Chris Lee & Partners Ltd

Market News 30 May 2022

The poor Australians, they're incensed about having to pay $2.00 per litre for fuel now.

Meanwhile in New Zealand….

INVESTMENT OPINION

FMA – Unusually I found myself nodding my head at some aspects of the latest report from the Financial Markets Authority relating to managed funds.

The tone of the report bordered on being a little too emotive.

The FMA is a regulator, not a parent, and thus they should define the boundaries and then monitor behaviour relative to those obligations, not try to play a governance roll in each fund.

The FMA report (criticism) is about fund manager performance (returns, costs, how much they are paid etc), relative to benchmark indices, and the questionable indices used by some of them to claim their outperformance fees.

I won't get into the first point, being what a fund manager earns, because there is sufficient disclosure and competition for the public to shift savings around. However, the FMA is right to highlight the inappropriateness of some benchmark indices being used.

Some funds use the performance of compounding 90-day deposits as a benchmark (very low risk), yet the risks the fund takes are shares (higher risks). The FMA rightly points out that this is incongruous and not appropriate.

It's certainly not appropriate to claim an outperformance fee based on this tortoise and hare comparison. (This is in addition to their standard fees)

The risk profile of the benchmark should closely align with the risk profile of the fund (defined in the investment policy objectives in the offer document). If this is not the case the fund manager is taking an excessive risk with 'my' capital and the results are lopsided; 100% of the downside goes to the investor but a rising share of the upside goes to the fund manager.

If one of our clients came in and sought performance based on a control group that was rolling 90-day bank deposits and we then urged them to buy a portfolio full of shares, the FMA would quite rightly kick us in the backside.

As an aside, the FMA uses the familiar terminology 'value for money'. Yes, the public will understand it, but this is consumer based language and I think the FMA should have taken the opportunity to educate the public and used the term 'value for risk'.

Investing is to put one's funds at risk, seeking a return. The return profile should roughly align with the risk profile. It's all about risk, not consumption.

The FMA's criticism is that too many fund managers are using benchmarks with risk profiles that do not match the investment risks being taken, being the risk profile agreed with the investor.

They are correct on this point.

I think the solution should be more disclosure. The industry has quite detailed disclosure obligations but if the FMA added a table to their public website disclosing all managed funds and their current benchmarks then more sunlight would have gradually improved the outcomes.

The FMA could demand common information from all fund managers (Fund name, risk settings, fees, returns, nominated benchmark etc), then compared this to credible industry benchmarks (an FMA opinion) and published the information annually.

Essentially the FMA would be displaying any variation they saw between the target risk of each fund, the risk of the nominated benchmark and recent performance data (and variations).

Investors could then begin asking fund managers, in writing, to explain the appropriateness of a benchmark, especially if the investor is exposed to payment of outperformance fees.

I happen to think that if a fund manager collects an outperformance fee they should also be agreeing to repay fee revenue if they experience underperformance relative to their benchmark.

I think one or two funds do this; Fisher Funds reduces their fees in years following underperformance (no repayments though). Infratil has high and low tide marks that must be exceeded before future outperformance fees can be paid.

Inappropriate benchmarks aside, I need to offer an olive branch to the financial advice and fund management community. I think the FMA should be careful when they conclude that the logical control group for selecting a benchmark is a passive fund, managed against some index, with modest annual costs.

This assumes that most of the population know what this control group is and understand its risk and return characteristics. I can assure you that they do not.

The public are busy being experts or hard workers in their field(s) of endeavour. Most do not wish to become even mildly skilled in the area of investment.

So, the financial advice community and the fund management community protect most investors from highly probable underperformance relative to such benchmarks, and possibly quite large losses of value.

A generic Vanguard index with a trivial fee might look like an appropriate starting point to use as a benchmark (a control group for measuring outperformance) but I could mount a strong case for the FMA that the control group for the wider public is that index LESS a certain percentage, and I do mean a wider percentage than the fees collected by fund managers.

More than 90% of unadvised people make common investment mistakes and I am near certain that if unadvised performance was measured it would be deeply negative relative to any index the FMA would like to choose.

There is a genuine risk that if New Zealand over-regulates an industry, such as ours, and diminishes the equally important influence of competitive tension then the public will be worse off as a result as the finance industry might focus its efforts on the profitable few, and not the many.

RBNZ – In the flurry to populate media headlines with how fast interest rates are rising, I think it's worth pointing out that the cash rate in Europe is still unchanged at -0.50% and in Japan it is -0.10%.

Japan's most recent commentary was to reinforce the ''nothing to see here'' position.

European commentary is logically describing a need to at least get to 0.00%!

Meanwhile in New Zealand…

Adrian Orr reminds everyone that we march to our own tune and the RBNZ increased our Official Cash Rate (OCR) by 0.50% to 2.00% (middle of the inflation target band) and increased the current forecast for the terminal OCR to be 3.95% by late 2023 (+0.60% relative to the previous target).

It was good to see more action. It was unsurprising to see them then use words to reinforce how 'serious' they are about controlling inflation. They all use such words. The financial analysts compare changes in single words between statements from central banks and then debate the importance of different adjectives (what fun – Ed).

The tone has been set for more increases of +0.50% this calendar year.

I thought the only unnecessary item was when the governor introduced an opinion about when he expects to begin cutting interest rates again! (2024).

There was no need for this prediction. There are too many economic factors beyond New Zealand's control to make such medium-term predictions. Businesses can price their own medium term financing risks of the current yield curve, they do not need the governors 50:50 predictions about where they OCR might be.

If you are an investor, which seems likely if you are reading this, then you should add one more increment of confidence to the view that inflation will not escape here in the way that it has in Sri Lanka, Turkey or Venezuela who have lost control.

The less volatile inflation is, and the more modest it is, the better for economic and business performance.

Default – While the world is focused on Russia and its pending debt defaults, under the financial pressure being applied by the world's largest economies, further South in Asia Sri Lanka has defaulted on its debt obligations for the first time in its history.

Wait, how did that happen?

They aren't shooting at anyone or being shot at.

Their economy has returned to reasonable growth, unemployment is modest at 4.6% (although employment participation is low at 50%). Maybe youth unemployment at 24% discloses part of the problem witnessed in the street violence?

Government debt has increased quickly to 100% of GDP, with a lot of the finance (US$50 billion) provided by external lenders but the country has very little in external reserves to draw on (Less than US$1 billion).

One gets a little tired of those who blame Covid, inflation or other people for their problems. So, it was nice to see a previous representative of the Asian Development Bank (Professor Moore from the University of Sussex) stating that this failure by Sri Lanka was entirely the result of poor governance, and not that of external influences.

It is uncommon for well-informed people to speak so candidly, which makes it so refreshing.

Professor Moore went on to say:

This is the most man-made and voluntary economic crisis of which I know;

That the previous administration had borrowed money for infrastructure projects and then insisted in this very macho fashion on repaying the mounting debts, rather than restructuring them with creditors;

He said the then government went along in this way until about six months ago and basically, they had given away virtually all the foreign exchange they could command;

And he finished with:

This is egregious incompetence.

After winning the civil war with the Tamils (2009) maybe the government made unsustainable promises to its people?

The world is not in the mood for as much diplomacy as was typically used in the past (witness also the French snipe at Scott Morrison last week after he lost the election) and whilst diplomacy is typically good form, maybe more clarity and honesty is better at this point on important matters?

Sri Lanka's financial incompetence will lead to default, this will lead to (has) loss of control of trade, product access, inflation pressures (now at 30%), higher interest rates (now at 13.50%) and widespread public upset.

Unlike Russia, Sri Lanka will ask the likes of the International Monetary Fund for help and they in turn will assist but with conditions of meaningful financial changes by government, changes that will hurt (remember the tensions over helping Greece a decade ago).

You understand that if you get yourself in financial trouble personally the only way to resolve the situation it to make cuts in spending, try and increase revenue and to inch forward with debt reductions until you are back in control.

The reason I am writing about the Sri Lankan default is to ask, 'is this the first cockroach?'

Which other developed nations have high debt loads, rising interest rates and have been spending far more than they earn along with deteriorating foreign reserves balances?

I'd rather not see a contagion here.

What I'd like to see is a few more nations acknowledging the current financial pressures, explaining them honestly with their citizens and then making new disciplined decisions about confronting those pressures.

Manawa Energy – Who is Manawa Energy they ask?

Trustpower is the short answer. Or, in Prince musical speak, the company formerly known as Trustpower.

The board of directors will be a little disappointed by the number of times we have been asked the question. I suspect Computershare is disappointed with the number of times 0800MANAWA needed to be answered.

I don't recall them delivering a marketing campaign to investors about the name change; something the Infratil group is usually very good at.

The name change followed the decision to exit the retail business, and thus their direct connection with Bay of Plenty consumers, the Tauranga Energy Charitable Trust and the Trustpower name associated with it all.

It was certainly a suitable time to debate the name change.

The new name is clearly wishing to respect its gifting from the local iwi, and to reflect the community oriented intentions.

The new logo looks (to me) a little like a blend of the Kaimai ranges and the oscillations of an electrical current, mind you, I do not have a designers eye!

I know many investors are not frequent users of technology and some do not have access, but if you do, it is worth taking a look at the evolved brand story for your company:

https://www.manawaenergy.co.nz/about-us

The risk of your investment changed following the sale of the consumer part of the business, but not when the name changed.

Ever The Optimist

Still  searching! Maybe something about a gold mine in Tarras? Actually, the café in Tarras is for sale, I reckon they'll make more money than our clients if mining starts again in the area – imagine the volume of pies being sold.

Investment Opportunities

Infratil – has announced the details of its new bond, being an 8-year term with two interest rate periods of 4-years.

The interest rate for the first 4-years will be a minimum of 5.75% (actual rate will be set on 2 June)

The offer has two stages:

First - New money from all investors – offer opens 26 May, closes 2 June. This will be booked by contract note (no brokerage costs to the investors). If you wish to invest new money in these bonds you must act immediately by contacting us to confirm an amount;

Second - Rollover investors (holding the IFT190 bond maturing 15 June 2022), open 3 June at the same interest rate, close 13 June. (Roll the same amount, or less).

This is an online process, and we are happy to help but we will need to know your ENTITLEMENT NUMBER.

Genesis Energy – has announced that it will offer up to $285 million of a 'new' subordinated bond to replace the 'old' one (GNE040 is reaching its review date of 9 June 2022).

The bond offer is open now and closes on 1 June (this Wednesday).

GNE has set a minimum interest rate of 5.35%.

Now is the time to act if you wish to invest. Please contact us with your request for an allocation.

BNZ – has, today, launched a new 5-year senior bond.

The deal is open now and closes on Wednesday 1 June. If you wish to invest, please contact us immediately.

The interest rate will be set on 1 June but we estimate it will be between 4.75% -4.80%.

 

Travel

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 early June. He will be in the boardroom at the Ellerslie International Hotel on Wednesday 8 June (FULL), at Aristotles in Wairau Park on Thursday 9 June, and in Jarden House, Auckland CBD on Friday 10 June.

Edward will be in Wellington on June 17.

Johnny will be in Tauranga on Wednesday, June 15 and Christchurch on Wednesday, June 22.

 

Michael plans to visit Auckland, Hamilton and Tauranga in the weeks ahead. Please let us know if you'd like to be contacted about an appointment.

 

 

Michael Warrington

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Market News 23 May 2022

Paying me to upgrade my car is a poor use of public funds relative to reducing the pricing of public transport for the passenger.

Low or nil (personal) cost public transport would attract the most determined car users to include it in their transport mix.

INVESTMENT OPINION

NZ Budget – I had a moment of déjà vu; didn't I say after last year's budget that by the time you read our Market News you are likely going to be very tired of the political tennis match of budget reviews?

Same same, but different in 2022.

I see I didn't get my wish (above) for heavily discounted public transport (free with a social services card?)

Gross increases in debt funded spending don't impress me.

Expectations of 4.2% growth in the economy feel unrealistic to me as does the low point of a nice tidy 0.00% growth (not a recession!) from Treasury. Nothing is that simple, or smoothly achieved, in economics.

With the major themes of the budget being large sums spent in health and the environment I didn't see any meaningful drivers to improve outcomes for the productive parts of our economy and we cannot afford the new higher income levels that we seek if we do not improve the country's productivity.

Treasury forecasts inflation of 5.20% to June 2023 (no real return from bonds for the next 12 months) but wants to believe inflation will be back down to 3.60% for the year to June 2024.

If Treasury is even close to being correct with its inflation forecasts our long term bonds are close to appealing levels. I think investors should factor in some risk of it taking longer to tame inflation than the current forecasts suggest.

That will do from me. If you'd like more opinions on the matter just turn on a radio, television or the internet.

US Federal Reserve – These words from the chairman last week were aggressive, but also very useful:

The Fed is prepared to hike interest rates until there is clear and convincing evidence that inflation was starting to roll over (begin a period of decline).

The 2022 journey of higher interest rates and lower share prices will continue.

Recession – Ukraine stories appear to have been bumped off the front page by declarations that a recession is coming (as is winter – Ed).

A retired CEO from Goldman Sachs, Lloyd Blankfein, says a recession in the US is now very likely.

I guess it's easy to say anything you like from the Hamptons with as many millions as Blankfein has.

Retired chairman of the US Federal Reserve, Ben Bernanke, says that the US Fed has been too late to tighten monetary policy to combat the threat of inflation.

That's a bit rich coming from the man who constantly eased monetary policy based on the thesis of his PhD about monetary policy from another era (The 1930's depression), dropping the Fed Funds to 0.00% in 2008 and never increasing it again before he retired in 2014.

Maybe Bernanke was overinvested in shares back then?

So Blankfein says – don't increase rates too much because there is a recession coming, and Bernanke says increase them faster.

Two opposing opinions from highly credible people.

Welcome to the world of financial advice and investment decision making.

The conclusion of highest probability, in my view, is that they are both correct (temporarily) and the well discussed stagflation is the result; a weaker economy but we must pay higher prices.

Global Tax – Slowly, but hopefully assuredly, the world is intent on capturing more tax from the borderless businesses that pay so little to the nations where they extract so much.

You may recall the recent attempts to set a global minimum tax rate at 15% to avoid a race to the bottom with nations competing to attract the likes of Google to 'move' to their tax jurisdiction.

The latest useful move came from Switzerland, with their ever so impressive form of democracy (they actually ask the public what they prefer!).

Switzerland now intends to introduce new law (the Lex Netflix law) that will oblige video streaming businesses to invest a portion (4.00%) of the revenues generated from sales in Switzerland back into purchasing content from producers in Switzerland.

4.00% won't seem like much but the principle of 'taxing' these global entities based on gross sales is expanding widely and is the logical method of having global entities pay some taxes into the jurisdictions of their consumers.

It would be nice if New Zealand followed the leaders here and pursued a little more of this tax type than many of the others being proposed here.

FATCA – speaking of global tax collection.

I am getting tired of the same organisations asking me the same question multiple times in unfamiliar language (whether I am a foreign tax resident) and judging by the emails and phone calls, you are tired of it too.

FATCA tax legislation was a result of the NZ government agreeing to ask about my tax residency on behalf of the US who are trying to find their citizens who are not paying tax at home!

Common Reporting Standards law forces people to respond to such enquiry if they do not want their account(s) frozen.

I don't mind the concept of global agreement on trying to enforce tax payment, but I do mind being asked the same question repetitively and in tax language that is difficult to understand and is foreign to most readers.

It makes no sense that Computershare and Link Market Services are asking the same question over and over again, for each entity that they represent. If they can be an agent for ownership records, why not also for other information?

Our FATCA and CRS law should enable agents, such as these registries, to seek a declaration from me and to then share it with entities they act for.

However, I thought of an even more logical process; IRD (and/or Work and income as an entity that makes taxable payments not operating in the investment space) ask me to make an annual declaration about my current tax residency and link it to my tax records.

IRD is the focal point of my tax information. I have a legal obligation to make declarations to them. Why delegate one of those declarations out via many different portals?

Doing so is illogical and is an example of unnecessary red tape, which slows our economy.

As it happens, I also view the current process as anti-competitive because it is discouraging the public from pursuing comparable service types more widely.

New Zealand's IRD could then share this centralised information more widely, when obligated to do so.

While I am on the subject of efficient, central, declarations, we should be doing the same with Anti Money Laundering identity obligations!

Post Script: In my guise as Prime Minister for a day, I shall launch a Ministry of Simplification.

Russia – More very big decisions are being made by the day in response to Russia's invasion of Ukraine and the ongoing delusion about their place in the world.

McDonald's is the latest to announce a complete departure from the country.

Business decisions, such as this, may look like an inevitable decline in sales revenue, but in reality, it might also disclose a more serious corporate concern about the nationalizing behaviour of Putin and his government.

Perhaps McDonalds sees a risk of a far larger capital loss?

This is not just a protest against the invasion of Ukraine. Here are their words used when announcing the exit:

The humanitarian crisis caused by the war in Ukraine, and the precipitating unpredictable operating environment, have led McDonald's to conclude that continued ownership of the business in Russia is no longer tenable, nor is it consistent with McDonald's values. (bold highlight is mine)

McDonalds opened in Russia during the far more reasonable period of governance under Mikhail Gorbachev's leadership (USSR at that point) so the departure shows just how extreme the Putin era has become.

McDonalds state that they expect to lose (write off) about US$1.3 billion as a result of the exit, yet the share price did not move, which confirms that shareholders agree with the action and the risk that far greater capital losses are probable if they remain in Russia.

The McDonalds business seeks to be an accepted global citizen, Russia does not.

Other businesses will continue to follow.

China – Bloomberg reported that China has stopped reporting the bond trading data about overseas investors’ activities, triggering concerns about transparency.

Anybody not already concerned about transparency from China is a little naïve.

The assumption is that the dominant flow of information would disclose ongoing exit (sales) from investment in Chinese bonds and perhaps shares.

This relatively silent behaviour of exiting Chinese investment (very few headlines disclosing such strategic changes) by international investors makes sense to me following the behaviour by Russia and the amplified autocratic behaviour from China (President Xi in particular).

The world has accumulated some huge investment exposures in China over the past three decades and some of it may be very hard to explain to investors if China's political actions deteriorate (democratic perspective).

Reducing or exiting post any deterioration in acceptance of the political landscape would be very difficult and would unquestionably press toward much lower pricing of assets.

Being preemptive is always important as an investor and it's nice not being left as the last horse to close the gate.

As mentioned last week, the very strong rise in the value of the US dollar tells you a lot about the current investor retreat to what they know and trust.

ESG – is becoming more interesting by the week as we all wrestle with what it should mean and test whether it will deliver the outcomes sought.

On this occasion I was reading about the issue of gender.

A California court has ruled that the recent law requiring a minimum number of women to serve on a board is unconstitutional by violating the right to equal treatment for all.

Even though the intent of the new law was good, the ruling seems logical enough and might help New Zealand as it reflects on some of the policy changes 'we' are trying to force into place.

The next ESG (gender) related item to cross my desk last week was from the Asian Development Bank issuing new bonds labeled 'Gender Bonds' where the funds would only be allocated to projects that address one or more of the following five areas / dimensions of gender equality and women's empowerment:

Women's economic empowerment;

Gender equality in human development;

Reduced time poverty of women;

Participation in decision-making and leadership, and/or

Women's resilience against risks including climate change and disaster impacts.

In their own light they all read as reasonable targets.

I was brought up to understand that the world is not fair, so I don't mind the efforts being made to be sure that everyone has the opportunity to succeed (as ADB is trying to ensure), but I also have some sympathy with the US court decision that we should simultaneously try to avoid legislating or forcing opportunity away from others.

This situation will soon throw up another legal conundrum: Does the law (any gender focused law) anchor its judgments in genetics or recognition?

Ultimately, I hope we end up with the wider population feeling they all have similar access to opportunity, but thereafter involvement should be a function of skill and performance.

It will remain a very difficult space for investors to measure.

ESG II – Tesla has been removed from the S&P500 ESG index, yes Tesla!

The removal relates to harm to employees involved in the production process.

Elon Musk has a strong opinion – 'ESG is a scam and has been weaponized by phony social justice warriors'.

As I said, ESG is already becoming a very difficult space for investors to measure.

ESG III – Another fact that will make ESG investment more difficult for a while is the inevitable increase in global spending on defense that will now happen, for many years ahead.

Ever The Optimist

The heightened demand for electricity storage has battery scientists at the forefront of development in the electricity sector.

I once described for you some progress in carbon storage battery types (speed and capacity), and last week I read about advances in anode and cathode performance using different materials (Silicon and Nobium).

These battery experts must be enjoying the period of being very well funded.

Investment Opportunities

Infratil – has announced the details of its new bond, being an 8-year term with two interest rates periods of 4-years.

The interest rate for the first 4-years is likely to be between 5.50% - 5.90% and will be announced later this week.

The offer has two stages:

First stage - New money from all investors – offer opens 26 May, closes 2 June. This will be booked by contract note (no brokerage costs to the investors);

Second stage - Rollover investors (holding the IFT190 bond maturing 15 June 2022), open 3 June at the same interest rate. (Roll the same amount, or less)

We have a list for investors using new money which all clients are welcome to join and request a firm allocation.

We will communicate with rollover investors once details of the rate and process are confirmed.

Post Script – All Infratil investors (shares and bonds) would benefit from reading the company's latest annual results (strong):

https://infratil.com/for-investors/announcements/2022/infratil-full-year-results-for-the-year-ended-31-march-2022/

Genesis Energy – has announced that it will offer $225 million of a 'new' subordinated bond to replace the 'old' one (GNE040 is reaching its review date of 9 June 2022).

We expect an interest rate on the 'new' item to be around 5.50%.

We have a list for investors wishing to participate in this offer, which is formally being made on 26 May.

If this new offer is successful, the old GNE040 bonds will be repaid. The GNE040 bonds cannot be used to pay for an investment in the new offer.

Vector – If you plan to roll your VCT080 investment, this is the last week to take an affirmative action and instruct the rollover.

Holders who plan to roll their investment are encouraged to 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%.

Travel

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 early June. He will be inside the boardroom at the Ellerslie International Hotel on Wednesday 8 June, At Aristotles in Wairau Park on Thursday 9 June, and in Jarden House, Auckland CBD on Friday 10 June.

Edward will be in Wellington on Friday, June 17.

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

Seminar Dates ahead:

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

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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

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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

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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

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