Market News 28 May 2018

I didn’t expect to be making a submission to Michael Cullen’s Tax Working Group, but something cropped up.

Siblings often talk plenty of nonsense at loud family gatherings as everyone fights for ear-space, but last week my brother proposed an interesting idea:

Set PAYE at 0.00% for employees of certain essential, government financed, services.

Police, nurses (they’ll be keen – Ed), teachers etc.

If paying them an agreeable income is as hard as we are told, why not cut out the circular tax part?

These people still contribute to the tax base via the country’s moves toward ‘user pays’ tax collection and both red and blue governments have tried to shift tax off PAYE and onto other sources, so the proposal isn’t as wacky as it sounds in headline form.

There would need to be some re-working of the system, which may include increased tax collection form the unproductive sectors of the economy (here’s looking at you; residential investment property) but I suspect this is coming anyway.


Dear Sir Michael Cullen;

Investment Opinion

Tiwai Point– By broadcasting a plea to the current government to not kill off fossil fuel electricity generation until renewable supply is more reliable Tiwai Point’s CEO, Gretta Stephens, (representing Rio Tinto in NZ) has disclosed how weak her negotiating position was around the smelter’s electricity supply debate.

Mark Binns, then CEO for Meridian Energy, knew this but our government was a weak negotiator, in my view, and agreed to a new taxpayer funded subsidy for Rio Tinto.

Rio Tinto has now announced that it will re-open the fourth smelter pot, such is the reliability of NZ energy and good pricing of that electricity.

This is further evidence that the Minister of Energy is wasting time with her call for an inquiry into the pricing of the electricity sector and retail consumers have access to wholesale electricity pricing via Flick Electric so consumers are not bound by the retail profit margins.

The diversity value to Rio, of Tiwai Point, is also disclosed during the current surge in Australia’s energy prices and the Australian government debated attempts to reduce the country’s huge reliance on coal and need to increase the supply of renewable electricity (think Tilt Renewables).

The Tiwai smelter CEO seemed to enjoy quoting that the new Tesla battery farms in Australia would only keep Rio Tinto’s Tomago smelter in South Australia operating for eight minutes!

She just dug the hole deeper and deeper for ever having a Minister accept a call about electricity price subsidies ever again.

I hope the government is taking notes.

Actually, I have a plan for NZ to move to 100% renewable electricity generation; squeeze Tiwai smelter out.

If that is deemed unpalatable at least move their pricing up to attractive commercial rates of return against a short depreciation time frame for the assets.

Then, pump water back ‘up’ to Manapouri (from the fresh water surface of the sound) at times of extreme lows in electricity pricing to replenish the battery pack for greater use during periods of high demand and higher pricing.

This is the principle used at Lake Coleridge by Trustpower and should be used more widely in NZ.

Maybe I have stumbled onto a new idea here; charge Tiwai smelter for the development and running costs of this recirculation appendage to the Manapouri power station.

I’ll stop here before Rio sends people over to ‘trip me up’ and take away my keyboard.

Retirement PPP – As we sit in the middle of our government’s greatest push to build new houses since the 1940’s I find myself asking whether, or not, the retirement accommodation providers are the cheapest Public Private Partnership our government has ever enjoyed.

The likes of Ryman, Summerset, Metlifecare, and their peers and followers, have been doing for 20-30 years what the government was not, namely, planning ahead.

By planning ahead they accurately forecast a need to build ahead, using private capital; there were no government contributions to this ‘PPP’, hence my claim that it is the cheapest on record for Treasury to assess.

How can it be considered a PPP then?

Has it achieved some of the government’s goals alongside the risk adjusted returns sought by private investors?

Think about the sequence:

Ryman, et al, (I’ll switch to single name use) are adding to the residential property pool at a bulk rate;

Ryman initiate the developments with private capital, essentially delivering the accommodation (reducing the risk for the buyer), prior to asking a resident to pay over their capital to move in;

Upon purchasing a Ryman unit, the buyer usually releases a residential house back into the pool for other house buyers within the wider community;

One reason the public consider moving into a retirement village is proximity to primary, and sometimes secondary, healthcare.This is a service that is becoming more difficult to access in the public health system. So, again, Ryman assists the government by removing some of the tension presented to the public health network;

I know it’s not only Ryman who are saving the government some pressure under this PPP; the residents are agreeing to pay a premium price for the premium service on offer, so they too are providing meaningful assistance to the government in two critical community areas;

Further, it is typical for a new resident to release some net equity to their bank account when moving from a residential property into a retirement village; such is the pricing model of these businesses. This displays that Ryman is delivering lower cost housing into the community.

This value difference frees up capital either to pay for the premium service, or perhaps to assist grandchildren with education costs and deposits for first homes? (Children are often already established in homes); and

This movement of money isn’t currently widespread, but I know for a fact that it happens, and again, the government should be grateful for this intergenerational transfer of assets (without the need for estate taxes! -Ed).

Last week the Minister of Finance stated that he was very interested in PPP that could assist with delivering the high build rate for housing to try and solve one of the country’s greatest needs (and political promises - Ed).

This invitation implies that the government is willing to put a little equity on the table, equity that the retirement sector providers were never offered even though their planning was so much better than central governments.

Actually, I’ve thought of another benefit that Ryman provides, again ahead of its adoption by the government; wellbeing.

The Minister has declared an intention for future budgets to introduce wellbeing measures, something that is to be applauded.

Armed with my straw poll of one (Dad) I can confirm that his wellbeing improved after moving from the workload of a suburban property to the community that is a retirement village near his old home.

At this point I am expecting a call from Grant Robertson to buy a few shares in the retirement sector.

Although, when I think about the subject a little longer, wasn’t the last communication from the government to the retirement accommodation sector a threat of an inquiry into the pricing of its services?

I’ll not even look up the name of this minister who wanted this inquiry, although they deserve to be named and shamed for such a stupid idea.

I think it best that the Hon. Grant Robertson now state that such an inquiry of the retirement sector is not only unnecessary but that he is also planning to ensure that the likes of Ryman are not negatively impacted by the pending tax review, which is quite clearly targeting more pressure on unproductive investment into residential property investment.

Ryman, and peers, are demonstrably productive investors and with zero equity input from the crown they are coordinating a PPP that is relieving pressure from several of the government’s most sensitive policy areas.

Disclosure – I own a few RYM and MET, so might appear to have a bias in complimenting the companies in this sector, but this would not alter any words I have said about the benefit being enjoyed by the government from the work of these businesses.

Oil – The sharp increase in the cost of oil products (wholesale price up, currency down, taxes up) is a short-term problem, but it can become a long-term benefit for NZ depending on how we respond.

If we respond by increasing the use of electricity as our preferred energy source this will be great for NZ’s energy self-sufficiency.

Becoming a net oil exporter will be beneficial for the US, and NZ could enjoy the same robust economic position if we position ourselves to be net neutral with our own energy supply/demand.

To that end, I don’t mind the higher taxes on petrol because it both acts as a user pays tax revenue resource and a simultaneous disincentive to this transport type and thus an incentive to sharply increase the vehicle fleet using electricity as an energy source.

This strategic change has very little to do with the fuel distribution companies. Yes, their profit margins are up (from memory a move from 7c to 15c per litre) but this factor is small in the scheme of petrol at $2.50 per litre.

You’ll observe that the single addition of a new 10-cent per litre tax by the government is greater than the total increase in the profit margin for the fuel companies.

Where am I going with his?

For investors, it is almost a long term ‘ETO’ item and near term it reinforces the long-term merit of investment in our electricity sector.

Investment News

Trade War – You may recall me pointing out that Donald Trump’s trade war won’t just be about products, it will also be related to settlement in US dollars.

Last week the President prohibited the purchase of debts owed to the Venezuelan government.

The order covers all transactions involving debts owed to the Venezuelan government or state-owned enterprises, including accounts receivable. It also prohibits the sale, transfer or pledging of collateral of any equity interest in which the Venezuelan government has a 50 percent or greater stake.

If any transactions happen to be settled in US dollars, even to a NZ investor, the US also can block such transactions if they wish.

I recently read an estimate that 90% of all foreign exchange is settled against the US dollar, which gives you some sense of scale about the influence that the US can exert over global trade and investment.

Those wishing to defy the US approach with respect to the Iran trade situation will be hyper-sensitive to this financial risk as they consider their next moves.

China – Whilst China is playing out a better long-term strategy than the US, in my opinion; by definition these changes will take a long time to be influential.

Last week’s snippet of major change (major snippet? – Ed) was the plan to scrap all limits on procreation to ensure that China has sufficiently large labour force in the decades ahead.

The Yuan will undoubtedly become more influential on the global stage, but this will take decades and will barely show up during the Trump presidency, leaving Trump the room to negotiate the way he likes to.

Turkey – After reading Market News last week global financial market participants promptly started selling the Turkish Lira and have been very aggressive about it.

At its most fretful the Lira fell 10% in value in one day (from 0.22 US dollars to 0.20 USD), after previously falling 20% from 0.265 US dollars in February.

To put this in perspective, or NZD terms that may be more familiar to you, it is the equivalent of the NZD versus USD cross falling from 0.7000 to 0.5280.

Dictator Erdogan will present his defensive response at some point, including criticism of the behaviour of financial markets.

Fortunately, global financial markets are a voting machine that Erdogan cannot manipulate.

Fonterra–seems to be confirming that they haven’t yet discovered how to add more value to the milk produced by their farmers.

FSF has announced nice pricing payable to the farmers for the raw milk, but the nicer (higher) the price payable for the milk the lower becomes the profits and dividends for Fonterra share/unit holders.

This confirms for FSF investors that the company is not yet proving successful with the productive deployment of its capital.

I appreciate that Synlait is very small and thus very nimble, but they have been running more that just two rings around Fonterra in the value-add category from the dairy sector.

Ever The Optimist–Negotiations to boost free(r) trade between NZ and Europe are underway.

The expansionary intent is clear and that’s great news for NZ.

ETO II – Log exports keep setting ever-higher volume records, at high prices.

Last year NZ shipped a record 18.8 million cubic metres of softwood logs overseas last year (+18 percent on 2016), yet this March alone we exported almost 2 million cubic metres.

It’s a great time to own a chainsaw. (not very environmental of you – Ed)

ETO III - Kiwifruit (NZ’s fastest growing horticultural export) surged 82 percent in April to $438 million, a new high for any month.

Zespri must be licking its lips at the prospects for the new European trade agreement.

ETO IV – The Pike River 29 Trail in the Paparoa national park isn’t complete yet (mid 2019) but the locals are wisely planning events to attract more tourism to the region, such as a 65km mountain bike race along the new trail.

After they cross the finish line send the riders on to do The Old Ghost Road trail too.

The West Coast is a fantastic location, different from all other NZ regions and this makes it as magnetic for tourism as the rest of the country.

It’s good to see some local energy pushing to attract more of this business their way.

Investment Opportunities

Fixed Interest investors should be on alert. We understand that the recent bond announcements are the beginning of a ‘season of issuance’, intended to occur prior to the end of June.

NZX Bond – The NZX new subordinated bond set its interest rate last Friday at 5.40% during the process of making allocations.

Unsurprisingly for such a small deal the issue was impacted by very heavy scaling and our allocation is now full.

If you have a firm allocation from us, please act now to complete your application form and deliver it to our offices prior to 10 June. (please do not send to the registry as it increases the risk of the investment missing out altogether).

If you are also an NZX shareholder you should also consider submitting an application into the Priority Pool for more bonds.

Summerset Group – indicated in a recent corporate release that it is considering issuing a new bond (SUM020).

Given the new methods available to the market under FMCA law, it would be remarkable if their new bond weren’t identical to its current bond (SUM010) except for the maturity date and interest rate.

One can certainly get a head start on considering all the key risks of lending to SUM.

Housing NZ – has received permission to increase its funding programme via bond offers.

They are making presentations to the market shortly and may offer a 5-year and a 7-year bond later this week.

HNZ’s very strong credit rating implies relatively low interest rates.

We will keep you updated here.

Fletcher Notes – We continue to keep our FBI170 list open for those wishing to hear more about the possible supply of this fixed interest investment.

All investors are welcome to contact us to join lists if they wish to invest under a new offer.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Edward is inWairarapa 11 June and Taupo 13 June.

Chris is in Auckland 18 June, Whangarei 19 June, Auckland 20 June and Christchurch 26-27 June.

Kevin will be in Christchurch on 7 June and in Queenstown on 15 June.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a free meeting.

Michael Warrington

Market News 21 May 2018

Poor economists, they are so often challenged on their progressively variable conclusions, which to be fair reflect the constantly changing inputs.

Nonetheless, I enjoyed an economist’s sense of humour recently when he offered to estimate his telephone number if the audience wanted to follow up with questions at a later date.

Investment Opinion

Energy – The cobalt supply chain is just one reason to be gradual about ‘our’ switch away from fossil fuels across to more reliance on other energy sources, such as electricity.

Just like investment decisions, rapid change is typically unnecessarily disruptive.

I have just finished reading one of many articles about the political difficulties with the cobalt supply chain to the world, a world with a growing hunger for batteries, which currently require cobalt.

The battery industry is reported as currently using 42 percent of global cobalt production, a critical metal for Lithium-ion cells. The balance is used in diverse industrial and military applications (super alloys, catalysts, magnets, pigments) that rely exclusively on the material.

Approximately 97 percent of the world’s supply of cobalt comes as a by-product of nickel or copper (mostly out of Africa) and related to the start of my story, the poor treatment of the population of the Democratic Republic of Congo (DRC).

Apparently in the DRC child labour is rife in the mining industry.

If ‘we’ are to worry about the environment, maybe we should apply one portion of worry to the future of it, and two portions of worry to the current inhabitants.

While investment analysts are focused on the excitement (and despair? – Ed) surrounding Elon Musk and his Tesla company, what we really need is Nikola Tesla himself and his electricity skills to help develop more options for electricity storage if we are to ensure that electric transport has a robust future, without abuse of people in mining territories.

I have also been reading the summary of NZ Refining Ltd’s (NZR) plans for a month-long $85 million maintenance shut down. This is part of the fossil fuel industry’s huge commitment to the supply of energy.

Ironically this certainty of supply isn’t something that our desired electricity industry can promise without fossil fuels (coal in this case) as a back-up.

With the NZ government’s recent action over the oil and gas industry NZR must now be pondering its forward-looking financial calculations.

NZR is reported (by as employing about 300 people and supplying 85 per cent of New Zealand's jet fuel, 67 per cent of diesel, 58 per cent of petrol, all fuel oil for ships, sulphur for farm fertiliser, and CO2 for carbonated drinks.

I can see progressive success with a push toward electric vehicles for commuting, and some trucking, but changes to aircraft and shipping are surely more problematic to me and I am a fan of ‘sparkling’ water when asked.

Those with reasonable memories (2017) will recall Kiwirail’s recent decision to expand its diesel fleet by 8 units at the expense of 16 electric units for moving freight. Given that Kiwirail has political masters this decision would not have been taken lightly and thus it was certain that the merits of the decision were compelling.

As is necessary for all business and consumer products, we need to ensure competitive price tension exists. If fossil fuels were removed and electricity was the only energy source you can be sure that pricing of electricity and cobalt would change and the treatment of miners in the likes of the DRC would become even worse.

NZ now has a Minister for Climate Change, James Shaw (Green), a chap who I enjoy listening to, but I doubt even he has addressed the tricky question of ‘are we prepared to push aggressively for changes to energy sources and storage at the expense of people in Africa (specifically, the abuse of children)?

What is more important; climate theory, or real people’s lives?

We don’t need Al Gore to speculate for us about how these children might be treated based on extrapolation variables.

Trying to manage climate change is centred on the long-term comfort (survival) of the human species. Cobalt mining for electricity storage (batteries) never offered comfort and it abuses the most vulnerable of the species today.

The problem of child abuse in Africa cannot be solved by James Shaw but my point is that NZ should be careful with its rate of change for any strategic policy to change its energy sources.

Regular readers will know of my concern for anything that changes too fast for people to keep up. Rapid change is a disruptive influence that it is preferable to avoid, regardless of the topic.

My underlying point, for NZ, is that it is better not to kill off fossil energy sources, that are very well managed at present, until the alternatives are equally well managed, reliable and not more damaging to the planet and its population.

If ‘we’ can achieve such a position then regulation can indeed be used to advance the preferred option and penalise the twilight option.

Frankly New Zealand’s current government ambitions for influencing fossil fuel use may be less influential than a pebble in a pond.

The US is using its newly achieved position of being almost self-sufficient with oil to play a far more aggressive hand with some of its political will. In conjunction with this new energy based strength the US dollar remains the global currency of choice and it is the second powerful prong on President Trump’s trident. (whisper – the nuclear arsenal is the third).

If the US no longer needs to import oil from the Middle East and can block USD payments used by anyone, anywhere (except cash), they command a very powerful position.

Bitcoin, or no Bitcoin, I’ll predict that US paper money on issue will increase in volume during the balance of the Trump administration. It is likely that smuggling US dollars across the border with Mexico will become more popular than smuggling humans.

China and Europe will see a chance to elevate the relevance of the Yuan and Euro as global settlement currencies, which will slowly be useful, but even combined they don’t have the capacity to block the current US influence.

Another energy observation is that Japan, once committed to cutting its coal use by 10% has now increased its use of coal as an energy source and intends that it will be 26% of the nation’s energy in 2030.

They weren’t helped by the Fukushima nuclear plant’s destruction, but the move to coal is instructive as the cheapest, most reliable, near term option for energy.

Australian electricity generation is dominated by coal use. It is pushing toward more renewable energy but it received a rude warning when its ‘renewable energy state’ South Australia, had its power knocked out by a robust weather event.

The CEO of Trustpower recently touched on these points when he spoke about his understanding of the political push toward 100% renewable energy but observing that a mound of coal beside Genesis Energy’s Huntly generation plant remained the most efficient back up energy source in NZ for certainty of supply.

Interview a few Aucklanders who lost power recently to ask about the importance of certainty of energy supply relative to occasional failure to deliver from renewable energy sources.

None of this ramble, including the global irrelevance of our government’s changes, means we shouldn’t set high standards, and I don’t have ‘the answer’, but I like to listen to experts and I absolutely know that to rush is to err.

Proxy Votes – I have often urged readers to exercise their voting rights, when invited, for the constituents of their investment portfolio.

Or, if you are not going to exercise that vote please pass it to a proxy holder, such as the NZ Shareholders Association (NZSA).

The NZSA are demonstrably on ‘our’ side with their voting assessments and intentions.

Assigning your proxy can usually be done online, with great ease.

Until now I thought it needed to be done one vote at a time but Link Market Services tells me that an investor can assign an ongoing proxy by presenting them with a signed letter, listing each security to assign votes on and to whom.

New Zealand’s very low voter participation is disappointing, and this behaviour dilutes the influence of small shareholders, strengthening the relative position of the larger shareholders.

I would like to propose that individual investors strongly consider offering an ‘open’ proxy vote assignment to the NZSA for their securities, especially shares.

Imagine the influence that you can help provide, to a genuine advocate for small investors, by collectively assigning the leverage of a very large voting position. The collective will garner a far greater level of respect (the sum of the parts).

Note also that an ongoing proxy assignment, such as I describe, means that NZ companies will need to expand their relationships with the NZSA and not consider each vote as a single negotiation with them. It should become a long-term relationship and not a ‘battle per meeting’ scenario.

Such an assignment can be removed at any time, by further instruction to the registry.

I have a draft example of the letter I propose, and all readers are welcome to the draft. Clients of Chris Lee & Partners are welcome to ask us to populate the letter and email out to you for printing, signing and returning.

Let’s see if we can use our ‘sum of the parts’ to help the NZSA increase its influence for us all.

I shall be assigning my votes.

On a separate matter, the NZSA welcomes your membership too, so they can afford to represent you, and provide you access to the deepening pool of investor information and events.

Buffettology – Having directed you, last week, to the Berkshire Hathaway annual report video, I’ll save the rest of you by offering a few notes from my observation.

Warren Buffett and Charlie Munger (W+C) answer questions with a charming frankness that strips away 90% of the nonsense communicated in the investment sector.

W+C about their late investing in the technology sector (they are buying Apple now) – ‘we missed the bus, but if you’d offered us Coca-Cola the year after it was developed we would have turned that down too’.

Whilst they do make many informed assumptions when investing they are evidence-based investors more than speculators.

Speaking of Apple, it makes more money than NZ’s reported GDP so we can be sure that Berkshire Hathaway is not looking in NZ for investments. We are too small for them, just as Christchurch projects were too small for the NZ Super Fund; especially once the council refused to raise much needed finance by selling shares in the likes of the airport or the port. (I wonder if the new local government funding review will describe not selling assets as a failure).

W+C are experts at investing in business that require a lot of capital, and how to seek efficiency, but they found it hard to initially understand the capital-lite technology businesses, believing they would be easy to compete with (until brand took over, like Apple).

Waiting for a brand to gain strength requires a lot of patience or investment risk tolerance.

If you want to be a long-term investor, invest in productive things for this is what benefits a population. (W+C compared poor returns on gold over long periods, then concluded crypto currencies would be worse than gold).

A 6.00% after tax profit is a good, long-term, return target.

W+C are not disciples of Efficient Market Theory declaring its Priesthood as having strayed, regularly, from the principles of good investment. They encouraged EMT disciples to re-read Ben Graham’s ‘Intelligent Investor’, to keep learning and to acknowledge that conclusions change over time.

On the questions of equality (women in this case) W+C replied that more women in business and politics will almost double the quality of performance.

On questions about artificial intelligence (AI) W+C acknowledge the various benefits of robotics but question the AI’s ability to make investment decisions (allocating capital). ‘False precision will deliver false outcomes’.

Listening to this AI answer I realised that the scale of Berkshire Hathaway and its oft-described family firm approach means their decision makers have access to vast information about financial risk, information that is unavailable to most analysts and certainly to AI computers.

Listening to W+C was more valuable for me than most of the qualifying ‘Continuing Professional Development’ that satisfies our regulators.

Investment News

Fletchers – Shareholders who elected not to take up their Rights to more FBU shares at $4.80 will be sent a payment for $1.65 per Right because they have now been sold to institutional investors.

The $6.45 price paid for the additional FBU shares, well above the diluted market price of $6.07 at the time of the announcement, displays a robust vote of confidence from professional investors in these financial steps being taken by the company.

Institutional FBU investors took up 98% of the Rights offered to them, whereas retail investors only took up 58%.

The market price on the day the surplus retail Rights were sold was $6.56 so you can see that the market has ‘charged’ a 1.67% ‘underwrite’ fee for accepting these additional shares.

I read a couple of articles that griped about the underwrite fee but this was incredibly short-sighted thinking from the same media who had just finished writing about the person(s) who positioned FBU with the financial problem that this capital raise was solving.

$25 million was part of the price for solving the $1 billion problem.

I could bat around the minutiae of who extracted the most value from the capital raising but from my perspective the Rights offer now looks like a good example of win:win:win to me, which implies good strategy by FBU and good advice from the investment bankers.

$1 billion – Two weeks ago the CEO of Westpac NZ, David McLean, batted away a media suggestion that he was focused on lifting the local bank’s annual profits to $1 billion.

Last year’s after-tax profit was $970 million.

Actually, I’d be disappointed if WBC wasn’t targeting a profit above $1 billion given the continued growth in consumer debt, funds under management and our rising population base.

However, that’s not the thrust of my message here, which is who else is talking in terms of billions?

Last week A2 Milk announced a forecast of ‘almost’ $1 billion revenue ($900-920 million) for the current year; note the difference though between revenue and profit, but for ATM to so quickly be talking in billion(s) is a remarkable achievement by any company.

Further, with ATM’s rapid growth trajectory they have every chance of leaping straight past Westpac NZ’s annual profit result too.

Given ATM’s low capital requirements, relative to that of Westpac, a lonely man could conjure an argument of sympathy for the bank.

Petrol – The price of petrol clearly isn’t high enough.

Over the weekend I saw two Dad’s driving their dogs around, instead of walking, whilst they played digital games on their mobile phones (catching digital characters in different geographic locations).

Tilt – The Tilt Renewables share price is another example of excessive selling by unhappy shareholders, unhappy for reasons other than value, and I might add another example for Warren Buffet of ‘Inefficient Market Theory’.

Having pressed the TLT share price down a little too far, to $1.80, the market witnessed an alternative view about the value of their company when Mercury Energy (MCY) purchased 19.99% of the company from the Tauranga Energy Consumer Trust (TECT) at $2.30 (+27.7%).

MCY would have purchased more shares too if takeover regulations hadn’t stopped them at the 19.99% level. They won’t get any further because Infratil, owner of 50.5% of TLT has already stated that they would block any further moves by MCY.

For the patient investor TLT value = $2.30

Indexing – Shares moving in and out of indices, tracked by various funds, also results in temporary distortions to a share price relative to a company’s value.

Last week’s review of constituents in various MSCI indices (Morgan Stanley Capital International) resulted in some large jumps in share pricing for those most likely to be ‘in’ or ‘out’ of an index.

A2 Milk (in) was a jump, Synlait Milk (in) was a jump, Fletcher Building was a fall (to $6.30) on speculation of ‘out’ until the market discovered it was ‘in’ and became a jump (to $6.65), Mercury was a fall once confirmed as being ‘out’.

The value of each company didn’t change that day, but the interim pricing did.

If you remind yourself that volatility is for traders and value is for investors, you’ll ignore this noise and be fine.

Turkey – as a pronoun.

After Turkish President Erdogan ‘wins’ the upcoming democratic election he plans to take more control of monetary policy.

This spells doom for the Turkish economy, not progress.

Globally, the volatility of inflation has been controlled and stable for decades because governments passed control of monetary policy to central banks, removing it from the vote catching playing field that is politics.

Edogan’s foolish ego will deliver instability to Turkey.

Ever The Optimist – I thought I’d have plenty to say about the NZ Budget, but not so.

I don’t need to dwell on political philosophy to say that the budget was fiscally careful and to compliment them considering how they’ll budget for the whole next 3 year term in government.

I also like the intention to introduce a new department to cost and assess political promises and to begin measuring government performance in other areas of societal wellness.

I think those who criticised the lack of big strategy from the budget rather missed these two new points.

ETO II - When we hear the European drums, they presently echo the subjects of Brexit, Italy’s lack of a government and the European Central Bank’s monetary settings.

This ETO wants to highlight a European success story; Portugal.

Like Ireland, Portugal has reformed its economy and is enjoying the successes they deserve.

After 14 consecutive quarters of labour force reduction employment is growing again.

Unemployment has fallen from 17.50% to 7.90%, ‘growth’ has improved from receding to be +2.70% for the past year, debt to GDP reached 130% and has begun a decline, now at 126% (initially targeting 80%).

The government is forecasting a fiscal surplus of 0.25% of GDP in 2020 (It was -0.9% last year).

Portugal has exited its special funding from the European Union and IMF.

The credit rating has been lifted back to investment grade (BBB credit rating).

The proportion of low skilled employees is declining; in 1982 only 2% had university degrees but now 20% of the population do.

Portugese banks are again attracting capital investment from international providers.

Do you remember the derogatory acronym PIIGS?

P – Portugal.

Be honest about the facts, set a good strategy, do the hard work, be persistent and be patient.

ETO III – We should be grateful for small bursts of luck.

The climate recently has resulted in a new monthly (April) record of 148.2 million kilograms of milk solids; lucky because it is amid the Mycoplasma bovis threat to the country’s herd.

Investment Opportunities

Fixed Interest investors should be on alert. We understand that the past three bond announcements (Christchurch Airport, NZX and now ANZ bank) are the beginning of a ‘season of issuance’.

NZX Bond – The NZX has announced a new subordinated bond to replace its bank debt, most of which is used to support its clearing house (settlement) risks.

The new bond will have a 15-year (2033) legal maturity date, with Election dates each 5 years (2023 next).

The interest rate will be set on [date] but in our view will need to be 5.00% or close to it. Guidance was given on 17 May at 5.40% minimum rate and the final rate set will be on 25 May.

The issue size is small at $40 million, with $5 million of this held in a priority pool for NZX shareholders.

This offer is being processed via a Product Disclosure Statement (prospectus) and application form and the NZX will be paying the brokerage costs for the issue.

A summary of the key details and investment opinion for the NZX Note Issue will soon be available on our website for advised clients.

We have a mail list for investors who wish to participate in this offer.

CIAL – The Christchurch Airport bond was finalised last week with an interest rate of 4.13%.

Thank you to all who participated in this offer with Chris Lee & Partners Ltd.

ANZ Bank – today announced a new 5-year senior bond (ranks alongside bank term deposits). We estimate a market yield of about 3.60%.

This will be a fast moving, contract note style offer with investors paying brokerage.

Summerset Group – indicated in a recent corporate release that it is considering issuing a new bond (SUM020).

Given the new methods available to the market under FMCA law, it would be remarkable if their new bond weren’t identical to its current bond (SUM010) except for the maturity date and interest rate.

One can certainly get a head start on considering all the key risks of lending to SUM.

Housing NZ – has received permission to increase its funding programme via bond offers.

They are making presentations to the market shortly and may offer new bonds thereafter.

HNZ’s very strong credit rating implies relatively low interest rates.

We will keep you updated here.

ICBC – Industrial and Commercial Bank of China has also indicated that it may issue a new bond in coming weeks, after presenting financial updates to the market.

With their ‘A’ credit rating investors should expect ICBC bond yields to align reasonably closely with returns on bank term deposits.

If a bond offer is announced, we will repeat the details here (Market News) and via our ‘All Issues’ email group.

Fletcher Notes – We continue to keep our FBI170 list open for those wishing to hear more about the possible supply of this fixed interest investment.

All investors are welcome to contact us to join lists if they wish to invest under a new offer.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Edward is in Auckland on 28 May, Wairarapa 11 June, Napier 12 June and Taupo 13 June.

Chris is in Auckland 18 June, Whangarei 19 June, Auckland 20 June and Christchurch 26-27 June.

Kevin will be in Christchurch on 7 June and in Queenstown on 15 June.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

Market News 14 May 2018

Partial Absolutes;

I don’t think the new CEO of Volkswagen has what it takes either after promising to make the carmaker ‘more honest’.

This is like those who would describe something as ‘very unique’.

I see VW is also considering pursuing charges against the previous CEO, presumably those charges will be for ‘less honesty’.

Investment Opinion

RBNZ MPS – The new governor, Adrian Orr, delivered a new style, a new clarity of message but old outcome with no change to the settings.

The Official Cash Rate (OCR) was left at 1.75% and the current collection of influences is balanced sufficiently to continue with the conclusion that there will be no change in the foreseeable future (2018).

This outcome doesn’t surprise me, or anyone else, but it does warrant continued thought from investors; if we don’t get inflation and higher interest rates during a period of robust economic performance and employment tension when will interest rates next increase?

Inflation (as measured) isn’t at the 2.00% centre point, but its close and importantly longer-term expectations believe 2.00% will occur, so the 1.75% OCR delivers a negative real rate of return for the shortest term of investment.

Investors are feeling this ‘negative return’ via their call accounts, where they often hold too much money.

One must always have an Emergency Fund in a short-term bank account, but thereafter savings really should be invested over longer terms, according to an investment strategy, to reach out to higher real returns.

The fact that 90% of money in banks is deposited for terms of 12 months or less, with an average of less than 6 months, is a failure of the NZ pool of savers to widely access financial advice and thus higher risk adjusted returns.

It may sound like my natural bias showing through as I say that, being a financial adviser and all, but the comment is a fact.

The same lack of financial advice is seen in the disproportionately large volume of Kiwisaver investing held at irrationally low risk settings.

I got a little off topic for moment there (we’re used to it – Ed).

Having an OCR at a negative real yield setting should be inflationary and cannot be a long term setting otherwise something is structurally wrong elsewhere in the economic mix.

Or is it?

Regular readers may recall my comments a few weeks ago about the effectiveness of the central bank’s macro-prudential regulations for influencing the public financial behaviour (Loan to Value Ratio settings (LVR) and a desire for a Debt to Income lever (DTI)).

The OCR has often been described as a blunt tool, and slow to influence. If the RBNZ has found its macro-prudential tools to be both more targeted and more immediate with effectiveness this makes them good tools to have in the shed.

If the analysts who declare that excessive debt suppresses growth, and I believe it does (eventually one chokes on bringing forward too much consumption), then New Zealand’s long-term growth prospects should be enhanced by the RBNZ gaining approval for a DTI tool.

And if …

(That’s three ifs, or if cubed, which is becoming a problem – Ed)

… these macro-prudential tools reduce the heavy lifting once born by the OCR for influencing consumer behaviour, then it may well be that the OCR will sustain a negative real yield setting for many years.

If cubed is necessary for a forward-looking investment strategy.

We recommend, frequently, that investors read RBNZ information due to its large influence on your outcomes. Adrian Orr wants more of you to do this too and promises to make presentations during his term even clearer than they have been in the past. He wants engagement and no room for misunderstanding.

To be clear then; the OCR is 1.75%, it’s not going anywhere without meaningful change to inflation risks, and very short-term interest rates may well offer negative real returns for the rest of my career.

Light Rail Offer – The unsolicited approach to the government by NZ Super and partner Caisse de dépôt et placement du Québec (Quebec Super – ‘deposits and investments’) was great for talk-back radio.

Many callers thought NZ Super was mad, offering various disaster scenarios for the cost and usage of light rail services in NZ.

I’ll avoid the political nature of the debate around light rail but I can assure people that Matt Whineray (acting CEO) is no fool, and in my view will rightly be confirmed as the new CEO for the fund.

My first take on the investment offer was; ‘good, Matt (and friends) can remind the government of the presence of investors willing to provide capital to government (central and local) for necessary developments’.

Public Private Partnerships!

In my estimation NZ Super and CDPQ will price the investment to have a high probability of inflation adjusted real returns of 5-6%, net of project costs. They are not in this to win votes, or catch trains; they are in it to add value to their investment portfolios.

This government has in two previous breaths said ‘yes to PPP’ acknowledging the scale of desired projects and then ‘no to PPP’ because they are philosophically opposed to private investors making gains from projects initiated by public decision makers.

I think the government, and our various councils, confuse themselves as they bounce around within this debate.

Government can borrow money cheaply, so their members ask ‘why would we accept a higher weighted average cost of capital for a project that includes private investment?’

Because private investment typically introduces far better management disciplines that are worth more than the few percentage points (%) you think you can save as you rush our public debt ratios skyward (take a look at many council debt ratios).

In my opinion our government (blue and red) has done an excellent job, for a long time, of conservative financial management for the country. They must keep this up under all scenarios.

Good PPP investments would reinforce that strong financial management by insisting that desired, but not urgent, projects be able to deliver some form of marginal return (and public benefit) so as to justify private investment. If they cannot achieve this then the project isn’t as urgent as the lobbyists presented it to be.

Private investment offers the government an immediate financial discipline for a project, at a skill level that is not often achieved by projects that are purely ‘ministry run’.

One might want to accuse the government of ‘sale and lease back’ if they agree to a PPP for light rail through the use of external capital but undoubtedly being required to offer underwritten financial support for the operating of the service. However, this scenario is entirely consistent with the Public Transport Operating Model (PTOM) that surrounds NZ bus services (councils use our rates money to support public transport services with others owning the buses).

If the government agrees to a PPP on light rail my only complaint is that they should be inviting wider participation across NZ investors; why not consider an NZX listed PPP vehicle with NZ Super and ACC as cornerstone investors and 49% or less made available to a wider pool of investors? (The successful Mixed Ownership Model).

I look forward to the government’s response to NZ Super and CPDQ’s investment offer for advancing the light rail projects.

Post Script: NZ Super and CPDQ should call Infratil; they have a ‘lighter’ bus service, with public support, available for sale.

Z Energy – In the face of another round of politicians trying to hate fuel companies, I’d like to note that Z Energy is a great NZ business story.

In fact, I don’t even need to use the words oil, petrol or diesel to record these thoughts.

Z Energy was born out of Shell New Zealand’s desperation to leave our beautiful country.

Shell no longer wanted to distribute ‘its product’ to NZ. We were an ‘underpopulated, unprofitable wasteland in their global strategy’. (self-generated quote – Ed)

Infratil and the Guardians of NZ Super felt differently, and they agreed to purchase the distribution business. Industry expert Mike Bennetts agreed with them and became its inaugural CEO.

In the same way that start-up Flick Electric Ltd does not produce its own energy, Z Energy is not a company focused on mining; it is a distribution company and they have both proved that good customer service can build a good business and deliver reliable profit margins.

My observation is that BP has been impressed by the change brought to the market place by Z Energy, as has Mobil; both have improved their game from a service perspective and their profit margins.

The tardy service level of the 1990’s was indicative of unreliable profit margins and elevated business risks.

Given our reliance on the product from these companies and our shortage of locally mined product (prior to the recent political steps to reduce it further), we could hardly afford to have these other entities follow Shell’s lead and leave NZ (prior to the emergence of Z Energy and Gull).

Caltex (Chevron) elected not to improve its service model (NZ was still too small for them) and Z Energy willingly purchased this business from them.

Z Energy’s emergence as an NZX listed company allows consumers with investment savings to partially hedge their own expenses by owning a few shares in the company. If it happens to be true (it is) that profit margins are wider, then benefitting from a few dividends helps offset a little of the increased cost of the product.

The public has both the opportunity to reduce the volume of product that it purchases (public transport, cycles, walking etc) and to save money and hope to be able to invest in such profitable enterprises.

We are not without opportunity as consumers.

You can see from the story above that I hope we don’t try and reach a 100% electric vehicle fleet too soon, even though I know this will be good for NZ’s trade balance.

Back to my point:

Z Energy’s 2018 (single year) profit of $263 million is 38% of the original purchase price (7 years after purchasing the business), or $449 million earnings if you remove the inventory valuation movement (65% of purchase price).

This is impressive in any business person’s, or investor’s, language.

Over-zealous energy minister, Megan Woods, may be barking emotive content at the sector right now but I’ll bet she’s pleased that ZEL shares reside in her Kiwisaver (or other retirement) fund.

The government should also be pleased about the Guardians of NZ Super shareholding in the business too. I’d certainly prefer that Infratil had kept their shares a little longer.

So, regardless of the widgets or fluids that Z Energy distributes they are demonstrably a great NZ business story and one that we, inside NZ, should be very proud of.

Disclosure – I do not currently hold any ZEL shares (rightly or wrongly).

Investment News

Bank Attack – In the shadow of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry our Financial Markets Authority and Reserve Bank have launched a local ‘shot across the bows’ of local banks.

The have issued a letter demanding that the banks immediately:

Review conduct and culture, and define any resolution to weaknesses found; and

Demonstrate to customers and regulators that they can have confidence in the NZ financial services sector.

We all have views about bank service, and the relationship of the major banks to Australian parents is obvious so the letter from the regulators should not be a surprise to the banks.

There will be some ‘could do better’ scenarios and these will attract bold emotive headlines, but these errors, or failures, happen often in very large organisations so I’m not expecting disturbing findings locally.

Of more interest, than examples of poor behaviour, should be the large scale of fees charged by the banks in the financial advice sector, and my personal gripe, in the Kiwisaver sector where the regulator delivered new business into their laps, yet they charge me (us) like they had to fight for the business from a standing commercial start.

ASB credit rating – The outlook for ASB Bank’s credit rating was lowered by Fitch Ratings following a damning report into the culture and governance of its parent Commonwealth Bank of Australia.

The bank’s credit rating remains very strong at AA- but now has a ‘negative’ outlook.

Historically the Australian banking parents have been financially supportive of their NZ branches, especially in 2008.

Today ‘we’ (ASB) is feeling the cold draft of the parents’ problems.

ASB customers and lenders need not worry for their investments in the bank.

More fossil fuel regulations – California has a similar preference to NZ with respect to reducing fossil fuel use but this story implies a respectfully slower approach.

California has sent a clear signal that rooftop power is moving beyond a niche market and becoming the norm.

The Golden State became the first in the U.S. to require solar panels on almost all new homes from the start of 2020, as part of the standards adopted by the California Energy Commission.

If this helps bring pricing down (globally) for solar panels it may increase the uptake of self-generation as it becomes financially compelling to do so.

Wide uptake of solar electricity generation on private property also helps reduce the reliance on the wholesale generators, something that NZ will be increasingly interested in if we kill off the use of fossil fuels in electricity generation.

Warren Buffett – If it is raining, and you have a few spare hours, Berkshire Hathaway’s 2018 Annual Meeting has been held and can now been viewed online (search Yahoo Finance, Google or YouTube).

Warren and Charlie are fun to listen to as they respond to question from the floor and make investing sound rather simpler than it is.

It is both fun and instructive for investors.

Synlait – SML’s fantastic performance has caught the attention of many. It is a great NZ business story, alongside that of A2 Milk.

Kevin Gloag has written a research item about SML, which is published on our website, accessible by those who make use of a financial advice service from us.

Ever The Optimist – NZ manufacturing confidence is on the rise again.

The Business NZ - Bank of New Zealand performance of manufacturing index rose to a seasonally adjusted 58.9 in April from 53.1 in March and higher than the 56.4 reading a year earlier.

Investment Opportunities

CIAL Bond – our list for this new 6 year bond remains open until this Thursday.

CIAL has set the minimum interest rate at 4.00% p.a.

The interest rate will be set at this coming Friday and following that we will issue contract notes to those on the list.

Fletcher Notes – We continue to keep our FBI170 list open for those wishing to hear more about the possible supply of this fixed interest investment.

Possible deals for 2018:

One or two potential bond offers are being worked on, which we all hope will make it to market over coming weeks. More details if they are revealed as actual offers.

UDC Finance – IPO of ordinary shares (iterative speculation by us).

All investors are welcome to join these lists by contacting us.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Edward is in Auckland on 28 May, Wairarapa 11 June, Napier 12 June and Taupo 13 June.

Chris is in Auckland 18 June, Whagarei 19 June, Auckland 20 June and Christchurch 26-27 June.

Kevin will be in Christchurch on 6 June and in Queenstown on 15 June.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

Market News 7 May 2018

Quotes that are a good basis for investment, not from an investor.

‘Victory awaits him who has everything in order—luck people call it. Defeat is certain for him who has neglected to take the necessary precautions in time; this is called bad luck.’ —Roald Amundsen, The South Pole

Amundsen’s philosophy:

You don’t wait until you’re in an unexpected storm to discover that you need more strength and endurance.

You don’t wait until you’re shipwrecked to determine if you can eat raw dolphin. You don’t wait until you’re on the Antarctic journey to become a superb skier and dog handler.

You prepare with intensity, all the time, so that when conditions turn against you, you can draw from a deep reservoir of strength. And equally, you prepare so that when conditions turn in your favor, you can strike hard.

Another similar theme, but this time from a writer within the investment sector, Jim Collins:

On the one hand, winning investors understand that they face continuous uncertainty and that they cannot control, and cannot accurately predict, significant aspects of the world around them.

On the other hand, winning investors reject the idea that forces outside their control or chance events will determine their results; they accept full responsibility for their own fate.

From the perspective of our readers being as prepared as Amundsen (after saving more money than you need) means to have a well-developed investment strategy for your savings and to seek as much valuable information (financial advice) as possible to support good decision making, both forward looking (can I eat dolphin?) or immediate (should I strike now?).

In the meantime, I shall book flights to prepare harder at becoming a superb skier.

Investment Opinion

Money Talks – If you are given the choice of listening to the words (tell me) or following the money (show me) you’ll know which one I choose.

After squealing loudly about the price of NZ electricity:

Mining company said NZAluminium Smelter's electricity costs are ‘very high’ relative to its global peers, despite its proximity to generation, which meant ‘it has thin operating margins with the profitability of the smelter therefore highly exposed to fluctuations in both the New Zealand dollar and the LME (London Metals Exchange), affecting its ability to achieve long-term commercial sustainability.’

The have now elected to re-open the fourth potline for smelting aluminium in Tiwai, because it is profitable to do so.

It still grates at me that the NZ government agreed to provide $30 million to subsidise a private (and Australian! – Ed) company.

NZAS reports that it employs 650 people. $30 million immediate payment would have gone a long way to settle these peoples financial stresses if a subset had lost their jobs, rather than sending this cash to Rio Tinto in Australia.

Mark Binns (then CEO) did well to make sure that Meridian shareholders didn’t pass equity across to Rio Tinto but sadly government wasn’t as robust at negotiating with tax payers money.

‘Show me’ typically talks to the facts. Tell me requires a lot of secondary and even tertiary thought by the observer.

Korea–On a daily basis we see political posturing on a small scale around the globe, but the Korea story has been escalated significantly.

At face value one must admire the meeting between the leaders of North and South Korea, and I do, but I am troubled by the volatility of a 180-degree turn.

Financial market volatility (50-100% swings) is unwelcome for long term strategic investment planning and it is just as unwelcome on the political stage.

It doesn’t seem too big a leap for me to declare China’s hand being visible as the third member of the handshake between Kim Jong Un and Moon Jae-in at the border between the two countries.

Kim Jong Un’s seemingly unscripted invitation to Moon Jae-in to step back across the border into the North disclosed more political skill than the West would like you to believe about the North Korean leader.

What do I hope is happening?

I hope North Korea has been prompted by China to call out Donald Trump and seek concessions from the US.

I hope China has insisted that North Korea genuinely reduces its nuclear ambitions in return for accepting them as a protector. A genuine reduction in the nuclear threat from North Korea would be a global victory.

The real coup, for China,and visibly for Kim Jong Un, would be if the two parts of Korea merge into a single country again. It shouldn’t have been hard to offer Kim Jong Un a castle, wealth and perpetual support for his ego (deity?) if he conceded control of the combined nation. (Remember KJU’s recent visit to China).

Historically North and South Vietnam were able to re-join post conflict so the same is surely possible in Korea and frankly it should be desirable for its people.

The US is displaying some reduction to its desire to fight for international territory, aided by its new self-sufficiency in oil, and the Korean North/South separation has demonstrably not restricted Russia or China’s ability to manoeuvre politically.

The US has a good trading relationship with South Korea so it would be illogical to witness de-nuclearisation and a merge with the South but retreat from trade.

Japan will be pleased about reduced weaponry but would otherwise need rose tinted glasses to be comfortable with a merged Korea as a friend of China.

I have no doubt that China is better at the game of Global Chess than Donald Trump, so, if the end game is a merged Korea and boosted egos for Trump and Kim Jong Un then I think they can quietly whisper ‘check mate’.

Interestingly, even though I dislike the ‘volatile’ about turn in Kim Jong Un’s behaviour, based on my ‘hope’ scenario I feel better about investing now than I did in February when missiles were been sprayed around.

China –Other moves within the Chinese game of chess:

You may recall the recent story about China opening a futures market for oil trading, settled in Yuan, to compete with US dollar (settlement for Brent Crude and West Texas Intermediate).

It seems likely to me that this Yuan settlement for oil will succeed because OPEC countries know that the US is almost self sufficient for oil and China remains a significant consumer.

This week’s story was about China opening up the trading of iron ore futures on its market to include foreign investors, or producers.

This was followed by a story that the Chinese regulator (Chinese Securities Regulatory Commission) will now allow foreign investors to take majority (control) stakes in local securities trading companies. They will also gradually allow expansion in business scope of joint ventures.

The final point drew a laugh for me:

‘Foreign shareholders must be large financial institutions with good operating performance and good reputations

Bold highlights are mine. (Are there any left?)

My point though, is that China is taking additional steps to open its economy up just as President Trump is shutting the US in.


Broad Use – Last week I smiled as I read an opening line to a story because it can apply to so many companies:

‘Just when you think [company] is making headway, something bad happens’.

If you can guess the company the story was referring to, well done, you are very focused.

However, I think plenty of your responses will offer company names that happily sit in the same sentence.

The sentence succinctly sums up one ever-present aspect of investment risk; no knowledge about what might go wrong next but knowledge that it often does.

RBNZ–New Reserve Bank of NZ governor, Adrian Orr, who has already carved his name under a desk at the central bank (deputy governor in 2003-2007), has been granting interviews to begin disclosing his views from the top.

Governance strategies always evolve, something Adrian Orr agrees with when observing that it was past time for the 30-year-old Reserve Bank Act to be reviewed for effectiveness, so he embraces the current move toward some changes to methodology.

He is a fan of macro-prudential tools and like the two previous governors (Wheeler and Spencer) Adrian Orr wants a Debt to Income (DTI) ratio regulatory tool. It seems so logical to me, it’s hard to understand why parliamentarians would fight it.

This preference for macro-prudential tools, which have been demonstrably effective at influencing behaviour, mean I retain my view that changes to the Official Cash Rate will be smaller, less frequent and within a tighter range over the coming decade.

Whilst the shadow of poor banking behaviour in Australia is stretching across the Tasman the governor does not see evidence of such failures here and he is certain that the NZ banks are all triple checking their own circumstances, just to position themselves for confident responses to the obvious question.

Nonetheless, the governor does see some need for more active regulatory supervision of NZ banks and he will be asking the minister for more staff within that division.

The last point worth discussing was his view that perhaps a deposit guarantee scheme could be considered for NZ banking.

He explained that in fact the current NZ Open Bank Resolution law technically delivered a similar outcome to guaranteeing modest ratios of deposits (after an event of distress, define residual money left within a bank and equity required to re-open the bank for business within 72 hours).

However, the public find the OBR difficult to understand and thus whilst it delivers confidence to the RBNZ and the government that banking will continue post the next event of stress, critically it doesn’t provide the depositing public with the same confidence.

The public, and their financial advisers, know to pursue investment diversity strategies, even across several banks, but according to the statistics (massive proportions of cash in one’s own bank for terms of 12 months or less) the wider community are not pursuing simple risk reduction techniques.

Guarantees don’t come free. They are a form of insurance. Insurance costs money, premiums which will be deducted from the interest rates offered to depositors (just like fuel taxes are added to the price of our fuel).

However, the behaviour of the NZ public dictates to regulators, or should, that they need protection from themselves, which means offering and charging them for insurance.

(compulsory 3rd party car insurance next? – Ed)


Adrian Orr is one of the most influential people to your investment portfolio.

Keep an eye on him.

Tourism – is the second, or perhaps the largest, export sector for NZ and its growth is to be celebrated, even if we are struggling to manage some of it.

With the creaking at the seams I was wondering whether tourism may suffer a setback.

That was until I read about US company Delaware North signing a 20-year sub lease for the Pinewood Lodge backpackers in Queenstown.

The lease is reported as being linked to the NZ 90-day interest rate, which is linked to the NZ inflation rate (over time).

Today’s 90-day interest rate is close to 2.00%, the centre of the NZ inflation target range and I’ll guess that the lease negotiated should have left the property owners with a real return (margin over inflation) of at least 4.00% plus some reference to revenue for maintenance.

Inflation adjusted bonds in NZ (issued by the government) only offer a real return of about 1.75% - 2.00% at present but when you own a specific asset in a specific and attractive economy such as Queenstown, you can ask for a little more return.

There were several points for me in this story:

International investors see a long and rosy future for NZ tourism;

NZ tenants are a little timid in their commitments to commercial leases, but this is changing judging by the rising average terms being reported by the NZX listed property entities;

Longer average leases mean greater value for owners of commercial and industrial property.

If BP was a property owner, to rent out to third parties, they would probably be changing the rental pricing today, following this new Queenstown lease.

Property – Should property investors worry about rising interest rates or focus on rent?

After considering the story about the long Queenstown lease I read another about strong demand in Auckland and Wellington for commercial and industrial property, resulting in rent increases of between 7.50% - 8.70%.

The short answer is to stay tuned to both changes, because they both have influence, but the market for your asset (rent) is of primary concern with interest rates being a secondary influence.

Budget – I look forward to reading, and hearing, about the details of the government budget for the year ahead.

We don’t need to agree with the current government’s philosophies to remain comfortable with the strategic intention to be conservative managers of the purse.

Don’t jump to assumptions for investing prior to the reading, there is no need.

The government intentions are well broadcast and financial markets have factored most of the known, and probable unknown into current market pricing.

Vehicle Sales – a small but interesting piece of economic information; vehicle sales volumes have dipped in April for the first time in four years.

Recurring weakness would be unwelcome with respect to economic growth ahead of us.

Too much angst – Media headlines amplify too much, and content often blows up the balloon beyond appropriate scale.

The poor old CEO of Sainsbury’s has been jumped on publicly for singing a happy tune after the successful (yet to be approved) bid for competing supermarket ASDA.

We chant at our regulators for better disclosure obligations when an executive keeps a straight face following a genuinely negative event (I’m thinking Adamson and Norris at FBU) but we think a legitimate smile (appropriate disclosure) following business success from the Sainsbury CEO is a crime.

A little more perspective would be better for all concerned.

Ever The Optimist–Unemployment dropped another 0.1% to 4.40%, which makes sense given the frequent calls from employers about difficulty finding suitable employees.

I hope it drops further as employers concede a need to train some of the ‘almost suitable’ people who remain unemployed.

Within the report was a statement about anaemic wage growth. Given the tension around employment this may seem surprising, but I’d speculate that many employers are trying to factor in what they can afford beyond the sharp rise to the minimum wage.

Regardless, these are good quality problems to be solving.

ETO II – one of my favourite, passionate, leaders (Jim Delegat) has seen his namesake business has enjoyed a record (volume) harvest in 2018.

It may not mean record profit, but given Delegat’s marketing prowess it’ll surely mean sustained high revenues and cash flow.

Investment Opportunities

Christchurch International Airport – has announced a new $100m senior bond offer, for a 6-year term, which we guess will need to offer a yield close to 4.00% p.a. (paid semi annually).

CIAL has a BBB+ credit rating. CIAL intends to list the bonds on the NZX.

The deal is being booked by contract note with investors being charged brokerage (fast moving transaction).

We have a list that investors can join, once they conclude that they would like a firm allocation. The list will be open until Thursday 17 May.

Fletcher Notes – We continue to keep our FBI170 list open for those wishing to hear more about the possible supply of this fixed interest investment.

Possible deals for 2018:

One or two more potential bond offers are being worked on, which we all hope will make it to market over coming weeks. More details if they are revealed as actual offers.

We expect Genesis Energy to approach investors holding the company’s subordinated bonds (GPLFA) with a reinvestment opportunity (prior to the July call date).

UDC Finance – IPO of ordinary shares (iterative speculation by us).

All investors are welcome to join these lists by contacting us.

The fastest way to hear about new investment offers is to join our ‘Investment Opportunities’ (New Issues) email group, which can be done via our website or by emailing a request to us to be added to this list.


Chris will be in Christchurch again on 15 May.

Edward will be in Auckland 28 May.

Kevin will be in Queenstown on 15 June and Christchurch on 7 June.

Our future travel dates can also be found on this page of our website:

Any person is welcome to contact our office to arrange a meeting.

Michael Warrington

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