Market News 16 May 2022

 

So, Bitcoin has made its way back from the heady days of USD$65,000 to now be about USD$29,000 and falling.

Bloomberg offered a nice one liner on the subject:

Pity the man who has now lost everything on Bitcoin and lamented that it would have been better if thousands of people had warned him about the risks!

INVESTMENT OPINION

NZ Budget – our 2022 budget will be presented this week.

I don’t think it will turn the dial and effect change for local investors. Worldly influences will be more important.

We can chat about the details seen next week.

Inflation – The threat of the disruptive change to the inflation landscape becoming even worse is a leading concern for investors, followed very closely by declines in economic activity being experienced in China and Europe.

This combination is the very definition of stagflation where economies earn less but are asked to pay more.

It feels worse if you are willing to pay more yet cannot even access the products sought.

Experienced investors and economists have long been concerned that the oversupply of cheap money would drive inflation higher. They were all perplexed by the fact that it was not happening over the past decade.

Now it is, and whilst the cheap and plentiful money supply was leaning on consumers to act with purchases and investment, this was what governments and central banks wanted, so I don’t think it is the major driver of inflation data being witnessed today.

For me the main driver is an item we cannot control, nor invest to guard against, the fracturing of global tolerance.

There are plenty of egotistical politicians in the world and for the most part world economics maneuvered around the smaller road bumps put in place, but Vladimir Putin has quite literally destroyed the map.

President Erdogan’s selfish and foolish displays in Turkey were a serious concern, witnessed by the collapse in the value of their currency and the surge in their local inflation, but this did not disrupt the global networks.

Countries and leaders of the world had reached a point of tolerating a lot of poor behaviour from smaller players so reactions were modest and routines were, for the most part, retained.

That all changed with Putin’s invasion of Ukraine.

It was the straw that broke the camels back for the majority.

Not all nations have engaged in pushing back on Russia, and some who are silent are unsurprising, but when the economic powerhouse that is China decided to support Russia’s actions, this news compounded the economic fracture that Putin initiated.

The lack of resistance from India is also unhelpful.

Those opposed to Russia’s behaviour have very quickly moved past the negotiating table and are establishing new policy settings to reduce their economic interaction with Russia, and I suspect silently reducing their exposures to China too.

Europe is taking steps to make huge reductions in the energy volumes that it purchases from Russia and to stop doing business inside Russia.

Siemens is exiting after a 170-year association! 170 years straddles all the conflicts that I can remember!

Neutral countries are taking sides.

China has a policy of expanding its autocratic governance footprint, now obvious in Hong Kong and they are wanting to control Taiwan. China’s preferred approach to Covid management is having a strongly negative impact on economic activity, and as we know, the virus is not going away; the evolution of a virus is unconnected to political preferences.

Not even Xi Jinping can command a virus to do something, and it would be nice if he learnt some hubris from it and governed a human population differently too.

These policy settings are having enormous impacts on the economic networks that the world had come to rely on for heightened efficiency and thus price stability.

We are in the midst of discovering the price of global inefficiency (relative to the past decade or two) via the inflation being experienced in each local jurisdiction.

New Zealand’s tiny size in the world, and our reliance on external products makes us more vulnerable than many.

When manipulation is not the policy of the day, an interest rate is a construct of inflation plus some real return (the higher the risk of the borrower, the higher the real return required).

I apologise to those who find this repetitive, but congratulations to you for having such a good grasp of the drivers of returns for part of your investment portfolio.

With the exception of my first five years work, interest rates have been declining throughout my career, albeit with bouts of increase along the way as economies tested appropriate interest rate levels.

This means that there must be a large number of financial advisers, and investors, who have never endured an extended period of rising interest rates.

It’s hard enough to make decisions with 35 years of experience let alone ‘only’ having 10 years under your belt.

Central banks are now stepping in to change the scale and pressure of tension applied to their economies, so I don’t think they will lose control of the situation as some contemplate, but no matter how skilled the central bankers are they cannot influence the egotistical fools leading some nations.

Putin’s actions have triggered a fracture of prior trade efficiencies and the newly found attention on improving our use of the planet.

It’s going to be rather more difficult now for fund managers adhering to good ESG principles to find enough tolerable investment options to satisfy ESG investors.

Putin has blown up my ‘Lorax moment’ for the world.

Reflecting upon our thoughts last Christmas about what 2022 might bring, where I decided to place my chips on ‘Rising interest rates and share markets lower’ (and Bitcoin down – Ed).

I didn’t think central banks had the spine to push interest rates above the level of inflation.

Long term bond returns in New Zealand are roughly the same as short term inflation results and we will soon know whether inflation is to push higher, and whether the central banks are willing to insist on even higher interest rates to move above inflation and beyond current intentions.

I know some of you now think you have too many long bonds, just as you thought you had too many short-term bonds when interest rates were declining, but the ongoing truth is that a portfolio needs both.

For investors managing their own portfolios (ie not using managed bond funds), the average life (duration) of fixed interest portfolios in New Zealand is very short. Most invest in the range of 90 days to 5-years with a few items beyond that. You’ll find these portfolios average less than 3 years when you do the calculations, and this is very short in term and thus only has a modest exposure to the damage caused by rising interest rates.

Rising interest rates won’t be fun to watch relative to one’s old bonds (or other asset valuations) but will be fun to watch for new investment opportunities.

For the record though, whilst still debating whether inflation can move higher (it was +8.30% in the US at last reading), and whether interest rates can increase further, long term interest rates in the US are falling again (for the moment). +8.30% inflation was lower than the markets had feared.

There’s never any certainty and there’s nothing quite like a nicely diversified portfolio with an overlay of financial advice.

Risk reduction seems wise.

We seem to have returned to living in a period of ‘interesting times’.

Bias – As an appendix to the item above, now is an excellent time to double check your thinking to ensure that you do not let confirmation bias creep into your decision making.

Trade– Then, overlaid on the period where trade is being disrupted by poor behaviour from dictators, New Zealand is also suffering a trade disruption from a friendly nation (Canada) simply refusing to respect well negotiated trade agreements!

The Pacific trade agreement with the unnecessarily long name is to be tested under dispute resolution protocols after Canada fails to accept the agreed volumes of NZ dairy product.

After only two years we are already debating the ABC’s of the CPTTP to test the TRQ’s and hopefully reach XYZ without fracturing this agreement.

I hope this proves to be a misunderstanding and not an example of a trade agreement being ‘say one thing but do another’.

OIL – As the policies of idealism are developing, we are getting a stark reminder about the importance of oil (all reliable energy sources) to the world’s population.

Saudi Aramco is again the world’s most valuable company, and after Apple, they are probably followed by the likes of Shell, BP, Exxon Mobil, Chevron etc.

Money – It is instructive to watch the majority of the world buying more US dollars and selling other currencies and speculative assets (think crypto currencies) as confidence declines or narrows its focus.

Ever The Optimist

Finally, a news item that differs from the concerns I discussed above:

President Biden is discussing potential reductions to the trade tariffs between China and the US put in place by Donald Trump.

I am sure there will be strings attached, but if tariff cuts happen it would be great news.

ETO II

Here’s a nice statistic:

The Guardians of the NZ Superannuation Fund delivered the highest annual returns of any sovereign wealth fund in the world over the past six years (11.79%).

The also beat all but two public pension funds globally.

ETO III

A plummeting Bitcoin price might rescue some nations from the excessive (and I would argue wasteful) use of electricity resources.

Investment Opportunities

Channel Infrastructure (CHI) – CHI completed the issue of $125 million senior bonds (CHI020) with the interest rate set at 5.80% (being the pre-defined minimum that it could be).

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

Christchurch International Airport – completed its offer of $100 million new 6-year senior bonds.

The interest rate was set at 5.18%

Thank you also to those who participated in this bond offer with Chris Lee & Partners.

Infratil – We think you will hear from Infratil next (19 May) about their next bond offer and rollover offering for those holding IFT190 bonds maturing in June.

Vector – has begun the process of rolling its VCT080 Capital Notes (subordinated bonds). Holders have been approached to make a decision prior to 31 May.

Holders who plan to roll their investment are encouraged to actually complete the online process and select their broker (or us!) because by doing this some brokerage will be directed from Vector to the broker. (This doesn’t happen if you do nothing, even though your notes will be rolled over).

The interest rate will be set on 15 June, but will not be lower than 5.50%, (current market conditions imply about 5.65%).

Genesis Energy – subordinated bonds (GNE040) are coming up close to their review date (9 June 2022) and all things being equal will offer a new, similar, product to invest in.

Previous such offers have invited participation by new investors and Mercury has just set the reward scene with its 5.73% interest rate.

Watch this space…. Or the NZX announcements.

Thereafter – we expect Property For Industry and the banks to announce new bond offers.

 

 

Travel

Kevin will be in Timaru on 20 May.

Chris will be in Taupo on Monday June 6, available to meet with clients, before talking to a group on June 7

Edward will be in Auckland over three days in June. He will be in Mount Wellington (exact location TBD) on Wednesday 8 June, on the North Shore (exact location TBD) on Thursday 9 June, and in Jarden House, Auckland CBD on Friday 10 June.

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

 

Seminar Dates ahead:

Monday 23 May, Mt Wellington - Mt Richmond Hotel, 1.30pm

Tuesday 24 May, Takapuna - Milford Yacht Club, 11am

Thursday 26 May, Whangarei - Flame Hotel, 11am          

Monday 30 May, Palmerston North - Distinction Coachman Hotel, 11am    

Tuesday 31 May, Napier - Crown Hotel, 11am 

Michael Warrington


Market News 9 May 2022

The Hon. Grant Robertson is leading into his next budget; the official leaks are underway.

It was nice to see that after reading Market News last week Grant has begun forming the basis of a Spending Principles Act, although it looks rushed and needs a lot of work.

I do not like a simple change of measurement to come up with better looking answers (debt was 50% of GDP and hey presto it is now 30% of GDP).

Interestingly I once asked Grant if the charts he was presenting to me (and others) implied a 50% debt ceiling, to which the answer was 'No, you cannot infer that'.

Yet here he is, placing a 50% ceiling on debt to GDP (now described as a 30% ceiling under the new rules of measurement).

Please remember that our current debt level is double the sum of our prior target debt ceiling defined by previous governments.

At least Grant is trying to add a little more discipline to how much debt can be used, and its purpose (there's a difference between debt for operating and debt for capital spending such as infrastructure).

I'd prefer that government focused on ways to improve our financial position than claim improvements via new methods of reporting, however, to be fair it is adding some new binding principles to the process in the same way as Ruth Richardson's introduction of the Fiscal Responsibility Act did.

It will take a while (many years) to discover if these new principles deliver better financial management, and the members of our government will have changed several times by the time we know.

INVESTMENT OPINION

Air New Zealand – Dame Therese Walsh and Greg Foran must be pleased with the very successful capital raise for the airline.

With the exception of the unnecessarily confusing 1 for 2 documentation, the offer has been a success and the actual acceptance by shareholders has been very high with 88% of shareholders exercising their right to buy more shares and invest new capital into the business.

Before you worry about the missing 12% ($145 million), know that these shares were eagerly mopped up by new investors at 81 cents per share immediately after they were released by other AIR shareholders.

It's clear to me that most retail investors love their airline, know the government won't let it become insolvent and professional investors see potential for a return to profit.

Strategies for success are in place. The money is in the tin. AIR is ready for takeoff.

US Fed– The US Federal Reserve has done as expected, after leading financial markets to that point over recent weeks; they have increased the Fed Funds rate by 0.50% to a new target range of 0.75%-1.00%.

So good was the Fed's market leadership that the currency barely moved. It fell a little as those hoping for +0.75% rate increase were reminded that the Fed will never be so irrational.

Nonetheless, the US dollar is currently the world's strongest and most dominant currency.

Jerome Powell (Fed Chairman) said that they will be considering increases with an order of magnitude of +0.50% again, but +0.75% is very unlikely.

If the Fed is keen to reach 2.50% rapidly, then the next 2-3 meetings may result in +0.50% increases the Fed Fund rate. Financial markets don't yet seem convinced about this speed of increase.

Some of the markets uncertainty probably relates to the negative (recessionary) economic data that came out for the US in the first quarter of 2022. Inflation up, but economic activity down, is the very definition of stagflation that some have been warning was on its way.

It is very hard to invest and protect yourself against stagflation, although Warren Buffett recommends investing in oneself (education) because if your skills are in demand you will both beat the economic average and be paid at the current pricing level.

As an obscure idea, this might encourage some of our clients to invest a little more into the grandchildren's education(s) rather than leaving too much languishing in 1-2% bank accounts.

Of equal interest to me was the forthright declaration from the Fed that there will also be no delay in reducing the scale of their balance sheet.

The bonds purchased by the Fed as part of the Quantitative Easing (print money) programme are to be sold, staring on 1 June. Quantitative Tightening (QT… cute) is underway.

Economies and businesses now need all their financial ducks in a row if they wish to succeed under the new financial conditions. There are no 'rescued by the central bank put options' available any longer.

Scale of debt and capacity to service it matters again, thank goodness.

The Fed literally had to say this: the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong because they are mandated to achieve it, but it applies more pressure to investment decision makers, especially in New Zealand.

If you can invest in reasonably strong long-term bonds in NZ at 5.00%, or more, you need to form an updated view about the probability of central banks being able to hold inflation centred around 2.00%.

If you believe this to be probable, then long term bonds are offering real returns approaching 3.00% per annum, and this would be attractive.

NZ Dollar - On the topic of currency, it is becoming a little disappointing to watch the NZ dollar losing ground relative to Australia even though we have much higher interest rates.

Over the past 15 years the NZD has traded between 90-100c per AUD$1.00. The market has become comfortable that this should be the long-term range, but in my prior career the exchange spent most of it's time between 80-90 cents per AUD $1.00.

Today we are trading at about 90c again and for the moment it looks perilously close to dropping back into the old lower range and reducing the buying power of New Zealanders.

For us to lose ground whilst offering higher interest rates begins to imply that financial markets think the Australian economy will be reliably more productive than ours and that is a deflating thought.

It is also a reminder for holding some international diversity within one's investing.

Credit Margins – In the spotlight of what seems to be an attractive 5.73% for the latest subordinated bond from Mercury you could be forgiven for not noticing that this is based on a lower credit margin than previous issues of these bonds.

The credit margin here was +1.70% over the benchmark rate. Five years ago, the same sort of product paid a margin of +2.75% so you are receiving less relative reward today.

Odd.

The world is more disrupted now, with more financial failures emerging and internationally credit margins are widening; why has the opposite happened in New Zealand?

I know we are a little bit haven-like here in NZ, and some of our borrowers are essential services, but Armstrong Downes just failed and defaulted on financial obligations in the busy property development space.

What of the businesses that are not busy?

Risk and reward are relative and always evolving, and financial advice helps one to understand.

Infratil – confirmed that it has finished its stock buyback, investing $40 million at an average price of $8.00.

This doesn't imply that the share price won't fall below $8.00 again, but it does give you a reasonably good understanding of what Infratil directors think about the value of the businesses owned within the company.

The aggressive way that private equity funds, and energy businesses like Shell, are buying into renewable energy generation businesses supports Infratil's early entry into this sector.

Trusts – Many people still operate family trusts as entities for investment.

Recent changes to the Trusts Act prompted some to wind up their trusts and I suspect more will follow as the IRD increases the reporting obligations, starting in the tax year to March 2022.

The level of enquiry is similar to that required under the Anti Money Laundering Laws and is clearly linked.

Anyone not running their trust like a small business should seek advice from their solicitor and accountant about the purpose of their trust and reassess the cost/benefit of operating that trust.

Using a trust as an investment vehicle does not advance the risk versus gross reward scenarios for investors.

I applaud the increased reporting obligations but would ask two things of the government:

Use the newly elevated identity and reporting obligations to achieve good Anti Money Laundering data, which the trust can share with other Reporting Entities such as their financial advisers and bankers; and

Go one step further and made it an obligation to register a trust (any entity) under the NZ Companies Office model (NZ Trusts Office register?), again with information obligations aligned with those in AML law.

Centralising AML monitoring will improve productivity and reduce costs across the economy, removing wasteful duplication and gross time wasting introduced by AML law.

Ever The Optimist

In a triumph of what's best over what is politically correct, Berkshire Hathaway defended Warren Buffett's dual role as Chairman and CEO with Charlie Munger having fun by saying:

It's like Odysseus would come back from winning the battle of Troy and some guy would say: “I don't like the way you were holding your spear”.

Buffett and Munger, both in their 90's, strong on good principles and wealthy beyond need don't need halflings and politically correct people telling them what to do and it's great to see them respond accordingly.

Investment Opportunities

Mercury Energy – completed its offer of $250 million subordinated bonds last week, setting the interest rate at 5.73%.

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

Christchurch International Airport – announced today its offer of $100 million new 6-year senior bonds (19 May 2028).

The offer is open now and the offer closes this Thursday morning (We need to hear from clients wishing to invest by 5pm, Wednesday evening please).

The interest rate will be set on Friday (minimum interest rate of 5.15%).

Clients will pay normal brokerage on these transactions.

Channel Infrastructure (CHI) – (Previously known as NZ Refining) is the next in line to offer a new 5-year senior bond.

The issue is open now and closes on Friday. The offer documentation can be found on the Current Investments page of our website.

The company has defined a Minimum Rate of 5.80% (actual rate set is on Friday)

CHI will pay the brokerage costs for the issue.

Given the significant changes that have occurred for this business Kevin has written a research article on the company and this bond, which advised clients can find on the Research (login) page of our website.

We have opened a list for investors who would like to invest in this new bond offer.

Vector – has begun the process of rolling its VCT080 Capital Notes (subordinated bonds). Holders have been approached to make a decision prior to 31 May.

Holders who plan to roll their investment are encouraged to actually complete the online process and select their broker (or us!) because by doing this some brokerage will be directed from Vector to the broker. (This doesn't happen if you do nothing, even though your notes will be rolled over).

The interest rate will be set on 15 June, but will not be lower than 5.50%, (current market conditions imply 5.75%).

The volume of notes that VCT080 holders say they would like repaid will be offered for sale to new investors, but we expect this to only be a small sum and thus availability will be limited.

We have a list for investors to join if they would like to invest in these notes (try to purchase some) after 31 May.

Genesis Energy – subordinated bonds (GNE040) are coming up close to their review date (9 June 2022) and all things being equal will offer a new, similar, product to invest in.

Previous such offers have invited participation by new investors and Mercury has just set the reward scene with its 5.73% interest rate.

Watch this space…. Or the NZX announcements.

Infratil – Infratil has a bond maturity on 15 June (IFT190) and their usual behaviour is to ask bondholders to roll their investment over, so you should expect an offer to be made to you during May.

Infratil always likes to invite new investors to participate too, so you do not need to hold IFT190 to invest in a new Infratil bond, fresh cash will be fine.

As I understand it, the new strategy from Infratil will be to first offer the new bond to those new investors with cash, and thereafter (immediately) offer the same bond to IFT190 holders for rollover of their investment.

Their annual results announcement is on 19 May, so we'd expect this to include a public announcement about the bond offer details.

So, investors with cash, be ready soon.

Investors holding IFT190, you'll be next.

Returns on Infratil bonds with maturity dates longer than 5-years are now above 5.00% and a 6.00% interest rate is a chance based on current market conditions.

Travel

Edward will be in Auckland over three days in June. He will be in Mount Wellington (exact location TBD) on Wednesday 8 June, on the North Shore (exact location TBD) on Thursday 9 June, and in Jarden House, Auckland CBD on Friday 10 June.

If you would like a free appointment, please contact our office.

Seminar Dates ahead:

Monday 16 May, Tauranga -Tauranga Cruising Club, 11am

Tuesday 17 May, Hamilton – St Andrews, Hamilton Golf Club, 1.30pm

Monday 23 May, Mt Wellington - Mt Richmond Hotel, 1.30pm

Tuesday 24 May, Takapuna - Milford Yacht Club, 11am

Thursday 26 May, Whangarei - Flame Hotel, 11am

Monday 30 May, Palmerston North - Distinction Coachman Hotel, 11am

Tuesday 31 May, Napier - Crown Hotel, 11am

Michael Warrington


Market News 2 May 2022

David Parker says the government wants more tax from the wealthy and they plan to introduce a Tax Principles Act to achieve it.

Well, he doesn't say it that way, but…

If the Act was solely about delivering an efficient tax system I'd be pleased, but it is not. So, I am concerned that the government is delivering ever more ways of reducing New Zealand's productivity and thus reducing the efficient use of the funds available to our economy.

Statistically I have learnt that the bigger a government becomes, as a participant in its economy, the worse the performance of that economy becomes. Politicians putting self-justifying labels on it won't change that outcome.

If the new Act was genuinely about principles, Parker wouldn't have lamented publicly that he doesn't know how much tax ''the wealthy'' are paying. Why make statements about the stratum of taxpayers when discussing principles?

To further display his bias, Parker linked a consumption-based tax (GST) with a person's income in his attempts to describe GST as unfair in favour of the wealthy. GST has no connection with income.

GST is this country's simplest, fairest and easiest to administer method of tax collection.

Parker is undermining his own claim that he wants to see better principles applied to tax policy when he confuses his own descriptions of tax types and thus he risks bad tax policy to address government's philosophical preferences.

In truth we know the wealthy pay an enormous proportion of the nominal taxes collected in New Zealand (without commenting on the calculated ratio of tax collected). This is logical because the ''wealthy'' sub-group is involved in the movement of more money than the average population group.

Creating tax policy based on envy will deliver poor policy.

Remember, that genuine experts describe the best tax policies as easy to administer, broad, shallow and fair so that everyone is exposed to tax and happy to pay it. This includes some progressive element such that those with more pay more.

I'd have liked to see the discussion include fairness across the corporate environment too; directing some focus to joining the global push for a minimum corporate tax rate of 15% on revenue (not earnings) for global entities selling products in New Zealand? (Think Google, Apple etc)

Those of you who remember my time as President for a Day will recall that I am a fan of cutting personal and corporate tax rates (the productive parts of the economy) and introducing a Land Tax (recommended by Tax Working Groups).

Land isn't productive. How it is used can be. Owning spare houses is not. A land tax would be simple to collect and unavoidable. It can be designed to be shallow and fair. (Finer details can be debated later once government reaches the start line).

If the government is so keen on using new law to define good principles of financial governance, I'd like to propose a sister Act – the Spending Principles Act 2022.

INVESTMENT OPINION

RBNZ – I wonder if the Reserve Bank, on review, considers its macro-prudential tools and recent legislative changes as effective contributors to success for New Zealand?

What would that success look like – no bank failures, controlled inflation, improved economic productivity?

The list of macro-prudential tools is:

The countercyclical capital buffer

Sectoral capital requirements

Adjustments to the minimum core funding ratio

Restrictions on high loan-to-value ratio (LVR) residential mortgage lending.

Debt serviceability restrictions (Debt to Income ratios, being finalised)

These tools exist to try and reduce the likelihood of financial crises and add to the resilience of banks (more restrictions), but the government then also charged the central bank with responsibility for full employment (less restrictions).

The central bank has achieved the bank integrity results but loosened economic tension when it agreed to start buying government bonds with fictional money, adding artificial volumes to the money circulating within our economy. Now inflation is getting away from us.

It would be hard to describe the 'printing money' period as good for New Zealand.

Having the central bank encourage more economic activity, at any time, could be viewed as artificial financial support (like very low interest rates) leading to artificial performance. Some of this is now being found out in post covid realities.

The new fight against today's inflation won't drive robust economic growth because it limits the financial impetus, but it is unquestionably the right action for the RBNZ to take.

Loosen with one hand but tighten with another?

The most recent act of constriction came with the government tightening lending obligations in the Credit Contracts and Consumer Finance Act.

Bank balance sheets are unquestionably becoming stronger, carrying less risk, however credit for business use and accessing home ownership has declined significantly and is restricting important economic channels.

Economic activity currently appears high, and unemployment low. A tick for now, but inflation is not well controlled at present and recession debates are real.

It's a tough gig being a central banker when politicians tell you how to do your job.

As I say, I wonder if the RBNZ views all the changes as being a success overall for NZ, or not. They certainly haven't stopped inflation from getting out of the bottle and I don't think they have been helping productivity, which is the most important economic activity measure.

Fed  – There's a big week ahead for the US Federal Reserve, which makes it an important week for investors, everywhere.

China – remains a rising concern in my opinion.

One can debate their political ideology forever and not agree on matters, but I will never view less individual freedom as a successful model for a society to function well.

Chinese political ideology results in more artificiality, witnessed currently in China through the view that they can beat a virus (which has no political opinion) and that they should attempt to manipulate share market outcomes.

You'll all have read about the Covid responses and can decide for yourselves if it will succeed or fail. The rapid declines in the share market pricing offer one view.

When I then read that China's response to a weaker share market was to push local fund managers to buy more shares and help the market to rise again in value.

Good grief, is this how naïve our leaders and large swathes of the global population have become?

Plenty have tried in the past to manipulate share market outcomes. Ultimately, they have all failed.

I don't deny the scale and economic potential of China but the leadership of it is becoming an increasing concern for me.

I don't feel alone in this concern either. Professional fund managers have been reducing investment exposure in China at the fastest rate on record and have been accelerating after China seems to have indicated support for Russia's actions in Ukraine.

The behaviours of Russia and China alone are causing serious changes in a world that had been at least trying to be more global in method over the past few decades, but the opposite has become true and so quickly as to be of concern.

I may have said this before in recent Market News items but now is not a time for complex investment products and elevated risk decisions across a portfolio.

Z Energy (ZEL) – Last week (26 May) the High Court issued final orders approving the Scheme of Arrangement (takeover) with Ampol Australia, as expected.

We have reached the finish line for one of the slowest takeovers that I can remember.

ZEL shareholders will be paid $3.782 per share on 10 May and the local ownership of this fuel distribution business will be over.

What was once Royal & Dutch Shell, then SHELL, then Greenstone Energy and finally Z Energy will be foreign owned again.

The bonds will remain on issue and AMPOL will have the option to repay them at maturity or discuss with the market the option of offering new bonds at that stage, if they'd like to retain funding diversity (away from dependency on the banks).

Drivers will still be able to fill their cars at Z Energy stations. It makes little sense to have built such a good brand and then remove it from the landscape.

However, I can imagine them removing the Caltex brand from the landscape and replacing this with AMPOL branding and remove the need to pay a license fee to Chevron for use of the CALTEX brand.

Z Energy still owns the majority of Flick Electric. It will be interesting to see if they wish to mop up the small shareholders and then explain their commitment to the distribution of electricity in New Zealand.

Ampol does display a commitment in Australia to supporting the electric vehicle fleet so initially it seems likely that they will do the same in New Zealand and should be pleased with the steps that Z Energy has already taken into that space.

As I have said, I think it is a shame to be losing investment access to another major NZ business, at what I consider to be a weak buy price, even though many are trying to define it as a sunset industry.

Transport is not a sunset industry. Supplying energy to the transport is not a sunset industry. The energy types will change, but this isn't news because it has been changing through time anyway (remember LPG in the 1980's).

Whatever your view, if you are a Z Energy shareholder you are about to receive cash and will need to make a new investment decision for those funds.

Interest Rates – are always changing and at the moment they are changing very fast, especially medium and long term interest rates.

Central banks talk about the interest rate changes they plan, and then roll them out gradually. Financial markets discount such forward looking information and move long term interest rates immediately.

Observe the overnight cash rate (OCR) in New Zealand that was increased by a significant 0.50% recently, so now this rate is 1.50% - hardly a large number. The intention is to reach an OCR of about 3.25%.

Bank deposits have moved further than the OCR, faster, to now offer 3.00% across most terms that exceed 2 years.

However, bond yields are already at 4-5% and are a chance to move a little higher yet (unless recessions kick in sooner than expected).

The OCR will follow its gradual, and for the most part, predictable path upward. Returns on bank deposits will rise and try to remain competitive, but I am pleased to say, from a selfish brokers perspective, that bonds easily win the risk versus reward race at present.

For example, here are the rewards for bank deposit and local government bonds (very low risk option):

2 years – bank 3.25% versus local government bond 3.85%

3 years – bank 3.55% versus local government bond 4.05%

4 years – bank 3.65% versus local government bond 4.15%

5 years – bank 3.75% versus local government bond 4.20%

It's not common for this choice to be so obvious.

Bonds issued by entities with more risk than local government offer higher rewards again.

Bank bonds maturing in 4-5 years now offer yields above 4%.

Corporate bonds, such as the recent one from Precinct Property offer yields above 5.00%.

Bank deposits have their place for investors, and are a great control group for decision making, but the decision is different today than it has been in recent years.

Ever The Optimist

The NZ financial market is performing admirably in the face of some stark pricing changes and the global movement of large capital sums in response to some unwanted political situations.

Witness the very active issuance of new bonds in our market recently, all successful, including Housing NZ borrowing $800 million last week.

Investment Opportunities

It's getting crowded. Bonds, both primary issue and secondary market purchases are now widely available at returns that exceed bank deposit comparisons.

Precinct Properties – last week completed its offer of $175 million senior bonds for a 6-year term. The interest rate was set at 5.25%.

Thank you to all who invested in this issue through Chris Lee & Partners.

Mercury Energy – MCY is the new bond issue on the schedule, opening today.

It is fast moving – we need your responses by 10am this Thursday 5 May, if you wish to invest.

MCY is offering a subordinated bond, in the same format as used by many others, with a 30-year legal maturity date and a 5-year initial period (thereafter rollover or repayment might occur).

MCY has defined a minimum interest rate of 5.50%. In my opinion it needs to be more like 5.75% once set.

MCY will be paying the brokerage expenses for the issue.

Channel Infrastructure (CHI) – (Previously known as NZ Refining) intends to offer a new 5-year senior bond next week.

The offer documentation can be found on the Current Investments page of our website.

The company will define a Minimum Rate and pricing definitions this Friday. The interest rate will need to exceed 5.00%.

CHI will pay the brokerage costs for the issue.

We have opened a list for investors who would like to invest in this new bond offer.

Christchurch International Airport – has announced that next week it intends to offer a new 6-year bond.

We have a list that investors are welcome to join if they are interested in investing in this pending offer.

CIAL currently has a BBB+ credit rating, downgraded amidst Covid19 conditions (so improvement is now a chance), so we'd expect the interest rate offered to be very close to 5.00% with clients paying the brokerage costs.

Infratil – also has a bond maturity on 15 June (IFT190) and their usual behaviour is to ask bondholders to roll their investment over, so you should expect an offer to be made to you during May.

Infratil always likes to invite new investors to participate too, so you do not need to hold IFT190 to invest in a new Infratil bond, fresh cash will be fine.

As I understand it, the new strategy from Infratil will be to first offer the new bond to those new investors with cash, and thereafter (immediately) offer the same bond to IFT190 holders for rollover of their investment.

So, investors with cash, be ready soon.

Investors holding IFT190, you'll be next.

Returns on Infratil bonds with maturity dates longer than 5-years are now above 5.00%.

Waiting - Let's tackle the June bond offers once we get there – Vector, Genesis Energy, Property For Industry, subordinated bank bond offers etc.

Seminar Dates ahead:

Monday 9 May, Christchurch - Burnside Bowling Club, now 2pm

Tuesday 10 May, Timaru - Sopheze on the Bay, 1.30pm

Monday 16 May, Tauranga -Tauranga Cruising Club, 11am 

Tuesday 17 May, Hamilton – St Andrews, Hamilton Golf Club, 1.30pm                                           

Monday 23 May, Mt Wellington - Mt Richmond Hotel, 1.30pm

Tuesday 24 May, Takapuna - Milford Yacht Club, 11am

Thursday 26 May, Whangarei - Flame Hotel, 11am     

Monday 30 May, Palmerston North - Distinction Coachman Hotel, 11am   

Tuesday 31 May, Napier     - Crown Hotel, 11am         

Michael Warrington


This emailed client newsletter is confidential and is sent only to those clients who have requested it. In requesting it, you have accepted that it will not be reproduced in part, or in total, without the expressed permission of Chris Lee & Partners Ltd. The email, as a client newsletter, has some legal privileges because it is a client newsletter.

Any member of the media receiving this newsletter is agreeing to the specific terms of it, that is not to copy, publish or distribute these pages or the content of it, without permission from the copyright owner. This work is Copyright © 2022 by Chris Lee & Partners Ltd. To enquire about copyright clearances contact: copyrightclearance@chrislee.co.nz