Print this pageMarket News 29 May 2017
$55 million spent and Transit describes their Wellington motorway as ‘smart motorway, dumb drivers’.
Maybe there’s another point of view.
Investment Opinion
ETF Voting – When you invest a portion of your funds into an Exchange Traded Fund do you expect that fund’s manager to exercise the voting rights on your behalf?
I do.
When I raised this with the NZX once (Smart Shares ETF’s) the response was that they do not exercise voting on behalf of the ETF investors.
I am not put off investment in Smartshares based on this policy but I do think they need to revisit their strategy upon exercising voting rights. They, after all, exercise their ability to lend shares from the pool for rental return so they have recognised part of their role as a centralised manager of a large pool of investments.
Clearly, I think not voting for shares held in an ETF is an incorrect strategy.
I have returned to the subject because I enjoyed Kevin Gloag’s recent article on the subject of ETF’s and now pausing as I come across articles on the subject globally. The article that I touched on last week referred to the significant market scale of the three largest ETF managers (Vanguard, BlackRock, State Street) but within the story it touched on voting.
Vanguard, BlackRock and State Street do exercise voting rights on behalf of the investors within their funds.
This is logical to me. Investors have elected not to buy shares in specific companies themselves (for the cash placed into the ETF) and it stands to reason that these investors’ expect the fund manager to exercise those rights on their behalf.
Just because they invest in an index, with mathematical proportions, does not mean an investor abrogates the ability to express views to company directors within the nominated pool of companies.
When invested in an ETF an investor no longer appears on the register and thus does not receive the invitation to the corporate meeting, nor the voting paper to express an opinion; this is received by the fund manager.
Where a manager has agreed to manage funds on behalf of an investor, in return for fees, I think they have accepted more than just a responsibility to select the investments (active management or mathematical index approach). They also have a duty, in my opinion, to present an opinion by way of vote when invited to do so on the pool of shares or units that they control.
If ETF’s are to be increasingly dominant on the register of listed companies, as explained last week, then to not vote is actually to the detriment of the fund manager’s client because to not vote would be to assign a disproportionate voting influence to a smaller group of company shareholders.
Vanguard, BlackRock and State Street were reported as having US$11 Trillion in ETF’s. The market capitalisation of the S&P 500 is reported at about US$20 Trillion. A reasonably large portion of Vanguard, BlackRock and State Street’s funds will be invested in the S&P500 and even if they only hold 10% of that market (US$2 Trillion) it is far too big an influence to abstain on when asked to vote.
In theory, the more successful ETF Managers are the more disproportionate company voting would become if an ETF manager elected not to vote on behalf of its investors. This is an illogical outcome.
Interestingly the story I read about these three large managers voting, which I support as the appropriate strategy (on my behalf, because I want a vote heard on my investment) sparked a concern about the rising influence that these mega-managers’ might have on company governance.
Are they achieving a dominant, near monopoly like position on corporate governance?
If their governance beliefs become too homogenous will it stifle competition and risk taking?
These are all very interesting questions but I am certain that the likes of Vanguard et al can seek independent external input on governance principals and proposals (capital allocation) before exercising their votes.
This reminds me of my occasional calls for NZ retail investors to contemplate delegating their voter analysis to the NZ Shareholders Association with a demonstrable focus on analysing for the benefit of small shareholders.
Vanguard, BlackRock, State Street and presumable most large global ETF managers exercise a vote on shares or units held within a fund. They must have good reason for doing so, reasons that are logical to me, so, in my view the directors of the NZX need to revisit their decision not to vote on Smart Share ETF’s and in my opinion they should begin doing so immediately.
If the NZX see conflicts that are not apparent to me they should adopt a policy of appointing the NZ Shareholders Association as a discretionary proxy vote holder because the majority of investors within Smart Shares are retail investors, the catchment of NZSA membership.
I hope the NZX is already a corporate member of the NZSA.
Kiwisaver – whilst scribing on funds management, I was pleased to read that I have a supporter for my view that Guardians of NZ Super should be asked to offer a Kiwisaver fund to the public.
Paul Glass (Devon Funds Management) promotes the concept of both ACC and Guardians of NZ Super offering Kiwisaver with very low fees (at cost) to add necessary, skilful, competition to the sector where fees are too high.
He also suggests that the government regulate a maximum Kiwisaver fee at 1.00% per annum, but they could avoid this level of involvement by simply agreeing to Paul’s other proposal (ACC and NZGS at cost). Competition would do the rest.
Fees below 1.00% are already available via inactively managed funds such as NZX Kiwisaver provider SuperLife (at about 0.65%, which needs to fall too) but I really like the idea of ACC and NZGS actively managed Kiwisaver accounts.
Interest Rate Direction – Interest rates are going up right?
That’s been the view of many investors over the past five months, with the majority holding back from making longer term fixed interest investments.
Company analysts once held similar views and reduced their valuations on various shares, especially those with easily recognised future cash flows (utilities, property companies etc).
Well, as always, we can all be forgiven for conceding that we are just not sure what happens next, including the ‘best’ and the ‘most active’ fund managers on the planet.
I saw a very interesting chart last week relating to investor views about US long term interest rates. The chart measured the scale of investor opinion with respect to expectations for interest rates to rise or fall and the data involved real money decisions, not just surveyed opinion over a glass of Chardonnay.
Between December 2016 (post Trump election) and March 2017 investors held positions that were consistent with the most aggressive view ever (in this data series) that long term interest rates would rise.
Between April and May the view completely reversed and is now sitting at the equal most aggressive view (the same as 2007/2008 pre-crisis) that long term interest rates will fall.
I’m not going to pretend that I have a better view than these short-sighted fund managers and Hedge Funds but it is worth reminding investors to try and avoid getting caught up in the yo-yo hype that is present in financial markets.
When we are unsure, which should be with every decision, the most appropriate approach is to stick to your own strategy and to maintain a good mix of maturities across your portfolio including longer term choices.
Be careful not to find yourself underinvested and in the corner of the room with the overhead bubble asking ‘but weren’t interest rates supposed to be going up now?’
Fundamentally it is worth noting that, as I write this, the US inflation data preferred by the US Federal Reserve is slipping a bit lower (from 2.10% to 1.80%) and the market’s enthusiasm for Trump to wave a magic economic wand is waning. Inflation is the core driver of interest rates.
On the note of inflation, there was a useful article in a recent John Mauldin newsletter (from the Economic Cycle Research Institute) which attempted to display that inflation in the 21st century is both less volatile and more synchronised across global economies.
Their contemporary view is that the upcycle for inflation of the past 24 months may be over.
If ECRI’s view about global synchronicity is true then so too is their conclusion that single central banks’ now have less influence over local inflation outcomes. Ipso facto, the Reserve Bank of NZ is to be congratulated for its journey into applying other macro prudential tools to achieve financial stability.
The US Fed has tried to lead the market to expect two or three more increases to the Fed Funds rate this year, taking it from 1.00% currently to 1.50% or perhaps 1.75%.
The long term bond market sees this preference as unlikely now, signalling its concern by reducing the yield on 10 year Treasuries (government bonds) to 2.25% from a recent high of 2.62% when commentary declared that 3.00% would happen next.
The Fed would be very concerned if this 10 year interest rate fell close to their target for Fed Funds and would be downright concerned if the paths crossed. Remember my recent comments about the recession concerns that are being hinted at in China witnessed by long term interest rates sitting lower than short term interest rates.
Year to date data for US interest rates now shows short term interest rates to be up 0.60%, but 10 year yields are only up +0.40% and 30 year yields up 0.28%. Both the longer term bonds are declining in yield at present.
I do see one silver lining in this new decline to long term interest rates, it may well provide an opportunity for the US Federal Reserve to sell some of the securities that it owns to real investors in the market and begin the reduction of its manipulatively bloated central bank balance sheet.
Central banks pulled the ‘last option’ lever when they started buying all available bonds in the market to add further cash to economies but it is long past time for this artificial, manipulative, behaviour to be removed from financial markets. If the excessively accommodative assistance from central banks is not removed there will be ‘no more options’ when we sail into the next major financial problem.
Be careful what you believe from changing daily information, stick to your own well defined investment strategy and you’ll be fine.
AML – You don’t need to read my comments all that often to know that I think the handling of Anti Money Laundering regulations in NZ is unnecessarily cumbersome in its repetitiveness (all are obliged to gather AML data ask for exactly the same items from the same people).
A centralised, government provided, AML identity service would cut masses of red tape from the process. Given how much red tape the Government Stores Board goes through I would have thought they’d relish this saving.
A centralised process, which requires a person’s (the owner’s) authority to share, would also meet nicely with the concerns of the Privacy Commissioner who stated the following when reviewing the latest proposed changes to AML law in NZ:
‘I consider the information sharing regime provided for under the Bill as currently drafted is ill-defined, overly broad and goes well beyond what is necessary to give effect to the Shewan Report's recommendations or to provide for an effective and efficient AML/CFT regime.’
I (Mike) further declare that:
The AML regime was weak when introduced, has unnecessary multipliers in data gathering, is inconsistently applied, is not efficient and is only partially effective’.
A centralised identity service with appropriate sharing authorities would solve both of our concerns.
Investment News
NZ Budget – I’ll leave the political aspects of budget analysis to others but I was pleased to see tax cuts that will benefit all of our clients.
Pre-tax incomes between $40,000 - $60,000 for retired people are a common sight for us and it is nice to see an additional net $500-1000 per annum heading to these people.
It’s just another of my tax proposals for Hon. Steven Joyce, but I’d rather he now removed the 30% marginal tax rate from the equation completely and then cut the 17.50% marginal tax rate to 15.00% (to benefit more people) before he contemplated shifting the 33% marginal tax rate threshold.
I am happy to pay the higher rate (33%) on my higher earnings.
Then, I’d rather he did what he only hinted at this time, and considered reducing the tax impact on savings, particularly those within Kiwisaver which is the vehicle with the strategic intent of convincing the next generation to accumulate more net wealth.
I’ll bet Mr Joyce wishes his job was as simple as I make it sound.
UDC – Investors in UDC no longer need any financial advice, the new owner (Hainan Airlines) has announced that it will be repaying all depositors and arranging its financing through other channels.
ANZ will approach all UDC investors with a proposal to change the trust deed to allow for early repayment of UDC deposits, or a switch to an equivalent remaining term with ANZ Bank.
What a waste of brand value.
Tax – Further to my recent ramblings about reforming the NZ tax base a little further, the Labour party in Australia has a clever idea; limit the tax deduction applicable to accountants’ fees to $3,000.
You may pay your accountant vast sums if you wish, almost always focussed on tax reduction, but you may only have a tax deduction on $3,000 of that cost.
There is little point in taxpayers funding those who are trying to avoid paying tax!
Nice thinking.
Sky TV – The NZ Rugby Union has validated my opinion, and confirmed the Commerce Commission error, by addressing other ways to sell its rugby viewing rights (via Vodafone within a stadium).
The NZ Rugby is the owner of the asset. Sky TV leases that asset.
Blockchain – Tested use of the technology that is Distributed Ledger Technology continues to expand like amoebae and is clearly claiming an influential position in societies globally.
The headline that most recently caught my attention was one reporting that the University of Melbourne is to test use of Blockchain (DLT) for its student records, with the assistance of US Company Learning Machine. Learning Machine reports that 5-10 other universities are also considering the technology.
Shortly after this testing I’d be surprised if all respected educational institutions weren’t migrating to DLT technology for the security and surety of qualification that it will provide.
DLT will enable a university to retain very secure and granular records of student performance, which students can choose to share with third parties and those third parties can easily verify the information with the issuing entity (University in this case).
Is anybody else thinking ‘Anti Money Laundering verification’?!
Open proposal to Hon. Steven Joyce;
Please allocate some project funds to Internal Affairs to promptly get up to speed on Distributed Ledger Technology, to also pay a visit to India to understand their use of finger print and retina information for identity, and then get home and build NZ a robust and easy to use identity system.
The current manual process, multiplied by ask organisations asking for the same thing, is a drag on the productivity of our economy. Recall our productivity was recently measured as not improving.
Bitcoin – speaking of BlockChain, the price for Bitcoin has jumped from US$1,000 to US$2,300 over the past two months, and whilst extra-ordinary I don’t know what this is telling us (other than demand exceeds supply).
Technology – Whilst I am on technology,’ I remind people of the rising ability review annual results and now some board meetings online from home but I’d like to repeat the value of this opportunity. Investors, especially retail, come from all locations around NZ and attending public presentations is often difficult, or expensive. Gaining indirect access to these though is increasingly simple and the best corporate governors are offering the information online.
Infratil has long been one of the great communicators and given the wide involvement of retail investors in this business I have pasted the link to their annual result video here to display how simple it is to participate in these events:
https://infratil.com/for-investors/company-results/
On their website you can also find the dates and locations of planned investor presentations around the country shortly.
Ever The Optimist – Yes, yes, yes.
Rocket Lab has successfully launched its first test rocket from the Mahia Peninsula.
This is awesome news for a company launched in NZ by a ‘kiwi kid’ (Peter Beck) with a vision and a passion to succeed.
This launch shouldn’t have been a 60 second clip in the nightly news, this should have been widely broadcast, live, just as various sporting events are.
All colleges in NZ should be presenting Peter Beck’s story to their kids and I hope once Rocket Lab is settled in a state of financial success that Peter Beck himself goes and speaks in our major cities encouraging schools to send along their youth to listen.
If Peter can, over the next two decades (he is already one decade into this project), retain the NZ connection with Rocket Lab I expect that he will become Sir Peter Beck for the way he will have opened the eyes of youngsters to the way that dreams can be achieved.
ETO II - Fonterra has lifted the final pay out for the 2016-2017 season to $6.15 per kilogram of milk solids (from $6) and forecasts a $6.50 price for the 2017-2018 year.
Just in time for Mystery Creek Field Days.
Investment Opportunities
Genesis Energy (GNE) – the offer of $225 million subordinated Capital Bonds set its interest rate at 5.70% for the initial five years to 2022.
Demand for this offer significantly exceeded demand and all investor allocations were scaled back to modest sums.
Investors with allocations should now have delivered their application to us.
The offer closes on 7 June and we wish to receive application forms long before this date (to avoid Queens Birthday delays), even if post-dated. (Interest starts on the date the application is processed by the registry).
Investors require a firm allocation from us before investing as there will be no public pool.
Infratil – new bond offer is now open.
The bonds being offered are:
5.5 years – 5.65%; and
8 years – 6.15%.
The way Infratil is handling allocations sees us handling applications on a first come first served basis, so if you are investing please submit your application form immediately. (If you wish that we process it on a later date please draw this to our attention).
The issue is open now and closes on 23 June.
The offer document can be downloaded from the Current Investments page of our website and application forms must be delivered to our offices.
Goodman Property Trust – issued their new seven senior bond last week (GMB040), setting the interest rate at 4.54% p.a.
This bond will begin trading on the NZX next week for investors who missed the issue but would like to invest in this bond.
Thank you to those who participated in this offer with us.
The fastest way to hear about new issues is to join our ‘All New Issues’ email group, which can be done via our website or by emailing a request to us to be added to this list.
Travel
Chris will be in Whangarei on June 12 and Auckland on June 13.
Kevin will be in Christchurch on 22 June.
Edward will be in Hamilton on June 7.
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.
If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.
Michael Warrington
Market News 22 May 2017
None of you will be shocked to learn that SPARK is again having failure issues with its email management process!
Email traffic stopped a few times today. We hope that missing emails will 'magically appear' overnight.
If you have not had a reply from us, but it was obvious that we should have replied, please leave it a day or so and then follow us up.
Thank you.
Investment Opinion
Tax Opinion - I know that one’s residential property is not a commercial investment, its purpose is to provide shelter and perhaps to own it is to hedge oneself against changes in value of that shelter, but I have a proposal for government (I’m sure they’re all ears – Ed).
Level the playing field and offer exactly the same tax circumstances to the family home owners as those enjoyed by investors in residential property; namely deductible debt costs. (plus taxes on gains if traded too fast).
This is the opposite of the complex proposal from Labour to try and remove some of the tax deductions from professional investors, an idea that clashes with wider tax law.
Investors currently have a financial advantage over home owners and this must be part of the distortion of higher prices for those who use a house for shelter ahead of investment. Investors can tolerate paying a higher price than the family owners of a home due to the tax effect.
Wouldn’t this proposal create an immediate hole in the government’s future revenue accounts?
No.
You’ll not be shocked to hear that the government will find ways to collect sufficient taxes to resolve the reduction implied by my changes to property related tax. This proposed change opens up the opportunity to revisit the Tax Working Group recommendations and further evolve how NZ tax is collected.
After all, the likes of Amazon, Apple and Ebay are evolving the way they pay tax (or don’t) globally, so our government is certainly entitled to evolve the way it collects tax.
Long-time readers may recall the Tax Working Group review of NZ tax collection (must be broad, fair, effective etc) and you might also recall that the TWG said the two gaps in NZ tax collection were from measurement against capital and land.
I debated the land item briefly given the impact that councils have on the population with the rapid rise in rates collection.
However, where I am going with this is that if all property owners had access to tax deductions then the government could re-approach the concept of a land tax, or a capital based tax that would also capture all persons, especially those with the most.
Perhaps the Australian stamp duty (tax) on property transactions isn’t so bad after all? Given that nothing is ‘stamped’ anymore and Blockchain technology may mean bureaucrats aren’t even involved in the property settlement process maybe this tax could be renamed what it is, a property transfer tax.
This type of tax might slow the turnover of property and thus reduce some of the unnecessary hype in the property market.
Maybe ‘we’ could then define any investment in property beyond the first item as being ‘in the business of property investment’ and thus have these properties regulated under the higher equity demands from the banking sector. The higher interest costs for investors would slightly tilt the property market away from them and toward residential home owners/users.
Whilst I am reforming the tax base, in quicker time than was required by the TWG (standing on the shoulders of giants) I would increase consumer based taxes but reduce the tax impact on good savings behaviour (e.g. match Australia’s 15% tax rate on superannuation saving schemes like Kiwisaver).
I know we need more houses to be built to help resolve high house prices relative to incomes but offering the same tax conditions to resident home owners and house investors would iron out another wrinkle in the yet to be levelled playing field.
Rabobank – further to our commentary about Rabobank and its perpetual notes last week, trading of RBOHA securities on the NZX has been busy lately.
I interpret this as healthy interaction between the believers and the non-believers with respect to repayment this October.
The market price has lifted to about 98 cents in the dollar reflecting the force of the believers.
I think the believers will get another shot in the arm in June when Rabobank repays a US listed Tier 1 security issued in that market and reaching its ‘Call Date’.
Negative – Last week the yield curve in China (interest rates measured across different time frames) showed signs of moving toward a negative slope.
The yield on the 10 year bond is slightly lower than yields for 2, 3, 5 and 7 year bonds. Oddly the yields on 15 and 20 year bonds are higher, so the 10 year dip is a ‘kink’ at this stage.
The ‘kink’ needs explaining (to me) but my message for you is that negative yield curves are a sign of concern because it is one guide from financial markets that an economic recession is within sight.
There could be plenty of reasons for a slow-down in China but excessive debt is definitely one of them.
I’ll keep an eye out for useful stories about the Chinese economy but the behaviour of the Chinese yield curve will precede most analysts actually spelling out declines in the economy.
If the yield curve slope tips more steeply negative it will be a reason for elevated concern and our exporters, such as our dairy sector, should become very conservative about their own spending at that point.
Investment News
Heartland – The good performance by the bank (HBL) continues (untaxed by the Australians – Ed).
I would say ‘unsurprisingly’ but in truth all that we knew about HBL’s plans from day one (the 2008 restructure and new plan), and expected them to deliver, has been achieved, and more, so now we are just like you in viewing HBL from a ‘what happens next’ frame of view.
HBL’s nine month update reports profits of $44.9 million, up 13% on the same period last year, and an expectation for the annual profit near the top end of the forecast range ($57-60m).
The analysts will like seeing a fall in the cost to income ratio (now 42%) proving more profit can be made from the same input costs but the most impressive sentence for me was ‘growth in receivables across all divisions’, disclosing more than just a growing economy to me but also hard work and a good team spirit.
There’s no harm having friendly internal competition followed up by shared congratulations.
Disclosure: Happy, biased, HBL shareholder and depositor.
Ports of Auckland – It seems that the Auckland Council is considering what Christchurch would not; the debate around the sale of some mature assets to fund other new, necessary, assets for the city.
The mayor’s musings will spark a flurry of political energy between those who support or oppose this proposal. Much of the heat in this political debate will be wasted in column centimetres for the media and not in making good conclusions about progress for the city.
Many will scream at Phil Goff that he would be a turncoat if he didn’t ensure his Labour heritage blocked the prospect of asset sales (even though he was here in the 1980’s) but the facts of the matter are that Mr Goff now has a different job, leading the business that is Auckland City.
The capitalist and markets participant in me supports the prospect of Ports of Auckland returning to the NZX. If I was an Auckland ratepayer I would definitely encourage all attempts at intelligent capital allocation and better control over ratepayer expense.
The Council need not sell all of its shareholding in the Port; it could follow the government lead of retaining control.
I haven’t seen it referred to but it could also contemplate the sale of a long term management contract to a third party, thus raising some cash and removing itself from some of the regulatory risks of owning and managing the Port.
How well might the two dominant ports in NZ be run if Port of Tauranga held a 25% share plus a management contract for the Port of Auckland?
How much efficiency could be offered to freight carriers in NZ from such a partnership of port management?
(Aren’t you forgetting the Commerce Commission? – Ed)
Fair point; ComCom won’t let us share video content across different mediums nor media content so maybe they won’t let us share freight movement either.
There is no rush for investors’ to get excited here because there is an enormous volume of tidal movement to be had under the wharf before any decisions will be made about the sale of Ports of Auckland shares.
It’s nice to consider though.
European Politics – European politics may just be settling down a little.
Maybe the low points were BREXIT and the heat generated by extreme subsets of society leading into the Dutch and French elections but it is beginning to look as if the ‘unionists’ (as in a preference to retain the EU) hold the majority middle ground.
A few months ago headlines would have us believe that Germany’s impressive leader, Angela Merkel, was likely to lose control of power. However, last week Merkel’s Christian Democratic Union comfortably won an election in the country’s most populous state (20% of total population) – North Rhine-Westphalia.
Of more modest interest from the election was a lift in support for the ‘pro market’ Free Democrats and the decline of the Social Democrats (the second largest political party in Germany).
The next milestone that the EU must help to settle is the political leadership of Italy.
Good luck with that one.
The steps are small but they are in the direction of more stable outcomes.
ETF Info – Further to Kevin’s articles last week about Exchange Traded Funds, I learned that in the US the three largest funds, being Vanguard, BlackRock and State Street, now have US$11 Trillion in funds under management.
These three are now the largest shareholder(s) (when combined) in 90% of the companies listed on the S&P500 index in the US and the largest shareholders of 40% of all listed companies in the US.
When one ‘follows the money’ they usually see what has motivated the decisions of those controlling the money and it should be no surprise that reducing fees for investing is the main driver. (a philosophy that we adopt here).
Next week I think I’ll take up the subject of exercising voter rights on shares held within Exchange Traded Funds.
Lloyds Bank – The UK government has managed to exit its compulsory support investment in Lloyds Bank (2008 Global Financial Crisis) by selling its remaining shares and retrieving the money it invested, being GBP 20 billion.
There is much political noise about how the return over the past 8 years has been very poor when measured in terms of lost interest (Time Value of Money) but frankly a financial return for risk was not a consideration in 2008, survival for the banking framework was the objective.
I think the UK government is entitled to say ‘objective achieved’ and the public plus the diluted Lloyds Bank shareholders should be saying ‘thank you’ and not measuring minutiae of the financial opportunity cost.
Examples like this and General Motors in the US confirm that when a good business with a clear future potential to succeed is simply short on equity during a period of distress then the correct thing to do is inject new equity (preferably private money) and work patiently toward positive cash flow and profits.
NZ didn’t handle its financial crisis management as well as we might have.
2 Degrees – It is nice to see 2 Degrees Mobile announcing its maiden profit, hopefully cementing its position as the third meaningful competitor in the telecommunications space for NZ consumers.
However, what stands out for me is that it has taken them eight years to reach the point of profitability and in my view much of this reflects NZ’s small population.
A new business is typically expensive to establish but gaining sufficient scale in a small country is clearly difficult and this difficulty offers part of a moat that protects established businesses from would be competitors.
2 degrees mobile has proved it is possible to compete in major industries but they have also proved how difficult it is to succeed.
Ever The Optimist – NZ based Rocket Lab’s inaugural rocket is on the launch pad and testing for launch over coming days.
Peter Beck said that the plans are to make several test launches before moving to phase II of the programme of 20-50 launches per annum (!) for paying customers.
This is an awesome business story launched (pun intended) by a passionate young New Zealander.
ETO II – US Industrial Production was stronger than forecast last month at the fastest pace in more than three years, +1.0% versus estimates of +0.4%.
The US Federal Reserve will use data such as this to reinforce why they would like to lift the Fed Funds rate further during 2017; by 2018 they might even reach 1.75% being New Zealand’s Official Cash Rate!
Investment Opportunities
Genesis Energy (GNE) – offer of $225 million subordinated Capital Bonds has announced a minimum interest rate for the initial five year period at 5.70% p.a.
Thank you to all who joined our list and requested an allocation. The issue was very popular and allocations were less than sought across the market.
If you received an allocation from us please now urgently deliver your application form to us, even if you wish to post date the application. (The application form can be downloaded from the Current Investments page of our website).
At the time of writing we are fully allocated but we have established a waiting list which investors are welcome to join.
Investors require a firm allocation from us before investing as there will be no public pool.
Infratil – During its annual result announcement (profits ahead of forecast) IFT has also confirmed its new senior bond offer to the market.
The bonds being offered are:
5 years – 5.65%; and
8 years – 6.15%.
Please contact us if you would like a firm allocation.
The issue is open now and closes on 23 June for new investors (closing 12 June for investors rolling the maturing IFT160 series bond).
The offer document can be downloaded from the Current Investments page of our website and application forms must be delivered to our offices.
Goodman Property Trust – GMT has announced a new senior bond with a seven year term.
We bid for an allocation this Friday and estimate an interest rate between 4.50% - 4.65% based on today’s market information.
This offer is one of the ‘fast moving booked by contract note’ method, with clients paying the brokerage expense.
We have a list for this offer. If you wish to invest please contact us including an expression of the amount that you wish to invest.
The fastest way to hear about new issues is to join our ‘All New Issues’ email group, which can be done via our website or by emailing a request to us to be added to this list.
Travel
Chris will be in Christchurch on May 23 and 24, in Whangarei on June 12 and Auckland on June 13.
Kevin will be in Christchurch on 22 June.
Edward will be in Auckland on 26 May and then in Hamilton on 7 June.
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.
If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.
Michael Warrington
Market News 15 May 2017
Unemployment in NZ is low, and falling, but I suspect this trend will run into resistance as more businesses try to replace people with machines.
It is a strategy that I hear often.
Last week’s statement was from Genesis during their bond presentation where they described a hope that greater use of client communication ‘via App’ will reduce the need for people on the frontline.
Investment Opinion
Exchange Traded Funds – Kevin writes:
Someone once told me that 80 per cent of what you worry about never happens and in light of the growing number of ‘alerts’ being offered about impending disaster in global share markets I hope that the 80% rule also applies to financial markets.
It seems that just about every financial market expert (all are self-appointed) is predicting a major correction to equity markets citing charts and graphs and all sorts of historical information and trading patterns.
Eventually they will be right although no-one knows when and with so much central bank interference and money printing, and near zero interest rates in most developed economies, how useful will historical information prove to be as a guide going forward?
It was unanimous that Auckland house prices were ridiculously over-valued 3-4 years ago and that a major price correction was imminent.
Needless to say the pundits are still waiting for the big Auckland house price crash as is the case for global equity markets where prices keep marching onwards and upwards, amidst a growing cluster of worry.
Worrying aloud is of course a way to sound smart and informed; an undertaking to anticipate trouble, for a fee, is a key element of the funds management industry model, particularly hedge funds and active fund managers.
Do we really need to pay a high level of fees to have a third party (fund manager) unnecessarily worry for us 80% of the time?
The rapidly growing use of passively managed funds, particularly in the US, has been widely reported with hundreds of billions of dollars withdrawn from actively managed funds and invested in passively managed index tracking exchange traded funds (ETFs).
Perhaps this reflects a market saying ‘we are paying too much to have you worry on our behalf’?
In New Zealand, Smartshares, a division of NZX Group, offers access to a number of global and domestic ETFs although the product’s use is still quite small here relative to the US where growth rates have been phenomenal. Smartshares will expand though and are a significant part of the NZX growth strategy.
Lower fees and in many cases better performance make for a fairly compelling investment case and ETFs have become one of the fastest growing investment products in the world.
Most ETFs are constructed to match or track published market indexes, like stock and bond indices, and because fund managers of index funds (such as most ETF’s) are simply replicating an index there is no research, analysis or so-called management skill in the stock selection process.
The value added proposition from the fund management industry is often questioned but lower fees from ETF’s do mean less value added. By definition they hope that less expense over time will win out over the higher expense: value add proposal.
With equity markets rising steadily for the past 6 years, and the flow of money into index funds growing rapidly during the same period, it is hardly surprising that ETFs have recorded impressive value gains.
The continuous flow of new money into the index funds and then on into the underlying stocks in the index being tracked provides forward momentum for the individual stocks regardless of any business performance considerations.
In the US the sheer volume of passive money now being invested in the underlying stocks by the indexed mutual funds and indexed ETFs has made it virtually impossible for active fund managers or ‘stock pickers’ to outperform the index, and therefore the returns on ETFs.
Even with an information advantage active fund managers are struggling to add value as the efficiency in equity markets is increasingly overrun by the huge inflows into index tracking funds which have created a very high and unhealthy correlation between the share price movements of individual stocks (all moving with the same tidal change).
With a correction to equity markets likely at some stage and the majority of the growth in ETFs only happening in recent years, and during rising markets, the big question is how markets, particularly in the US, will cope if the flow into ETFs suddenly reverses. (80% fear 20% reality)
With index funds if investors suddenly decided to cash-out the funds would have to sell the underlying securities to fund redemptions leading to large scale selling across the board at exactly the same time as liquidity (buyers) is diminishing (fear) and bid/ask spreads (market pricing) are widening.
Just as ETFs and other index funds have locked together price movements of individual stocks on the way up the same will apply on the way down. There will be no price discovery, just get the deals done. The market pricing will reflect the weight of the tide of changing retail investor opinion (greed and fear) rather than the progressive changes to performance of the underlying companies.
While active fund managers and individual stock owners face the same challenges during market corrections in most cases there should be some level of preparedness and there will be decision making into which stocks are held and which stocks are sold, if any.
ETFs on the other hand are purposefully designed for absolutely no decision making into either stock selection or anticipating the direction of the market.
Actively managed funds will also face withdrawals during market downturns forcing them to join the sell down in stocks although those worthy of their fees will be much better prepared for big market swings than ETFs.
In anticipation of market corrections active fund managers reduce their exposure to shares and increase their cash holdings, a strategy that, not surprisingly, is currently being employed by many local and global fund managers.
It is a fund manager’s task to market its skills and attempt to display that the value they add exceeds the fees charged. Clearly many struggle to achieve this, hence the trend by investors toward passive investment exposures.
So while index funds offer low fee, low maintenance, diversified exposure to virtually any given sector of the market their recent popularity has yet to be tested during a major market correction.
Like all investment products ETFs have their place and provide low cost, fast and efficient access to sectors and markets not otherwise available to many investors.
Having a mix of active and passive investment within a portfolio seems the most logical outcome to us.
I just hope we don’t follow the US lead and overdo a good thing, a skill they seemed to have perfected.
ETF II - The increasing use of ETFs and their growing influence on share prices might be offering a legitimate and temporary front-running opportunity for active investors.
Every quarter the S&P indices that ETFs track are rebalanced, based mainly on market capitalisation (share price multiplied by number of shares on issue) and liquidity in the prior period. The larger the company, the larger its weighting in the index.
Companies are regularly added and deleted from share market indexes, meaning that index funds have to sell the shares of departing companies and buy the required weighting in the companies being added so that they continue to replicate the index being tracked.
The announcement of additions and deletions is made by S&P Dow Jones Indices, a division of S&P Global, and it seems that the changes are announced about 10 days before they become effective.
Assuming that the index funds don’t get advance notice of the changes they are finding out at the same time as you and me.
While some investment managers might look to gain advantage by working out the likely index changes for themselves the ETF fund managers have no incentive or reasons to do any research or analysis – they are simply following the index not selecting its constituents.
What I don’t know is how long the ETFs have or take to rebalance their portfolios following index change announcements and whether the ETF managers apply a staggered or tactical approach to their buying or selling, although I suspect not as it is not part of their brief.
Casual observation of price movements and trading volumes for two recent index additions, namely A2 Milk and Chorus, suggests to me that the index funds are just buying as and when required without any science and on the surface at least this seems to be providing an unlikely window of opportunity for investors.
It is highly likely that active managers will have been trading shares in a way to profit from the robotic approach to investing taken by the passive index tracking funds.
It might also just be pure co-incidence. (But don’t attach yourselves to this idea too strongly)
I need to qualify these comments by adding that company performance and major market movements will normally have greater influence on a company’s share price than being added or deleted from a market index.
Investment News
RBNZ - As expected we have entered a period of relatively boring statements from the Reserve Bank with respect to setting the Official Cash Rate.
They have found a suitably balanced set of thoughts to conclude 'no change'.
These were the key sentences for me:
Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.
Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.
This is further evidence that investors should not be ‘scared’ of long bonds; the rate of change, if up as it seems in the US, will not be fast and thus rolling short term investments will find it very difficult to keep up with a portfolio that includes some longer term investments.
This scenario of extra reward for longer term commitment makes good sense.
Rabobank Update – Where respect is due it should be given.
I’d like to publicly compliment Rabobank for the respect that they have shown the NZ market since they started business in NZ. I have taken more notice of the bank since they issued their first perpetual securities in 2007, unsurprisingly.
NZ is just a spec on the planet with a tiny population (even though we angst over immigration), only 25% of the Dutch population, yet every year Rabobank ‘sends’ out two senior executives to update us on the bank’s progress.
For 10 years I have been attending their updates to NZ financial markets and every time I have been impressed by the clarity, honesty, performance and consistency.
At times NZ investors have been concerned about European bank exposures. ‘Europe’ has become a medusa-like beast and many of its limbs warrant that concern but not once have I felt Rabobank deserved to be placed in the ‘concerned’ category; they act well strategically and invariably adopt a conservative approach.
This year’s update was no different.
In fact from their perspective (the executives) they are entitled to the air of confidence because they have successfully consolidated the bank’s decision making structure from involving hundreds (Co-operative model) to entrusting the decision-making to a central core.
Of similar importance is the bank’s members (they do not have shareholders) approval for the bank to issue new equity securities (Tier 1 subordinated securities) to non-member investors and this opens up a wide window of options for ensuring the equity capital of Rabobank is maintained at a desirable level.
This opening of the door to additional equity from institutional investors means it is unlikely that Rabobank will issue new Tier 1 and Tier II securities to retail investors in NZ in future.
The question Rabobank is always asked by Kiwis is ‘will you be repaying the RBOHA perpetual securities on their 10th anniversary (October 2017)?’.
Again you must admire the consistency of their response, which I add is easy to achieve given the longevity of staff tenure at Rabobank (similar people visit each year); ‘we cannot assure investors of repayment otherwise we would breach the terms of equity that we gain from the securities, however, we prefer to meet market expectations around the globe and we are aware of market expectations with respect to repayment of the RBOHA securities in NZ’.
The answer (and potential for prepayment) was reinforced this year when they described the additional avenues for raising new capital that the bank is already making use of, their repayment behaviour with other legacy capital securities and the intention for less use of such securities in future now defined by the directors of the bank.
Rabobank’s equity capital ratios are impressive, and well above today’s minimum requirements (more than double) and factor in the board’s anticipated view of even more conservative risk requirements from banking regulators in future.
There is no reason for the Dutch central bank to reject any proposal from Rabobank to repay the NZ$900 million RBOHA perpetual securities.
RBOHA holders should be pleased by this knowledge. Holders of the other Rabobank perpetual securities (RCSHA ) may be less pleased about the prospect for repayment given the enjoyment of fixed rate returns and a wider credit margin but they too should ultimately be pleased because Rabobank’s behaviour in capital markets is what we need more of.
So, yes, RBOHA and RCSHA should expect to be repaid on the 10th year anniversaries (October 2017 and June 2019).
NZ$900m million was an impressive, record setting, transaction in NZ capital markets (lead by old friends at First NZ Capital) and is indeed a large amount of money. However, it is a modest sum to Rabobank (global perspective) so I do not expect repayment to be disruptive to the bank or NZ financial markets. It will make the broking and financial advice community busy, which is always welcome.
Well done to those investors who stayed the course and well done (again) to Rabobank for their performance throughout.
Banking – You always learn more about the evolution of banking when listening to banks’ presentations and Rabobank’s was useful in that regard too.
One out-take for me was another reminder that the real cost of debt must rise and I hope the world’s reaction to this higher cost of debt is to reduce the excessive current proportion of debt being used.
The regulators are continuing to increase the equity requirements for banks and this cost must be passed through to those who lean on a bank’s balance sheet (borrowers for the most part).
Rabobank spoke firmly about plans to reduce the scale of their balance sheet, which discloses that returns from some lending simply isn’t high enough to justify against the equity required. They intend to still arrange most of the same lending but will bundle up some of it to sell on to other investors, retaining what amounts to an arranger fee.
I don’t think depositors will enjoy higher interest rates if lending rates rise.
It is more likely that banks’ will use Covered Bonds for their cheapest funding (to help balance the greater costs of higher equity requirements) and then maintain competitive deposit rates, passing similar equity performance to shareholders through dividends (or Retained Earnings for a co-operative like Rabobank).
Put differently; the overall risk of the banking sector will decline but the reduced risk profile will mostly go to Covered Bond lenders and the sustained rewards will go to shareholders.
Ever The Optimist – It is clear that Australasian banking is prepared should another disruptive financial crisis emerge.
The International Monetary Fund says that our banks are well prepared and the Australian government has declared them so rudely profitable that they plan to introduce a new tax especially for the biggest banks.
Investment Opportunities
Again, we find ourselves in a sweet spot for fixed interest investors. There are now multiple opportunities and the rewards for risk have increased. If you are holding excess cash don’t miss the opportunity.
Genesis Energy (GNE) – has launched its offer of $225 million subordinated Capital Bonds and announced a minimum interest rate for the initial five year period at 5.70% p.a.
The bonds are very similar to those GNE issued in the past (GPLFA – 30 year maturity with probable restructure at year 5) and are being issued under the same class of securities process.
The full terms sheet and application form is available on the Current Investments page of our website.
Investors require a firm allocation from us before investing as there will be no public pool.
Genesis is paying the brokerage costs, investors do not pay brokerage.
We bid for an allocation on 18 May and the offer closes on 7 June (all applications must be in to our office prior to this date).
If you wish to invest in this offer please contact us urgently to confirm the amount that you wish to invest.
Infratil – has also announced to the market that they intend to offer a new long term bond (or perhaps two maturities) which will help toward the repayment of the bond they have maturing on 15 June 2017.
Details are yet to be announced (we guess yields will be between 5.50% - 6.00% range) but we have established a mail list, which all investors are welcome to join by contacting us.
Goodman Property Trust – GMT has announced a new senior bond with a seven year term.
We expect to learn more detail about this offer over the next 10 days.
An educated guess at the interest rate is that it will fall between 4.50% - 4.75%.
This offer will be of the ‘fast moving booked by contract note’ method.
We have a list for this offer. If you wish to invest please contact us including an expression of the amount that you wish to invest.
Vector – We have closed this list because supply will clearly not meet demand.
We will be in touch with those on the list shortly. (Allocate June 1, request payment shortly thereafter).
Given the scarcity of Vector subordinated bond investors may wish to look closely at the Genesis item above.
The fastest way to hear about new issues is to join our ‘All New Issues’ email group, which can be done via our website or by emailing a request to us to be added to this list.
Travel
Chris will be in Christchurch on May 23 and 24, in Whangarei on June 12 and Auckland on June 13.
Kevin will be in Ashburton on 18 May and in Christchurch on 22 June.
Edward will be in Auckland on Friday 26 May (21 Queen Street)
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
Market News 8 May 2017
Did you see last week the remarkable ‘SpaceX’ delivery of a satellite into Low Earth Orbit before returning nine minutes later to land, upright, back on earth where it took off from (Cape Canaveral)?
The rocket is ready for re-use.
There’s no escaping how quickly information capture, and its use, will develop in the years ahead.
Technology development will continue to be a marvel until our last breath.
Investment Opinion
Media Merger – I don’t have a strong view about the Commerce Commission’s decision to reject the proposed media merger between Fairfax and NZME (unlike your Sky TV opinion – Ed) but the decision is very useful for investors all the same.
Both the proposal to merge and the rejection by ComCom provide input to understanding what investment risk is and the fact that subsets of risks come from unexpected directions, no matter how prepared we think we are.
The story around this media evolution discloses how major industries can change and there are few golden geese to invest in.
Some reactions have criticised ComCom as erring in the belief that the status quo was an option for the media sector.
I doubt that the ComCom team used the status quo, or an unchanged landscape, as an input to their thinking. (Didn’t they fear sports rights would remain unchanged in NZ? – Ed)
The way information is being gathered, distributed and overlaid with opinion is expanding faster than most of us can keep up with, witnessed by ‘old’ media’s difficulties in remaining relevant and profitable. ComCom must know this.
I won’t dwell on the decision, rather, I’d like investors to contemplate the change that has been occurring in the media sector. Then apply the change and the elements that surprised you to a review of your investment portfolio; what are the potential surprises that could add or subtract value from my portfolio?
Do you no longer buy, or read, newspapers?
Do you read news online and if so is it from the old media suppliers or new channels?
What advertising captures your attention and influences your behaviour?
Has the way you consume evolved? How?
Ultimately all businesses generate their profits through sales of goods and services to the public (individuals) or to government entities. Business to business sales are still on the journey to the ultimate consumer.
Understanding how the public and government entities (spending taxes) are consuming is vital to understanding the future of business success.
So, how has your consumption been changing?
I’ll try and think of another couple of tidal changes that are occurring and should impact investment decisions.
Ah, yes, the largest is the demographics of NZ and the scale and type of consumption of those aged 65 years and above. The story is well underway but growth in providing accommodation and health services to this group has a long future (immediate decades).
Then, technology. This is an old theme but its rate of change seems to be accelerating. The development of steam power supported decades of production whereas today major changes occur every 2-3 years. The iPhone was introduced in 2007 and 10 years later they are passing model seven and users are beginning to think it is stale, yet smart phones (ultra-mobile computing/communication) have revolutionised how we do things.
Businesses with too much money invested in old technology are either in trouble or about to spend a lot more money to keep up.
The massive depreciation rates of technology do not support high debt levels for businesses reliant on large quantities of technology, they need revenue levels that are commensurate with this rate of spending/investing in their businesses.
My opinion is that technology is a must have for the leverage that it provides but it will be a surprisingly small incremental contributor to the bottom line for most businesses.
The impact of carbon, including taxes and incentives from government to look after the planet, is another issue that investors should be cognisant of. This will be a global story but the most recent headline was local with our government tasking the Productivity Commission with reporting on maximising opportunities and minimising costs from a low carbon economy.
Carbon monitoring will be difficult to benefit from for investors because it will add expense to most major businesses and add employment to those who spot the new service opportunities that crop up as a result of the new regulations, but it is hard to see it adding to the marginal revenue of businesses.
ComCom may, or may not, be right about media dominance but we are clearly mid tidal change for the sector and my impression is that they have lost a huge portion of the advertising revenue space so to survive they must develop a better understanding of what you and I will pay for, without subsidy from advertising revenue.
Keep an eye on the other tidal shifts that you see affecting your investment portfolio.
Infratil – Last week IFT was reported as ‘losing’ two thirds of its Wellington Bus contracts.
In reality the new Public Transport Operating Model (PTOM) forced a reduction on them because historically they had 80% of the contracts but the PTOM model now restricts a single operator to a 60% maximum.
IFT tendered for three of nine of the units offered (this excludes the Go Wellington service for the inner Wellington City area) and missed out on these three.
My initial reaction was not one of being a disappointed IFT shareholder but one of disappointment for the failing potential of Public Private Partnerships (PPP). If returns for risk are compressed too much either services won’t improve or tax/rate payers will absorb unrealistic returns for the risks taken with their money.
IFT will undoubtedly have tendered based on an acceptable risk adjusted return. To have missed out will be disappointing for NZ BUS but IFT shareholders should be complimentary about the discipline taken by IFT (and HRL Morrison & Co) with respect to managing shareholders’ funds.
The government declares a desire to use more PPP to develop various necessary assets but based on evidence they clearly are not engaging all that often and neither are councils.
I recall speaking about this once in the past when considering IFT behaviour and noted that NZ’s lack of action on PPP developments was a significant contributor to IFT looking to Australia for new investment opportunities.
The impossibly slow drag in getting the NZ Social Infrastructure Fund fully invested (it is not yet there five years on) is additional evidence of our failure to make better use of PPP in our economy.
The growth of Kiwisaver funds under management measured against the very modest scale of the NZX listed sharemarket means we need more NZ dollar investment opportunities (the greater portion of liabilities for Kiwisavers’ is in NZ dollars).
PPP based infrastructure developments strike me as ideal investments for Kiwisaver funds to invest in; the funds can afford to own some very long life illiquid assets given the net positive inward cash flows for the next two decades and the high cash flows expect from such utility like assets will ensure no cash squeeze for holding such illiquid investments.
Further, given the utility like nature of PPP type assets they should be simple to sell to new investors if a Kiwisaver fund ever found itself under pressure to exit the asset (liquidity crisis).
From the corner of the room I hear the lone cry about not wanting to ‘pay investors high returns for investing in social infrastructure’ but this means some things do not get developed and is a contributor to why NZ often falls behind on necessary infrastructure.
Many people are squealing now about the under-development relative to the rising population. Population growth was easily predictable even if the rate of growth was not.
If returns on PPP for private investors are so high then it reinforces my view that Kiwisaver funds should be involved because sustainable high returns into these funds should attract even more investors to them, which in turn adds to our potential for being financially self-sufficient in retirement.
This started out as a ‘News’ item but on the basis that it has become more of a rant I relocated it under ‘Opinion’.
Until our government can prove to taxpayers that they are so financially efficient that they understand every marginal 1.00% cost of funds then I’d prefer that they advanced infrastructure development including private investment via PPP.
Investment News
Tegel – The immediate resignation of the Tegel Chairman, James Ogden, is yet another corporate surprise that requires attention from investors.
As further evidence of my elevated age, or perhaps my varied work history, I have worked with James Ogden during my time at Credit Suisse/First NZ Capital.
James is a man of good principles and is an admirable person to attract to a board.
His very prompt departure from Tegel should sound bells for investors.
I can’t avoid having my bias against private equity investors enter my head as I ponder James’s departure from the board of Tegel.
French Election – European polls are clearly more accurate, or involve less computer hacking, than those in the US.
Emmanuel Macron was forecast to win the French Presidency and he did so comfortably (64% of the vote).
The European Union members will be pleased about this outcome from the French.
The markets anticipated this so they shall remain reasonably settled in reaction. However, this doesn’t change the disenchantment of the electorate who turned out in very low numbers.
Voters have made it clear they do not support extremism (Le Pen et al) but they are also unimpressed by the position that past governments’ have delivered France too (as is the case in many other countries).
Now Macron begins the unenviable task of setting progressive strategy and delivering small incremental gains over a long period of time. There are no home runs to be hit here.
The electorate understand the need for middle ground governance but will they be patient enough to allow good strategy to deliver?
World – It’s a little like the movie sliding doors.
As the world closes (partially) doors on poor behaviour, such as Turkey or North Korea, other doors are opening wider.
Cuba continues to open itself to development and one business to respond smartly was Google who has installed a local framework for data supply dramatically increasing internet speed for Cubans.
Reserve Bank – This Thursday the RBNZ releases its latest Monetary Policy Statement (always good reading for investors) and will review the Official Cash Rate.
They won’t be changing the OCR. (From 1.75%)
There are plenty of reasons why not.
The main reason though for no change (beyond relatively stable inflation) is the announced departures of Governor Graeme Wheeler and his deeply experienced deputy Grant Spencer.
The current RBNZ Mandate sees the OCR announcements ultimately left to the decision of the governor alone. This power is being debated.
Regardless of whether a dictatorship or committee is the most appropriate way to manage monetary policy Graeme Wheeler will know that the most appropriate approach for 2017 is to make such decisions by internal committee. His time is up, ‘dead man walking’ if you’ll excuse the phrase and the RBNZ is losing its strong deputy at the same time.
This is no time for singing solo or going off in search of a breeze that others can’t see.
So, when the ‘committee of friends’ meet to discuss threats to the stability of prices and finance in NZ they will find no disturbance in the force, certainly none that come close to the international economic influences.
The speech notes will be pleased about the stability of inflation, the declining price of the NZ dollar, the rising influence of macro-prudential tools, the government accounts (ability to spend in the economy), the rising potential of regular trade surpluses (commodity price lifts, tourism etc.), but cooling offsets will be provided.
The biggest offset will be ‘geopolitical risk’, which will be a polite label for the extra-ordinary set of new leadership behaviours that the world has (Think Trump, Edogan, Castro, Kim Jong Un, Modi, Putin, Najib Razak etc.) and the seven wave sequence of major elections yet to get through in 2017 with Germany, Britain and perhaps Italy the largest.
I like the latest Pronoun (or is it a verb?) to describe the potential for Italy to be next for considering exit from Europe; ‘Quitaly’.
The US Federal Reserve is taking the lead with respect to old-style central bank influence (moving cash rates up finally, and hopefully selling the absurd volume of bonds owned by the government agency) and given the scale of the US economy we should all keep our usual eye upon their moves.
However, I agree with the economists/analysts who conclude that central bank policy is finally receding from its position of financial market dominance to its role of regulatory influence. Central banks that can reach this position the soonest will be helping the economy the most (So, the US, Japan, Europe and the UK will be the slowest given the volume of bonds they need to sell).
The US Federal Reserve may have taken the lead on lifting interest rates and planning to sell bond holdings but I predict that the RBNZ will be viewed as a leader in the introduction of new regulatory tools and other central bankers will visit NZ to learn and then copy at home.
If central banks can progressively lift credit margins, being the price of credit relative to risk (higher interest costs for higher risk borrowers), there may be little need for large moves in benchmark interest rates, starting from the overnight Official Cash Rate.
If I am correct then investors will receive more appropriate returns relative to the default risks of borrowers and almost always receive higher returns from longer term investment.
There you have it, Mr Wheeler, you can take Thursday off; OCR will not change. (Proxy committee member – Ed)
Ever The Optimist – The NZ jobless rate fell to an unexpected low of 4.90% and the participation rate was at an all-time high of 70.6 percent as the working-age population.
International observers might wonder why we are making such a fuss about our immigration numbers given that our robust economy clearly needs the employees.
Maybe some more time and money should be spent on retraining and relocation to employ more of the 4.90%? (By relocation I include people moving to the jobs and some employers moving jobs to the people!)
ETO II - Registrations of new vehicles rose 7 percent to 10,635 in April from the same month a year earlier, led by a 16 percent gain in commercial vehicle registrations to 3,639.
Industry is getting back on its feet again, which is great news.
The farmers, from around the North Island, whom I met two weeks ago when riding in the Wairarapa were certainly all more comfortable with dairy, stock and horticulture pricing.
Investment Opportunities
Vector – has confirmed its plans to rollover its Capital Notes reaching their Election Date on 15 June 2017.
They have set interest rate conditions that make 5.70% p.a. (paid semi-annually) for the new five year term a likely outcome. Our view is that the return offered is competitive for the risk involved.
Current holders of the VCT070 Capital Notes have the opportunity to rollover their investment, add to their investment or ask to exit their investment. These people are encouraged to complete and return their forms to the registry and to handwrite Chris Lee & partners into the Broker field (Vector is paying 0.50% commission on rollovers bearing Broker Names).
Vector has invited new investors to purchase Capital Notes made available in the resale facility (current investors who ask to be repaid).
If you wish to purchase Vector Capital Notes, as new investor, please contact us urgently.
Genesis Energy (GNE) – has announced its intention to offer up to $225 million of a new subordinated Capital Bond, similar to those it has issued in the past, with a 30 year final maturity date but GNE will have options to repay or restructure over a much shorter time frame (such as 5 years).
The interest rate, once announced, will need to be at least 5.50% to appeal to investors.
This offer is expected to occur under a new Offer Document (and application form) with GNE paying the brokerage expenses.
If you wish to join our mail list for this offer please contact us, including thoughts on an indicative amount.
Infratil – has also announced to the market that they intend to offer a new long term bond shortly which will help toward the repayment of the bond they have maturing on 15 June 2017.
Details are yet to be announced but we have established a mail list, which all investors are welcome to join by contacting us.
Senior Bond – We are also expecting to learn of a new senior bond offer over the coming weeks and have established a generic list for those wishing to hear more about this offer once it occurs.
The fastest way to hear about new issues is to join our ‘All New Issues’ email group, which can be done via our website or by emailing a request to us to be added to this list.
Travel
Mike will be in Wellington on Wednesday 10 May and has a few times available for appointments.
Chris will be in Auckland on May 9 and 10, in Christchurch on May 23 and 24, in Whangarei on June 12 and Auckland on June 13.
Kevin will be in Ashburton on 18 May.
Edward will be in Auckland on May 26, available to clients in the CBD (Queen Street)
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
Market News 1 May 2017
It is hard to comprehend, or maybe disappointing to accept, that we have reached May so ‘quickly’.
Last week I completed a research trip of the Wairarapa and was very pleased to see there is so much green grass there, even at the highest elevations, that all farmers have plenty of options with respect to timing for sale, or retention, of stock.
Investment Opinion
Variable Bank Policy Settings – Over recent years when I read various articles each day about global central banks and interest rate forecasts I became bored with the ‘same, same but different’ approach of almost all central banks as they seemed to follow the same policy strategies of their peers.
‘If they are (insert relevant description per country – cutting interest rates, printing money, lobbying bankers to lend) we should do the same here because harmonic behaviour is less volatile and this is a good outcome’.
Yes?
No!
A central bank is tasked with meeting inflation targets and financial stability. Unhelpfully some are also tasked with woolly growth and employment references, but none are tasked with copying other central banks.
So, it is satisfying to now read about some variation in the policy behaviours of various central banks around the world.
In NZ, even though recent inflation data was a little higher than expected, I do not expect to see the Reserve Bank of NZ increase our Official Cash Rate; at least not until 2018, or beyond.
The main reason, in my view, is the progressive success of the recently employed macro-prudential tools in improving financial stability (centred predominantly in our huge debt use for our favourite asset – residential property) and a personal view that inflation will not ‘blow out’ in the current environment of high personal debt levels.
The RBNZ has created a new way of increasing or decreasing credit use, and its price, without a simultaneous need to adjust the Official Cash Rate.
If these new tools prove to be very effective I predict that you will start reading headlines about other central banks visiting No.2 The Terrace to interview the board and the governors about the new policy settings.
Australia is concerned about over-supply of apartments (although under-supplied in residential housing, go figure), but with the recent run up in resource pricing looking to be over for now and inflation forecasts hovering around 2.00% in the year head the RBA is unlikely to make changes to its cash rate.
During my career the RBA has been one of the great (reasoned, patient) central bank performers and I doubt very much that they will be rushed into change by their peers.
England a key policy maker, Michael Saunders has echoed comments from other BoE officials in stating that he expects inflation and economic growth to exceed expectations and interest rates will need to be increased in response.
India surprised its markets by increasing one of its interest rate settings in April, only three months after most had expected ongoing interest rate cuts into 2017.
India’s central bank is concerned that inflation will exceed its 4.00% target, will see growth jump from 6.70% to 7.40% and believes that banks can find other ways to reduce their cost bases without relying on the central bank to cut its cost of funds. (How refreshing).
Japan however is comfortable with its strategy of forcing 0.00% long term interest rates and, ‘printing’ additional money if required, to continue in its role of economic sponsor and underwriter.
Europe concurs with the Japanese policy of holding interest rates very low, save for trying to force specific long term interest rate settings across the various member nations of the European Union. The European Central Bank continues to ‘print’ money (buying bonds as required from the market) and the ECB now has the largest balance sheet of all central banks.
However, the biggest central bank of them all, the US Federal Reserve, now sees many good reasons to continue its increase to interest rates and is leaking out conversation about its preference to begin maturing off, or selling, bonds from the Fed’s balance sheet.
Now I accept that much of the preferences of these central bankers are easily said than done, but at least they are now writing different lyrics even if the underlying tune of global economics remains disappointingly similar.
Retailing is difficult – The retail trade has almost always been difficult.
The Walton’s, with Walmart, proved that scale helps when trying to dominate but now scale does not need to be as visible on main street.
Amazon has confirmed that it is making significant increases to its presence in Australia and is looking for warehousing with a scale five times the size of the Melbourne Cricket Ground (a total of 93,000 square metres) to support its intentions.
This is phenomenal in size as most of you will know from visits to Melbourne or from watching major sporting events on TV. The MCG capacity is about 100,000 people, so Amazon is looking for space to hold 500,000 people whilst still being able to hold five simultaneous sports matches!
I wonder whether they are planning on competing with FOX TV rather than other retailers?
At this scale Amazon will not be in downtown and frankly may need to buy an entire airport, such as Moorabbin in Melbourne, and the Capital Golf Course next door to develop the logistics they seem likely to require.
If they move a little out of town where affordable housing should exist Amazon ought to be able to attract employees.
If they are successful, and expand further over time, they may by force of presence establish a new suburb and its residents can call themselves Amazonian’s (as long as Brazil doesn’t protest – Ed).
Analysts speculate that Amazon shouldn’t have much trouble achieving 5% market share with its ‘low price, wide range, fast delivery’ strategy and is credible given the 3.50%-4.20% market shares achieved in the UK and US respectively.
Good retailers should be able to compete with this and have time to prepare, as long as they are not wearing blinkers today; it is the naïve, over-priced and slow who will fail. I don’t however think all retailers need to follow the wide range mantra because I expect to see that plenty of specialists with genuine product knowledge and a good service ethic will be able to compete and gain a premium price for premium products and service.
As a footnote I read this week that 8,640 retail stores are in the process of being closed in the US, the majority reportedly ’harpooned’ by Amazon.
Dick Smith – on a smaller scale, but following the ‘no bricks and mortar’ model, the new owners of Dick Smith (Kogan.Com in Australia) have quickly starting pushing technology sales again through the old brand name.
Kogan will no doubt have benefited from watching DSE’s management mistakes under prior private equity ownership (sadly DSE was dumped on investors when floated on the ASX shortly before its failure).
I haven’t looked but I wouldn’t be shocked to learn of any crossover between the prior owners of DSE and Kogan who bought the business from the receiver.
The dual messages here are:
Service and price look likely to improve for consumers in the foreseeable years; and
Choose your ‘horses’ carefully when making investments in the retailing sector.
Investment News
Better Financial Stability – The International Monetary Fund (IMF) must have felt that we deserved a warm comforting headline when they came up with ‘Global Financial Stability has Improved’ recently.
They quietly avoided discussing the fact that debts are higher today than in 2008, doubl in fact, and are clearly satisfied by the world’s ability to continue shuffling this excessive volume of debt around the world without significant default, for now.
It’s a good thing that they gave the report some balance by noting that there is also an elevated level of political and policy uncertainty around the globe!
A Private Equity Story – Yes, all deals are different but the generalised approach of private equity investment is to borrow as much as lenders will allow reducing the equity involved and thus maximising returns on successes or minimise losses on failures.
It sounds logical but failures leave debt holders very poorly served. You can supplant the term ‘debt holders’ with ‘lenders’ or an old favourite ‘Other People’s Money’ if you wish.
The story that caught my eye recently related to the owners of the ‘iHeartRadio’ service, a method of accessing ones preferred radio services via the internet.
I thought iHeartRadio was a simple centralising structure where the selected radio station paid very modest sums to broadcast over the centralised channel (App) but this has been put to the sword by the likes of Spotify, Pandora, Apple Music and Google Music all of which have developed far greater reach and can offer specific knowledge of listener patterns.
Whatever the process the model is failing.
I digress; this brief news item is about private equity investment and excessive debt.
The owners of iHeartRadio are private equity investors Bain Capital and Thomas H. Lee Partners (no relation – Ed) who borrowed $20 billion (!) as part of its $24 billion purchase in 2008 (83% debt).
It would seem that the purchase price was agreed prior to the Global Financial Crisis later in 2008. Mind you 83% debt is irrational at any point.
The debts are now progressively coming due for repayment (fat chance) or re-financing (apparently very unlikely) and clearly there is not enough profit being made to provide any of the players with confidence in the future.
Some of you may recognise the strategy being followed:
First; the senior unsecured lenders successfully negotiated (forced) themselves into a position of ‘senior secured’ lenders. This locked up what assets are remaining, putting further distance between the subordinated lenders and the assets/cash.
Second; the company approached $14 billion of the subordinated lenders with a proposal to extend much of their debt and accept (write off) conversion of some debt into equity in the business.
This will sound familiar to past investors in a certain (prefer not to re-name and remember!) printing company in NZ.
Credit Rating agencies have assigned ratings of near failure and one commentator simply, but accurately, stated ‘The bottom line is you have to have a profit and you have to have sufficient cash flow to function as a company’.
Always keep that last line in mind when making investment decisions.
Tax – There seems to be continuing potential for more change to tax collection over the next few years and I think ‘we’ consumers and savers should be pleased about the developments, if my speculation is correct.
Tax must be collected, no matter how tricky some corporates become, and tax avoidance by many large international businesses has forced government to address how it captures tax from the products and services that these entities sell.
Increasing sales taxes, applied to the value of transactions, whilst reducing tax on personal income makes sense to me and should be effective in sustaining a certain tax collection rate based on the scale of an economy.
The Australian Tax Office is already well down the track of increasing sales tax collection from international transactions. Good on them.
EBAY has publicly complained about the moves being proposed by the Australian government and the ATO but I have no sympathy for them. One of the complaints from EBAY was the complexity in developing technology to capture what is proposed.
This is complete and utter nonsense from a business built on technology; read our prior commentary about the rapid emergence of Distributed Ledger Technology including its efficiency and effectiveness.
I doubt that EBAY, or the other efficient sales portals, are falling behind in the technology stakes and I hope that the Australian and New Zealand governments’ will show that such businesses are falling behind in the lobbying stakes!
What were Lincoln’s words? – Government of the people, by the people, for the people.
No sign of the word business.
Government should, and will, layout a fair and broad tax gathering framework within which there is no doubt that businesses and consumers will find a way to operate.
I look forward to the upcoming NZ budget (May) and hope that Steven Joyce uses his clear strategic thinking skills to continue the evolution of NZ tax law further rewarding hard work (lower PAYE tax scales) and saving (wider or higher tax on consumption).
Ever The Optimist – The recent cyclone caused less damage and disruption than feared and I can confirm that farmland between the Bay of Plenty and Wellington is very green.
ETO II – Zespri announced that it expects to set new profit records based on the success of its Gold3 variety. They forecast a 2018 profit of around $100 million, which is almost threefold the profit made in 2016.
We love export success stories.
Investment Opportunities
Oceania (OCA)– share placement begins trading on 5 May. Thank you to all who participated in this offer with us.
Genesis Energy (GNE) – has announced its intention to offer up to $225 million of a new subordinated Capital Bond, similar to those it has issued in the past, with a 30 year final maturity date but GNE will have options to repay or restructure over a much shorter time frame (such as 5 years).
The interest rate, once announced, will need to exceed 5.00% to appeal to investors and we expect that it will do so.
This offer is expected to occur under a new Offer Document with GNE paying the brokerage expenses.
If you wish to join our mail list for this offer please contact us, including thoughts on an indicative amount.
Infratil (IFT) – has also announced to the market that they intend to offer a new long term bond shortly which will help toward the repayment of the bond they have maturing on 15 June 2017.
Details are yet to be announced but we have established a mail list, which all investors are welcome to join by contacting us.
Senior Bond – We are also expecting to learn of a new senior bond offer over the coming weeks and have established a generic list for those wishing to hear more about this offer once it occurs.
The fastest way to hear about new issues is to join our ‘All New Issues’ email group, which can be done via our website or by emailing a request to us to be added to this list.
Travel
Chris will be in Auckland on May 9 and 10, in Hastings on May 16, and in Christchurch on May 23 and 24.
Kevin will be in Christchurch on 4 May and Ashburton on 18 May.
Edward is in Blenheim on Wednesday 3 May.
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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