Chris Lee & Partners Ltd

Market News 28 November 2016

We know the world is changing.

It always is.

However, we witnessed two examples last week that rose to the top of my attention; internet use and electric vehicles.

Chorus announced faster growth in the uptake of fibre for Ultra Fast Broadband than they had forecast, now passing 300,000 users. Given the unimpressive installation quality that I have seen (in various residential settings) it is an impressive growth track for Chorus.

The ongoing rise of internet use was further displayed when Adele announced she would come and sing in NZ and sell tickets online (as is common). She originally offered one concert but within 60 minutes Adele had sold out three concerts to 100,000 people!

That is an awesome display of the leverage of technology. (Especially during work time – Ed)

If my father had wanted to go to the Adele concert he would barely have left his driveway, heading for the ticket booth in town, before tickets ran out. As it happens I doubt he even looked for his car keys on this one.

The other story of developing significance was the report that a Chinese designed and manufactured electric car set a new speed record around the Nurburgring race track (Germany), a control group test track for the ego of the motoring industry.

I have long thought that the mainstream car manufacturers will need to remain alert to competition from clever physicists and aerodynamicists wishing to produce electric cars. The new NextEV Nio EP9 from China will have rattled more than one or two vehicle manufacturer’s cages with a 7 minutes 5 seconds lap time in a purely electric vehicle.

Did you miss out on tickets to Adele’s concert?

Are you making changes in your world?

Investment Opinion

Populism – Kevin Gloag writes:

I suspect that by now everyone is a bit ''Trumped'' out but keep your eyes open for a continuation of the populist movement globally.

Financial markets have certainly embraced with optimism Trump’s proposed economic agenda, driving up stock prices in the US to record highs and causing a sharp increase in long term interest rates and the US dollar.

Markets appear to be saying “good riddance” to the previous regime and seem to believe the systemic risks that existed prior to the presidential election have now magically disappeared.

Rising deficit spending, inflation and higher bond yields would seem to undermine the idea of higher stock prices. Also a strong US dollar is destabilising for markets and foreign assets and S&P 500 companies generate half their earnings offshore. Not a problem according to current trends in US equity markets.

The US markets appear to be focussed on cuts to corporate tax rates and incentives to repatriate capital (revenue? – Ed) currently held outside the US at present, in Ireland for example.

I can see economic benefits from rising interest rates. Low rates have depressed growth and inflation by seriously reducing household spending and the velocity of money.

What low rates have achieved is a series of asset bubbles and a build-up of more debt, enlargening the cause of the original problem.

For Trump to be successful I believe his administration must confront the imbalances caused by 50 years of bad public policy which would include deflating some of the bubbles referred to above and inflicting substantial losses of paper wealth on many investors (the minority) whilst simultaneously delivering an improvement to living standards of the majority.

Already, since the election, US$1.2 trillion of bond market value (present value, not repayment value) has been wiped out. (As rates rise, market values of fixed rate bonds must fall.)

Trump is a pragmatist and may or may not turn out to be everything people hope for but what his appointment has confirmed is a rapid rise in populism throughout the Western World. His opponents believe he is a selfish opportunist, helping himself to anything he fancies.

The Brexit movement was also evidence of people versus the establishment and status quo, people whose living standards have been steadily declining for the past 2-3 decades, and people who simply can’t see a better future.

The anger and discontent of the global populace has risen significantly since the global financial crisis, where, largely due to radical monetary policies, the gap between the haves and have-nots has grown much wider.

And while all the recent noise has been coming out of the US the focus of global financial markets is about to shift to Europe where two significant upcoming events could be game changing for both the European Union and the future of the single currency union.

The first of those significant events, taking place on 4 December, is the Italian Referendum on a proposal of a constitutional reform, streamlining the legislative process by decreasing the power of the country’s second chamber, its Senate, and also abolishing Italy’s provincial governments.

The referendum was called by Italian Prime Minister, Matteo Renzi, who has staked his political reputation on the vote by vowing to resign if the electorate rejects his proposal.

Italy’s most credible Prime Minister for many years, Renzi believes that by reforming the Senate the legislative process will become more nimble and direct and that he will be able to enact badly needed structural reforms in Italy.

Currently legislative bills bounce aimlessly back and forth between two chambers of parliament until they can be passed in identical form. One recently approved law was first tabled 30 years ago!

Renzi hopes to overturn legislation passed after the Second World War when the authors of Italy’s republican constitution dispersed power so it could not be wielded by any one person or institution, and gave two houses of parliament equal power, effectively paralysing the legislative reform process; a move from Mussolini to Dolce Far Niente (art of doing nothing).

Renzi can’t offer any sweeteners because of his Eurozone obligation to keep budget deficits to 3% of GDP but he has revived a hoary pledge to build a bridge linking Italy to the mainland (walls, bridges what will politicians try next?)

There is serious opposition to Renzi’s proposal, and opposition parties have pounced on the Referendum as an opportunity to discredit Renzi and strengthen their own support bases in a country deeply divided and where there is much financial hardship, high unemployment, abject poverty and very strong anti-Eurozone, anti- European Union sentiment.

The danger in Italy is that it has several Donald Trumps waiting in the wings as leaders of the main opposition parties, all of whom favour exiting the euro currency and the EU.  As we know, in democratic countries opposition parties eventually come to power, more so where the people are restless and disillusioned.

The Italian people have been emboldened by Trump’s victory and ideas, ideas that previously seemed crazy but now seem achievable – taxation at 15%, duties on Chinese goods, a halt to uncontrolled immigration and suspicion of supra-national bodies, like the EU.

The people see Trump carrying these ideas forward and the leaders of the populist opposition parties have seized the moment. Regardless of the outcome of the Referendum there promises to be a long period of political confusion and instability following the vote.

The second and, in my opinion, more significant event looming for Europe is the French presidential elections to be held in April/May 2017.

The lead-in to the elections is now in full swing and is being dominated by the dramatic rise in popularity of Marine Le Pen and her far-right National Front Party.

Le Pen is the French version of Donald Trump. She applauds Trump’s election and believes that the ‘elite’ have lived too long among themselves and that globalisation has forgotten and put aside the people and the people’s interests, aspirations and dreams.

She believes that the ‘elite’ have acted like carnivores and used the world to enrich only themselves but with the election of Trump and Brexit the ‘elite’ have realised that the people are not listening to them anymore and that they are now losing the power they had given to themselves.

Le Pen openly shares and supports the same political views as Trump – she is opposed to mass immigration, has a protectionist stance on free trade, a distrust of “wild globalisation”, has a desire to pacify international relations, notably with Russia, as well as ending warmongering expeditions which she believes are the root cause of huge migratory waves.

If elected, Le Pen has confirmed that she will call a referendum on France’s use of the euro currency and its EU membership. She wants to pull France out of the single currency.

Despite her rapid rise in popularity, where she now seems likely to make it through to the final round of voting and battle it out with the Centre Right Republican Party, the pollsters and main stream media still pick her to be soundly beaten in the final round on 7 May. (Sound familiar?)

France has unemployment of 10% and has been subjected to a series of savage terrorist attacks so a big swing to the far-right would hardly surprise, especially as Trump’s victory is proof that anything is possible.

Imagine President Putin, President Trump and President Le Pen. Four of the five permanent members of the UN Security Council would be occupied by either undemocratic governments (Russia and China) or by democracies led by nationalist right-wing leaders (US and France).

Populist groups are also challenging the old order in Germany, The Netherlands and Austria, all of whom have elections in the next 12 months. Austria’s right-wing populist freedom Party holds a narrow lead going into the Austrian presidential election, which will also be decided in early December.

If Trump achieves nothing else he has given people and groups around the world the confidence to not only challenge but defeat the status quo.

It now seems inevitable that leadership styles around the world are going to change. It is happening already; that the ‘old guard’ are on borrowed time. The ‘elite’ are now vulnerable to changing policies and less protection and the ‘non-elites’ finally see a way forward. We are seeing the metaphorical pitchforks. We hope the situation remains metaphorical.

Although I envisage a rapid shift to nationalist far-right leadership in Europe I’m not sure this will work out for them (wider population) over the long term.

For some time now I have believed that the next financial crisis will have its roots in Europe and that the European banking sector, which has been on ECB life support since the GFC, will be at the epicentre of the crisis.

A break-up of the Eurozone or mass exodus from the EU could easily be the catalyst.

Finally I read this quote the other day and it sums up 2016 for me:

''When markets are 100% convinced of a certain outcome the bell is ringing to get out of the pool.''

Michael Warrington writes:

Piano Player – Bapcor didn’t like the tune that Grant Samuel was playing so they have foolishly decided to shoot the piano player.

This is not a respectable way to go about a takeover, let alone a conventional way.

The behaviour looks weak and reinforces, in my opinion, the financial reasons for rejecting the takeover offer, even if the Hugh Green family, holding 27% of Hellaby, is siding with Bapcor.

Grant Samuel described the $3.30 per share offer as too low, relative to their estimate of $3.60-$4.12 and thus the directors of Hellaby have logically recommended that shareholders decline the offer.

Investors are free to make up their own minds, of course, but if Bapcor executives have reduced themselves to being rude about professional, independent, value assessments then in my view they have a hidden agenda that needs to be disclosed.

Bapcor should be sent home to rethink their offer.

Hellaby shareholders are reminded that their objectives are different from those of Bapcor.

 

Investment News

Air NZ – My compliments go to Air NZ for its nimbleness.

AIR has responded to customer demand and commercial benefit by adding 80 additional flights around the weekend of 24-26 March 2017 to deliver an enormous number of people to the phenomenally popular Adele concerts in Auckland.

As touched on above, the power of technology has assisted AIR with this decision making; they can see second by second the consumer demand behaviour through bookings, giving management sufficient time to consider available resources to increase the services accessible to consumers (and thus profits for AIR).

It is impressive to see such effective use of technology, especially when so many underutilise the potential of technology.

I have a free piece of advice for Mr Luxon, if he has chosen to read our newsletter this week. Mrs Warrington recommends that you run several ‘Night Rider’ flights on Saturday 25 March to get people home between midnight and 1:00am.

Consumers would then thank AIR for saving them the absurd hotel pricing, which has strategically, but unsurprisingly, sprung up in response to the success of the Adele concerts.

I have always viewed owning airlines as a risky investment, and its true the AIR share price has been very volatile, but when investing one does seek strong management and AIR has been displaying this trait for many years now.

ASB Bank increases Offer – ASB Bank belatedly (in the final week) increased the size of its Tier II subordinated bond offer from $375 million to $400 million.

This is an unusual move and displays above average enthusiasm by ASB to maximise the raising of new equity for the bank, or its parent CBA.

It is however evidence that the scaling enforced at the outset of the offer, when they elected to accept only $375 million, was unnecessary or that the bank did not have excess demand at that point in the issue and could not reach the optically attractive $400 million.

Clearly ASB was offered a late commitment of an additional $25 million, which is likely to be money from professional investors, who can act this quickly, and not from the public.

This is a surprise to me because the rising market interest rates meant that the credit margin available on the ASB bonds had reduced by the time the additional $25 million was issued, swap rates have risen, perhaps prompted by Trump’s implied borrowing plans.

Perhaps the coupon rate of 5.25% remained an attractive deal then, fortuitous that the deal aligned itself with the arrival of the Trump Tidal Wave?

Maybe it’s as simple as that, the return was attractive to investors whilst the equity capital is simultaneously attractive to ASB and CBA banking group and the volatility of 0.25% interest rate wasn’t enough to remove either party from the negotiating table.

It is certainly a much better outcome than the 4.60% - 4.80% that was being touted in the early days of the ‘proposed’ offer.

Oil – contrary to my excitement above about the wide potential for production of electric cars, the US Geological Survey reports the biggest ever oil find in North West Texas, dwarfing others found so far in the US, which is some statement given the long history of oil exploration there.

The Midland Basin of the Wolfcamp Shale area in the Permian Basin is estimated to have 20 billion barrels of additional oil accessible, using modern drilling techniques.

It is hard to see oil prices rising at present given the continued discovery of new oil fields, the US becoming an exporter, the re-entry to the market by Iran and probably Russia, the ongoing disagreement at the OPEC table about controlling supply and the continued growth in supply of electric vehicles.

Trump – If you are still sitting on your hands wondering whether to change any investment weightings in response to ‘President Trump’ then worry not, you are in very good company.

The European Central Bank President, Mario Draghi, says Trump’s election will likely have long term consequences but he cannot yet assess the Trump impact either and he still wants monetary stimulus for Europe.

The US has jumped to a higher level of fear about new inflation but Europe is unsure if they can generate any.

Draghi’s opinion is a refreshingly honest assessment from a person who is likely better informed than most about such matters.

Investment decisions founded on good personal investment strategy remain a sound way of progressing, even in these times of disruptive market influences. Speculating at such times is only for the very brave.

Commercial Property – The market prices of all listed property entities fell by unusually large proportions over the last six to eight weeks, partly in response to weaker markets and partly rising interest rates as Donald Trump was elected President.

The impact of the recent earthquake(s) in Wellington did not help some of the assumptions being made by investors but it’s true that there is plenty to yet understand about the earthquake’s impact on property value in Wellington. We are being reminded of the need for higher maintenance reserves when owning property in naturally vulnerable locations.

I suspect that all of the property companies executives will have been a little surprised by the share price moves as they were in the midst of gathering their latest data for reporting performance to the NZX (and their owners).

They have all now reported and without significant exception they all reported increased asset values, higher profits, longer tenancies and continued quality improvements within portfolios. (Enforced improvements in Wellington – Ed)

Has there been a market disconnect?

In short, probably. However, I always dislike declaring the market to be wrong.

Influences that impacted investor views may be tidal in nature, and thus longer lasting and resulted in giving investors cause for pause, or exit.

Subsequently, over the past week, the prices of the various shares/units have recovered with most nerves settled by disclosure of the facts surrounding the performance of the assets and their managers.

Performance reports won’t always be rosy but at present the property managers have a lot to be proud of and I have no doubt they are the best people to tackle property management in a disrupted Wellington landscape.

I can give property investors one good piece of news out of Wellington. The damaged properties have immediately created tension around rental pricing for available floor space. As the likes of Statistics and BNZ, among others, quickly hunt for temporary (?) new homes demand appears to be exceeding supply. (Capitalist! – Ed)

By the way, the return of Dividend Reinvestment Plans (DRP) from the listed property companies also caught my attention, especially given the relatively low and inexpensive debt levels of the various entities.

I pondered if it heralded a desire to buy or build more properties but given the breadth of the DRP offerings we think it is far more likely evidence of banks reducing their willingness to lend as freely as they have in the past.

Property companies have wisely responded to this industry change by allowing equity ratios to drift higher and perhaps even to use any surplus cash to reduce actual debt levels to ensure a barrel of dry gun powder exists for the rainy days or good value opportunities that emerge from time to time (often from others who are less well prepared).

Ever The Optimist – If you look hard enough you can usually find a silver lining and a small one surfaced as a result of the recent earthquakes in the Kaikoura and Marlborough districts.

Engineering firm OnGuard Seismic Systems (http://www.onguardgroup.com/) has been promoting seismic anchors developed for wine tanks after the 2013 earthquakes and they proved their value at vineyards during this most recent series of earthquakes by helping avoid damage to anchored tanks.

OnGuard had planned a shaking table simulation for potential international consumers of the product (think California) but the latest earthquakes had demonstrated the veracity of the seismic anchors under real conditions!

Investment Opportunities

Quantum – The Wellington Company has launched its offer of another property for sale via a syndicated structure - TWC Quantum Dixon Street.

The pdf version of the offer document is available under the Current Investments page of our website and we have hard copies available in our office.

If you wish to invest in this offer please contact us urgently to discuss access to a firm allocation.

Travel

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherstone St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Mike will be in Hamilton on Wednesday, 30 November.

Edward plans to be in Blenheim on Monday, 5 December.

David will be in Palmerston North and Wanganui on Wednesday, 7 December and New Plymouth on Thursday, 8 December.

Chris will be in Auckland and Albany on Friday, 9 December and Monday, 12 December.

Investors wishing to make an appointment are welcome to contact us.

Michael Warrington

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Market News 21 November

Life is indeed like a box of chocolates.  (Forrest Gump for President – Ed)

US voters have taken the ‘land of the free and the home of the brave’ quite literally with their voting in this cycle.

There is a real chance that retired NZ investors will, temporarily, be grateful to US voters for electing Donald Trump due to slightly higher interest rates.

Investment Opinion

Trump– I was in Laos when Donald Trump became US President Elect and I observed that the locals couldn’t care less about the news.

Trump’s success brought some amusement to our group, briefly, before we too concluded that it was just a distraction from our trip and its influence would take some time to settle in.

It was good to be away from the coalface and the noise of the political machine.

At face value Trump as President came as a surprise (just as Brexit was to the UK minority – Ed) but I agree with those who connect these victories to a widening display of public discontent with the narrow range of beneficiaries from governance strategies of recent decades.

Governments in all developed nations would be wise to contemplate the presence of this public response in their own electorates.

I didn’t like the reaction from a minority in the US of ‘use Facebook and March in the streets’ to display anger at the result immediately after losing a democratic vote. It is both naive and disrespectful of the democracy they enjoy.

I like Obama’s speeches and the key sentence in a recent one from him explained that his disagreements with Trump would not disrupt a well-organised hand over of power to display to the world how changes in power should be handled. No guns required, regardless of the Second Amendment to the US Constitution.

If those protesting in the streets of the US want a disruptive society there are plenty of places in the world they could move to. The Police should clamp down firmly on such poor behaviour.

From an investment perspective I have not been inspired to change my view all that much in response to the Election of Donald Trump.

Over my entire career politics has only resulted in short term volatility, which has, for the most part, benefited traders but not investors. You saw this volatility in the first 24 hours after Trump was elected; markets fell sharply as traders who incorrectly guessed the outcome of the election exited their positions, but markets quickly returned to near where they started.

The rate at which markets have moved is a little surprising. Shares quickly moved back to new high points and long-term interest rates rose by 0.50%.

A +0.50% change in 10-year interest rates is a significant price change by any measure.

Trump’s election seems to make certain that the US Federal Reserve will increase the Fed Funds rate (like our OCR) by 0.25% in December, but the market is already anticipating this move. The robust levels of economic confidence and promises of new government spending provide good support for the negative impost of higher interest rate costs.

The market clearly wants to believe in the effectiveness of Trump policies but meaningful economic change is much harder to achieve than simply changing the name on the letterbox at 1600 Pennsylvania Ave, Washington.

If Trump wants to push the economy as he proposes then he must increase US debt levels significantly, which is an illogical strategy in the current financial landscape, in my view.

In my opinion financial markets are over reacting (with optimism) to the Trump result.

Trump cannot, alone, deliver inflation and productive economic growth and the US will not default on its debts under his watch so the sharp lift in market yields is becoming excessive.

If simultaneously achieving inflation and economic growth was this simple to achieve the US Federal Reserve would, for the past year, have either been urging aggressive fiscal spending or urging the public to vote Trump.

So, the aggressive market reaction, especially with respect to interest rates, looks like a pleasant investment opportunity to me, with bond yields again well above bank deposit rates for similar terms.

I do not fear the rising interest rates with respect to NZ fixed interest portfolios (personally managed) for a second reason; the average duration (term to maturity) of NZ fixed interest portfolios is very short both by local and international standards and thus rising interest rates will only have a modest impact.

Most NZ investors receiving financial advice hold fixed interest investments between 1-5 year terms with many holding modest sums in terms between 6-10 years. The average duration of this investment strategy is undoubtedly shorter than three years based on my observation. The shorter the average duration the less the impact on value from rising, or falling, interest rates.

This links to my opening line that retired investors may well become grateful if Donald Trump delivers higher interest rates. However, interest rates are a measure of inflation and real return against default risks and I doubt Trump will deliver a sustainable change to inflation so this lift in longer term interest rates may be temporary.

So, should we buy bonds, not sell them?

Regulatory wisdom encourages me to leave that to one’s specific relationship with their financial adviser.

What of the moves for shares prices?

Well, share prices must stand on their own two feet measured against the normal combination of profits and asset values for the business concerned. Many local share prices have been retreating during the lead up to the US election but readers may recall my view from last summer that share prices seemed too high so it’s been nice to see them fall for a while to deliver better value for investors.

The US share market seems to be taking Trump’s election as a positive but I suspect it is more of a sugar rush (tax cuts, focused spending) than a meaningful change to US economic performance.

Thinking about that sugar rush, if you look at historical charts of share market pricing can you spot presidential cycles?

I can’t.

All financial commentators have been saying ‘current conditions can’t go on’, with reference to high debt levels, zero interest rates and financial support for all, but none of us are clear on how the model will break. I’m still not clear where the break(s) will occur but I remain concerned about our distance from a point of financial balance.

So, for now, I think investors can and should be patient in response to the US election of Donald Trump as President. Your personal investment strategy (policy) and its relationship to your specific needs is more important than guessing what Trump might or might not do.

Trump’s election has made for colourful viewing and reading, and there is doubtless a lot more colour to be sprayed about yet, but it has inspired little change with respect to my own investment decisions.

Inflation? – For those who disagree with me (above) and who do fear inflation, and thus increases in the official cash rate, you might wish to become early adopters of a return to favour for annual reset perpetual securities; especially those trading at price discounts.

Or not?

Over to you and your financial adviser again.

Shipping – The Kaikoura centred earthquake should see a move toward more coastal shipping for transport of NZ produce in the upper South Island, which will be to the benefit of Lyttleton Port and perhaps Timaru (in conjunction with Port of Tauranga).

By contrast I hear that Kiwirail and trucks are offering back up freight options after the Port of Wellington suffered a high level of damage from the earthquake.

These changes to transport methods may ultimately only be temporary but it is a good example of the value of diversity and always having multiple options available for achieving objectives.

Actually, while I am on the topic of diversity I can tell you what I learned (from a High Voltage guy on our ride in Laos) about the recent failure of electricity supply in South Australia through a lack of diversity.

SA had become too dependent on the tax subsidised ‘renewable electricity supply from wind generation and when the powerful storm came along all of the windmills automatically turned off, as intended.

The problem was that the rate of decline in local power supply was too large for back up supply to be effective (interconnect from the State of Victoria), so the ‘fuses’ blew. Good planning by SA should have resulted in a more diverse mix of generation and backup than they have, which I suspect industry experts had been telling them.

There is now an urgent debate occurring about establishing an ‘interconnect’ for electricity supply from NSW to SA and I suspect SA is asking what other local generation options should be considered such as geothermal and fossil fuel or not, gas, which Australia has plenty of. (Dam the Murray River? – Ed)

So often when you feel as if you are entering a winning stretch, something (risk) emerges from left field.

This is why ‘hope for the best but be prepared for the worst’ is always an appropriate strategy.

Investment News

Anti-Trade – Several of Donald Trump’s speeches have been either anti-competitive, or anti-globalisation, but whilst his input so far has been all talk the central bank of Malaysia (Bank Negara) is taking action.

Bank Negara is choosing to enforce its prohibition of trading the Malaysian Ringgit (and derivatives thereof) outside of the Malaysian banking system. Until this point investors typically used the liquid NDF (non-domestic) markets in Singapore and Hong Kong to exchange ringgit for dollars because of the many restrictions in the domestic market.

This is about to stop, and the reaction has been a flurry of sales of Malaysian assets to remove capital from the country.

Visually the market’s reaction can be seen through declines in the value of the Ringgit and in the sharp increase to Malaysian long-term interest rates with their 10-year government bond rising 0.60% in a week to 4.25%. It is logical to expect the currency to fall further and for this bond yield to rise further.

Coincidentally, NZ is so dependent on foreign capital that if our government and central bank began a similar blockade of free capital movement our interest rates would rise sharply too (pay off your debts if you want control of the situation!).

Free markets appear to be disassembling a little.

Listed Property Entities – Over the past four to six weeks the price of shares and units in the listed property sector have retreated by quite meaningful proportions.

These things happen in financial markets but I pondered the reasons and the appropriateness of the move.

Weaker markets, including aggressive selling of Argosy, were the initial driver and then higher interest rates following Donald Trump’s election appeared to compound the weakness.

However, these share price declines ran into resistance with recent reporting by listed property entities with quotes from senior management including the following:

‘significant building work and a swelling population in the country's biggest city provided a number of opportunities for the property investor’

‘Auckland office vacancies are at historic lows and we see demand continuing to stay high, with restricted land supply and construction price inflation keeping space at a premium’

‘Auckland CBD retail environment has strengthened considerably over the past few years driven by strong demand from international and local retailers’

‘We are happy that committed leases on our (new) developments to date provide a WALT of over 13 years. With future leases we expect the developments to increase the total portfolio WALT to eight years, putting the business in a very strong long term position’.

‘We are currently in discussions with a number of retailers and food and beverage operators and are very happy with the strong interest we are seeing’.

‘With strong property market fundamentals and low interest rates stimulating business growth, the outlook remains positive’.

It’s always good to have a series of facts to measure against the market pricing theories.

Earthquake – It is very clear that the NZ government will need to establish a larger asset position for EQC, similar to the changes made at ACC where the government demanded a strategy of asset and liability matching rather than hand to mouth financing.

The government contributes to EQC along with the insurance sector (you and me) and it seems likely to me that our insurance premiums are about to rise again.

With its relatively low debt ratios and imminent fiscal surpluses the NZ government is extremely well positioned to deal with this latest financial impost, however, the latest earthquake surely means that an imminent return to tax cuts or contributions to the ‘Cullen Fund’ will be removed from the Cabinet table.

NZX Judgment – NZX shareholders will be pleased to see the court case against Clear Grain (Ralec) resolved without further expense, but the ‘nil all draw’ described by the judge confirms that plenty of money and time were wasted, especially the court’s time.

The lawyers’ time wasn’t wasted because they were undoubtedly paid very large sums of money to co-ordinate the nil all draw.

The retiring CEO of the NZX, Tim Bennett, will be pleased to close this file before handing over the reins to a new CEO in 2017.

Scarlett – Those of you receiving Holder Notices from Computershare with a reference to Scarlett Ltd need not worry that you have unwittingly entered a game of Cluedo or that one of your investments has surprisingly failed (in the Library, under the weight of a lead pipe – Ed).

Scarlett Ltd relates to the metamorphosis (and Demerger) from ‘old Trustpower’ into the ‘new Trustpower’ (once known as Bay Energy Ltd, just to add spice to the mystery).

Scarlett Ltd is simply the renamed ‘Old Trustpower’, now an empty shell, and thus it is being liquidated (shut down and removed from the Companies Office register).

‘New Trustpower’ (aka Trustpower Ltd, TPW on the NZX) continues in business as intended and if you look further down your Holder Notices you will see a record of the TPW investments that you know to be yours.

Blame Trump? – Complectus has delayed its planned Initial Public Offer of shares in its trustee business citing market volatility as the reason.

I read this as ‘blame Trump’ which discloses another truth that some other unwritten problem exists, probably a lack of demand at a price acceptable to the seller or perhaps a trade sale alternative has returned to the options on the table (Chris strongly advocates a trade sale as the only sane option).

Blaming others or describing market volatility (normal condition) as the reason for a postponed sale is weak behaviour in my view.

Scams – The Financial Markets Authority is helping deliver the message to the investing public with an article that essentially says ‘hang up on unsolicited calls about investment’.

FMA Article Link (click here) or go to their website - https://fma.govt.nz/news/media-releases

We agree. You are always better to simply hang up on unsolicited calls and return to your dinner, or other activities, all of which are a better use of your time.

Laos – Having just returned from a 10-day motorcycle tour of Northern Laos I am happy to answer questions for any people planning trips there.

We had an excellent time and motorbikes were a great way to see the country widely.

Laos is clearly developing from a low base and tourism looks likely to add genuine value to the Laos economy, unlike my impression of the Chinese who appeared to be building dams to deliver electricity to China!

Surprisingly Laos mobile phone performance (voice and data) often put NZ networks to shame. This included making video calls home from the smallest of rural villages.

I didn’t see a lot of opportunity for NZ to increase its exports there. It’s not that Lao people don’t need better access to fresh dairy, for example, but they aren’t great consumers of it and tourist numbers seeking such luxuries were modest in number.

One of our team did however have a business idea after 10 days riding; establish a franchise of ‘Fulton Hogan Laos’ and you’d be very busy, all of the time.

Ever The Optimist – Dairy pricing increased again in the recent market auction and banking analysts are all now expecting farmers to receive $6 per KgMS (hat tip to ASB for sticking to this prediction throughout the weakness of the past year).

Shortly after typing the full stop on the previous paragraph Fonterra confirmed a move to $6.00 per KgMS.

Another chap on our ride through Laos happened to be a senior part of the Fonterra distribution network and he was pleased to see the price increases and near certain that Fonterra would not make the same over-supply mistake seen during the 2014-2015 season.

This over-supply allowed the likes of the Chinese to over-stock and then withdraw from the demand side of the market for an extended period, undermining the price of milk.

If you’re curious to follow the ongoing performance of this sector here is the website link:

http://www.globaldairytrade.info/en/product-results/

Investment Opportunities

ASB Bank – the offer of Tier II subordinated bonds (10 year term, 5.25% until 2021) to the public is closing this week.

If you have a firm allocation from us your application form should now be in for processing. Any undelivered amounts will be reallocated tomorrow.

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

TWC Quantum Dixon Street – The Wellington Company has launched its third share offer of another property for sale, with a forecasted PIE dividend yield of 9.25%

The pdf version of the offer document is available under the Current Investments page of our website and we have hard copies available in our office.

If you wish to invest in this offer please contact us urgently to discuss access to a firm allocation.

Travel

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherstone St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Edward plans to be in Blenheim on 5 December and Nelson on 6 December.

Chris will be in Christchurch on November 22 and 23.

Mike will be in Hamilton on 30 November.

Investors wishing to make an appointment are welcome to contact us.

Michael Warrington

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Market News 14 November 2016

Earthquake: Our offices are undamaged and the houses of our staff also escaped without damage. We extend our best wishes to those in earthquake related areas.

Interest Rates

As expected the Reserve Bank Governor reduced the OCR to 1.75% last week, but with the 25 basis point cut already priced into rates it was a bit of a non-event.

Movements in the OCR really only influence short term interest rates (call to say 2 years) , although with over 90% of all bank funding held for terms of 12 months or less, changes to short term rates do affect a large number of investors, and also of course floating rate borrowers.

What has probably been of more interest to investors, and borrowers, over recent months is the steady increase in the 2 -10 year wholesale rates (swap rates), with these rates much less influenced by the OCR, and much more influenced by movements in overseas bond markets, particularly yields in the US.

Even before Trump’s election success tighter global credit conditions had seen wholesale funding costs rising, and also credit (risk) margins, the other component of a fixed interest rate.

The current ASB Subordinated Notes offer provides a good example of the rising risk premiums being demanded by investors. ASB issued the same security in 2014 paying a credit margin of 2.15% but has had to pay a credit margin of 2.80% for the current offer.

And because our longer term interest rates track the interest rates in the US Trump has now become a big factor for global interest rate markets and his proposed tax cuts and infrastructure spending seem likely to widen US fiscal deficits and drive-up rates.

In fact, if he follows through, most of Trump’s proposed fiscal policies are potentially very inflationary and will require massive amounts of new borrowing, both strong cases for higher rates in the US, in my opinion.

Higher rates in the US would result in higher rates here, which would have obvious consequences for our financial markets. Will Trump’s ‘policies’ over-ride the global strategy of protecting the over-borrowed with zero or very low interest rate costs?

Exchange Traded Funds

In New Zealand Authorised Financial Advisers have to comply with The Code of Professional Conduct which was introduced in December 2010 and sets out minimum standards of competency, knowledge and skills, ethical behaviour and client care.

Code Standard 1 states that - “An Authorised Financial Adviser must place the interests of the client first, and must act with integrity. These obligations are paramount.”

The Financial Markets Authority now regulates New Zealand’s financial advisory sector, and has displayed much stronger supervisory and enforcement skills than its predecessor, the now defunct Securities Commission.

But while the FMA may have improved the conduct and integrity of New Zealand’s financial markets there is still very limited regulatory protection for retail investors in many overseas jurisdictions.

In fact in many countries retail investors still appear to be ‘fair game’, including in the US, where government officials estimate that $17 billion a year is being wasted in exorbitant and unnecessary fees associated with the country’s $25 trillion retirement services market.

Finally regulators in the US are introducing legislation to protect investors and already the proposed new rules are having an impact on the US funds management industry.

The new legislation, known as the Fiduciary Rule, comes into force in April 2017 and requires advisors to put their client’s needs and best interests before their own, and to disclose and justify the varying commissions and fees of products they recommend.

As a result of an increasing focus on fees and charges hundreds of billions of dollars are being withdrawn from actively managed equity funds and invested in passively managed index tracking exchange traded funds (ETFs). Active fund managers are recalibrating their charges.

This shift has been underway for several years now as investors weigh up the fee structures and performances of actively managed funds versus the index tracking ETFs, with the latter’s fees typically 75% to 85% cheaper.

ETFs are bought and sold on stock exchanges like regular shares and hold assets like cash, shares, bonds, property or commodities or a basket of assets like an index fund.

Most, but not all, ETF’s are constructed to match or track published market indexes, like stock and bond indexes.

Because the fund managers of an index fund are simply replicating the performance of a benchmark index they do not need the services of research analysts and others to assist in the stock selection process. They are run robotically, without analysis.

As a result ETFs typically have a much lower fee structure than managed funds whilst arguably offering better liquidity and greater transparency. They also offer broad diversification and exposure to virtually any given sector of the market.

Apart from being more expensive some actively managed funds regularly underperform the underlying benchmark indexes, especially in bull markets, meaning that investors are paying more for less.

We see the potential for greater use of ETFs in NZ by investors looking for liquid, low maintenance, diversified equity exposure at relatively low cost and with very little decision making, other than the fund itself.

In New Zealand Smartshares, a division of NZX Group, offer access to 23 global and domestic ETFs which are designed to either track the performance of a specific index or outperform a specific index.

For example the NZ Top 10 fund (NZX code TNZ) is designed to track the S&P/NZX 10 Index and is made up of the 10 largest companies listed on the NZX Main Board. The fund has produced 5 year annualised returns of nearly 15% (with distributions reinvested) and annual fund charges of 0.60%. Though this represents a strong period for markets and there have been periods when no growth occurred.

The larger the company the larger the weighting, with Fletcher Building shares, for example, making up 16.15% of this fund and Sky TV making up 4.16%.

Other funds include the NZ Top 50 Fund (FNZ) which tracks the return on the S&P/NZX 50 Portfolio Index, the NZ Dividend Fund which consists of 25 high yielding securities and tracks the return on the S&P/NZX High Yielding Index and several Smart Income funds which employ investment managers and are actively managed with the objective of outperforming specific indexes.

Annual charges for these funds range between 0.50% and 0.54%, probably less than half the management expense ratio for most managed equity funds.

Smartshares ETFs also offer exposure to global markets by investing in a selection of Vanguard ETFs where it is the underlying fund that contains the portfolio of securities designed to track a specific index.

Full details of the Smartshares ETFs, including fund composition, fees and performance history can be found under Smartshares on the NZX website.

Needless to say that after 5 years of healthy gains on NZ and global share market indices index-tracking funds have performed extremely well and the returns on Smartshares’ ETFs have been very impressive during this period.

However as we all know markets can move in two directions and while the value of ETF units move up when the index tracked moves up, the opposite also holds and index-tracking funds will literally follow the market wherever it goes, including down.

It is during down cycles and market corrections that actively managed funds claim advantage and justification of their fees. Asset allocation changes are not typical of the ETF template and thus would require each investor to consider any asset allocation adjustments to their overall portfolio.

While the managers of index-tracking ETFs make no attempt to change the composition of their fund portfolio regardless what they see in front of them active fund managers will move quickly to reduce or terminate exposures to any assets or sectors they believe to be at risk.

Active fund managers will attempt to anticipate market corrections, and alter asset allocations in advance, whereas index funds will literally go down with the ship.

There is of course nothing to stop unitholders in index funds from also selling down their holdings if they sense trouble, the only difference being that they, or their financial adviser, own the decision making process, not a fund manager.

As we have noted in previous articles some fund managers do better than others, much better in some cases, and we encourage investors to do their homework and compare the fees and relative performances of the various funds and fund managers who are caring for their money. This information is readily available on various websites.

Footnote: A notable feature of the new rules about to kick-in in the US is the inclusion of a Best Interests Contracts Exemption (BICE). This is a disclosure document that, if signed and acknowledged by the client, allows an advisor to offer products or strategies that would potentially have conflicts of interest and not be considered to be in the client’s best interests.

 

Including this exemption seems to me to be at odds with what they are trying to achieve, although nothing in the US surprises me anymore.

Aussie Banks

In our September 2015 Newsletter we wrote about challenges we saw brewing for the Australian Banks which we believed would put pressure on their future profits, share prices and returns to shareholders.

It seemed inevitable to us that the higher capital requirements being demanded by global regulators, together with new liquidity management and funding stability legislation, would increase Bank funding costs which would reduce their net interest margins and lead to lower profits and therefore lower dividends and share prices.

Net interest margin, basically the difference between what a bank pays its depositors and charges its borrowers, is the main source of profit for Australian and New Zealand Banks, who, unlike many of their global counterparts, do not engage in risky trading activities and rely on their investment banking divisions to make the lion’s share of their profits.

We also believed that the ability of the Aussie banks to continue to lift profits on the back of flat or declining revenues by reducing bad debts and lowering provisioning would be further challenged by tougher economic conditions in Australia and the introduction of a new forward looking provisioning model which threatens to be negative for bank profitability.

Commonwealth Bank, National Australia Bank, Westpac and ANZ have all recently reported annual earnings and although these banks are all still very profitable the transformation to a more resilient and less leveraged Australian banking sector has affected their bottom lines.

They each reported lower profits and higher impairment charges and provisioning for both their NZ and Australian divisions, with net interest margins declining between 12-19 basis points across this group.

NAB and Westpac maintained their dividends at the same level as last year but ANZ’s annual pay out to shareholders reduced by 12%.

In their quest to grow or at least maintain profit levels the banks are now busily divesting non-core  or non-performing business units  with ANZ agreeing to sell its retail and wealth management businesses in five Asian countries and stating that its Australian life insurance, advice and superannuation businesses could be next on the block.

NAB has also completed a recent divestment selling 80 per cent of its life insurance business in a deal it expects will result in a $1.2 billion loss.

In NZ we have witnessed the closure of some small town bank branches and the removal of some other services including ATM machines and I suspect this is only the start of a much bigger push to cut costs and keep bank shareholders happy. (We do wonder why banks’ cannot ‘code share’ and agree to have a common branch in small towns).

Because the interests of bank executives are closely aligned with shareholder returns, in terms of their own remuneration and bonuses, I have learned to never under-estimate a bank’s ability to generate profits and keep dividends going.

The proverb “where there is a will there is a way” definitely applies to bankers seeking profit although with higher impairments likely going forward, in Australia anyway, and Basel 1V already in the planning and no doubt requiring even higher levels of regulatory capital, the road ahead looks challenging for the banking sector, in terms of maintaining their current dividend pay-out ratios.

In fact the capital/dividend game the banks have been playing seems to have become somewhat circular with banks raising dilutive new equity capital from their shareholders and then passing it back as franked dividends.

The Australian Banks have been paying out 80% or more of their earnings in dividends and then having to raise new capital via shares, subordinated notes and dividend reinvestment plans in order to maintain their regulatory capital ratios.

Some analysts estimate that when capital raisings are included shareholders have probably invested more into the Australian banks over the past 10 years than they have received in investment returns, and only CBA’s share price is higher today than it was pre-GFC, making for fairly average  total returns over the past 10 years.

Interestingly ANZ reduced its dividend pay-out ratio from 83% to 60-65% in May of this year and saw its share price increase by nearly 20%, suggesting that investors now see less likelihood of more dilutive capital raisings.

So reducing dividends and retaining greater percentages of earnings might become the new norm for the Australian banking sector and shareholders might just be better off overall as a result.

And even though the ‘big four banks’ have posted their first collective fall in cash earnings since the GFC I believe that the new global banking regulations have strengthened the Australian banks and when you see this group still reporting annual cash earnings of between $6 and $7 billion they’re still doing OK.

To put their earnings in perspective NZ’s two largest listed companies, Fletcher Building and Spark, most recent annual net profits were $462 million and $370 million respectively.

 Hall of Shame

Credit Suisse has become the latest in a long list of global banks to be fined for misconduct after it misrepresented it had attracted 7.5 billion Swiss francs in new wealth management business in order to hit performance targets and send positive signals to the market about the firm’s success in attracting new money.

Managers at Credit Suisse pressured employees to deliberately misclassify assets as assets under management when they were in fact assets under custody.

The Swiss bank has agreed to pay a fine of US$90 million for violating securities law and while neither admitting nor denying the US Securities Commission findings Credit Suisse’s chief operating officer, Rolf Bogli, agreed to pay an US$80,000 penalty for his part.

Although admitting no guilt Bogli’s emails pressuring staff to make the transfers, despite their protests, seemed quite conclusive to me, but I’m no lawyer.

Trump proposes to roll back regulations on the banks; I don’t think this is wise; we still haven’t recovered from their last exhibition of greed and deceit.

Travel

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherstone St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Edward plans to be in Auckland on 15 November (on Queen Street), Auckland on 16 November (in Albany), Blenheim on 5 December and Nelson on 6 December.

Chris will be in Christchurch on November 22 and 23.

Mike will be in Auckland on 22 November, Tauranga on 28 November and Hamilton on 30 November.

Investors wishing to make an appointment are welcome to contact us.

Kevin Gloag

Chris Lee & Partners

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Market News 7 November 2016

David Colman and Chris Lee have kindly written Market News this week.

David Colman writes:.

US Election

Sadly, for those of us who feel fatigued by the protracted and pugnacious campaigns for the US Presidency, it doesn’t seem that the commentary and uncertainty will end with the Election Day results due this week.

If the election result is as tight as polls suggest then recent market volatility may continue well into the new President’s term and beyond Inauguration Day in January 2017.

Markets will be looking forward to having the US election in the distant past, as am I.

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Entitlement Offers and Rights Issues

Due to a high number of Rights Issues and Entitlement Offers this year, from many different companies and structured in various ways, it seems fitting to highlight the features of these issues.

Entitlement Offers and Rights Issues are names used to describe the issue of new shares by listed companies to raise capital.

Companies may raise capital using these issues for any number of reasons.

Growth companies may use such issues seeking working capital due to slower than expected sales or to fund new plant, equipment and staff. Companies have also funded mergers and acquisitions, paid off debt, or in the case of some banks increased their level of equity. Listed Property Trusts may use them to acquire buildings and manage their debt levels.

An entitlement offer/rights issue is often preceded by an Institutional Placement and/or Private Placement where funds are sought from institutional or wholesale, eligible investors prior to seeking funds from retail shareholders.

Retail shareholders are then offered new shares in the company, of which they already hold shares, at a particular ratio and at a price (the exercise price) to be paid on or before a specific date in the near future.

An Offer Document is sent to eligible shareholders which identifies the key terms of the offer in detail, including, but not limited to, the number of new shares on offer, amount of capital to be raised and the purpose of the offer.

They have the choice of taking up the new shares (either fully or partially) or to not participate. If the entitlements are tradable they have the further choice of selling them on-market or not.

Investors considering participating in a rights issue/entitlement offer have a number of factors to consider as the issues are structured in a number of different ways.

The purpose of the offer, the ratio of new shares on offer, the exercise price, whether the entitlements are renounceable or not and whether the issue is underwritten are key considerations and are briefly explained as follows:

Ratio of New Shares and Dilution:

Eligible investors are offered new shares at a given ratio. For example, an underwritten 1:4 rights issue entitles an eligible shareholder to subscribe for 1 new share for every 4 shares they already hold, an investment that would increase their number of shares by 25%.

Using the same example of a 1:4 rights issue above, if the investor allowed their rights to lapse their number of shares would remain the same but their shareholding as a percentage of the company as a whole would be diluted by 20%.

Occasionally the offer may allow for eligible investors to subscribe for more new shares than the ratio entitles them to through an oversubscription facility which allows for new shares not taken up by some existing shareholders to be bought by others.

In regards to your portfolio calculating the cost of investing further in a company you already have shares in may be important as the acceptance of the offer will increase the funds invested in the specific company. This may have consequences relating to your preferred asset allocation.

Exercise Price of the New Shares:

New shares are almost always offered at a discount to the recent on-market share price of the company and the eligible shareholders do not pay brokerage for the new shares.

Theoretically the discounted new shares reduce the share price after the offer to below the pre-offer market price.

Using the example of the 1:4 rights issue above with a market price before the offer of $1.25 and an exercise price of $1.10, a theoretical ex-offer price of $1.22 would be calculated assuming all the new shares are taken up.

Renounceable and Non-Renounceable Offers:

Companies may offer entitlements/rights to new shares that are either renounceable or non-renounceable.

Renounceable issues allow for eligible shareholders to sell their entitlements on market using a unique ticker code for the entitlements themselves.

The Ticker code for tradeable rights is the company’s ticker code followed by an ‘R’ and then followed by a letter in alphabetical order after the first issue. For example, if a company’s ticker code was ABC their first issue would have the code ABCR, their second issue ABCRA, their third ABCRB, and so on. If a company has multiple rights issues in quick succession it may signal that the company has poor capital management.

Non-renounceable issues do not allow the trading of the entitlements.

If there is no trading of the entitlements the new shares that have not been taken up may be offered to other eligible shareholders via an oversubscription facility, or through a bookbuild to Institutional investors. A bookbuild may result in a premium paid to the eligible shareholders who do not take up their entitlements, or if there is no premium their entitlements lapse for no value.

Underwriting:

Issues may be either fully or partially underwritten or not underwritten at all.

Underwriters are institutional investors who have promised to pay for rights that are not taken up by eligible shareholders.

A fully underwritten rights issue ensures the company will raise the money regardless of shareholder support.

Examples of Entitlement Offers and Rights Issues:

Entitlement offers and rights issues, like new issues, vary in risk. They can have positive or negative outcomes and are dependent on the company’s performance.

Listed Property Trusts such as Argosy and Vital Healthcare have successfully used rights issues to raise capital to reduce their debts and acquire new buildings.

Pike River Coal (PRC now delisted) was in the middle of its fourth rights issue in as many years, which never eventuated, when it was put in halt at the time of the fatal explosion that ended the company with the loss of 29 lives.

A red flag for investors may be that the company has had a number of rights issues in quick succession which could indicate the company is surviving only through raising funds from shareholders.

Synlait Milk (SML) raised $98 million of new equity capital in a 2 for 9 pro-rata non-renounceable offer of new shares at an exercise price of $3.00.

SML’s largest shareholder, Bright Dairy Holdings, participated in the offer to maintain its 39% shareholding with the rest of the offer being fully underwritten with the funds used to repay bank debt and support future capital expenditure.

Wynyard Group (WYN) audaciously announced in late 2015 that they believed they could succeed in raising funds including through a rights issue at a starry-eyed $2.00 per share. A price well above the $1.10 to $1.50 they were trading at. Eventually they offered rights at 85c in March 2016. The money they raised was eventually not enough for the company to remain viable as contracts for their software did not occur.

They were placed in voluntary administration in October 2016, just 8 months after receiving $30 million through the rights issue, and only a month after the Chairman assured shareholders in a letter attached to their Interim Financial Statement that the Wynyard ‘Board and management will continue to contribute the high level of effort that is required to restore market and shareholders’ confidence in the company’. Sadly, despite their efforts, my confidence in the company having saleable assets allowing some funds to be returned to shareholders is low.

Restaurant Brands (RBD), the fast food restaurant operator, is in the middle of an entitlement offer seeking to raise approximately $94 million to fund the acquisition of Pacific Island Restaurants (PIR) who are the sole franchise holder of Taco Bell and Pizza Hut in Hawaii, Guam and Saipan. A research article on the issue is available on our private client page for clients who hold RBD shares and have paid for advice.

We recommend careful consideration including information from the offer documents and seeking investment advice on rights issues and entitlement offers if and when they arise.

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Chris Lee writes:

The decision of one of New Zealand’s best people, Gareth Morgan to subject himself to the political process, is selfless but barely explicable.

Morgan has generated change in New Zealand through his own research, through research he has sponsored, and through his intellectual purity and generosity.

He will never be a ‘‘man of the people’’, as most politicians need to be, but he has already contributed far more than most political figures ever could, by being intellectual and apolitical.

I have known Morgan for a little more than 30 years and would be happy to sit with him at any function we both attended.

He is an original; questioning, challenging, energetic, not at all focussed on personal rewards, and he has helped build several important NZ businesses.

If he was ever to get into Parliament he would provide great copy for any thinking newspaper reporters.

Whilst the three-jug, or two bottles of wine, chairmen of public bar leaners might blurt out their mindless responses to his calls for uncomfortable change, there will be many thoughtful people who will dwell on the issues he raises.

To compare him to Trump, as various anonymous website forum heroes have done, is totally unfair, in my opinion.

Morgan is genuinely wealthy, has no debt obligations, is an intellect, he has worked in high-brow organisations, he performs serious research, he is far from a philanderer or attention seeker, and he would commit by himself to make the country a better place for all.

By contrast Trump is simply a failed businessman, a loud mouth who craves attention, a molester of women, and intellectually as low-brow as any other backstreet (maybe street-smart) property mogul, of whom there are probably ten for a penny, in many countries.

I hope for Gareth Morgan’s sake that he gets the best minds to think about the policies he advocates, maybe to investigate the implementation of the ideas, but I hope he avoids the need to submit himself to the indignities and childish and debilitating processes that are forced upon parliamentarians.

It is extraordinary that he would submit himself to such a travail.

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Investment Opportunities

ASB Convertible Notes - An Intriguing issue that was scaled even though the bank raised less than the potential $400 million (they raised $375 million) and despite a strong chance that Kiwisaver funds would have likely bid at the top of the range. This may suggest the organising brokers took a large, controlling chunk of the issue but doesn’t explain why they would limit the allocation of the notes to others when the issue amount was $250 million with the ability to accept oversubscriptions up to $150 million.

The Interest rate for the first 5 years before they are reset or repaid was set at 5.25% (2.80% over the underlying 5-year swap rate).

Please contact us promptly if you would like to access this issue.

Quantum – The Wellington Company plans to offer another property for sale via a syndicated structure. Offer documents are expected to be available later this week.

We have a contact list for potential investors to join.

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Travel

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherstone St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington - by appointment please.

Edward plans to be in Auckland on 15 November (Shortland Street), Auckland on 16 November (in Albany), Blenheim on 5 December and Nelson on 6 December.

Mike will be in Auckland on 22 November, Tauranga on 28 November and Hamilton on 30 November.

Investors wishing to make an appointment are welcome to contact us.

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