Market News 26 November 2018

Last week I returned from a riding 4,500 kilometres through the Southern half of Chile and Argentina and the following are some of the observations I made, acknowledging that the South is very different to the major cities in the North (Santiago, Buenos Aires), which I have also visited previously.

Overall, I saw yet again that a wider population of people are simply trying to get on with their lives as best they can within the circumstances that surround them. Global headlines, Trump’s behaviour, Brexit and Italian politics are irrelevant to them.

Weaker governance in Argentina relative to Chile can be observed, if you are curious about such matters, as I was, and this has far more influence on their lives than the other nonsense.

NZ does not have a lock on beautiful scenery.

If Chile and Argentina had agreed to significant tax breaks it is entirely possible that Sir Peter Jackson’s Lord of The Rings and Hobbit trilogies could have been filmed in the Patagonia region, such is the beauty.

As the scenery around us changed we would often discuss how awesome it was and how similar the regions were to well-known areas within New Zealand.

I am unsurprised that some of the last border disputes to be resolved between Argentina and Chile (after almost 200 years of sniping) covered the area of Patagonia, the islands around the Beagle Channel and the Straits of Magellan. These under-populated but strategically important areas would have been worth negotiating to win.

Speaking of disputes, you don’t travel far before seeing posted signs that Argentina still believes the Falkland Islands belong to them, ‘Las Malvinas son Argentinas’, including a law which determines they must be displayed on public transport!

There is also a large beach front memorial to the Falklands War (name from UK perspective) in Rio Grande but in my opinion the memorial looked a bit like an Eastern European claim of economic success may have looked in the 1970s trying too hard to convince the population that the government was doing the right thing.

NZ isn't the only nation with the advantage of plentiful fresh water.

Almost everywhere we traversed, save for the wide-open desert-like pampas, served up countless beautiful streams, rivers and lakes. They looked a lot cleaner than many NZ rivers.

The Andes is quite the catchment area.

The cool climate well into spring may well be a restrictor for them with agricultural production rates.

We stayed on a 12,000 hectare station (Estancia) and they reported a herd of 5,000 sheep and 750 Llamas, so there is little risk of arguments over access to food amongst these ‘competing grazers’ at 2 hectares per animal. None of them are grazing in winter when snow is 1-2 metres deep. The landholders said they made little or no use of fertilisers (cost).

Just as we experience often in NZ these farmers are seeking other cash generating opportunities, which resulted in us staying as guests (in a fabulous old house, built by settlers from Scotland) and learning that they have converted one large shed into a function centre (weddings, work functions, visiting car clubs etc). The estancia remains in the family (4th generation).

Chile appears to have it more ‘together’ economically than Argentina – After the first couple of border crossings (we visited each country five times in all) we had to stop and remind ourselves where we were to make sure cell phones carried the correct SIM cards!

However, by the third crossing we knew where we were just by looking around.

Chile had a more organised feel and higher build quality look about it and in the way things seemed to happen. This is not to be disrespectful to Argentina, whose people all treated us just as well as those in Chile, but anecdotally the Chilean road to the border would be sealed and you would ride away upon gravel as you rolled into Argentina.

There was no sign of ‘my flag is bigger than yours’ but you wondered.

Border crossings remain rather slow, relative to New Zealand’s increasingly digital experience, and the administration heavy process traversed conversations with 3-4 people at both the Chilean and then Argentinean border posts and each important person had a rubber stamp to use.

One or two spoke some English whilst others had fun insisting that we come up with some useful (?) Spanish to explain out travels.

The money experience threw up various thoughts.

There is no Spanish translation for ‘Bitcoin’ and I doubt they will ever care to establish one. Bitcoin supporters who are passionate about it becoming a global ‘currency’ should get out a bit more. It is useless in lower South America.

The Bitcoin market appears to know about my research trip, and my formed opinion, because following my return the price of Bitcoin has collapsed another 50% (from $6,000 to $4,000). If something is of limited use, and thus limited value, the price should reflect this.

I don’t recall even seeing ‘Pay Wave’ as an option for payment (from mobile phone).

Meanwhile, everywhere we went people were happy to quote us a US dollar price, and often it was their preferred method sought for our payment, which was understandable in Argentina as its currency has slumped in value (about 40%) during 2018. I am sure they like to hoard US dollars but at times people asked me if I wanted change for a transaction in USD or Pesos.

Argentina was certainly a bi-currency economy – USD and ARS Pesos. Nothing else.

If you visit Argentina, take some USD with you because at times the ATM’s would reject your request to withdraw Pesos and your credit card would be randomly rejected at retailers, without your bank causing the block.

Don’t try offering neighbouring Chilean Peso’s to settle up in Argentina; you might as well have offered Bitcoin or Reichsmarks.

Just as it is around the world, US dollars are accepted every time. The USD will not be usurped as the global reserve currency any time soon (and still represents 60% of reserve currency held by other central banks). Not even Donald Trump can undermine this situation in his 2-6 years left in office.

As it happens, I don’t think many retailers were as badly off as the Argentinean economic crisis might imply.

The government has a serious national debt problem, but what I saw was businesses adjusting prices to try and achieve a similar US dollar sales price; certainly petrol, food, accommodation and tourism activities were not cheap even in the face of a 40% decline in the value of the Argentine Peso (ARS).

Surely, locals earning only Peso’s will be missing out on some things that are priced against USD, such as petrol for their vehicles but travellers didn’t appear to be saving much money as a result of the weaker ARS.

It may be a bit of taunting humour to say, but the high fuel pricing may well have been why the roads were so quiet for our entire tour.

As a thought, nations should make it really easy for travellers to access local cash, at the airports and in the main streets, because once they have the cash they’ll want to use it all up before they leave the country, just as we tried to do. We were happy to carry spare USD away because we can use that anywhere but we were keen to leave the Pesos behind.

Speaking of good service at the airport; it was hard to get a SIM card when I got to Argentina, so ultimately, I didn’t bother (sadly Wi-Fi quality was poor too). Upon my return to Auckland I was impressed to see a dedicated team of Spark sales people offering NZ SIM cards to travellers and offering to get people set up and communicating before they left the airport.

Interestingly I shouldn't have worried about the rubbish foreign exchange rates and fees charged by banks on currency because when it came to spending, we always took a rough exchange rate and rounded anyway. Our value test in Chile was 'drop three zeros and multiply by two’, hardly accuracy with which to criticise the banks when they converted our NZ dollars originally.

Eventually you didn’t even bother converting costs, you just wanted the coffee or the beer and hoped it was good.

Whilst I am on pricing - Chilean and Argentinean national parks aren't bashful about charging tourists’higher fees than they set for locals, as they should. NZ shouldn't be bashful about earning more from our tourists, but we must keep up the service, and the smiles.

Chilean roads are generally better than Argentina. They both use concrete a lot, like US freeways, without run off areas, but it is such a big country there are plenty of unsealed roads, which appealed to us travelling on motorbikes and the many other globe trotting motorcyclists that we met along the way.

Road works in both countries have endorsed a similar volume of orange cones and vests as you’d find in NZ, but to their credit they seem to get on with the job as soon as it’s required. We often saw slips being dug out, spoils dumped on the downside and rock cages being put into place to reinforce the topside of the road for the future.

I thought of the two-year delays in repairing the slip at the bottom of the Ngaio gorge in Wellington as I watched such rapid work progressing in both Chile and Argentina.

Coffee – With Brazil and Columbia to the North you might have expected good coffee to the South, but no. With a single excellent exception in Puerto Natales the best coffee’s that we found were usually from George Clooney Nespresso machines, which were just as likely to be in service stations as cafes.

Petrol was a similar price at about NZ$1.80 - $2.00 per litre so if you add a few of our government’s favourite excise taxes you end up at much the same cost. We passed very few oil and gas installations so this can’t have been the final resting place of many rotting dinosaurs and ancient forests.

Food was a similar price for the most part, being a little cheaper than NZ when eating out which may simply relate to cheaper labour or land costs, but there weren’t significant savings.

Overnight accommodation was almost always cheaper than NZ at about $100-150 per night for pleasant places (not luxurious or premium).

Lower pricing may reflect cheaper to build, which may reflect weaker building standards? Most structures were not high quality based on our New Zealand experiences, often leaving me thinking that even I could build a house if the rules are as flexible as witnessed in the places we stayed.

The kids we met were great. Kids everywhere are the same, beautiful and happy… until adults intervene too much.

Locals speak about as much English as we spoke Spanish, but when they are mashed together it usually worked well and could easily be combined with charades. Armed with a SIM card or WiFi Google translate was very effective.

If you learn to be polite and to arrange transactions in the local language on your own, then Google can do the rest if it gets complicated. It won’t be long before Google Translate will become Google International Conversation and with a mobile phone on the table people will communicate freely across languages.


Patagonia, South of Coyhaique has more wind than Wellington. Just saying; you can’t beat Wellington on a good day.

Lastly, we were reminded when in San Carlos de Bariloche that this was where various Germans hid after WWII. For these Germans to stay hidden in Argentina for so long they must have bribed various senior people because it was a pretty big town and being inconspicuous would have been difficult.

If you haven’t been to the South of South America, it’s definitely worth a look.


Investment Opinion

Share Market – This is just a behavioural observation, (technical analysis for those who like to make predictions based on chart price changes) but with elevated volatility (uncertainty) present in the markets if the Dow Jones falls back below 23,500 then it seems likely that market will remain subdued for the months ahead.

23,500 is about the point the market began its Trump Sugar Rush late in 2017, on top of the cheap money era.

Cheap money was well known and factored in.

Sugar rushes are just that, not enduring.

If you’ve been reviewing your asset allocation weightings and the scale of specific investments, as we have been encouraging over the past couple of years, you’ll have little to worry about if the market does recede in pricing.

Investment News

Buyers – Private equity and dominant businesses continue to try and buy (mop up) attractive smaller businesses, especially those with reliable cash flows.

The latest announcement last week was from private equity firm Apax expressing a desire to buy Trade Me for NZ$6.40 per share.

Recent trading had been between $4.80 - $5.20 and the all time high was about $5.75 so Apax has confidence in the security of TradeMe’s claws locked into our economy.

TradeMe shareholders can sit back and await an opinion from the directors and an independent report on the company’s current value.

People selling shares now on the market at a price below $6.40 are expressing a view about probabilities the takeover might fail, which is fair enough, risk and reward assessments are what market participants do all the time.

There are many examples of such deals not proceeding, such as Tower and Steel & Tube recently, but selling shares one hour after such an announcement is a little surprising in my opinion.

Water – I see the government is addressing legislation to install central government into the funding mix for water management across NZ (drinking water, waste water, storm water).

I see merit in this central responsibility for a service that is clearly a national, not regional, interest. However, that’s not the reason for sticking my paddle in the water here.

I am thinking about the funding.

Efficient governance and funding of water management would benefit from the involvement of the NZ Super Fund and ACC Funds, which in turn reminds me of my call for NZ Super to be able to offer a Kiwisaver doorway to its business suite.

I have often admired NZ Super’s wide-ranging investment mandate and portfolio, alongside its willingness to invest large sums into developing NZ infrastructure projects, both risk types that I think other NZ investors would appreciate being able to access.

Ever The Optimist – It’s nice to read about private financial decisions that partially counteract the many stupid financial decisions made by government representatives.

This is a US story, but the principle remains one of optimism.

Michael Bloomberg has donated US$1.5 billion to his past university (John Hopkins) so that they can more easily accept enrolment from students who have the mental skill but would not the financial capacity to attend the university for further education.



NZ Refining – is offering a new subordinated bond to the public.

It has a legal life of 15 years, with 5 yearly resets and the option of repayment at each reset.

The interest rate for the first five years has been set at a minimum 5.10%.

The offer opens today and closes on 12 December and involves submitting an application form.

The offer document is available on the Current Investments page of our website.

Clients receiving financial advice from us can find a research article for this offer loaded to the Private Client Page of our website.

NZR is paying the brokerage costs for this offer.


Chorus – Thank you to all who participated in the Chorus bond offer through Chris Lee & Partners.

The interest rate for the first five-year period to 2023 was set at 4.35%.

Christchurch City Holdings– Thank you to all who participated in the CCH020 bond offer through Chris Lee & Partners.

The interest rate for this bond was set at 3.58%.

Stranger things have happened before, but we are not expecting any more bond offers to be announced prior to Christmas, with NZ Refining likely to be the last offer to the public.

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


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

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

Michael Warrington

Chris Lee & Partners

Market News 19 November 2018

That was fun.

Everyone should do research trips to compare reality with perception, or perceptions plural.

I’ll share a few anecdotes from Argentina and Chile with you next week.

Investment Opinion

Financing retirement – At its core we save money during our working years to ensure we can finance our retired years.

This is a paragraph about asset allocation.

Consolidated conversations with clients leave me hearing from people that the annual cost to run a house sits between $40-50,000 (without luxuries, such as international travel).

For a couple, National Super is currently about $31,000 of after-tax income, so another $15-20,000 income per annum is necessary to reach that recurring annual expense.

Mathematically one can calculate how much money they require in savings to reasonably ensure the comfortable financing of their future. For example, if you are 65 years of age and conclude that you’ll have as much as 35 more years left on this planet, the approximate financial scenarios are:

Spending capital option:

$400,000 saved now, expecting to earn about 4.00% pre-tax (at 17.50% marginal tax rate), without the impost of annual fees, will support approximately $20,000 of spending over 35 years (capital runs out at that point); and

Not spending capital option:

$600,000 saved now, again invested at about 4.00% pre-tax (17.50%, no fees) would deliver a recurring amount of approximately $20,000 after tax income per annum (capital is roughly maintained in 2018 dollar terms).

In both cases the actual income would vary based on contemporary returns, but interest rate returns would also vary based on inflation over time so to some extent real returns should be sustained over time allowing an inflation adjusted spend near to today’s $20,000.

$400,000 - $600,000 are substantial sums of money to accumulate during ones working life, after paying off a home.

If you want a truly inflation adjusted portfolio you should only spend earnings of about 2.00% and compound the balance of your income to ensure a rising capital sum in your portfolio (hopefully also 2.00% if the world manages to keep inflation stable in the targeted ranges).

However, this inflation adjusted scenario would require that you hold almost twice as much in savings today, and that isn’t a practical target for most people in my view.

Given that fixed interest investments are the lowest risk option for aligning your assets and income with your probable spending future, do you have sufficient money allocated to fixed interest assets to provide you with substantial comfort in your base case financial future?

Remember that the lowest risk asset should be expected to deliver the lowest ongoing return. If an investor is to stand any chance of exceeding today’s 4.00% pre-tax interest rate returns they will need to consider some investing with additional risk.

Investments allocated to higher risks, such as property and company shares often deliver higher returns than interest rates, but so should they otherwise there is little point in accepting the higher risk profile (more volatile valuations).

I touch on returns for risk further down in this article.

If you happen to have accumulated more savings than $600,000 and you agree that $50,000 is a workable annual rate of spending, then you have the luxury of being able to consider more investment into higher risk assets (such as property and shares). This, in turn, should support more luxuries and discretionary spending.

You may have deduced that once savings exceed $400,000 (near surety of $20,000 spending per annum for 35 years) an investor opens the door to potential for some higher risk investing (an expanding tolerance for risk), and hopefully higher returns, on the balance of their savings.

Theoretically one reward for a high savings rate during one’s working life is the virtuous spiral of being able to invest in some higher risk assets and thus receive a higher average rate of return than a lower risk investor.

Risk tolerance is a scientific question relating financial capacity, not an artistic question relating to emotional conclusions.

So, the more money you save, either the higher your investment risk tolerance can be, or the more you can spend, or both if it is managed carefully. You sometimes read that the young should always take higher risk investment positions with their Kiwisaver fund, which I agree with; this relates to the time they have to recover from errors, and initially the modest scale of the funds placed at risk relative to that time factor.

I do not wish to say that a portfolio of below $400,000 for a retired person should not include property and shares, it probably should, given the relative returns, but it does mean that a smaller portfolio should be managed with relatively high levels of care and attention.

As ever, a portfolio should try to minimise the impost of annual fees because a 1.00% annual management fee raids $4,000 per annum from a $400,000 portfolio, which may only be earning about $16-18,000 per annum income (pre-fees).

Allocating savings to higher risk investments is an imperfect science and requires various perspectives before making decisions, complicating the process of reaching conclusions. I am thinking of Albert Einstein as I say that; an item is only moving fast if it is considered relative to a stationary object (perspective I) but not if considered relative to another moving object (perspective II).

Linked to my comments above about higher returns being available from higher risk investing I came across a very useful table of data on Vanguard’s website.

Plenty of fund management businesses will direct you to data about greater returns from higher risk investment over time, but usually their time scales are 12 months, 3 years, 5 years and if they have done OK as a brand they’ll display a 10 year measure, but the Vanguard data went back to data post 1926.

90 years, crossing an enormous range of major political and financial events is surely enough to validate the performance reporting.

Vanguard combined property into their ‘Shares’ label so I cannot differentiate tangible property performance from business performance, but I suspect these two have a low enough coefficient (properties are rented by successful businesses, plus government) to accept this combination.

Vanguard then displays a migration of risk taken from 100% fixed interest (deposits, bonds) through various blends

The tables show the following results:

Average return, Best Year, Worst Year and Number of years with a loss.

I have displayed a few of the data sequences here to show that over long periods of time the diverse portfolios of increased risk delivered higher returns.

100% Fixed interest investment:

Average annual return          +5.4%

Best year (1982)          +32.6%

Worst year (1969) – 8.1%

Years with a loss         14 of 92

70% Fixed interest and 30% shares:

Average annual return          +7.3%

Best year (1982)          +28.4%

Worst year (1931) –14.2%

Years with a loss         13 of 92

50% Fixed Interest and 50% Shares:

Average annual return          +8.4%

Best year (1933)          +32.3%

Worst year (1931) –22.5%

Years with a loss         17 of 92

30% Fixed interest and 70% Shares:

Average annual return          +9.3%

Best year (1933)          +41.1%

Worst year (1931) –30.7%

Years with a loss         21 of 92

100% in Shares:

Average annual return          +10.3%

Best year (1933)          +54.2%

Worst year (1931) –43.1%

Years with a loss         25 of 92

Viewed through this long-term lens (perspective) you can clearly see the rising returns alongside participation in higher involvement of risk.

Frankly, that’s a relief to see it proved over a very long period; it wouldn’t make sense otherwise.

You can also clearly see the impact of more volatility when investing with more risk through larger loss proportions and more years when losses in valuation were experienced.

I found the fact that the best and worst year were often in the early 1930’s revealing. 1982 showed up a couple of times.

Years that incurred a loss were a quarter of the time or less, and typically were only 1/6th of the time all the way up to the inclusion of 50% in shares.

Vanguard’s research showed that in the last 50 years, equity returns (shares) remained positive during 10 out of 11 previous rate-hike periods. This time may be different, of course, but market timing is the wrong strategy. (Vanguard)

We make a lot of noise through headlines across the ‘share my thoughts in a Nanosecond’ internet but none of the best and worst years feature in the era of the internet (since 1989).

Maybe the internet’s speed of information sharing smooths out market volatility, in a similar way to Exchanged Traded Funds surprisingly supporting market liquidity, rather than the opposite?

Transport yourself back to the top of this article, helping people understand the level of savings they may need in retirement, and based on the scale of those savings when they might consider introducing higher levels of average risk in the pursuit of higher average portfolio returns.

If you are to spend your capital in retirement, which represents a sequence of future liabilities, then having a high proportion of fixed interest investing makes sense, until those savings exceed $400,000.

Thereafter (or a little prior) an investor should be considering inclusion of some property and shares investing in a portfolio.

The greater one’s savings, or time available, the greater the potential for accepting these higher investment risk proportions within the portfolio.

For the record, in the current highly priced share market, I am not encouraging readers to go out and take more risk. I am however, again reminding them to have a personal investment policy to manage your money against and yes, that it should have exposure to property and shares investing.

If all your future spending plans are covered by part of your savings pool, maybe you will discover that you are underinvested in terms of risk and the remainder of your savings can and should be applied to investment with a higher level of risk.

Whilst many people don’t like the thought, all of the investors considering the above will also have a debt free home and home equity release businesses will provide an assurance that you can access additional spending money if the unintended happens and the savings pool runs out. This is yet another reminder of a person’s capacity to pursue some additional returns via higher risk profiles.

I hope your retirement spending plans are well financed, I hope you have developed a good set of rules (investment policy) for investment decisions and I hope you can see that accepting some additional risk often delivers additional returns to you.



Chorus – Chorus has announced an offer of 10-year senior bonds with a fixed-rate for the first 5 years (minimum 4.35%) and then reset for the remaining 5 years.

Chorus incurs a 1.00% interest rate penalty if the company’s credit rating falls below BB+ (for the period that it remains below BBB), which is a useful incentive for maintaining an investment grade credit rating.

If you wish to participate in this bond offer please contact us with your firm allocation request by 5pm this Thursday 22 November.

Christchurch City Holdings – has announced a new 6-year senior bond (Maturing 27 November 2024).

We estimate an interest rate set around 3.50% p.a. (paid semi-annually)

CCHL has an A+ credit rating.

This is a fast-moving transaction, booked by contract note on Wednesday 21 November, with clients paying brokerage.

If you wish to participate in this new bond please contact us with you firm allocation request no later than 12pm on Wednesday 21 November.

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


Edward will be in Albany, Auckland on 21 November and has two appointments left. This will be our last trip to Auckland this year.

David will be in Palmerston North and Wanganui on November 20, and New Plymouth November 26.

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

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

Michael Warrington

Chris Lee & Partners

Market News 12 November 2018

Kevin writes

I felt sorry for the young Auckland couple who had the experience of owning their first home dragged through the media, and then inevitably social media. A couple of politicians had a go as well.

The young graduates won a ballot for one of the first homes to come available under the KiwiBuild scheme which hopes to provide 100,000 new homes for middle income earners over the next 10 years.

Although the couple met the criteria, including the earnings cap of $180k per couple, because one of the applicants was a graduate doctor, and supposedly on the road to great wealth, some believed he shouldn’t qualify for inclusion in the scheme.

What was most disappointing the media jumped on the story without seeming to understand even the basics of the KiwiBuild programme.

The main objective of the KiwiBuild initiative is provide more houses in defined areas in the mid-pricing range of $550k - $650k, houses that otherwise would not be built in large enough numbers.

It is about increasing supply not discounting or subsidising prices and is not about providing homes for low income earners or the unemployed.

With KiwiBuild the government can provide the developer with certainty through guaranteed pre-sales which should enable more projects to proceed; otherwise, in terms of pricing, it is just a normal commercial arrangement between buyer and developer, but without real estate agency fees which provides a small saving.

In terms of paying for KiwiBuild homes buyers have to arrange their own finance and meet normal bank lending criteria by having the required deposit and proving they can service the debt, the same as a non-KiwiBuild borrower.

The government is not involved in financing arrangements for the homes although at least one bank has pounced on a marketing opportunity by offering special terms on KiwiBuild homes but this is purely a bank initiative.

So I say good luck to the young graduates. Their critics are either not aware or don’t care that the young doctor has probably worked his butt off for the past 5 or 6 years to qualify, built up a big student loan in the process and will likely spend the next 5 years working as a junior doctor in a hospital somewhere putting in 80 hours per week and getting paid for 40.

There is a lot of noise about finding homes for the less fortunate, many of whom are looking to game the system,  in my opinion, so why shouldn’t we find a home for a young doctor who is going to make a positive contribution to his community and NZ.

What some New Zealanders, a minority thankfully, need to realise is that it is OK to help yourself by working or studying hard, having the right focus and being successful.

There will be a lot of deserving cases for a KiwiBuild home and hopefully as more homes are completed their opportunity will come.

Someone has even predicted that eventually there will be more KiwiBuild homes than demand from qualifying applicants, which should relieve pressure in the overall housing market and make home ownership more achievable for lower income earners.

 _ _ _ _ _ _ _ _ _ _ _ _

The government is proposing an overhaul of tenancy laws in NZ including removing no-cause terminations, limiting rental increases, allowing tenants to make property modifications and have pets and stop rent bidding.

They have already voted to ban letting fees from 12 December this year.

Around half of New Zealanders live in rented accommodation, much of which is provided by private landlords and although KiwiBuild might improve home ownership rates slightly over time private investors will continue to be an essential component of the NZ property market.

While there are obviously cases of very poor landlord behaviour I think property investors are often unfairly criticised and should not be confused with property speculators who operate a hit and run type strategy and add little value, in my opinion.

Many property investors have accumulated genuine wealth but for most it has been a long game during which they have had to endure many obstacles including major house price and interest rate fluctuations, economic disruptions, natural disasters, insurance issues, poor tenant behaviour, tenancy tribunal disputes, and more.

At the same time as the government is looking to impose new tenancy rules banks have also tightened the screw on investors and overall lending to investors is down 3.5% on a year ago.

Knowing that we already have a chronic shortage of rental properties and assuming that NZ’s population continues to grow at current rate, half of whom will rent, we are going to need a lot of new rental accommodation in coming years.

The government’s KiwiBuild scheme should increase overall supply slightly over time but it is designed for owner/occupiers not tenants.

The government has also undertaken to build a further 6500 state homes, but I doubt they will want anything other than a regulatory role in the private rental market so if we continue to rely on private investors to bring new supply to the market we need to think carefully before we flatten them with unrealistic and overly-burdensome regulations.

Regulations need to be based on common sense and workable for all parties.

  _ _ _ _ _ _ _ _ _ _ _ _

Over the past couple of years there has been a lot written about the inevitability of the next financial crisis and share market meltdown but equally as frequent have been dire predictions for the Australian property market.

National dwelling prices in Australia have increased 44% over the past 10 years with hotspots Sydney and Melbourne both recording increases of over 100%.

It mirrors our own market in many respects although Australia now seems to have supply and demand more in balance than NZ. Both markets have cooled a little recently particularly in Australia with prices declining 7.4% year on year in Sydney and 4.7% in Melbourne.

By global comparison NZ and Australia both have very low levels of government debt (22% and 41% net, respectively) but both countries have very high levels of household debt and it seems to be no coincidence that countries with high levels of household debt, measured against GDP and net household disposable income, also have hot property markets.

Switzerland has the highest ratio of household debt in the world at 128% of GDP, followed closely by Australia on 123% and then;  Denmark - 115%, Netherlands – 105%, Norway - 102%, Canada – 100%, Korea – 95% and New Zealand – 92%.

When measured as a percentage of net disposable household income Denmark tops the list at around 290% followed by the Netherlands -255%, Norway - 230%, Switzerland – 213%, Australia 200%, Sweden, Korea and Canada all around 190% and New Zealand 166%.

In the household debt figures above, mortgage debt accounts for 75% - 97% of the total, so it no surprise which 5 countries have experienced the biggest increases in real house prices (inflation adjusted) over the past 10 years;

·         Canada, New Zealand, Switzerland, Sweden and Australia - all 40% plus and Norway a little over 20%.

Debt sustainability relies on income growth exceeding debt servicing costs over time, and house prices strongly influence consumer spending behaviour.

Countries with high levels of household debt are very exposed to rising interest rates and/or tightening credit standards which invariably lead to a reduction in household spending, falling business revenues, job losses and further economic contraction.

Switzerland is a unique case in that not only does it have the highest ratio of household debt in the world, but it also has by far the highest household savings rate in the OECD and is second only to China on a global basis.

Swiss household debt is partly explained in that private individuals own 50% of the country’s rental apartment market and the Swiss tax system and mortgage market encourage borrowing, with all mortgage interest tax deductible, and friendly repayments terms allowing balloon payment options at retirement.

On the saving side, in addition to Swiss frugality, the Swiss pension and tax systems create strong incentives to limit consumption and save more, and that is exactly what the Swiss do. It is Switzerland’s exceptionally high household savings rate that underpins the country’s large current-account surpluses.

Australia, Canada and the US also have strong tax incentives that encourage retirement savings, and all have positive household savings rates, so perhaps it is something for our Tax Working Group to consider as NZ hasn’t recorded a positive household savings rate since 2013.

High household debt, inflated house prices and a negative household savings rate are not a healthy combination in an economic slowdown or recession, should one arrive.

Footnote: During the US housing bubble, which preceded the GFC, household debt in the US increased from about 70% of GDP in 2001 to 99% in the first quarter of 2008. Although larger now in absolute terms household debt in the US has fallen back to around 78% relative to their economy.

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Australia has avoided recession for 27 years and dodged the 2009 global slowdown because China engaged in massive fiscal stimulus and infrastructure spending which drove demand for Australian commodities.

China now buys 35% of all Australian exports and is also NZ’s largest trading partner, just ahead of Australia.

 Both countries will be hoping that the current US – China trade tensions don’t become a take sides affair, with the US a key ally of both NZ and Australia, and they will also be hoping that China can manage its over-indebted economy as global growth continues to slow.

China is the world’s second largest economy, the biggest trading nation and has the third largest bond market. Over the past decade China’s credit boom has been a major factor in global growth.

In 2008 total Chinese debt was about 140% of its GDP, today that figure is 260%.

China’s debt to GDP ratio is similar to that of the US, UK and Italy but China is a middle-income country with low GDP per capita and low income levels make it more difficult to overcome high debt levels.

China’s debt problems are in the corporate sector at 163% of GDP. Reported Government debt (46%) and household debt (51%) are both quite low although up to US$6 trillion of local government debt has recently surfaced, supposedly hidden in off-balance sheet financing vehicles.

The other major issue for China is its largely unregulated US$20 trillion shadow banking industry which sells opaque asset management products to the public and institutions and has the potential to throw-up huge investor losses in a downturn.

One thing for certain the Chinese government will continue to intervene in markets, where and as required.

Most recently Beijing has rushed in to support private businesses that had pledged shares as collateral for loans and faced the prospect of forced selling of the shares as their prices declined.

Big increases in debt without comparable economic gains rarely ends well and in a recent IMF publication they noted that in 43 credit booms, in which the credit to GDP ratio increased by more than 30 percentage points in five years, all but five ended in significant growth slowdowns or financial crisis.

China’s debt to GDP ratio has risen 54 percentage points in the past five years, and started from an elevated position.

The problem with limiting leverage once debt levels are high is that reduced credit growth slows economic growth which can lead to hard landings.

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The recent stock market correction provided an opportunity for buyers, especially growth stocks which got beaten up the most, but as one American analyst recently wrote it’s hard to pick the bottom, and therefore the best time to pounce.

In his newsletter last week he apologised to his readers for giving them the green light too early saying he suffers from a condition known as ‘premature allocation’.


Kiwi Property Group – the interest rate for KPG’s 7 year fixed rate bond was set at 4.06%.

We have a very small allocation left if you would like to participate in this bond offer.

Chorus Senior Bonds – Chorus has not yet announced the details of a proposed offer of 10 year senior bonds with a fixed-rate for the first 5 years and then reset for the remaining 5 years. Details now expected by the 14 November. We estimate the interest rate to be above 4.20% for the first 5 years.

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




Edward will be in Albany, Auckland on 21 November.

Chris will be in Blenheim November 20 (pm) & 21 (am).

David will be in Palmerston North and Wanganui on November 20, and New Plymouth November 26.

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


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

Kevin Gloag

Chris Lee & Partners

Market News 5 November 2018

Kevin Gloag writes:

Twitter has become a favourite communication tool for many high profile individuals, although strangely no-one of any note springs to mind.

Tweeting blindly to anyone who wants to follow you seems like a bit of an ego trip to me but it has become treasure for the media.

In many news articles today you don’t get comments or quotes from relevant parties you get a cut and paste of a tweet or multiple tweets. Often the story is crafted around the tweet.

Donald Trump is the obvious mega-example and while his tweeting behaviour can be quite entertaining the information he posts on Twitter is not befitting of a world leader in my opinion.

The recent childish spat between Trump and Democratic Sen. Elizabeth Warren, about Warren’s ancestry, which played out on Twitter and then through the media, didn’t set a great example from a current US President and his potential successor, in my view anyway.

Elon Musk, who like Trump appears to suffer from an ‘attention seeking’ disorder, is another who has used Twitter unwisely, recently coughing up US$40 million to settle fraud charges stemming from buyout tweets relating to Tesla.

In an interesting side-story to the Musk saga the CFO of Australian telco Telstra, Robyn Denholm, has been named as a defendant in a US lawsuit over Musk’s erratic behaviour and Twitter activity.

Denholm who serves as a director of Tesla is being sued together with the rest of the automakers board for failing to control Musk and properly manage his communications.

Ms Denholm’s independence as a director is being challenged on the basis that in 2017 she was paid A$7 million as a director of Tesla and A$2 million total compensation for her duties at Telstra.

In another incident an EU Budget Commissioner supposedly tweeted that the EU had rejected Italy’s draft spending plan and a letter was on its way to Rome. It seems that the Tweet was posted before the letter.

A harder line from regulators might be required to rein in rogue Twitter behaviour; it seems to be getting out of hand.


In the decade since the global financial crisis total global debt has increased 43% to $250 trillion.

During the same period global GDP has grown just 37% and global debt is now more than three times the size of the global economy.

Many borrowers are now totally reliant on low interest rates in order to stay in the game. These borrowers include countries, corporates and households.

The post-GFC recovery included massive fiscal stimulus programs by the major economies, including the US, Europe, Japan and China, and the cumulative size of their balance sheets is now nearly three times as large as it was before the crisis and their combined debt has grown by more than 10 times their GDP growth over the past year.

This easy, low-cost money was intended for business investment to improve productivity, create jobs and revitalise struggling economies but it largely missed its target and ended up in share markets and property markets, two asset classes which are now arguably grossly over-valued and very sensitive to changing monetary policies.

Since the GFC total global stock market capitalisation has increased 160% and the value of the world’s real estate assets now exceeds US$280 trillion, more than 3.5 times the size of the global economy.

The massive misallocation of money into shares and property and the resulting rise in their values has disproportionally favoured the wealthy and the gap between the haves and have-nots has widened significantly since the GFC.

Across the 34 OECD countries, which includes NZ, real wages (inflation-adjusted) have increased, on average, only 8.4% in the 10 years since the GFC.

During the same 10 year period median house prices have sky-rocketed in most developed economies, with NZ, Australia and Canada all recording price growth of 40% plus, adjusted for inflation), so it’s not difficult to see why housing affordability has slipped out of reach for many people in these countries.

Global share markets have enjoyed the same ride up with the NZX50 index up over 150% since 2008 and all US indices up well over 100% during the same period.

Rising interest rates don’t cause recessions, it’s the bad decisions made when interest rates are low that cause recessions, and over the past 10 years the world has gorged itself with debt.

Highly leveraged borrowers are now very susceptible to even small increases to interest rates leading many to believe that because the consequences of higher rates would be intolerable central banks simply won’t allow it to happen.

New Federal Reserve Chairman, Jerome Powell, doesn’t appear to adhere to this theory, so far anyway.

Unlike his predecessors’ Powell has made it clear that he does not intend to hold the market’s hand and will continue to raise interest rates, run down the Fed’s balance sheet and unwind what he considers is an overdependence by the market on Fed policy. How could you disagree?

The US share market doesn’t like the fact that the Fed no longer has its back and Trump is throwing a wobbly because he is using the share market as the barometer of his success and to demonstrate the strength of the US economy.

Trump thought Powell was his man but he’s wrong, again, and for him the share market correction couldn’t have come at a more inconvenient time, as in right before mid-term elections. (Don’t be surprised to see Trump tweeting a softer line on China pre-mid-terms).

Powell’s predecessors Bernanke and Yellen, both inadequate in my view, were very interventionist and always ready to act swiftly if cracks appeared in financial markets and had a level below where the stock market could not fall before they lent a hand.

It seems that the Bernanke/Yellen Fed ‘put’ (backstop) days are over and that Powell will push on with rate increases with a focus on managing inflation, not protecting the share market.

US interest rates are the benchmark for global interest rates so rate increases in the US influence borrowing rates in all countries, including NZ, although I think the extent of the increases will be modest with the Fed funds rate likely to peak at around 3.00% towards the end of 2019.

It seems extraordinary that the prospect of short term rates of 3.00% and long term rates of maybe 4.00%, at a stretch, could cause the recent disruptions to US and global markets, despite the massive accumulated debt pile.

I think it could be more psychological than anything because global interest rates for all terms are now less than half what they were 10 years ago. (In 2008 the OCR in NZ was 8.25% - today it is 1.75%. Longer term rates = same trend).

As the Fed continues to push up short term rates, into a slowing US and global economy, and as the short term benefits from Trump’s tax cuts and spending bill gradually wear off, you might see longer term yields fall in the US next year, and an inversion of the yield curve seems possible.

Although the prospect of further Fed rate hikes is being blamed for the current share market correction it is only one of many factors in my opinion.

The negative effects of trade tariffs (higher costs and lower sales and profits and a deterioration in earnings outlooks), the rising US dollar and higher fuel costs are all starting to weigh on the US economy and the growth outlook in the US is deteriorating.

Outside the US China’s massive debt problem seems to deepen by the day and bears striking similarities to previous credit booms in the US, Japan, Thailand and Spain, all of which led to crisis.

In Europe Italy is in the headlines but Spain, Portugal, Belgium, Slovenia and France are all running large structural deficits with high debt levels, high unemployment (especially amongst youth) and weakening economies.

Interestingly Greece doesn’t feature on the blacklist anymore after it was declared ‘ready to go it alone’ in August. Amongst the concessions granted to Greece when it was discharged from sickbay was enough cash to pay its bills for 22 months, so I expect them back at the door ‘cap in hand’ in approximately 19 months.

The European Central Bank is still signalling an end to its asset buying programme this year so I hope they stick to their guns.

The ECB and International Monetary Fund have been acting as lenders of last resort for the weaker Eurozone countries since the European debt crisis began in late 2009.

I think the ECB and other central banks need to take a leaf out of Jerome Powell’s book and step back and let markets control of the cost of money. Tighter monetary policies will let some air out of property and equity markets which is healthy in my opinion albeit a little too late.

I’m sure that low and negative interest rates seemed like a good idea to central bankers at the time but the resulting build-up of debt and misallocation of capital has created bigger problems for another day in my view. How far ahead that day is I’m not sure.


American financial writer John Mauldin and his team at produce some very insightful commentary on global financial markets and well worth a read in my opinion.

For some years now Mauldin has been warning about the massive debt bubble that has been created by inappropriate central bank monetary policy and how it might all end.

In a recent article Mauldin pointed out that data has proven that each dollar of debt now generates only one tenth of the GDP growth it generated 50 years ago and as debt has lost its effectiveness the doses have been increased.

Mauldin is not only worried about the extent of the US debt pile but who will buy all the Treasury paper required to fund the US’s $1 trillion budget deficits. He points out they need $325 billion of this just to pay interest on the country’s existing debt.

Apparently buying US Treasuries has become less attractive for Japanese and European investors because the cost of hedging the currency risk overly diminishes the returns.

The other problem facing the US Treasury, according the Mauldin’s article, is that the majority of US debt, held outside the Fed, matures in less than 5 years so Treasury will need to borrow about 43% of US GDP over the next 5 years just to rollover the existing debt, and at higher interest rates.

There are always buyers of US Treasury paper but at what price Mauldin is not sure.

He thinks that in the next decade we will either see double digit 10 year Treasury yields or massive debt defaults and worldwide debt liquidation in an event he describes as the “The Great Reset”.

Although I agree with Mauldin’s reasoning for higher interest rates, as witnessed recently with the sharp increase in Italian borrowing rates, when money drains out of equities it invariably heads to the safety of fixed interest and the US dollar (also Japanese Yen and Swiss Franc) and during the recent sell-off in US equities US Treasury yields fell quite noticeably.

I also think that the US economy, and global economy, would be in recession a long time before US interest rates reached anything like 10%. They are having a panic attack at present about the prospect of rates reaching 3% or 4% so it’s likely they would explode long before 10%.

An ideal scenario for inflated share and property prices might be if both asset classes gently came down around 15% or 20% in the near term and then stagnated for a lengthy period until the ratios of company earnings to share prices and household incomes to property prices caught up.

This might be asking too much however as markets tend to make their own rules, more so if central banks cease interfering and let nature take its course.


We often make reference to the close correlation between longer term US Treasury yields (2 – 10 years) and wholesale rates in NZ. Some of you may have noticed that this correlation has broken down in recent months, which is unusual.

Over the past 6 months the NZ 10 year swap rate has declined from 3.26% to 2.87% while the US 10 year Treasury yield has risen from 2.84% to a peak of 3.24% in early October (3.22% at the time of writing).

If will be interesting to see how long this pattern continues.




Kiwi Property Group – the interest rate for KPG’s 7 year fixed rate bond was set at 4.06%.

We have a very small allocation left if you would like to participate in this bond offer.

Fonterra – Fonterra has announced it is making an offer of 7 year fixed rate senior bonds. More details expected this week. We estimate the interest rate to be in the vicinity of 3.90%.

Chorus Senior Bonds – Chorus has announced it is making an offer of 10 year senior bonds with a fixed-rate for the first 5 years and then reset for the remaining 5 years. Details expected on 12 November. We estimate the interest rate to be above 4.0% for the first 5 years.

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


Kevin will be in Christchurch on 8 November.

David will be in Lower Hutt on Wednesday 7 November.

Chris will be in Christchurch on Tuesday 13 & Wednesday 14 November, in Nelson November 19 & 20 (am) and in Blenheim November 20 (pm) & 21 (am).

Edward will be in Albany, Auckland on 21 November.

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


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

Kevin Gloag

Chris Lee & Partners

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