Chris Lee & Partners Ltd

Market News 31 May 2021

This headline made me smile:

'NZ too late to cannabis party to grow its own.'

This author obviously doesn't get out to the regions very much.

To be fair, they were focused on medicinal cannabis, but I am sure NZ has cannabis growing expertise if the scientists want to look a little harder.

INVESTMENT OPINION

Budget 2021: Every budget that I have sat through, since the time I was actually interested, has been described by the Minister of the day as 'transformative', but very few have been.

I don't think the 2021 budget will transform anything.

Claiming that it rights the wrongs of 3-4 decades ago is cynical, incorrect and represents wasted words.

The budget stands a reasonable chance of improving conditions for those finding daily life most difficult to manage.

It speaks a lot about how the government will spend the money it has (taxes collected and debts raised) but says very little on how they will inspire national productivity (generate more wealth), which ultimately is the real driver of income and taxes.

I think a little too much hope is placed on GDP growth forecasts upon which the Minister predicts 'we will be fine' in our financial future.

I'm sure my kids would love it if all I did each year was explain to them how Mum and I were going to spend money on them, but not on how we, or they, might generate more income for the household (or reduce costs – Ed).

The government commitment to increase investment in infrastructure developments has merit but I worry that the big ideas may not start, let alone be completed for the following reasons:

There appears to be a shortage of expertise within New Zealand for delivering such projects, a problem that is further hindered by our current border policies;

The government plans to tighten our border policies for immigration;

Other more aggressive nations are already trying to poach our best people; and

Increasing welfare payments ever closer to minimum wage levels does not encourage movement toward employment.

I have a hopeful proposal on the labour front:

That community leaders might be able to encourage more of their local population toward employment, if they were given the opportunity to bid for more involvement in the infrastructure spending planned by government.

When the Maori Health Authority (MHA) was first announced I wondered how this would be effective. We have been poor at improving health delivery when delineated by region (hence the removal of the DHB process) so I doubted that doing so by race would help.

However, if the government thinks a focused MHA health management proposal has merit for pushing more people toward more health services, then so too could some community co-ordination of employment (although I mean all people in such communities), rather than simply relying on 'pull' via employment advertising.

I suppose I could argue that this is Work and Income's role but they are clearly not succeeding in connecting people with employment because as I understand use of benefits is rising even though unemployment is falling.

During my recent ride through the Far North (the 'research' trip – Ed) I stopped to look at the very impressive renewal of the marae in Opononi.

We had some Far North locals riding with us, so I asked about the development story. They told me the marae had benefited from Shane Jones regional investment.

There are plenty of reasons to laugh at some of the decisions made by Shane Jones but this was not one of them. I was rather pleased that some of my taxes went to such a project and hope that it draws the Opononi community even closer together.

A community that becomes closer will surely listen to its leadership with more commitment, won't it?

Can those community leaders improve local employment by encouraging underemployed people to participate in the large infrastructure spending proposed by the government?

When Public Private Partnerships were originally promoted, I wanted access for myself and our clients to pursue attractive returns within well governed projects, i.e., not led by government departments. I still want this, but I now also wonder whether local communities should be given an opportunity to drive more involvement from local people into the employment required by such projects.

We also need Work and Income to establish a better facility for moving people between fixed contract employment and benefits to ensure seamless cash flow for people who are forced to change employment projects frequently.

I am hoping the respect for community elders would be more effective at delivering the employees for a project than by asking the individuals on their own to apply to the lead contractor in Auckland or Wellington. (optimist – Ed)

It might be the only way that this country actually delivers on the grand infrastructure plans being described from the lectern by government ministers. It's very easy to say, but without the 'do' such speeches will have been a waste of time (and likely money – Ed).

Simply throwing out more cash doesn't solve problems or deliver projects; progress only happens when people make it happen.

On the subject of community respect, you'd do well to roll through Panguru one day and stop to see the impressive memorial to Dame Whina Cooper.

I see I have strayed a long way from the government budget.

That probably speaks to my attention span when the subject matter (the budget) seems weak.

If we don't find a way to increase participation in employment, then I don't see how Grant Robertson's additional spending on infrastructure can proceed.

For all you investors, the budget's simple act of continuing to pump large sums of money into the hands of the public will help to sustain current spending levels and some businesses will be very good at capturing their share of that spending, especially the dominant retailers.

Bad debts to the energy sector and banking should remain at low levels.

Businesses, such as Fletcher Building, hoping to participate in the increased infrastructure spending will be coy in my view, concerned about access to sufficient skills to deliver on the fixed price contracts demanded by government departments. Witness their recent decision to use $300m of current cash to buy back their own shares rather than pursue too many new projects.

They've all seen the problems faced by the Transmission Gully contract pre and post impacts of Covid19.

I do wonder whether the government's offer of another $15 billion infrastructure spending will be absorbed by increased margins sought for the projects that began in the past! Again, I witness the Transmission Gully project.

Now that we have a few skilled roading gangs, and machinery, operating surely we should keep them 'rolling' around the country. If we stop now, and only focus on trains and bicycles, we will lose some of the skilled operators to overseas projects.

Given that so many of you have been travelling around NZ post Covid19 I have no doubt you've seen the many road maintenance and development opportunities that should be tackled as soon as possible.

For interest rate investors, I don't view the governments additional social spending as contributing to inflation, and the risk of higher interest rates, because most of this money is going to those with the least discretionary spending capacity, and thus is not the sort of money that drives sustainably higher prices.

So, Grant, I don't find myself being critical of your budget. It is consistent with your party's political philosophy, but you have not inspired the private sector sufficiently to drive the production and thus taxes that you'll need to continue financing your philosophy long term.

Monetary Policy – The next significant influence last week was the Reserve Bank's latest monetary policy statement.

If you're an enthusiastic reader of financial market influences you can access the MPS here: https://www.rbnz.govt.nz/monetary-policy/monetary-policy-statement/mps-may-2021

The central bank left the Official Cash Rate, and its supportive funding programmes unchanged, but they did spell out that interest rates will need to following a rising track over coming years.

The focus is not a quarterly horizon but one of years and a very shallow track higher. The predictions are for increases to the Official Cash Rate in 2022 by 0.25% and then on up to 1.75% by…. 2024.

Does anyone find this situation disruptive to their current investment strategy?

Is anybody rushing to increase the cash held in their call account?

Nonetheless the direction of central bank thinking is now upward, and the market has now fully discounted a 0.25% increase for the OCR by May 2022.

All wording that referred to the potential for negative interest rates has been removed from the statement, and rightly so because it seemed an unlikely action to me even in the months after Covid so it would be inappropriate to describe negative interest rates as possible at this point.

I understand, and like, the need for our central banks to be vigilant about inflation and the damage it causes. However, there is nothing Adrian Orr can do to stop Wellington City Council increasing my rates by 15.99%, nor does he have much influence on house pricing, two of the largest impacts on my finances and my net discretionary income for pushing inflation elsewhere in the economy.

By increasing benefits and minimum wages in NZ we are acknowledging that a large proportion of our population have no discretionary spending available at all.

The inflation we are experiencing is linked to life's necessities, not one's wants, and it seems to be linked to poor regulations and not unsettled consumer expectations (fear of prices rising).

I think it will be useful for future flexibility to see interest rates lifted to align with inflation (neutral setting) and to have central banks exit the artificial financial support game but I think it would be an error to expect central banks to add any serious financial tension to the system in the immediate years ahead of us.

As you can already sense from the tone of my opening comment, I think short term fixed interest investments will continue to be the least rewarding section of a portfolio, for years to come.

The Warehouse – It seems like a strategy from an age ago, when the Warehouse (WHS) formed a strategy of entering the supermarket space to expand their role in the NZ retail sector (2006).

Many events have changed the way we shop and WHS has moved away from sales categories that might have seen significant overlap with the supermarkets.

In response, at the time, the supermarket chains stepped in to purchase shares and debated takeover strategies, which drew in others who purchased blocking stakes (10% of the shares).

Such holdings are no longer required, so following the recovery to sales and financial strength Foodstuffs has decided to sell its entire holding (now 9% after some dilution).

The sale suppressed the share price a little, but I am certain that the WHS board will be pleased to see fresh support on their share register and the removal of an overhang from a large investor who clearly no longer wished to be there.

Fletcher Building – Ross Taylor (CEO) must finally be feeling a sense of relief that his business reforms are aligning with conditions that actually enable FBU to make a meaningful profit.

For the past decade investors have wondered why profits were not already happening given the constant calls to build more houses and infrastructure. Part of the answer of course is that previous CEO's allowed their egos to get in the way and pursued enormous headline (skyline? – Ed) projects with far more chance of loss than profit.

Last week's announcement that FBU will use $300 million of its cash to buy back shares on market whilst also being able to hold company leverage below targets.

I can't remember the last time FBU reported 'robust volumes and good margins'.

This year's profit performance will be at the top end of the guidance range.

Long-suffering FBU shareholders will be relieved but will also expect management to ensure that this performance is maintained for far longer than just one year!

EVER THE OPTIMIST

Fonterra has announced a forecast that that midpoint for next year's dairy payout will be $8.00 /KgMS. (Synlait has the same target)

This is excellent news for the farmers and regional NZ economics.

ETO II – Vaccinations

Global Data:

Vaccinations doses delivered – 1.85 billion - The US has reached 50% first dose, and 40% second dose, which is great. However, their daily dose rate is slowing which rather suggests they too are reaching the anti-vacs ceiling.

Small island nations are having more success (more community minded).

Israel is still stalled at around 60%.

Anti-vaccination rhetoric will be the next global concern and will likely reinforce business and border rules that insist on vaccinations to gain access. In turn, this problem will place some new pressure on the revenue prospects of such businesses (think airlines, airports etc).

I can imagine private health facilities charging a lot to assist Covid19 sufferers in future if they turn out to be people who rejected the free vaccination supply.

Meanwhile here in NZ, we are so far from discovering our anti vaccinations levels, due to slow roll out, it is becoming frustrating.

Total (recorded) Corona Virus cases – 170 million

Active Cases – 14.6 million (declining)

Daily rate of new cases – 500,000

People in serious condition – 93,000 (declining)

Daily Deaths – about 10-12,000

I think the IMF is right, the wealthiest countries would 'help the world' if they pay for vaccinations for the poorest nations. Hopefully they'll agree with such a resolution when the G7 meet in June.

Investment Opportunities

Infratil Bond – Infratil announced its new bond, maturing 15 December 2027 with an interest rate of 3.60% and was promptly swamped with demand.

Essentially all who wish to invest from late last week must join our waiting list.

IFT has held some allocation specially for IFT220 rollover. If this is not utilised, there is some prospect that more 'new' investors will gain access. So, it is worth completing your form and sending it to us if you would like to invest as this will be done on a first in, first served basis.

Secondary Market – Remember that if there are no new investment offers to choose from, or none that appeal to you, we can help you to source investments for your portfolio from the secondary market. We also have a page on our website which displays the current yields of some bonds and shares which you are welcome to use.

TRAVEL

Edward will be in Auckland on June 9 (Remuera Golf Club) June 10 (NOW FULL) and June 11 (Wairau Park).

Edward will also be in Napier on June 24 and June 25 and in Nelson in July 8 and July 9.

Johnny will be in Christchurch on 17 June. 

Kevin will be in Timaru on 14 June.

David Colman will be in Lower Hutt on 16 June and Palmerston North on 30 June

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

Mike Warrington 

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Market News 24 May 2021

None of this information should be a surprise, but it's worth repeating:

The Reserve Bank of Australia's latest monetary policy statement reiterated that the current very low interest rates will remain at least until 2024.

The current overnight cash rate is 0.10%

The board remained committed to doing what it reasonably could to support the Australian economy, and would maintain highly supportive monetary conditions until its goals for employment and inflation were achieved.

The board will not increase the cash rate until actual inflation is sustainably within the two to three per cent target range. For this to occur, wages growth would need to be materially higher than it is currently

Pretty clear in my view.

INVESTMENT OPINION

SKC050 – Last week the largest association of finance professionals in New Zealand (INFINZ) had its annual awards dinner; they bestowed upon Sky City the award of 'Excellence in Treasury'.

It is true, SKC and especially their recently retired Chief Financial Officer Rob Hamilton (an old work colleague), were forced to work very quickly during 2020 to resolve the company's new financial risks, thrust upon them by Covid19.

I think they were lucky to have someone of Rob's capital markets experience with them at the time.

They now have new leadership in the finance division, who seem to have less market experience than Rob had, riding his coat tails to the award but then slipping up with their recent bond offer.

The 'excellence in treasury' reward was announced immediately after the unnecessary one-day delay to their recent bond issue.

The delay revealed a short sightedness in my view, coming immediately after yet another bond repayment announcement, presumably hoping that this late increase in demand might reduce the interest costs for SKC.

This may well have happened, but it made their bond offer look haphazard and treating it as if it were a small, single, transaction on an open market. It was not such a transaction; its scale required formal documentation and the gathering of many participants for successful completion.

SKC had a strategy, made its formal announcements, including dates, and asked the investment community to gather up demand and meet those timeframes.

We are constantly told that early information is good quality for lead managers and borrowers (a true statement) and it should be rewarded.

The well prepared delivered their responses and readied themselves to confirm business with the risk takers (investors) who provided SKC with multiple days lead time of knowledge that they would successfully borrow the $175 million sought.

It is therefore poor form to then, on the closing day of the offer, grab news from the 11th hour (11:59pm – Ed) and selfishly decide to delay the deal in the hope of riding a late demand wave just a little further.

It made what should have been a good bond offer in the market look very casual, and not one of excellence.

Budget 2021: I had every intention of providing 'Mike's discourse on the Budget' but I won't this week for two reasons:

The media is full of content, and I suspect most people are already sick of it; and

Kevin Gloag has written a far more interesting and relevant item for you on a widely held investment in New Zealand (below).

I'll digest the budget for a little longer and assess how it might impact you as investors.

Kevin Gloag Writes – Fall From Grace

A2 Milk shareholders will be hoping the pain ends soon with the former high-flyer's share price still in free fall following yet another earning's downgrade, its fourth downgrade in the current financial year.

A2s share price has lost more than two thirds of its prior value over the past 12 months as it battles to reignite infant formula sales into its largest market China.

A2 joins a group of listed, glamour health product stocks, which have gone from spectacular growth and 'market darling' status to fighting for their lives and those of their shareholders. 

The rise and fall of A2, Comvita (manuka honey), Bellamy's Organic (organic infant formula and baby products) and Blackmores (vitamin tablets and potions) bear many similarities.

The two biggest similarities were that they all became reliant on China for growth, and they all relied on the daigou sales network as their largest distribution channel.

Targeting the world's largest consumer market makes perfect sense but becoming over-reliant on one market and at the mercy of a marketing and distribution network you have no control over can be risky and for the businesses listed above these risks became real.

With 15 - 20 million babies born in China every year (but falling), versus a combined 250,000 in Australia and NZ, and a rapidly growing Chinese middle class hungry for quality health and wellness products from trusted suppliers, like NZ and Australia, China has become a natural hunting ground for many Australasian businesses.

In general, daigou (Chinese for “buying on behalf of”) purchase products from Australian pharmacies, supermarkets and specialty stores and ship them to China for resale, making a margin for themselves in the process.

Daigou include Chinese students, tourists and temporary migrants shipping products home to friends and family and large corporate daigou with sizeable operations.

During boom-times empty baby formula shelves were a regular phenomenon across Australia but the multi-billion-dollar Australian daigou industry has been upended by Covid with border closures, travel restrictions, lockdowns and shipping delays all contributing factors.

The daigou industry really accelerated in China following the 2008 baby formula scandal, which left 300,000 infants sick and 6 dead, and quickly expanded into a vast range of products including cosmetics, clothes, food, wine, vitamins, toys – basically anything a buyer wanted.

Consumer confidence in locally made products has never really recovered in China although Chinese authorities have worked hard in recent years to rebuild trust in home-grown products and wean consumers off reliance on imports and recent figures suggest they are making some progress.

In today's very connected trade world and when you consider the open relationship enjoyed between NZ, Australia and China it seems almost unbelievable that personal shoppers sending products back to China could become the major distribution channel for so many large businesses.

That is, until you understand the scale of the daigou back-channel operation in Australia.

Before Covid 19 there were about 1000 Chinese specialty stores and logistics companies and an estimated 150,000 Daigou operating across Australia.

Daigou made up as much as 60% of some business' sales and the daigou market was estimated to be worth about $2.5 billion per year in Australia.

Daigou would live-stream their products and services through social media apps like WeChat sometimes to audiences of tens of thousands of people across China enabling Chinese consumers to view products online before they purchased.

Daigou would then take their orders to local specialty stores to be processed and funnelled on to logistics firms, many of whom maintained industry-scale warehouses near Australian airports to facilitate processing and dispatch to China.

At its peak, pre-Covid, up to half a million packages were being sent to China every week.

The Covid 19 attrition rate is yet to be accurately quantified but daigou numbers have reduced significantly as have the number of specialty stores and logistic firms.

The daigou network operated in NZ until about 10 years ago when our government banned unauthorised exports of consumer goods through unregistered channels.

As a result, many NZ products are now sold into the daigou ecosystem through Australia, including A2's Platinum Infant Formula, once a favourite of both daigou and Chinese consumers.

One of the problems with the informal daigou channel is traceability of product as A2 highlighted in its recent results announcement.

After a brief period of increased demand last year, when Chinese consumers stockpiled products in anticipation of Covid related shortages, disruptions to the daigou distribution channels have left many businesses, including A2, uncertain as to how much product they still have in the Daigou ecosystem and how dated some of that product might now be.

In A2's case they have made a decision to reduce the amount sold through daigou and reseller channels to rebalance stock levels and rediscover true demand for their products.

A2 will also destroy 8-9 million tins of older dated formula and replace it with newer stock, which will be a good PR exercise if nothing else.

Like other NZ and Australian businesses A2 will be hoping that it is still on daigou shopping lists post-Covid as absence from the market and growing competition will no doubt have cost it customers who might be hard to win back.

Global giants Nestle and Danone are just some of A2's new competition in China as dairy companies look to cash-in on the A2 milk revolution.

With revenues and profit growth going through the roof reliance on a marketing strategy they had no control over would have been the furthest thing from A2's mind but it's now going to be a true test of the marketing company's leadership team if they are to stop the rot and start growing again.

Former CEO/Managing Director Geoff Babidge, who took A2 from almost a penny-dreadful to NZ's largest listed company during his 8 years at the helm, had proven food industry experience and was always going to be hard to replace.

For me, the biggest failing exposed by the appointment of former Jetstar boss Jayne Hrdlicka's as Babidge's successor was not her wasting over $30m on consultants because she was out of her depth or immediately cashing up of the A2 Milk shares given to her as part of her employment agreement but that she was appointed in the first place.

I think her appointment raises some serious questions about the usefulness of the A2 board that seem either out of touch or simply lacking industry knowledge.

Adding to current A2 boss David Bortolussi's problems is the recent resignation of his Asia Pacific CEO, Peter Nathan, and the fact that many of Babidge's experienced senior leadership team have now also left the company.

With growing interest in the daigou sector by both Australian and Chinese tax and regulatory authorities it is an opportune time for Bortolussi to grow A2's Chinese business through other distribution channels to become less reliant on the personal shoppers.

The daigou industry has been trying to rebrand itself as a Cross-Border E-Commerce enterprise in order to shake its reputation as an unofficial and unregulated channel.

Under CBEC, which refers to all digital international trade like that done on eBay and Amazon, the daigou are trying to tie their whole network together so it might look more acceptable to regulators.

Beijing has already introduced a raft of new regulations on imported products and of course Australia and China are currently locked in a serious trade dispute with Beijing slapping major tariffs on many Australian products and blocking some products altogether.

A2 will be hoping infant formula is not added to the list as China moves to promote its own locally produced A2 products.

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Organic infant formula maker Bellamy's Australia's story bears so many similarities to A2's I wonder whether it might have the same ending.

Bellamy's listed on the ASX in 2014 offering shares at $1.00.

Little more than a year later its shares were trading at $16.50 driven by rapid sales growth in China for its organic infant formula and baby products.

Much of this growth was driven by the Australian daigou network on which Bellamy's became heavily reliant.

Then two things happened – Chinese authorities tightened regulations of baby formula imports into China, to improve safety standards, and Bellamy's decided that spectacular growth in China meant everyone wanted their products so they could take over and sell directly into China and undercut the daigous.

This proved to be a huge error of judgement by Bellamy's who completely misunderstood the influence of the daigou reseller network as ambassadors and sellers of their products in China.

While Australia has a good reputation in China for food quality and safety it is the daigou who have rapport and personal trust with Chinese consumers not the Australian companies or brands.

Unfortunately for Bellamy's as it embarked on its direct marketing strategy in China some of its competitors started selling off stock at discounted prices in anticipation of not meeting the new Chinese regulatory requirements and having their licences cancelled.

This created the perfect storm for Bellamy's with both daigou and Chinese consumers abandoning them in favour of other products.

It is estimated that up to two-thirds of Bellamy's sales came from China.

What followed was a collapse in sales revenue, earnings downgrades and of course a collapse in Bellamy's share price with the company losing half its value in a single day.

Like A2, Bellamy's then had to clear excess stock but also had to pay penalties to suppliers for not taking minimum volumes plus set about repairing its brand, a task not helped when it was discovered that after the big sales drop in China but prior to informing the market Bellamy's CEO and Chairman had quietly sold off more than $5 million worth of Bellamy's shares.

The CEO, a former Australian Businesswoman of the Year, immediately stood down and Bellamy's major shareholder, and co-founder of Kathmandu, Jan Cameron set her sights on removing the board and replacing them with her own people.

Although Cameron was unsuccessful, and later faced charges herself for failing to disclose her true shareholding in Bellamy's, the Chairman eventually stood down and Bellamy's underwent a major restructure.  

Despite their problems Bellamy's traded on but unfortunately did not have the required import approvals when regulatory changes in China kicked off in January 2018, meaning they could only sell products via online channels and not in physical retail outlets, where Chinese consumers were increasingly headed.

The reason behind the lengthy delay was answered in 2019 when China Mengniu Dairy Company, part owned by the Chinese government, made a takeover offer for Bellamy's which was ultimately successful much to the delight of its shareholders, including Cameron who netted around A$300 million.

The $13.25 per share offer was an especially good outcome for Bellamy's new CEO who had been awarded options which vested in the event of change of control and the Mengniu takeover netted him a quick $15m. Unsurprisingly he has already moved on.

A sceptic might conclude that Chinese authorities withheld Bellamy's regulatory approval for nearly two years to hinder its performance, run down its share price, and present a discounted buying opportunity. This theory was briefly investigated then abandoned by Australian authorities, probably for political reasons.

Regardless of tactics, it confirms that there is a growing interest from large Chinese infant formula manufacturers in international infant formula brands, particularly NZ and Australian brands that have established brand equity.

The authenticity of a premium, trusted brand is very attractive to Chinese companies and in the new regulatory environment the Chinese government supports partnering with international brands.

Unlike A2, Bellamy's troubles with the daigou distribution channel were non-Covid related otherwise their stories are very similar. I wonder if their stories might finish the same way.

Bellamy's had a strong and trusted brand, and the “clean, green image” Chinese consumers are looking for, which helped attract a buyer.

A2 enjoys even stronger brand equity in China, has the same “clean, green image,” and might just be ripe for the picking. It certainly doesn't look expensive anymore – just ask its shareholders.

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Comvita and Blackmores's stories are also very similar – spectacular growth in China and share prices through the roof followed by disruption to the daigou distribution channel, increased competition and rising costs combining to crush earnings and destroy shareholder value.

I think comments made by Marcus Blackmore sums it up for all the companies mentioned in this article.

Blackmore's China business grew from $2 million a year to $130 million in less than 5 years and majority owner Marcus Blackmore confessed to shareholders – “we didn't see it coming and we didn't see it going.”

Blackmore believes the board, himself included, didn't keep up with the speed of the sales growth and got 'too fat, too quick', too bureaucratic and too slow at making decisions.

Let's hope A2's governors have also learnt some lessons.

EVER THE OPTIMIST

After a dreadful year for business, it is quite impressive to see Air NZ on top of the corporate reputation rankings (again).

This, even though the CEO knows they burnt some of the goodwill enjoyed by the brand during the urgent changes when reacting to Covid, which he intends to now rebuild.

ETO II – Vaccinations

Global Data:

Vaccinations delivered – 1.65 billion

Total (recorded) Corona Virus cases – 167 million

Active Cases – 15.5 million (declining)

Daily rate of new cases – 5-600,000

People in serious condition – 96,000 (declining)

Daily Deaths – about 10-12,000

Investment Opportunities

Precinct Properties – successfully issued $150 million of its new 6-year bond (2027) with an interest rate of 2.85%.

Thank you to all who participated in this bond offer through Chris Lee & Partners.

Infratil Bond – Shortly Infratil will announce a new bond, maturing 15 December 2027 and it will have an interest rate in the mid 3% range.

We have a list open for those wishing to participate, once offered.

Secondary Market – A lot of money is being repaid over coming weeks, leaving investors on the hunt for new investments to add to their portfolios.

Remember that if there are no new investment offers to choose from, or none that appeal to you, we can help you to source investments for your portfolio from the secondary market.

TRAVEL

Edward will be in Auckland on June 10 and June 11, Napier on June 24 and June 25 and Nelson on 8 July and 9 July.

Johnny will be in Christchurch on 17 June. 

Kevin will be in Timaru on 14 June.

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

Mike Warrington 

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Market News 17 May 2021

The poor Americans.

Imagine their financial suffering at having to pay a new high price of US$3.00 for a gallon of fuel for their car.

This is the equivalent of NZ$1.10 for a litre.

No, you cannot arbitrage this market because the difference is tax collected on fuel here in NZ.

It's impressive that Tesla sales have been as good as they have against this price for fossil fuels.

INVESTMENT OPINION

BNZ090 - As expected, the BNZ has announced the repayment of its Tier II subordinated bonds, with NZX code BNZ090.

Repayment will be made on 17 June 2021 returning a large $550 million to predominantly retail investors.

Holders will recall that the prior expectation for repayment was on 20 December 2020, being year five of these 10-year bonds (5+5 year terms) but the central bank instructed them not to repay at that point.

In fact, the Reserve Bank instructed all banks not to repay any subordinated bonds in the immediate aftermath of Covid19 amid concerns about the potential for financial instability and a rise in bad debts.

This instruction affected ANZ (ANBHB) and Kiwibank (KCFHA) who had been lining up repayment and possible reissuance during 2020. These were both bonds that the Reserve Bank had publicly stated that it dislikes as equity on a bank balance sheet so restricting repayment disclosed the level of concern held at the time about financial conditions.

It was the prudent, and appropriate, course of action but as we now know subsidies protected employment and then the economy surged back into life resulting in far better financial outcomes than the banking regulator feared.

Banks also provided interest payment holidays bridging the cash flow gaps experienced by some so bad debt levels barely increased relative to prior periods.

By way of reminder, the BNZ090 Tier II bonds only provided full equity contributions to a bank balance sheet for the first five years of the 10 year bond. After year five the equity content declines at 20% per year so they quickly become less useful to the issuing bank and thus repayment at year five is the probable outcome under normal conditions.

Actually 2020 was an excellent example of why banking regulators insist on these equity contributing bonds being 10 years legal life even if they invite repayment after five years; sometimes 'stuff' happens, and the funding may need to be retained.

We should now see the other 'old' Tier I and Tier II subordinated bonds repaid (ANBHB may convert into ordinary shares in the ANZ) and banks getting into their programme of issuing new series of Tier II subordinated bonds.

The Reserve Bank does not like, nor want, Tier I bonds to feature as equity on bank balance sheets, preferring retained earnings and ordinary shares.

So, now another $550 million cash will be returned to a market with a shortage of similar investment alternatives.

This may not be so bad because in response to the increased use of shares for investment by the public I rather like the 'balance' of having subordinated (equity like) bonds being repaid, preferring that these investors use stronger bonds as the counterbalance.

I wonder if the BNZ is watching Westpac closely, with its potential for listing on the NZX, which would open up the potential for raising new equity very quickly should the need arise, including repayment of equity temporarily provided by subordinated bonds?

All Blacks – Good on Forsyth Barr for their proposal that listing the All Blacks business on the NZX is an alternative for accessing additional capital for the NZ Rugby Union.

It appears that the real need of the Rugby Union is to generate more income, so someone needs to change the way they market themselves and sell products and services but other than connections I don't see that the private equity investors held any other significant advantage.

The brand 'All Blacks' already exists. It doesn't need to be built. Perhaps it would benefit from expansion. Marketing and sales are the problem.

Warren Buffett with his ownership of Coca Cola doesn't make claims about adding to its brand value, nor its marketing strategy, other than using his annual meeting to remind everyone to drink it! He provides capital and leaves marketing to the experts.

Surely the Rugby Union can engage experts in marketing?

Clever marketers will find ways to link All Blacks shareholders to product purchases and perhaps even broadcast subscriptions (think Sky TV, or directly on 'All Black TV' via the internet for international viewers.)

How about paid podcasts provided to the Rugby Union by famous players and coaches for the benefit of rugby players and coaches globally?

If there can be a movie about Richie based on his fame surely the Rugby Union can create other video content for fans.

Can one already pay to use named All Blacks in their specially selected team in a digital global rugby challenge? Online gaming is an enormous marketplace, I hope the All Blacks are already part of it.

I don't have enough financial information to work with, but I happen to agree with Forsyth Barr and the Rugby Players Association that the NZ public would support such a share offer very widely, justifying the financial adviser's view that they can achieve a slightly higher price per share for the Rugby Union's capital raise than the Silverlake proposal.

Plenty of investors the world over have proved they are willing to buy shares in businesses even if they don't, or might not, make money; think Tesla, Uber, Spotify, GameStop, even General Electric.

I also prefer the concept of domestic ownership.

I am genuinely surprised by the NZ Rugby Union's angry response. Why wouldn't they welcome alternative funding options for their problem?

When a new buyer recently offered to pay more ($8.10) for Tilt Renewables business, after the board had conditionally accepted the previous offer ($7.80), the directors didn't scream at the disruptor (2nd offer). They simply sat down and reviewed the new and improved options available to them.

It's always good to have more options.

Not that this is an obligation of the Rugby Union but why wouldn't we try and introduce more capital hungry businesses to the NZX?

We will surely need them now that Kiwisaver default schemes are to adopt a 'Balanced' risk profile resulting in more investment in shares and less in bonds (changing asset allocation proportions along with the change to risk profile). Don't underestimate the influence of this evolution of risk within the NZ savings pool.

Hopefully the NZX will join the lobby in favour of the Forsyth Barr proposal.

I can see it now: Lead Manager – Forsyth Barr, Co-Manager Sharesies!

Fed Change Opinion? – There have been plenty of commentators now debating the emerging inflation risks and the need for the US Federal Reserve to increase interest rates and return to the fight against inflation.

It is refreshing to have two sides to the debate again after such a long period when everyone agreed, which is an unsettling state for decision making in financial markets.

However, whilst the new debate rages, and we allow months to pass by so we can analyze the developing data, I'll again remind people of a career long warning – 'Don't fight the Fed'.

The US central bank has made it very clear that not only are they as interested in economic activity (employment and growth) as they are inflation, they have also switched from forward looking proactive management of inflation risks to a reactive stance.

This alone implies to me that they will do nothing in 2021, and in all likelihood not in 2022.

Take the opposite position to the US Federal Reserve at your peril.

Digital Currencies – I do look forward to the likely efficiency that digital currencies will bring.

Whilst there is a constant stream of headlines now about which central banks are making progress on their own digital currencies it is still going to take years before they are used widely.

Nonetheless I was pleased to see another strand of credibility added last week when the global payments system SWIFT announced that it wishes to become a trusted party for settling cross border transactions between digital currencies.

They propose to use Distributed Ledger Technology (Blockchain) to operate their network.

Wisely they also intend to provide a bridge so settlement can occur between current Real Time Gross Settlement payments systems and the new Central Bank Digital Currency (CBDC) systems. You can be certain that the world will not move simultaneously to the use of CBDC.

They also expect that regulators will want separation between governance of payments systems and operational use, just as occurs today with cash and credit.

My hope is that CBDC will be significantly cheaper to use and thus society will logically migrate toward more and more use of CBDC and away from cash.

I then hope that it will reignite global travel and trade growth in the post Covid19 world having stripped out the huge costs of foreign exchange transactions.

It is an exciting development in the world of payments.

Tesla – Whilst on the subject of digital currencies, Elon Musk has confirmed my opinion of him being a poor governor and executive by now deciding to stop accepting Bitcoin as a method of payment for a new Tesla because Bitcoin is a massive (wasteful – Ed) user of energy.

It is illogical for a company that claims to be on the frontier of energy efficiency and goodness for the environment to align themselves with an unnecessary digital commodity that is an enormous user of electricity, predominantly generated by coal.

If you watched TVNZ news last week you'd have seen that Bitcoin mining uses three times the amount of electricity as New Zealand each year!

This puts into perspective some of the grand claims, and ideas we have in NZ, for changing the world. We should focus on good form locally, and not telling other nations how to behave because we are barely a speck on their radar.

It is still inappropriate that Tesla bought Bitcoin for their balance sheet.

EVER THE OPTIMIST

Our nearest trading partner, Australia, has in its latest budget, doubled down its efforts to support employment and business activity.

NZ will surely benefit from some of this (hopefully without people crossing the Tasman for employment – Ed)

ETO II – Vaccinations

Global Data:

Vaccinations delivered – 1.39 billion (total daily doses are declining). Given the large scale of their populations the US and UK are two of the most impressive performers now.

Total (recorded) Corona Virus cases – 162 million

Active Cases – 18.8 million (stabilizing)

Daily rate of new cases – 6-700,000

People in serious condition – 104,000

Daily Deaths – about 10-13,000

Investment Opportunities

Sky City Bond – The very successful 6-year bond offer from Sky City (SKC050) was completed today with an interest rate set at 3.00%.

It was delayed by a day because of the high level of demand.

Thank you to all who participated in this bond offer with us.

Local Government Funding Agency – Thanks also to people who participated in this 10-year bond (LGF140) offer last week with an interest rate of 2.25%.

If you'd still like to invest in this bond please let us know as they are reasonably easy to buy on the market.

Precinct Properties – is the next cab off the rank offering a 6-year bond (2027) and a minimum interest rate of 2.85%.

This is a simple, senior bond. The Precinct Property story is well known, and can be reviewed via their website for those wishing any updates over time - https://www.precinct.co.nz/

Secondary Market – A lot of money is being repaid over coming weeks, leaving investors on the hunt for new investments to add to their portfolios.

Remember that if there are no new investment offers to choose from, or none that appeal to you, we can help you to source investments for your portfolio from the secondary market.

Bank Share Offer? – After spilling my speculative views last week about the potential for Westpac to sell its NZ business, Jenny Ruth of Business Desk kindly shared with me an article she had written on the subject.

She feels it is more likely that Westpac will simply offer its current owners two shares, one in WBC Group, and one in WBC New Zealand.

This would be simple to execute but also lead to a long flurry of securities trading as shareholders repositioned into the part of the bank they prefer to own.

I don't mind earning a little brokerage from such an outcome and Jenny might be onto something here because this would pass such brokerage costs to WBC shareholders and avoid the bank itself paying transaction costs to launch what would be a very large share float (estimates between $10-15 billion for WBC NZ).

By contrast the float of Meridian Energy valued it at $1.9 billion.

If you are a keen reader of financial press Business Desk is a successful subscriber news service offering good content from skilled journalists.

TRAVEL

Edward will be in Auckland on June 10 and June 11, Napier on June 24 and June 25 and in Nelson on July 8 & July 9.

Johnny will be in Christchurch on June 17 and returning in July.

Kevin will be in Timaru on June 14.

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

Mike Warrington 

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Market News 10 May 2021

I have just completed my third research trip in the Far North and there's plenty to be optimistic about as you look around.

I hope when I get back and see some of the detail in the latest employment data (see ETO below) I'll discover that the Far North is enjoying some of the most rapid increases to employment participation.

Another you'll discover below is that this newsletter seems to be entirely populated by Ever the Optimist items, which frankly I am pleased about in a world of media that constantly tries to find negative and unnecessarily critical content.

INVESTMENT OPINION

 

Financial Stability Report – It was unsurprising that we were told there was little to fear in the financial stability stakes for New Zealand. There really hasn't been since late 2008 and early 2009.

The Reserve Bank spoke about the usual subjects of bank equity levels, lending risks, Loan to Value Ratios and the housing market but they also included some statements covering the obvious, such as:

We are also seeing the impact of low global interest rates resulting in increased risk taking

This 'development' has been happening for years and now that interest rates are below inflation (negative real returns) it is entirely logical that investors are seeking additional risk to pursue positive real returns on their savings.

To not achieve positive real returns is to accept a financial drag on one's wealth, like a modest amount of capital spending. This is acceptable for some people but offering capital (your savings) to a business either via a loan (deposits and bonds) or as equity (shares) should really be done in the pursuit of returns that exceed inflation.

It is the central banks driving interest rates lower that has resulted in the increased risk taking (asset allocation changes), making it ironic that this is one of their concerns.

The key word you should focus on is 'global'. Having interest rates very low globally means it will be very hard for single nations to break ranks and begin to increase interest rates, and certainly not a rate of change that varies from said global stance. To do so could become very disruptive to currency pricing and trade outcomes which might lead to an accusation of sparking financial instability!

Another thing to remember is that influence of interest rates as a monetary policy tool is being crowded out by other macro prudential levers (such as LVR settings, deposit guarantees and perhaps Debt to Income ratios) and disturbingly the Minister of Finance seems to think he should have a say too.

There isn't a politician in the house that could avoid the fear of upsetting the voters and thus none could offer the independent thinking that has so benefited our central bank, and by extension financial stability in the past.

Courtesy is the reason Adrian Orr didn't describe the Minister of Finance as the new greatest threat to financial stability in NZ.

Equity held by our banks is increasing again, bad debts are declining, and the risk profile held by the banks is also declining (less lending in the highest risk sectors) so you have little to fear with respect to the stability of the NZ financial system.

EVER THE OPTIMIST

Unemployment has surprised the Reserve Bank and declined to 4.70% and, to compound the success, the participation rate of employed has increased too.

This follows a good previous quarter for employment and is very promising evidence that anxious economists need not be concerned about broad economic prospects and that the Minister of Finance can reduce the scale of free money he might having been budgeting on spending.

ETO II – Vaccinations

Global Data:

Vaccinations delivered – 1.25 billion

Total (recorded) Corona Virus cases – 156 million

Active Cases – 19 million (stabilizing)

Daily rate of new cases – 7-800,000

People in serious condition – 109,000

Daily Deaths – about 14,000

Investment Opportunities

Sky City Bond – Skycity has announced the issue of a 6 year bond maturing 21 May 2027.

A minimum interest rate of 3.0% has been established with the final rate set on Friday 14 May.

The bonds will be listed on the NZX under the code SKC050.

No brokerage will be charged to clients.

Please contact us no later than 5pm Thursday 13 May if you would like to purchase the bonds (there is potential for scaling where investors receive fewer bonds than sought).

Bank Share Offer? – One very possible outcome from the review by Westpac Banking Group into what they'll do with Westpac New Zealand is to simultaneously list it on the NZX and offer all the shares for sale to new investors, thus becoming one of the largest IPO's to come to market in many years.

Initially most had reacted to WBC threats to exit NZ banking as either a negotiating tactic with the central bank, or an opportunity for another bank to buy a large chunk of additional market share.

It is unlikely that the Reserve Bank, or the Commerce Commission, would allow a steep decline in competition if ANZ, BNZ (NAB) or ASB (CBA) offered to buy WBC NZ.

Our smaller banks do not have the financial capacity to buy WBC NZ, in the same way that a whitebait doesn't attempt to eat a whale.

Kiwibank also looks too small to me but is a chance if its owners (NZ government via ACC, NZ Post and NZ Super) were prepared to add a lot more capital. It would become far more likely if WBCNZ was listed on the NZX and Kiwibank bought 51% allowing the public to participate also but without control.

Frankly it would make most sense to me if Kiwibank bought WBCNZ, merged the entities and listed 49% on the NZX for public investment.

This and the arrival of government guarantee on bank term deposits would finally remove the moral hazard of customers thinking the government guarantees Kiwibank and it opens the bank up to far more options for raising new capital for growth

The Hon. Jim Anderton (RIP) is long gone. His baby (Kiwibank) that many rejected before it started has become a success (of sorts - Ed) but it has the capacity to become a very strong player if the government allows it to expand and to simultaneously invite public investment.

You may recall that Westpac is the banker that arranges payments for the NZ government. It feels like a nice concept to migrate that payment facility into a bank that the government owns, or we could become the owners of!

Maybe after Kiwibank buys WBC NZ the government could add a little value for investors by extending the service agreement for government payment processing.

The banking, financing and payments playing field was changing rapidly prior to Covid19 but since then change has accelerated markedly. It is not a place for the faint hearted, witnessed in part by WBC proposing to exit NZ, so it is surely not the place for the government to be investing.

The government agrees with the progressive removal of cheques as a form of payment from the banking ecosystem (government departments don't accept this form of payment), and they'd like cash use to decline (crime linkages). So, in five years' time will you be only using EFTPOS, online banking and a credit card for payments, or, might you be using VISA or PAYPAL backed payments systems, or maybe stored value within a family of retailers?

Imagine a flybuys style card or application on your phone that TradeMe could credit from asset sales, and refunds and discount vouchers from retailers and reward schemes like Airpoints could be credited to.

Major retailers could then accept payment for groceries, energy or everyday items from these credits.

The emergence of central bank digital currency globally onto the payments playing field could open up enormous payment movements without the need for bank involvement. If real time (immediate) settlement becomes possible between a customer and say The Warehouse (WHS) why couldn't WHS be offered a settlement facility with the Reserve Bank for a NZ digital currency?

Then, along with other major retailers such as Air NZ, New World, Countdown, Z Energy, Trustpower, etc why wouldn't they offer consumers an integrated payment portal to use within this community, linked of course to sales benefits instead of bank fees?

Do you remember Facebook was trying to launch such a scheme, at their sole control, with their version of a cryptocurrency; LIBRA?

Then there's Bitcoin, for its disciples.

There's no doubting, it's becoming harder to 'be a bank'.

So if the government will not allow Kiwibank to buy WBC NZ, and WBC sells it to the public, will it still be called Westpac in NZ?

Surely.

It makes no sense otherwise. The name is an enormous part of the value (brand).

If WBC wants to exit NZ in terms of financial commitment and regulatory obligations it rather implies that they would need to license or franchise the use of the Westpac brand.

What might that cost?

In theory a lot, but how would that make sense to new investors; paying away an annual license fee from the current profit margin, which WBC describes as insufficient to tolerate continuing to operate within the NZ market themselves!

It is all very interesting and seems likely to lead to a rather large shift in NZ banking and may yet lead to one of the biggest share floats in NZ for a very long time. (Hence the position here within the newsletter).

Then if WBC succeeds with an IPO and brand licensing, would NAB immediately follow by selling BNZ and CBA possibly quit ASB?

Or might a Chinese bank claim the opportunity to dramatically expand their beach head in NZ?

So many permutations and mental gymnastics to consider.

I think I'll just wait for the facts.

Kevin Writes – Z Energy

 

Z Energy's profit announcement last week should have pleased its shareholders although there has been a muted response from investors with only a modest lift in Z's share price.

Z returned to profitability for the year ended 31 March 2021, announced a final dividend of 14 cents per share and signaled 19 to 23 cents per share for the year ahead. If achieved this would produce a very heathy dividend yield based on Z's current share price.

Perhaps investors are not yet convinced that Z's improvement is sustainable or that fuel volumes and margins will return to pre-Covid levels any time soon.

Certainly, recovery in Z's Jet Fuel business seems some way off despite the opening of the Trans-Tasman travel bubble.

Travel numbers have been low to date although snow and the Australian June/July school holidays should grow these numbers, provided, of course, Covid is kept under control.

Also suppressing Z's share price is probably an element of investors being a little peeved with the management and governance decisions that led to Z's demise in the first place.

The rapid growth of unmanned and no-frills petrol retailers like Gull, Waitomo and NPD over the past decade has put a lot of pressure on the mainstream petrol companies to cut their prices to remain competitive.

While the growth of the fuel discounters has been a thorn in the side for the big petrol companies, consumers should be grateful for their presence.

When Z bought Shell's fuel distribution business in 2010 they abandoned Shell's 'first mover' on price strategy and margins at the pump quickly increased.

The other big fuel companies were happy to take Z's lead and hold their prices also and the resulting margin expansion led to a very profitable period for the major fuel companies, mostly at the expense of consumers.

When the competition finally arrived, Z decided not to compete on price believing its customers would stick with them based on loyalty and convenience.

This error of judgement proved costly for its business and together with the Covid related disruptions which followed it has been a very challenging few years for Z and its stakeholders.

To its credit Z now has a plan and seems to be executing well, and despite its recent wobbles it is still NZ's largest fuel distributor.

Z's improvement includes $50m of structural cost savings, successfully growing its digital payments platform, and raising some equity to pay down debt which has shored up its balance sheet.

Reduced volumes and margins, due to Covid, have yet to cause the retail site closures many expected but Z believes this might be still to come.

With volumes down and capacity up you would expect some casualties and Z now seems better positioned to handle further sector disruption.

The recent Government inquiry into the fuel industry has resulted in new regulations which are likely to benefit Z, not disadvantage it, as many had predicted.

Long ago the major fuel companies invested heavily in infrastructure and made a commitment to service retail, commercial, industrial, aviation and marine customers throughout NZ, not just 'cherry pick' the best locations and sites.

This infrastructure included storage facilities and it seems the recently passed Fuel Industry Act will provide the framework for the majors to achieve more appropriate returns on these assets.

While it's still early days Z deserves some credit for turning things around during very difficult trading conditions.

TRAVEL

Edward will be in Auckland on June 10 & June 11, Napier on June 24 & June 25 and in Nelson in July 8 & July 9.

Johnny will be in Christchurch in May 20 and again in June. He will also visit Tauranga on 12 May.

Kevin will be in Timaru in mid-June, date to be confirmed soon.

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

Mike Warrington 

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Market News 3 May 2021

May already, and my thirteenth May in the office.

Quick spot test - how many years have passed since the Global Financial Crisis that shook the financial system with the impact of an 8+ earthquake?

12.5 years!

It's already 13 months since the Covid disruption to finances.

Conclusion – Look forward and get busy.

INVESTMENT OPINION

 

Art or Science – Last week I had a client ask me if investment was an art or a science.

I felt like a politician as I offered my response by saying - both!

I explained to them, and now share with you here, that in my experience the best investors get the science right first, forming a robust foundation, and thereby tilt the probable outcomes in their favour.

Essentially, they are trying to neutralise as many downside risks as possible, leaving open more of the 'probable' upside rewards.

We’ve spoken a lot about the importance of investment rules, starting with asset allocation (influence of volatility), geography, business themes, and the use of financial advice with specific investment selection (risk versus reward scenarios by investment item).

This is part of the science.

Then the art begins as a lot of mental energy is spent on the forward looking 'if' and 'what if' scenarios.

For me 'if' relates to scenarios that I can readily define as a possible problem or threat.  I am spending most of my time looking for downside risks that threaten lost value, not reasons that might drive rewards higher (markets seldom have a problem spotting exciting opportunities to win, which probably means risk/reward is lopsided toward being overpriced).

'If' the government were to restrict or cancel mining licenses how would that impact the future of NZ Oil & Gas business?

If the Minister of Finance interferes with the operation of the central bank and adds irrational pressure to bank management obligations what might that mean to banking services and returns in NZ (remember Westpac is considering leaving NZ)?

If the Reserve Bank of NZ were to reduce the capital requirements of non-bank deposit takers, in response to the proposed deposit guarantees, what would that mean for the competitiveness of banks with lending?

'What if' is really just one's guesses about what might come out of the dark, from behind you, and completely disrupt the playing field.

Most of us felt we had reasonably good portfolios in early 2020 but almost none of us discussed the 'what if' risk of a pandemic emerging.  The steepest decline in the values of both shares and bonds was evidence that 'most' were shocked by the news event.

There have been other serious health threats over recent years but none that grabbed the world's attention, and forced response, as Covid19 has since the Spanish Flu 100 years ago.

Factoring in 1:100 risk scenarios under the 'what if' risk category seldom gains much traction with an investment decision.

Regulatory interference and losing an excellent chief executive too soon are far greater risks to the performance of an investment.

So, spend a lot of time on getting the science (foundations) correct then spend some time wondering how a selection of 'if' and 'what if' scenarios might impact your investment performance.

At your best you'll pre-define the way you'd react to certain unpleasant risks, should they emerge.

As ever, we are happy to help.

Tesla – has done as I suspected and become a Bitcoin trader, not a supporter of some new method of settling vehicle purchases; Tesla has already sold some of the Bitcoin purchased just a few months ago to collect some profits.

I'm not denying that Telsa made some money from the action, I am saying that it is evidence of poor management via a loss of focus on their real goal 'to accelerate the advent of sustainable transport by bringing compelling mass-market electric cars to market as soon as possible'.

Now the company describes Bitcoin as part of its capital-raising strategy, naively assuming the value of Bitcoin will only rise.

Again, it is a car company, not a cryptocurrency speculator.

Elon Musk must be perplexed then by the German who made a lot of money on Bitcoin and has used his profits to help finance a political party that proposes to ban the use of Bitcoin as a settlement method (gross unproductive waste of electricity)!

That's a nice segue to the next item . . .

Green Energy Supply – Demand for uranium (U3O8) is rising and whilst you might not like the idea it would appear that 'we' can't dislike both coal and nuclear energy simultaneously and hope to meet the global climate-related goals.

Some countries of the world are shying away from nuclear as a fuel for electricity generation (think Germany, Japan, NZ) but not China. They seem to need it in large scale if they are to meet their global climate change commitments, which demands a significant reduction in the use of coal.

Nuclear energy was without friends recently as a source of reliable, non carbon-emitting, energy but so poor is our effort with reducing carbon emissions that it seems China is recognising the need to increase the nuclear option.

I can imagine they'll operate such power plants with better discipline than others (Russia) and I can only hope they have better plans for storing waste material than dumping it in someone else's back yard.

China (presumably President Xi) recently approved the construction of five new nuclear power units to be built by 2026.  Being China, you can probably safely bet that they'll be delivered on time.

China's longer-term plan, out to 2035, is to build 3-4x as many nuclear power units on top of their current portfolio, but even this only represents 10% of the nation's electricity use (with or without Bitcoin mining? – ed).

The article I read concluded: If we assume reactors take 5 years to build, on current technology China will need to approve 10-12 new reactors per year between now

and 2030.

If you'll excuse the pun, the fund management industry is becoming energised about the renewed demand for uranium and the rising price.

The uranium mining industry is tuned in to such developments and is quickly re-opening dormant or suspended mining operations (Cameco – Cigar Lake, Paladin – Langer Heinrich in Namibia).  The interesting one in this group is Cameco because Canada had been actively reducing its mining volumes over the past five years but this has now been reversed and strong increases are expected.

The analysts describe China's plans as requiring an increase in demand for uranium of 65 million pounds per annum for at least the next 60 years!

The market price for uranium confirms the re-emergence of demand with spot prices rising from the lows of US$21/lb back up to US$30/lb which seems to be the level required for sustainable mining commitments.

https://www.cameco.com/invest/markets/uranium-price

Actually, this is an interesting market to observe because it displays a low level of price volatility, which likely relates to the fact that uranium does not trade on an open market for nuisance speculators like me to interfere; all transactions are negotiated agreements between the miners and the users of the resource.

I always wondered when someone would confirm that the only way the world can meet its 2030 and 2050 targets relating to carbon exhaust reductions (climate change) was to include nuclear power generation in the supply mix.

If we are to truly disinvest, removing capital from the coal miners, we need to invest in other forms of electricity generation, including nuclear energy.  Over the next decade or more, solar and wind have no show of supplying sufficient energy to replace coal, let alone oil and gas.

Remember of course that one strategy is to drive up the use of electric vehicles, thus increasing the need for additional electricity generation.

Nobody said it would be easy.

Digital Currency – These new digital payment methods won't arrive quickly, but it is clear they will arrive widely across most developed economies and are being encouraged by the Bank of International Settlements.

China seems to be determined to lead the pack with its digital Yuan constantly in the headlines, which is unquestionably 'approved' by President Xi.

The Bank of England has just announced that it has opened its Real Time Gross Settlement system to integrate with blockchain-based payment methods.  What an impressive step forward.

I am excited about what our central bank will one day create in the digital payment space for NZ and hope that it enables significant steps forward with payment efficiency, which should accelerate the velocity of money in our economy.

If we combine the efficiency of this future method of payment with widely accessible tutorials for the public then people currently concerned about the retirement of the cheque may well wonder why we kept such quaint pieces of paper in use for so long.

EVER THE OPTIMIST

There is a bubbling sense of economic optimism appearing in the headlines, growing at the rate of the vaccine rollout.

NZ has enjoyed ongoing and smoothed out optimism, having remained largely Covid free, but nations that have locked down, long term, are bursting free with far more potential energy than we ever experienced.

Vaccination is still one of the major stories for 2021, across all economic and health matters globally; the other is the flood of surplus cash being supplied.

Yes, the optimism is lopsided toward the wealthy nations who are leading the charge but before you cry 'unfair' we should acknowledge that wealthy nations will do the most business with others and be most generous in supplying the vaccine to the poorer nations.

The scale of savings that has been accumulated during the Covid period, both for security reasons and because people were locked down, is becoming enormous (one estimate was US$5.4 trillion!) and you just know people are itching to get out and consume in public again.

Maybe some of the wildly optimistic economic growth forecasts won't be wild enough?

ETO II – Vaccinations

Global Data:

Vaccinations delivered – 1.15 billion (20 million per day!)

Total (recorded) Corona Virus cases – 150 million

Active Cases – 19 million

Daily rate of new cases –9,000

People in serious condition – 110,000

Daily Deaths – about 15,000

Interesting fact – the first 100 million doses of vaccine took 61 days to inject. The latest 100 million took five days!

Israel – whilst they are now finding it difficult to rise above 60% of the total population, they have achieved 85% vaccination for those aged over 70 years.

Investment Opportunities

ASB Bank – very quickly issued a new series of 5-year bonds last week with a yield of 1.64% p.a.

These bonds sit alongside (parri passu) bank deposits in terms of risk and the return is very similar to that of bank deposits, but bonds offer the additional value of liquidity (saleable).

These bonds can now be purchased on the market if investors still wish to access this investment type (we will help).

Thank you to those who participated in this fast-moving bond offer with us.

TRAVEL

Edward will be in Wellington on Wednesday 12 May. He will be in Auckland on June 10 & June 11, Napier on June 24 & June 25 and in Nelson on 8 and 9 July.

Johnny will be in Christchurch on 20 May and again in June. He will visit Tauranga on 12 May.

David will be in Kerikeri on May 6 and Whangarei on May 7.

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

Mike Warrington 

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