period. The gap is currently 17.4%.

China sits in the same zone but the BIS hopes that their much higher economic growth rate will help them to avoid a crisis. There are plenty of financial analysts who don’t share the BIS confidence about China.

I was surprised to have Canada placed on my radar as a source of concern, but the driver (debt) was no surprise at all.

EDUCATION CORNER

Bond Pricing – ‘How does bond pricing work?’ several people asked.

Mathematically is the first word that pops into my head. Calculating the dollar price on a bond with a defined maturity date is science, not art.

For this exercise I have focused on bonds with maturity dates. Perpetual or conditional repayment dates are handled differently in terms of pricing (reaching an agreeable dollar price for buying and selling).

I have also conveniently decided to ignore tax. Just imagine you are sitting in Bermuda or a similar tax exempt location of your choice. Tax simply complicates the tutorial.

Back to bonds with defined maturity dates.

The movement of yields on markets (Yield To Maturity or YTM) is a little artistic but once a buyer and seller agree to a YTM at which they will transact then the science can begin.

A maturing bond typically has a series of defined future cash flows, being each of the interest payments (calculated from the Coupon interest rate) plus the maturing principal amount (usually $100).

If we were sitting in front of a white board I would draw a graph for you with an X and Y axis (X = time, Y = $). You would see a sequence of small cubes and then a single large rectangle as the last item.

$100 invested in a five year bond with a 5.00% p.a. interest rate, paid semi-annually, would present $2.50 cubes spaced out along the X axis (twice each year) and $102.50 on the date of maturity.

Once I apply the Yield To Maturity (YTM) that was agreed from the market between buyers and sellers I can calculate the amount of money I should pay for this bond today by discounting each of the future cash flows back to a value as at today.

An example of this Time Value of Money concept (discount future values back to a today value) can be seen where a $100 deposit in the bank at 5.00% has a value in 12 months of $105. So, a Future Value of $105 (12 months) and a YTM of 5.00% both defines a Present Value of $100.

Time is influential in the calculation. This means that the Present Value of each $2.50 interest payment over the five years ahead is different when viewed at their Present Value today.

In my bond example above (five years at 5.00% Coupon rate) if it happens that the YTM is 5.00% then the price I pay today is $100 (excluding any accrued interest mid cycle).

If the YTM is 4.00% (lower than the Coupon) then the price is about $104.50.

The price premium reflects the difference between the Coupon which will be unchanged at 5.00% and the YTM of 4.00% that the new investor has agreed to for the remaining five years. The buyer must pay a premium to buy the additional 1.00% of cash flow.

If the YTM is 6.00% (higher than the Coupon) then the price is about $95.70.

The discount reflects the difference between the Coupon which will be unchanged at 5.00% and the YTM of 6.00% that the new investor has agreed was necessary for the remaining five years. The buyer receives a price discount to gain the additional 1.00% return.

Coupon interest rates are important because this is what appears in your bank account, but a Yield To Maturity is more important because it defines the return on your money over the period.

On a new issue the Coupon and Yield To Maturity are usually the same (whew, no mathematics required – Ed).

Try not to let Accrued Interest distract you if you like to check the maths of yield versus price. If you buy a bond from the market and pay for Accrued Interest as part of the price this will be returned to you when the next full interest payment is made to you.

The majority of the yield versus price calculation relates to the Capital Price (excluding Accrued Interest) of the bond.

Questions are welcome.

I would discourage anyone from burning too much mental energy on this pricing subject because it doesn’t carry as much weight in the investment process as choosing good assets (risk assessment) and identifying good returns (Yield for risk)

INVESTMENT NEWS

FOMC – The US central bank’s Federal Open Market Committee has, as expected, increased the Fed Funds rate (similar to NZ’s OCR) by 0.25% to now target 0.75% - 1.00% on overnight funds at the central bank.

The market reacted with surprise with the tone of the statement, which was described as ‘dovish’ (i.e. not as forceful for additional interest rate hikes as expected).

There is an irony in the Fed bringing forward its interest rate hike sequence (previously the market expected June for the next hike) and having the markets react by declaring them to have taken a soft approach.

It will remind the Fed’s governors that they are not here to satisfy financial market participants; their focus is the bigger picture of inflation, economic activity and financial stability.

Financial markets had fully factored this interest rate hike into market pricing, leaving the Fed with a ‘free hit’; go now and nobody will be disrupted.

Inflation is reported to be drifting higher – interest rates up.

Economic activity is generally in good shape – interest rates up.

The market was ready for the change – market stability means ‘stick to the plan’.

I would therefore describe last week’s US interest rate hike as ‘nothing to see here’. Interest rates are being lifted, on a slow schedule.

Relocate– Recently when I speculated that if Sky TV relocated to the Bahamas they might not be captured by the harsh stance adopted by the Commerce Commission I hadn’t contemplated other businesses that might be thinking the same thing.

The fact that I was predominantly being ‘tongue in cheek’ now looks almost naïve.

Last week’s news item was from NZ’s largest taxi company (combination of Auckland Co-Op, Wellington Combined and Christchurch’s Blue Star), those now carrying the ‘Blue Bubble’ signage.

The head of their business was addressing the threat presented by Uber and the silent accusation that Uber incurred less domestic tax liability than the local taxi services.

He closed his interview with the potential option of relocating their businesses outside of NZ.

This immediately aligns with the stories we have all been frustrated by where international businesses, such as Apple, locate themselves in one place but reallocate revenue to low tax jurisdictions many miles away from the point of sale.

A lower tax burden might result in higher relative returns for shareholders and if Steve Tew is a good negotiator it might yet mean higher revenue for the NZ Rugby Union from ‘Sky TV Bahamas Ltd’, than the lower revenue that I discussed recently.

But, what a failure it would be on the part of our regulators and tax collectors.

Iceland – continues to be an example of the merits of honesty with respect to excessive debt.They acknowledged their financial problems early and it resulted in very large defaults in the banking sector (reduced repayment to lenders). The Icelandic government elected not to continue the charade by injecting large sums of tax payer money into the banks.

Iceland was forced to put capital controls in place to try and ensure that the movement of money in and out of Iceland was not disruptive to the economy.

The government now feels the economy is stable enough to remove the last of those capital controls and to return the foreign exchange market to a free floating state.

The pricing of the Icelandic Krona has increased a little in reaction, confirming a wider view that the economy’s recovery from the 2008 crisis has been well managed.

Compare this with the ongoing saga around Greece.

Ireland – Interestingly Ireland has also returned to a robust economic state following its use of post crisis support from the European Central bank and some austerity measures.

However, their story is quite different from Iceland and to be blunt involves capturing more than the world might think was its fair share of corporate tax from the various international businesses that like to describe Dublin as their head office!

AML – The Anti Money Laundering legislation has been expanded to capture most other industries that arrange large transactions, namely: lawyers, conveyancers, accountants, real estate agents, betting agencies and those who accept large cash transactions.

The AML imposition on our sector was large and it was frustrating to sit and watch the property market in particular continue unrestrained for three more years, when this asset was just as likely to be involved in money laundering as any other.

Our readers are becoming reasonably familiar with the AML obligations and we are grateful to those who delivered the information that we were obliged to have.

The government’s next move should be to re-focus on the idea of a centralised AML compliance register from which the compliant AML person can share that confirmed status. I think such an institution must be Crown controlled.

Until such a centralised service exists the independently coordinated AML obligations (of each business in each industry) will place a drag on economic activity and deliver rising business prices as a result of the AML obligations undermining competitiveness (who wants to shift business given the chore of doing so?)

This brings me back to my view that the government should insist that all entities (not natural persons) should be obliged to be registered, just as companies are. Then MBIE or similar could coordinate this AML register.

Perhaps IRD could coordinate the AML register for natural persons.

Then ‘simply’ get the MBIE and IRD computers to talk to each other.

Problem solved. (Of course – Ed)

Politics – There is always plenty of global politics to talk about but two caught my attention last week for different reasons.

Turkish politicians meddling in the Dutch election was seriously concerning to me. The European Union has long wanted Turkey to become a member but this looks impossible now.

The other item was an optimistic one; after placing immense pressure on the Indian economy with the removal/replacement of cash, cash that seemed to fuel an excessively large black market, Prime Minister Narendra Modi has had his authority enhanced with electoral victory.

Modi’s courageous governance has been supported by the Indian people and his party now looks likely to be able to govern alone in reward for doing the right thing by the country as a whole.

I know the changes to India’s cash were just one small part of what Prime Minister Modi has achieved but its impact globally may be disproportionate. It reinforces why other nations should be tackling the removal of large currency notes from circulation and enhancing wider tax collection across the economy.

New Zealand’s tax collection is pretty good in my view (broad and fair) but manipulation is incessant so IRD has an ongoing obligation, in my view, to promote change to the government.

Currently it would be nice to see personal taxes slightly lower, slightly higher tax collection from cross border business entities and possibly slightly higher sales taxes to retain more income from tourism spending.

I saw that the IMF was recently encouraging NZ to have a capital gains tax but I recall that our own Tax Working Group rejected the need for this and questioned its effectiveness.

Gareth Morgan will help the debate because he has announced a policy of cutting personal income taxes and increasing tax on assets to capture the wealthiest more.

All regulators should take note of the success of Modi’s courage.

BIS on Blockchain – Demand to be involved in the development of Distributed Ledger Technology (such as Blockchain) is sky-rocketing.

A little over a year ago a group called the Hyperledger Project was founded with the intent of bringing together the many users and likely users of DLT (Blockchain) technology in business and banking.

They are famous enough to have their own Wikipedia page, from where I borrow a useful description of their intention: to develop open protocols and standards, by providing a modular framework that supports different components for different uses.

Membership of the project is now at 122 according to Executive director Brian Behlendorf and the story that caught my attention was of some central banks joining the project.

The Bank of International Settlements (BIS) is also watching closely commenting on the risks and merits of DLT development. They clearly want central banks to be deeply involved in the development but to retain control of the risks that could disrupt financial stability.

The BIS state the following within the summary of their report:

‘Distributed technology could become a game changer for payment, clearing and settlement activities if fintech companies and financial institutions can leverage the technology to meet demanding legal, operational and risk management requirements’

‘Central banks have traditionally played an important catalyst role in payments and settlements,’

‘This report will help central banks, other authorities and the public identify the risks as well as the benefits associated with the emerging technology, which could be the basis for next-generation systems.’(Emphasis is mine)

Central banks however are not rushing to establish crypto currencies (like Bitcoin) as they retain a healthy suspicion about their use in local and global settlement.

There is no doubt that DLT technology (Blockchain) will move from our consciousness to our participation rather quickly.

At this stage I have no concept of how to invest in this development but I suspect one thought will be to look out for businesses who decide against adopting the technology, when able to have done so, because they might find themselves underperforming their peers faster than they realise.

EVER THE OPTIMIST – The fact that the US Federal Reserve feels comfortable increasing interest rates on a faster schedule is good news about the evolving potential of the world’s largest economy.  

If this plays out as the Fed believes we should all be pleased.

ETO II – If I had to lose money on my Wynyard shares then holistically I am pleased as a tax payer that the NZ Police elected to buy back the software that was developed by them (and purchased by Wynyard) at a buyback price of $1.

Investment Opportunities

There are still plenty of bonds exceeding 4.50% on the secondary market (see the Current Investments page of our website) and we expect the pipeline of new issues to continue in most months of the immediate future.

All investors are welcome to join our ‘All New Issues’ email group if they wish to hear about such offers as they are announced.

Travel

Michael will be in Tauranga on 18 April.

Kevin will be available in Christchurch on 30 March.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

David is in Palmerston North and Whanganui on 29 March and in New Plymouth on 30 March.

Anyone wanting to make an appointment should contact us.

Michael Warrington

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Market News 13 March 2017

I compliment the NZ Government on policy discussions that aren’t confined to the three-year electoral cycle. (Superannuation in this case)

They seem to have made it the season for disclosing the key planks pledges, if re-elected, so there should be some more interesting releases over the next three months over-lapping the budget in May.

Perhaps they could offset some savings in National Super by offering a gradual decline in the tax rate of Kiwisaver funds to further encourage the young toward higher savings ratios? (but not the corporate tax rate paid by the fund manager who is collecting excessive fees – Ed)

Perhaps the government could also consider offering annuity like (principal and interest payout) government bonds/deposits to people exiting Kiwisaver so as to provide funding to the Crown and reliable stable cash flow to the retired.

Modest reductions in the government’s superannuation liability, increases in the scale of the Cullen Fund and modest increases in the savings rate of Kiwis, should ensure that this country’s retirement lifestyles continue to be affordable, unlike the majority of the world’s population.

INVESTMENT OPINION

Market Manipulation – A small step forward with improving market conduct occurred recently; the High Court delivered  judgment on a case of market manipulation.

If you are an avid reader of Court findings and would like to gain a tertiary understanding of things that influence securities pricing then you may benefit from reading the judgment by Justice Venning in the case ‘FMA vs Warminger’ which includes 10 allegations of manipulating markets (under Section 11B of the old Securities Markets Act, replaced by the Financial Markets Conduct Act).

Mr Warminger was found guilty on two of the ten allegations (certain trading in F&P Healthcare and in A2 Milk shares) and the judgment explains the behaviours that were deemed to have been market manipulation.

We have a copy of the judgment and are happy to forward it to those who are interested.

For those who don’t enjoy such a depth of information I offer a few thoughts based on what I read.

I feel reasonably well qualified to offer an opinion as a result of my time in wholesale financial markets having witnessed a very high volume of trading (buying and selling) in financial markets across a very wide range of products, client types and locations.

Mr Warminger isn’t the only person over the years to have traded as he did.

I know some financial market participants from the 1980’s share market era who will be more than a little relieved that activities from that time are well outside the Statute of Limitations for allegations of manipulation.

This feeling of relief confirms that the trend for financial market conduct is moving in the right direction.

For the record; given the subtlety of some behaviour in financial markets I applaud Justice Venning’s work on this case and specifically the circumstantial clarity that he achieved and the appropriateness of setting a high standard of evidence before a judgment of manipulation can be found.

I think Justice Venning developed a very clear understanding of Mr Warminger in his role as a fund manager. He may even have found himself pondering the possible behaviour of his own fund manager(s) and broker(s) (if he happens to invest directly himself).

After reading the judgment I also have a clear understanding of the approach that Mr Warminger took to participation in the market and nothing about the situation surprised me, although one behavioural trait disappointed me greatly.

Mr Warminger’s objective was, as it should be, to always pursue financial gains for his clients (as a fund manager) and to minimise losses when exposed to them. Our financial market laws rightly insist that he doesn’t mislead or deceive to manipulate other market participants as he tries to achieve his outcomes.

Financial markets are not a place where people hold hands and sing ‘Kum ba yah’ striving to achieve a fair distribution of value. Markets are confrontational and outcomes follow a complex blend of information, emotion and an ever-changing demand and supply balance.

With this in mind all participants must approach financial markets cautiously. With more than a little bias from me, this caution is another reason the public should engage a financial adviser when investing their savings, and if they find one who has spent time in financial markets all the better.

A substantial proportion of the FMA’s allegations were linked to Mr Warminger continuously changing his demand and supply profile. I don’t find this behaviour unusual for traders and for some large fund managers because they are managing large balance sheets and circumstances change.

To some extent I think the FMA may have overplayed their hand in this case but as I discussed above I think Justice Venning’s skill allowed him to address this potential and recognise any tenuous allegations, even if he understood why the FMA brought them to court in the first place.

When I reflect on the two items where Mr Warminger was found guilty of manipulation (trading shares in F&P Healthcare and in A2 Milk) I am less troubled by the 2-3 cents value being debated (in the case of FPH) and was more focused on the breach of good faith between Mr Warminger and the brokers that tried to provide him with a service. The court was also focused on the principle of manipulation, not the few cents of price movement.

As an investor I can decide whether or not to buy FPH shares at $4.35 (a price point discussed in the case), or to wait for a different price, even if I conclude the price has been ‘forced’ up to $4.35 (without knowing why).

However, to learn that Mr Warminger appears to have taken advantage of information supplied by service agents and then used it against them in the market is an intolerable breach of good faith in the relationship in my view (albeit that this information advantage happens the world over, including by those using automated trading by computer algorithm – try reading the book Flash Boys).

Just because something happens elsewhere doesn’t make the behaviour appropriate, it is not.

In the case of the FPH allegations it is my view that the evidence disclosing this breach of good faith is what made the finding of manipulation easier for the court to conclude (Paragraph [150]) for trading in FPH shares.

In this case it seems to have been large investors who were taken advantage of by the price movements but it is a fair assumption that retail investors using unadvised online broking services are often exposed to these small market price movements without knowing why they are occurring.

Again, engaging with a financial adviser helps investors to discover and understand some of these micro price movements in the market.

Generally the other allegations from the FMA centred on a debate about the appropriateness of trading on market at particular prices when some of that trading seemed illogical to the regulator, other than for the purpose of manipulating an outcome that best suited Mr Warminger’s funds.

On one such occasion (an A2 Milk allegation) guilt was found but the other eight allegations made too many assumptions and failed to meet Justice Venning’s test of proof.

I am not aware of any follow up cases relating to what the FMA has learnt here but aspects of the evidence suggest that the FMA believes others may have colluded with the market manipulation. Justice Venning was logically never happy when assumptions were made and he discounted such speculation, which highlights for me why the term ‘burden’ is used in ‘burden of proof’ for a prosecutor; sometimes establishing evidence to support a clear perception is difficult.

The FMA should not necessarily conclude that their assumptions were incorrect in this regard, just that some motives and behaviours are very hard to prove in a court of law.

The NZX should be interested in any delayed reporting of transactions and the impact this secrecy has on other market participants. Paragraph [127] describes a late reporting to the NZX of a completed transaction. Is non-disclosure (delayed) worse for a market place than disclosed aggressive trading?

I doubt that the FMA will want to prosecute late reporting for this case but I certainly hope that they discuss it with the NZX and consider the need for defined time frames for reporting transactions to the market.

NZX firms always have staff online (NZX systems) so reporting is easy to achieve.

Reflecting on what I read, and understand, I would be surprised if Mr Warminger appealed this judgment.

I further think the FMA would be wise to propose a modest fine in this case to reduce the financial merit of any appeal and to try and cement into case law our first definitions of what will be considered manipulative behaviour in financial markets.

This alone would help improve conduct by other people who frequently set prices in financial markets.

Post Script – After writing the paragraph above the FMA announced that it was laying insider trading charges in a different case, against a different person with respect to trading in EROAD shares.

We have learnt that legal process is very slow but if the FMA case for insider trading is proved and guilt is found then it will provide another useful strand for improving public confidence in financial markets.

We have grown tired of watching share prices move significantly in the 48-72 hours ahead of important announcements. They have become important indicators of pending news!

It will be nice to witness a behaviour change based on the now far more vigilant monitoring of CSN based activity by the NZX and FMA.

Fees and Returns – Last week’s Buffett Letter prompted me to read subsequent mail in my letter box (yes, real mail, not email or Facebook broadcasts) from my old superannuation providers (I am locked in until 60 years of age!).

Out of fairness I’ll leave the provider unnamed. I have complimented them in the past for cutting their fees  from 1.50% per annum last year to 0.85% now.

Buffett highlighted the very damaging effect of annual fees within our industry when boasting about how far ahead he is in his performance bet with hedge fund managers (index funds versus managed funds).

Warren Buffett puts fees in perspective by complimenting John Bogle and his Vanguard Fund which charges 0.05% per annum on its largest funds (unsurprisingly most of them are very large now – Ed). So, my provider only has 0.80% to trim for me to be internationally competitive.

Next I was obliged to check investment performance to understand the real value for money of the fund manager in return for their fees; I used the MSCI global share index to measure my ‘International Share Fund’ performance.

My fund – 12.66% per annum over the past five years and 4.26% per annum over the past 10 years.

The MSCI index – 13.76% per annum over the past five years and 6.26% per annum over the past 10 years.

Over five years my fund manager generated some added value (0.40% of the 1.50% per annum fee charged to me) but over the 10 year time frame the performance is a clear 2.00% below market, being 0.50% per annum on top of the 1.50% fee.

Over ten years this means I have missed out on 21 cents for each dollar that was invested as at 2006.

That theoretical 2006 dollar, if returned to me now, after 10 years of management, would be $1.62 (less tax) but the market tells me it should be $1.83 (less tax).

I don’t know about your impressions but in my view the NZ lifestyle is becoming quite expensive (a client tells me it is 35% more than living in Japan by his measurement) and that extra 21 cents is likely to be very important to most savers.

The message, as ever, is to always seek ways to keep annual fees to a minimum because those fees really do have the large damaging impact that many, including Warren Buffett, draw to your attention.

EDUCATION CORNER

Bond Pricing – after the description about bonds a couple of weeks ago several of you asked us to explain how bond pricing works.

Mmmm, this would be easier if you were in a room with me, armed with a white board, but I am up for trying to describe it in a few hundred words. It will be a good test for me.

I have run out of room in today’s Market News so I’ll tackle this item next week.

INVESTMENT NEWS

US Payrolls – February’s US non-farm payrolls exceeded 200,000 again (235,000) and the market’s reaction (increasing long term interest rates) implies that it is almost certain the US Federal Reserve will increase the Fed Funds rate (equivalent of NZ Official Cash Rate) this week.

The yield on US 10 year Treasuries lifted back above 2.50% and seems a reasonable chance to make its way toward 3.00%, a level last seen in 2014 when yields were still declining.

As was the case pre Christmas 2016 I think any additional returns offered up will be well received by fixed interest investors.

NZX – The NZX has appointed Richard Bodman as a director on its board; they have my compliments for grabbing such a high quality person whilst he was available.

Disclosures – I own a few NZX shares and have worked with Richard in the past. There is no person in NZ with stronger industry compliance skills and integrity to go with it.

Richard Finished up a long career with First NZ Capital recently and took a break before focusing on what appealed to him next. He has told a few people about his preferences, which clearly include governance aspirations and unsurprisingly he is being approached with new opportunities.

As I write I am wondering why The Financial Markets Authority hasn’t already nabbed him for their board of directors.

Richard is the chap I referred to recently, but did not name, as available to assist businesses in our sector from a compliance perspective. If you were tempted to pursue him then clearly you shouldn’t delay as his dance card is filling quickly.

If you are a Chairperson of a financial markets industry entity, and by chance you read our newsletters, then you’d find it hard to better having Richard on your board. If you want to reach him I expect you’ll be able to find him but if not I am happy to quietly provide you with his details.

As an NZX shareholder I am pleased.

As a friend I am pleased.

As an industry practitioner I am pleased because Richard’s presence on the NZX board will ensure further progress with market integrity as you read about above with the market manipulation case and the pending insider trading case.

Very few, if any, of you will know Richard but as market participants you should be pleased about his involvement with industry governance and its efforts to build public confidence in financial markets.

Heartland Bank – HBL received very strong interest from its shareholders wishing to buy more shares in the placement. Total demand of $62.117 million dwarfed the $20 million shares on offer.

Accordingly, those who applied for more shares will receive approximately 32.197% of the volume of new shares sought.

HBL directors will be pleased to see this evidence of support for the bank’s current strategies and performance.

EVER THE OPTIMIST – I see that one of my speculative comments was proved accurate recently (1:10 is hardly something to be proud about – Ed) - the ‘dreadful’ summer that we have been having has indeed allowed farmers to hold stock back from the market and to now enjoy ‘record high pricing’ for certain lamb cuts.

ETO II – Last week NZ company EROAD became the first registered provider of a comprehensive ‘permanent in-cab hardware’ (Electronic Logging Device) required to meet US federal rules for recording of a drivers’ hours of service.

There are other more limited service providers on the register but at this point none offer the full suite of services that EROAD does.

EROAD has thus delivered upon what it described in its capital raising as ‘first mover’ advantage at this service level, which you’d think a small company from NZ would need to achieve, so as to stand out.

Now, EROAD must secure sales traction.

Investment Opportunities

Meridian Energy – The outcome from the Meridian bond offer confirms our view that patience is likely to be rewarded, more often than not.

MEL issued their new seven year bond last week, maturing 20 March 2024 with an interest rate set at 4.88% p.a., paid semi-annually. The yield was influenced a little higher by the chatter in the US about robust employment data (confirmed) and the potential for an earlier interest rate hike than previously forecast.

This bond will begin trading on the NZX soon making it available to investors who may have missed out during the new issue process. We are happy to help with buy orders.

Thank you to all who participated in this offer.

Transpower – TRP investors also enjoyed the same market conditions.

TRP issued their new five-year bond last week, maturing 16 September 2022 with an interest rate set at 4.069% p.a., paid semiannually. (There had been a risk of it falling below 4.00% when the deal was announced).

Yes, some borrowers like to work to three, or four, decimal places. I guess on very large sums it counts but it otherwise looks odd when 4.07% would have made the most sense to retail investors.

Again, this bond will begin trading soon making it available to investors who may have missed out during the new issue process. We are happy to help with buy orders.

Thanks also to those who participated in this offer.

Travel

Michael will be in Tauranga on 18 April (morning).

Chris will be in Auckland on March 20, flexible about where he can meet investors.

Kevin will be available in Christchurch on 30 March.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

David is Palmerston North and Whanganui on 29 March and New Plymouth on 30 March.

Anyone wanting to make an appointment should contact us.

Michael Warrington

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Market News 6 March 2017

March again, seriously?

INVESTMENT OPINION

Financial Advice - I doubt that many of you are keen on this, but, the financial markets regulators have launched a review of the financial advice laws and draft material indicates that they wish to change some of the framework and many of the labels.

I’ll save you from the detail for now as there is plenty of water to flow under the bridge yet, but I will say that I am a fan of simplicity and clarity and what I have seen so far doesn’t meet success under these two tests.

From your perspective I suggest that you retain the thought that the intent is good even if the smoke makes it hard to discern a good outcome.

Our definition of financial advice is clear: ‘a recommendation or opinion to buy, sell or not’, but our definitions of who is a financial adviser and for what products leaves a lot to be desired.

It is clear that lobbyists continue to have some success in pretending that there are different types of financial advisers but if you re-read the sentence above I don’t see how this is possible.

If your job description enables you to act on the definition of financial advice with a customer then you are a financial adviser, full stop. If you are a financial adviser then in my opinion you must operate under the industry’s Code of Professional Conduct.

The conflict lies in whether a financial adviser is restricted or unrestricted in what they can provide financial advice on. (e.g. an ANZ financial adviser within a branch cannot be expected to provide financial advice on a BNZ product, but I can comment on both). This situation is easy to resolve in disclosures.

Side bar – I think our Code of Professional Conduct is messy. It still needs more simplification. I am not holding my breath though as the most recent review added to complexity. The Hippocratic oath from the medical sector remains the benchmark, which appears to be about 300 words whereas ours is more like 300 paragraphs.

As I say, I suggest that you just stand on the bridge and let the water flow. Once new terms and regulations are defined we shall explain them and their impact to you.

We hope that impact will be modest.

Interestingly, in the UK they too have been reviewing their financial advice definitions. They appear to be moving to a definition of financial advice that is more consistent with that in NZ and away from the much broader ‘advice on investments’.

I know that a lot of what we do when communicating with clients relates to the financial advice relationship, but I am pleased that we operate under a tighter definition because recommendations to ‘buy, sell or not’ should be able to be tied back to the work supporting those conclusions.

Financial Markets Conduct– I see the High Court has reached a decision on the market manipulation case against a fund manager (name not relevant).

I plan to make some time to read this case once I get a copy of the judgment and I am sure I’ll end up expressing an opinion on the subject next week.

The situation has very little value impact on you as investors directly but it helps the Financial Markets Authority with respect to setting ‘conduct’ expectations of financial market participants serving you.

INVESTMENT NEWS

Election year – There always seems to be an election on somewhere in the world although they haven’t typically dominated my investment consciousness, especially not in NZ, because our moderate attitudes on both sides of the house are not all that disruptive in a global context.

However, the tone of the global electorate is changing and it seems to be happening reasonably quickly, where success encourages a greater following, followed by even more success.

Some of the political themes that are gaining such success are giving pause for concern given the quite strong changes that are being proposed. At present President Trump is the most visible example of this but others having taken confidence from his success and now many nations are facing stark changes in ideology.

I was considering occasional articles about some imminent elections in Europe when I decided to look up the list of elections in 2017. Here is the surprisingly long list:

Albanian parliamentary election;

Armenian parliamentary election;

Bulgarian parliamentary election;

Czech legislative election;

French presidential election;

French legislative election;

German presidential election;

German federal election;

Hungarian presidential election;

Liechtenstein general election;

Dutch general election;

Northern Ireland Assembly election;

Norwegian parliamentary election;

Serbian presidential election;

Slovenian presidential election;

Italy averages an election most years so you can probably add them in.

India;

South Korea;

Singapore;

Argentina;

Chile.

Oh yes, then there’s little old New Zealand.

Always looking up for the next election is a bit like swimming in the waves, one gets a bit punch drunk from constantly riding one wave then jumping to your feet to make sure the next wave doesn’t knock you over. 

Historically I haven’t let elections change my approach to investing all that much but at present the potential for a significant move in political ideology warrants monitoring more closely.

With so many significant elections during 2017, especially France and Germany, and the risk of snap elections in some nations under political duress (I am thinking of the UK) it reinforces my view of adopting a patient stance when making each next investment decision.

I am not trying to highlight any particular concerns here, just that there may be an unusually large change to global governance during 2017 and that patience is likely to be rewarded.

ComCom – Suncorp has begun its lobbying for why it should be OK for them to buy Tower insurance if they launch a full takeover offer and compete with the offer from Canada’s Fairfax.

Given the ComCom stance on Sky TV and presumably a ‘No’ for the proposed media merger, which interestingly involves a different entity by the name of Fairfax, the Suncorp proposal should have no chance of regulatory approval.

Suncorp explains that buying Tower would only see them with 25% market share in the insurance sector, ‘much less than IAG with 45%’, promptly disclosing 70% market influence for the two operators. 

Where have I seen 70% market share before recently?

Oh yes, that’s right, BP and Z Energy when I roll up to pay too much for my fuel in Wellington.

I see that last week ComCom also decided to reject a proposal for the consolidation in the fire alarm and sprinkler inspection sector. They used the same reasoning as other rejections – ‘not convinced it won’t reduce competition’.

If firm A buys firm B then by definition competition has reduced but is this temporary or permanently influential to price and service? The ComCom seems to be deciding that normal business development will not occur and are declaring that they ‘know the unknowable’.

If the price of fire alarm and sprinkler systems becomes too high perhaps the NZ Fire Service should establish a business and begin service. It would be great training for apprentice firemen (and women, on equal pay – Ed) and it might help reduce the financial cost to the government and the insurance sector.

I wonder if the ComCom has a view about the lack of competition around pricing of chores in our household and its influence on pocket money for the children? 

Would you wash my car for $2?

I think it is becoming clear that the ComCom will need a higher headcount to cope with expressing opinions on the ongoing business evolution in NZ.

Buffett – Warren Buffet has released his annual letter and if I promise to keep this Market News brief I encourage you to allocate some of the free time to reading Buffett’s letter, here:

http://www.berkshirehathaway.com/letters/2016ltr.pdf

Buffet has proved his investment performance, and growing wisdom, over a very long period and whilst I doubt that he wants disciples it is now an inescapable fact of his presence in the investment sector.

I also have no doubt that the Buffett Letter is one of the most widely read publications on the planet each year.

Given our philosophy of trying to help you to keep investment costs down to minimise the impact of fees on your returns I encourage you to read the section titled ‘The Bet’ slowly, or twice.

Global Sovereign Debt – S&P reports that global sovereign debt will reach 44 trillion this year. Forty Four Trillion! (why did our forefathers remove the ‘u’ from four, when forty? – Ed)

It should draw two exclamation marks when one factors in the obvious, that 44 trillion will seem modest when we look back in a few more years.

44 Trillion is approximately $6,500 for every man woman and child on the planet, yet we know that only a minute fraction of that population earns enough to repay a debt of any size.

Global debt-to-GDP is now at a record high and according to the Bank for International Settlements over the last 16 years, debts of governments, households and corporations has gone up...everywhere.

Based on displayed behaviour there appears to be no hope of arresting this increased use of debt and thus it seems inevitable that debt default will be at the centre of our next indigestible financial problem.

Those who provide such loans, namely the well-behaved savers, will be hit again by this default when it happens. It is unclear where this inevitable problem will begin, or what will cause the first grain of sand to move, but the probability of failure is surely very high.

Perhaps this situation partially explains the ongoing rise in the value of property assets and shares, avoiding excessive exposure to fixed interest assets?

If this thought is even close to being correct we should one day see a widening of returns between interest rates on demonstrably low risk lending relative to higher risk lending. You may recall an example of this with the interest rates demanded by lenders to the Greek government (10% for 10 years) relative to other lower risk nations (German 0.75% for 10 years).

It’s not quite as simple as I describe (a move to property assets and shares) because even in the face of this obvious debt default risk one can comfortably lend to certain borrowers, such as the NZ government, councils, banks in NZ and various robust companies. 

However, globally, where I think the problems will emerge, it is progressively making more sense to tighten one’s lending criteria and to thus reduce allocations to higher risk fixed interest assets. If one is investing in a global bond fund I’d suggest asking a supplementary question about the risk limits for bonds that are accepted within such a fund.

Private Debt - On top of the extreme level of government debt globally, described above, we must add in personal and corporate debts. 

I haven’t looked deeply into global numbers but they are rising and are part of the problem of excessive debt ratios.

I know NZ private debts are nearing 100% of our country’s GDP and are approximately three times the ratio of our government’s net debt position. Given our willingness to borrow so much money privately we absolutely need the NZ government to target a very low debt position.

One report that I did find from the Bank of International Settlements explained their view that when private debts exceed 80% of GDP that economy begins to experience a drag, falling below its potential performance, because consumers are beginning to realize the financial limitations of their position and cut some spending.

The BIS report displayed that the mean private debt level for Advanced Economies is already 80% of GDP, rising throughout all of the past 15 years displayed in the chart.

Just like rising government debt levels, private debts are rising and I have seen no evidence of change to arrest this dangerous trend.

EVER THE OPTIMIST – NZ has signed a new trade agreement relating to the supply of sheep and beef to Iran.

It is impressive to see how quickly trade agreements can be achieved when there are two willing and fair minded parties at the table.

The press releases imply there are still some finer details to resolve about conditions relating to  handling of the product but if we are smart we (farmers, meat industry) will find a way to meet these reasonable demands (deliver what the client wants if there is business to be done at an acceptable price).

If the US doesn’t want to play (trade) then we must turn our attention to those nations that do.

ETO II – I have always taken a shine to the ongoing success of Delegat Group since they decided to ‘get big’ in about 2003 and proceeded to borrow money and list the company shares to pursue its goal.

From memory the shares were floated at NZ $1.70 but then fell in price as investors quickly lost confidence in the strategy.

Jim Delegat (along with his sister Rosemary), to their absolute credit, always robust with confidence in the plan, declared to the market that if the early sales and profit goals were not met they would personally hand over some of their own shares to the other investors on the register to reduce the price paid for shares in the original offer.

It was never required. 

DGL exceeded its early targets and has continued to grow since, along with many in the NZ wine industry.

They recently reported another 17% increase in operating profit for the first half of the year and DGL shares are now NZ$6.20.

This is a success story by any measure, in my view, driven by good strategy and people who were and probably still are more passionate about succeeding than most.

Yes, I understand how risky horticulture can be but through various seasons the wine industry is proving its worth to NZ and over the past few years our other horticulture sectors (apples, kiwifruit etc) are chiming in with some fabulous results too.

Investment Opportunities

Meridian Energy – has now offered a new seven-year senior bond maturing on 20 March 2024. 

It will be a fast moving (done this Friday) issue, confirmed via contract note with investors incurring a brokerage expense (at our normal rates).

The credit margin being discussed is the seven year benchmark +1.50% - 1.60% which implies (at time of writing) an interest rate around 4.75%-4.85% p.a. (paid semi-annually).

If you wish to invest in this offer please contact us by 5pm on Thursday 9 March with a confirmed investment request and we will be pleased to add you to our list.

Once we receive an allocation we will issue contract notes to confirm participation, probably late on Friday 10 March.

Transpower – has also announced an intention to issue a new 5+ year senior bond.

It is likely to offer a yield between 3.85% - 4.00% p.a., is likely to be issued via contract notes and is likely to result in the purchaser paying the brokerage expense.

We have established a deal list and investors wishing to purchase this new bond are welcome to join it.

Travel 

Michael plans to be in Tauranga on 18 April.

Chris will be in Auckland on March 20, flexible about where he can meet investors.

David will be in Palmerston North and Wanganui on March 29 and New Plymouth on March 30.

Kevin will be available in Christchurch in early April.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

Anyone wanting to make an appointment should contact us.

Michael Warrington

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