Market News 23 November 2020

Pfizer and Moderna now make it 'two birds in hand' in the battle against Covid19.

Hopefully, the world will soon require an aviary to coordinate the attack on the virus.

INVESTMENT OPINION

Investor Injustice – Some new investors in Synlait Milk (SML) have been mistreated by the company.

People buying and selling SML shares on the 6th and morning of 9 November did so without the knowledge of the new capital raise by discounted share placement. The timing and terms in the announcement impacted upon these people, negatively.

Trading on the NZX settles two business days later.

SML trades on Friday 6 November settled on Tuesday 10 November.

SML trades on Monday 9 November settled on Wednesday 11 November.

Inappropriately SML placed their shares in trading halt on the afternoon of Monday 9 November, and then on Tuesday 10 November SML announced the new share placement would involve retail SML investors on the register as at 5pm on Monday 9 November!

The announcement made it impossible for SML investors to have made an informed decision on 6 November or the morning of 9 November and that group is unable to participate in the offer.

SML appears to have recognised its error because the words carefully used in the announcement on 10 November included the following: almost all eligible existing shareholders have the opportunity to receive at least their pro-rata portion of new shares being offered (highlight is mine)

Companies raising new capital still cop criticism for placements and not simply offering pro-rata Rights issues, and there are two sides to that debate, but there aren't two sides to debate when a company makes it impossible for an investor to participate due to the timing and terms of their announcement.

Post Script: clients receiving a financial advice service from us can find a research piece for SML shareholders considering the offer.

Subordinated Bonds – The reminders about the sharp end of the ''fishhooks'' (concessions made) in subordinated bonds continues to be seen in the latest announcement from the BNZ relating to one of its subordinated bonds (BNZ090).

In response to demands made by our central bank restricting repayment of subordinated bonds, as one mechanism to assist with managing post Covid19 risks, the BNZ has announced that it will not repay its BNZ090 bonds on 17 December 2020 (the first optional repayment date).

The legal maturity of the bonds is 17 December 2025.

17 December 2020 was an optional repayment date, when the market had on balance expected repayment to occur. If the bank was allowed to state such things publicly, they too would have explained that repayment on this date was the original intention.

The new interest rate for the period between 2020 and 2025 will be set at the 5-year benchmark interest rate plus a credit margin of 2.25% resulting in a new interest rate near 2.50%.

The BNZ now has the option to repay these bonds on any quarterly interest payment date, subject to central bank approval.

I don't see a lot of point in guessing when the BNZ might repay. They have a price incentive to repay early, so I don't expect the bond to remain on issue until 2025 but in the meantime, you should just enjoy the interest rate being paid (enjoy 2.50%? – Ed)

The coming to pass of these less likely outcomes from subordinated bonds do not make them bad products for a portfolio but they remind investors that if you make a concession (additional risk in the terms and conditions) you have an exposure to that scenario playing out and not being a breach of the agreement.

Accordingly, subordinated bonds must pay investors a higher return than senior bonds which have much simpler terms and conditions.

The marginal rewards between senior and subordinated bonds evolves.

It has, at times, been very attractive during the past 11 years, such as immediately after the Global Financial Crisis when rewards were up a lot but the default risk of banks was declining.

Today, the marginal rewards offered on subordinated bonds could be described as slender. Are the risks lower now than then?

BNZ090 bond holders have no action to take.

Vital Healthcare (VHP) – You may recall us expressing our unimpressed view about the third-party management of VHP, essentially based on the selfish behaviour displayed by its Canadian based manager.

We were entitled to this independent opinion.

Last week ANZ bank expressed is dissatisfaction about the management of VHP.

Those with long memories will understand why the ANZ has almost no right to express such an opinion, because they were the ones who sold the management contract to them!

Bad decisions are usually found out as time passes.

Council Finances – I think the consequences of our councils thinking they need to be bigger, and exert more influence in our communities, rather than less, is coming home to roost.

The egos of our elected folk make it impossible for them to think less is best.

In Wellington the headlines are now disclosing the risk of rates increases that could, if unchecked, exceed 20%.

Christchurch endures the heat of the financial spotlight often, as does Auckland where its debt position is becoming so large that they have the scale to hire an investment bank all year to help with debt management obligations!

Auckland Council's (AKC) last attendance in the headlines related to their debt management when the media, without specialist knowledge, joined public criticism of AKC for its loss of $1.4 billion. The $1.4 billion number came from the accounting standards methods for revaluing assets and liabilities, not because money evaporated.

The critics, David Cunliffe (re-appearing on the political landscape) and the journalist are naïve on the subject they were being critical of, namely, interest rate swaps.

Interest rate swaps allow two parties to 'swap' interest rate obligations; one accepts a fixed rate whilst the other accepts a floating rate. Each party has a reason for accepting the chosen risk, which relates to debt obligations and the impact changing interest rates would have on them.

AKC elected to fix the interest rates on some debt (all it seems – Ed), adding certainty to its cost and thus probability to budgeting for project decisions, which makes complete sense for many of a council's long-term projects.

No borrower has the luxury of looking backward when making financial decisions so most of the criticism levelled at AKC is inappropriate.

If it's true that AKC converted all of its debt to fixed rate then it discloses an aggressive debt management policy (this assumes they have a policy) because most entities would have some floating rate debt to expose a portion of the liabilities to the potential for interest rates to fall.

You'd certainly do so if you had the potential to increase revenue during periods of higher interest rates (inflation) to offset the risk of higher interest rates, or the ability to repay such debt faster than scheduled.

I am sure you'll all agree that your council has made it pretty obvious that they have the potential to increase their rates invoices to meet increased costs!

AKC does however deserve some criticism if they locked in fixed interest rates for 100% of their debt profile and , in my view, criticism for following work programmes that allow for such enormous debt positions, which drive the $1.4 billion revaluation loss.

Typically AKC would be able to explain to rate payers that the value of their assets had increased in response to plunging interest rates (the driver of the $1.4 billion debt revaluation loss) but in their case that's scarcely true when you ponder the fact that the share price of Auckland Airport is lower this year than last year and Ports of Auckland is underperforming financially.

You may recall my view about the financial waste with councils owning businesses that they do not need as part of their regulatory or community function, or owning more than a controlling interest (50.1%) where they determine control is vital to the way the service is provided.

Did AKC begin to agree with my view during 2020 when they chose not to participate in the AIA capital raise, diluting their shareholding from about 26% to 20%?

And what is magical or influential about a 20% shareholding in their local airport?

Would they not have served their city better 10 years ago by selling their AIA shareholding and supporting, then investing in, Lloyd Morrison and John Key's proposal to develop a second airport for Auckland at Whenuapai?

I wonder how AKC councillors and finance staff felt in April witnessing the impact on AKC finances as the realities of Covid19 became clear. Losing money on interest rate movements and on the value of assets they thought it was important to own.

It's time to step down from my soap box.

It's also a good time for journalists to improve their knowledge before writing articles in the public domain.

If councils think it is OK to increase our rates by 5-23% per annum to continue with their egotistical approach to local governance, then my views are irrelevant (still – Ed).

Investors in AKC bonds have nothing to worry about from council incompetence; you are secured against the ratepayers' compulsory financial commitments to the council.

ETF – There is an educational irony in the Tesla share price performance that the bi-polar (investment thoughts) Warren Buffett would endorse; you can dislike the idea of investing in Tesla at current pricing, but be wise to retain an exposure to it all the same.

Buffett famously adds value for Berkshire Hathaway investors by selectively investing in opportunities that demonstrably should add value, however, he declares that when he is gone the best thing Mrs Buffett could do with her wealth is to place it in an Exchange Traded Fund focused on the US economy.

Both positions can be correct.

Warren loves to assess micro drivers for investment outperformance.

Mrs 'Buffett' does not.

A majority of investors who prefer to select specific companies to invest in do not like the Tesla story, nor its astronomical (no link to SPACEX) share price performance but there's no doubting Tesla influence within the US economy is rising.

As a reminder, the Tesla share price has moved from US$50 in 2019 to US$450 now and they still do not deliver a profit to owners.

Investors who dislike Tesla have missed an enormous value change for a rising participant in economy, but investors holding an ETF exposure to the broad US economy have enjoyed some benefit.

Warren Buffett's investment performance continues to exceed the market average, but his theory of ETF use for others exceeds the performance of the majority of active fund managers.

It's a recurring conundrum.

Cheques – the reminders keep coming that the cheque book is heading for retirement, fast.

Last week another of the major financial institutions in NZ declared that it would no longer accept cheques as a form of payment, including asking their bank not to process cheques if presented at the bank for deposit to their account.

For many, including us, cash is no longer accepted as a method for payment even if presented at a bank branch (Anti Money Laundering reasons).

From an investment processing perspective cash is out, and cheques are rapidly on their way out.

If you still love your cheque book, I hope you are developing an alternative method for making your payments.

I am certain that the majority of you are still wary of cryptocurrency as an option, but its presence is rising. I read a survey that reported 10% of the US population have participated in ownership of cryptocurrencies, a statistic that seems to be validated by PayPal's introduction of a cryptocurrency payment method to its service offering.

 

EVER THE OPTIMIST

What a strange ETO this one is; the tourism industry wants to employ more people but is having trouble finding them!

Given the staff requirements of our horticulture sector surely, we will see a temporary decline in the unemployment numbers over summer.

Investment Opportunities

Chorus Bond – Thank you to those who participated in this bond offer through Chris Lee & Partners.

CNU should be very pleased to have issued $400 million bonds in the end ($200m of each maturity), responding to very high demand for the bond offer from investors.

The 7-year bond interest rate was set at 1.98%;

The 10-year bond interest rate was set at 2.51%.

It's a shame the person with the magic wand didn't resolve slightly different interest rates; 2.00% would have been a nicely rounded outcome for the 7-year term and we would have tolerated 2.50% for the 10 year.

The bonds begin trading on the NZX from late next week.

Infratil Bond – IFT is offering investors the chance to buy more (up to $100 million) of its IFT300 bonds at a market yield of 3.00%, with IFT paying the brokerage costs.

The IFT300 bond pays 3.35% interest and matures on 15 March 2026.

The initial period for participation ends on 15 December 2020 and the purchase price is $101.619 per $100 bonds (this reflects the difference between the 3.35% interest rate paid out and the market yield of 3.00% for this offer).

Early Bird interest is being paid at 3.00% for applications that arrive prior to 15 December.

Participation involves the use of an Application Form (available on the Current Investments page of our website).

Investors must contact us to gain a firm allocation prior to submitting an application to our offices (or to us by email).

Ryman Healthcare – has announced that it proposes to issue a new bond over the next couple of weeks (more details to follow), possibly a 6 or 8 year term.

TRAVEL

Johnny Lee will be in Christchurch on 25 November.

Michael will be in Hamilton on 7 December and Tauranga on 9 December.

Please let us know now if you would like an appointment in your town.

Thank you.

Mike Warrington


Market News 16 November 2020

I quite like the Chorus strategy for balanced board representation: 40/40/20

40% female, 40% male, 20% either.

It respects the value of gender balance but otherwise demands quality as the focus, making no further reference to other filters (two left feet? – Ed)

INVESTMENT OPINION

Reserve Bank of NZ – Last week delivered the final monetary policy statement from the central bank for 2020 and frankly it would not have been felt by even the most sensitive Richter scale measurement device.

I don't suppose many statements from central banks are, because the possible actions are so heavily proposed and discussed by industry experts in the lead up to actual decisions by those in charge.

Remind yourselves that current governor, Adrian Orr, was one of those industry experts looking in on the central bank before he was appointed to look outward and actually make the decisions.

I have no doubt that Orr is currently the best man for the job but with a little humour I can well imagine the RBNZ board of directors employing the new governor from the financial markets industry with the welcoming remarks 'go on then, show us how we should do it!'.

I am a fan of show me, not tell me, and in fairness to Adrian Orr I think he is showing well.

Back to the unsurprising monetary policy statement:

No change to interest rates;

No change to the probability of negative interest rate use;

No change to Loan to Value Ratios (LVR)*;

No change to the bond buying programme;

Confirmation of the lending to banks programme (FLP)**.

*The RBNZ did launch a review, with the intention of returning to pre Covid19 settings (good);

**The bank had proposed this FLP (Funding for Lending Programme) previously, so its introduction was expected by all.

Actually, one surprising item, for me, was making a further delay to the start of regulatory demands for banks to increase the amount of capital they must hold. The increase to the Prudential Capital Buffer was initially delayed until 1 July 2021 in response to Covid19 outcomes, but now this has been pushed further back until 1 July 2022.

In theory this means banks can be a little more aggressive (more risk accepted) with their lending for 12-18 month terms.

Some of the 'no change' tactics might lead to a false impression that all is well again, and the RBNZ did state that 'Economic activity since the August Monetary Policy Statement, both international and domestic, has proved more resilient than earlier assumed'.

However, I suspect they are relieved by this situation, not pleased by its confirmation.

The statement from them that better aligns with their current forecasting of the economic situation is 'the COVID-19 shock to the economy is very large and persistent, and inflation and employment will remain below the remit targets for a prolonged period'; and

'We expect an ongoing increase in unemployment as the economy adjusts. Consumer price inflation is also projected to remain at the lower-end of the remit target range for a period'; and

'The Committee agreed that monetary policy will need to remain stimulatory for a long time'.

If economic reality happens to rescue us from negative interest rates, then we can be cheerful, and ponder if the return to wider financial success only taking 2-3 years instead of five or more.

There was one other thread that should alert you to interest rates being sustained at lower levels; the governor highlighted that without the recent interest rate cuts the value of the NZ dollar would have lifted significantly (interest rate differentials with our trading partners) and thus harmed the desperately needed contributions of our exporters.

You should read into that, our interest rates cannot stray far (marginally) from the rest of the world, and especially our trading partners, no matter what we prefer!

Observe how quickly the NZ dollar jumped from 0.6800 to the US dollar to 0.6900 when the governor was a little quiet on the need for negative interest rates in NZ.

In interviews the Governor stated that the central bank has been doing what it can but continued fiscal support (government spending) was needed.

At a macro level I agree that cheap access to money, and availability of labour should encourage our government to invest in useful infrastructure for the country, but this doesn't mean wasting money on consumption.

If NZ is truly to be seen as succeeding, we need our private businesses to expand their employment (hire more, pay more), which they will only do once business is expanding again. Regulators should be doing everything possible to remove resistance from the roadway.

In the meantime, your investment thoughts should focus on the central bank's reminder that interest rates are remaining near 0.00% for a long time, perhaps a very long time.

US Election – Everyone, except Donald Trump, now describe Joe Biden as President Elect in the US.

The most credible news item that I read last week was that Trump may start a reality TV show: TRUMP TV

This aligns perfectly with his narcissistic behaviour and financial interests and happens immediately upon knowing that 70 million people are interested in his views.

Some commentators seem to fear that Trump will disrupt the US to soil the nest for Biden but this is unlikely in my view. Trump needs to hold the support of Republicans to retain the maximum audience for his new marketing platform.

There were times in 2017 when I wondered whether even Donald Trump was surprised that he was elected to the Presidency and then pondered whether his behaviour indicated that he didn't want the role at all given the restrictions that it would place upon him; until he decided to just ignore those restrictions!

It is quite likely that the enigma that is Donald Trump will now make more money from expressing opinions, launched by his presidential marketing era, than he ever made from his attempts at the property business.

He will love that money is the driver, giving him complete freedom of expression (whilst people listen – Ed) and that he no longer has the pesky White House machine trying to restrain him.

When we look back in a decade or two's time will we remember this period more for Trump than Covid19?

Political Influence - Interesting; the Attorney General (David Parker) is a shareholder and investor in a fund manager that the Financial Markets Authority has taken control of.

Did the Hon. David Parker know he held this investment?

John Key set a different standard whilst in office by tasking others to manage his investments within a blind trust.

Something tells me our parliamentarians are exposed to many conflicts of interest relating to their personal savings.

Online Betting –Show me the money, and you'll discover the truth.

In this case I refer to political polls.

Polls have again been found wanting, but when the predictions are connected to money (risks of gain/loss) they prove far more accurate.

Betting on the outcome of the US election, which evolves by the minute, provided a far more accurate look at the probable outcome in the US election.

You'll not be surprised that we don't make investment decisions based on polls of 1,000 people who carry a phone (and answer it – Ed) but on the intensity of financial risks after assessing as variable outcomes.

Given the huge angst about the influence of social media in electoral outcomes, it's a little surprising that politicians aren't up in arms about gambling on the outcome.

There's a lot of herd mentality in a society, so if the herd saw a candidate progressively moving ahead in the race it would be a common behaviour for undecided people to then back that horse, and join the 'winning team'.

If Donald didn't already have TRUMP TV lined up to profit from, he could have placed bets on Biden to win as a partial financial hedge (offset) to the pain of losing the Presidency (conspiracy theorist – Ed).

Share price study – For those who like tutorial opportunities, the Synlait Milk share price is a useful example.

As investors worried about the debt build up for expanding the business in the North and the simultaneous legal threat from a Pokeno neighbour the share price declined by 40% ($9.30 to $5.50).

Then, following the announcement that the company had settled the legal dispute, with an amount described as immaterial in accounting terms, the share price jumped $1.00 being $200 million in the market value of the company.

$200 million is not immaterial in anyone's language.

Why had the market allowed SML to fall back to $5.00?

Why did it think it was appropriate to jump to $6.00 immediately after cessation of hostilities?

It's not credible for the 'Pokeno Risk' to be $1.00 per share.

For the sake of balance, SML also announced a new distribution agreement (great news) and to reinforce the tenure of this new agreement the company is to invest $70 million in support of deliverables under the agreement.

Could $70 million new investment, with a target return of say 15% ($10.5m per annum) deliver a $200 million uplift in the value of the company?

If the term of the new agreement is long enough it could, but I'd be surprised if it's a 20 year plus agreement.

The subsequent request for $200 million new capital ($70m for investment and $130m for debt reduction) was heavily supported, only placed modest dilution effect on others, and the share price has mostly held up in the face of this development.

It would appear as though shareholders lost confidence in the board and CEO to deliver on their strategy, which feels like an erroneous loss of confidence in these people.

Disclosure – as an SML shareholder I hope that the share price study now enters a rising phase now that all business stars seem to be aligned for success!

 

EVER THE OPTIMIST

Judging by the latest profit announcement the missteps and misfortune of Fletcher Building may be behind them!

The concept that 'surely we need FBU to deliver upon the housing and infrastructure requirements' may finally be coming true.

Patient (wildly optimistic? – Ed) shareholders will be …. Relieved, I think is the appropriate term.

Investment Opportunities

Chorus Bond – This new offer of 7 and 10 year senior bonds opens (and closes) this week.

The bonds are of the same securities type as the other Chorus bonds listed on the NZX (CNU010, CNU020) and thus this will be a fast moving offer booked by contract note (with Chorus paying the brokerage expenses).

Current market conditions imply interest rates of approximately 1.50% and 2.00% respectively.

We have a list that investor seeking a firm allocation are welcome to join, no later than Thursday please.

Property Syndicate – TWC Quantum is proposing to issue shares in a recently renovated building in Wellington, converted into residential apartments.

The projected income, after expenses, should allow for quarterly dividends at a rate of 7.50% per annum.

It is proposed that the building will be funded by 50% equity and 50% debt with a proposed minimum investment size of $10,000.

Clients are welcome to join our list to hear more once the formal offer is made (expected by December).

TRAVEL

Johnny Lee will be in Christchurch on 25 November.

Edward will be in Auckland on 20 November (will see clients in the CBD) and in Wellington on 27 November.

Michael will be in Hamilton and Tauranga during the week of 7 December.

Please let us know now if you would like an appointment in your town.

Thank you.

Mike Warrington


Market News 9 November 2020

An Auckland University student has designed and built their own satellite (Waka Amiorangi Aotearoa) to monitor whether atmospheric electrical activity is linked to earthquakes.

It is being delivered to space courtesy of Rocket Lab.

It must be a fantastic feeling for a student to discover that space is now accessible for a research project!

INVESTMENT OPINION

US Election – I had thought this heading might dominate today's Market News but I'm just not going to let it do that.

Last Wednesday night I turned off the television when I realised that all NZ channels thought the US election warranted 90 minutes of non-stop coverage and pretended that nothing else of interest happened anywhere.

The US election is important because the US is by far the largest economy in the world but it has been turned into the emotional equivalent of a sports match; Blue versus Red regardless of the quality of the game.

If you'd like an immediate summary, take a quick look at the market pricing reactions via the share market, US interest rates and the change in the value of the US dollar. I think they will brush this event off pretty quickly.

For the patient, we must now tolerate weeks of disputing the seemingly indisputable before Joe Biden changes from President Elect, to President.

RBA Interest Rates – What follows is not surprising news, but it reinforces the view for those struggling to believe it; that interest rates will remain at these very low levels for years.

I think it means many years, as in more than five.

At its latest monetary policy review the RBA cut their official overnight cash rate from 0.25% to 0.10% and moved its target yield on 3-year government bonds to 0.10% also, making it very clear that they see interest rates being this low, for that long (at least).

Suffice to say though that I applaud the RBA move away from 0.25% increments for change (albeit forced on them). I had proposed central banks use 0.10% increments 'way back' when the official cash rates were above 1.00%.

The key parts of the statement that also reinforce why interest rates will be remaining low are (comments are mine):

recent economic data have been a bit better than expected… but will be… bumpy and drawn out and the outlook remains dependent on successful containment of the virus; (this development is measured in years not months)

With Australia facing a period of high unemployment, the Reserve Bank is committed to doing what it can to support the creation of jobs. The Board views addressing the high rate of unemployment as an important national priority; (this isn't really about interest rates)

This extended period of high unemployment and excess capacity is expected to result in subdued increases in wages and prices over coming years. (Inflation used to drive interest rates, but now central banks do. Don't forget it)

The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. For this to occur, wages growth will have to be materially higher than it is currently; (Do you think strong wage growth is likely?)

Given the outlook, the Board is not expecting to increase the cash rate for at least three years.

This form of central bank enforcement is being applied around the world now, after it began many years ago in Japan. The strategy will not change for many years and frankly, if Japan found it hard to improve its economics whilst other nations were firing on all cylinders what makes central banks feel they'll be successful when the majority of the world is now struggling economically?

I know this is just another in my constant barrage of your emotions as they relate to investing but it is important; there is no avoiding the truth and interest rates near 0.00% for many years is the truth.

Z Energy share buyback – Last week ZEL was completing a legal obligation to disclose relevant issues to its shareholders when it announced a buyback of some shares from the Employees Long Term Incentive Scheme.

The communication generated a lot of enquiry.

Within the legally correct attempt to be clear with everyone, publicly, it would have been helpful if they had stated the following too:

No response or action is required from you, as a ZEL shareholder; and

You are not required to sell any of your ZEL shares.

The ZEL shares being discussed are held inside an isolated 'environment', for a nominated period, on behalf of employees.

ZEL lends the money to buy the shares, the loan is secured by the shares and employees will only benefit financially if ZEL is more profitable and the ZEL share price rises.

The substantial decline in the ZEL share price has made this particular incentive offering worthless, so ZEL has 'bought back' the shares and 'cancelled' the loan (zero net asset movement).

A technocrat might explain to you that you are slightly better off as there was a possibility that had these shares been passed to employees your share of profits and dividends would have been diluted a little (what dividends! - Ed)

Don't start.

This particular item of news can be 'filed'.

Junk Bond – How many of you would describe an Aston Martin as junk?

Nil presumably.

Well, the attempt over the past decade to rebuild this famous brand is floundering and after equity injections from the wealthy, and the might Mercedes Benz (Daimler Group) Aston Martin is still struggling.

They have been forced to raise new debt from the junk bond market, which means very high risk to the lenders and very high interest rates.

You are all becoming familiar with the 0.00% interest rate story on very low risk bonds and deposit, so imagine the perceived risk that Aston Martin will fail given that they tried to issue bonds at 'between 8 to 9%' last week.

The crushing news is that the offer failed to attract demand, that is until they increased the interest rate to 10.50% (almost credit card territory – Ed).

Aston Martin aren't alone, Jaguar and Rolls Royce are also reported as having issued junk bonds for urgent funding requirements. Rolls Royce is owned by the mighty BMW; what's going on here?

One analyst offered some generic input stating: 'with the Brexit hovering on top of its head, I can see why investors would not touch it unless adequately rewarded'

Brexit is surely a problem, as are Covid19 lock downs, but I happen to think that there is no yield that would be sufficient for new investors to lend money to a business under this pressure; they need equity from the owners (old, or new).

As is oft quoted when it comes to fixed interest investing; the primary focus is the return of your money, not the return on it.

Maybe not all is what it seems? (too often the truth in financial markets – Ed)

Maybe Mercedes Benz and BMW are quietly positioning themselves to migrate the likes of Rolls Royce and Aston Martin out of the UK, post Brexit, once the financial pressure becomes too great?

Maybe the European Union will offer the German car manufacturers attractive terms if they add these businesses to those operating on the continent?

Side story – I like that Air NZ's major shareholder, the government, is supporting the airline with the immediately available loan at (about) 9.00% but now the government has slowed AIR attempts to raise new money from all shareholders and guess who is being diluted by the expensive loan!?

Yes, all other AIR shareholders who are not receiving 9.00% on some of the money being used by the airline.

You may have read stories in the past about Warren Buffett riding in with urgent lending to businesses under duress but don't be hypnotised by the headlines, Buffett extracted huge helpings of value through the pricing of such 'lending' often gaining a huge return and a large shareholding at a discounted price.

Again, all is not as it seems, especially to the smaller investor.

At times like these when conditions are polarised between the very low risk (government, council, bank, strong company) and those struggling to stay afloat, retail investors should do two things (three actually):

1.    Get financial advice;

2.    Reduce the risk in their fixed interest portfolios (not the opposite regardless of returns); and

3.    Get financial advice!

I still remember the time when Feltex carpets asked to borrow money from NZ investors. The people I worked with turned down the fee and recommended that the company raised more money from shareholders.

It is a rare thing for an investment banker to turn down the opportunity of a fee.

As it happens Feltex found an investment banker to help them issue the bonds, which they just managed to repay shortly before failing as a business (leading to a court case that only looks like expiry this year!).

There's another lesson from being tangled up in a defaulting loan, a position I include myself in during the past decade, not only do you lose some immediate value via the obvious financial failure of the business but you then lose another huge sum through the time value of money and the costs incurred by the receivers and liquidators.

It's just not worth being in that position even if the bait is 10.50% per annum.

Remember also that 'back then', let's say 2007, a 10.50% interest rate offered you about 2-3% more than a relatively plain senior ranking loan/bond from a credible borrower and it was probably measured against inflation at 3%+.

Do you remember the World Bank bonds at a paltry 7.04% at that time?

A 10.50% bond from Aston Martin is now more like an additional risk margin of 10% above the low risk bond returns, with most now below 1.00% per annum, which yells the risk message to you loud and clear.

If you love the brand, buy one of their cars. If they don't make it as a business, you might even gain a little wealth through scarcity value (smile).

 

EVER THE OPTIMIST

NZ unemployment for the September 2020 quarter 'only' increases to 5.30%.

This is a much better outcome than the dire predictions made by the headline hunters ever since the March lock down.

Now the analysts are progressively reducing their 'how bad could it become' unemployment rates.

We all know business will be more difficult in the year ahead but there is no value in trying to out-gloom each other.

Now let's get that minimum wage up too.

Investment Opportunities

Chorus – has announced that it intends to offer up to $200 million of a new bond next week, including options for 7 and 10 year terms.

We expect more details (possible interest rates) to be announced early next week, with the deal closing late next week. Interest rates are likely to land between 1.50% - 2.00%.

We have started a list for those wishing to invest to join.

It would be very helpful if you tell us your preferred term from the two being offered.

Property Syndicate – TWC Quantum is proposing to issue shares in a recently renovated building in Wellington, converted into residential apartments.

The projected income, after expenses, should allow for quarterly dividends at a rate of 7.50% per annum.

It is proposed that the building will be funded by 50% equity and 50% debt with a proposed minimum investment size of $10,000.

Clients are welcome to join our list to hear more once the formal offer is made (expected in mid-November).

TRAVEL

Johnny Lee will be in Christchurch on 25 November.

Edward will be in Auckland on 20 November and will see clients in the CBD.

Please let us know now if you would like an appointment in your town.

Thank you.

Mike Warrington


Market News 2 November 2020

Here we are, November already, and tomorrow is the Melbourne Cup, which we understand will be won by a socially distanced 2 metres between each of the placings.

We think this is an improvement on having each horse run at a different track, or a virtual Melbourne Cup coordinated by an online gaming company.

INVESTMENT OPINION

US Election – We'll discover who is to be the ring leader of this circus shortly.

Neither look impressive to me, so I think the US has more to sort out than most citizens realise if they think this election is the pinnacle event for their nation's immediate future.

I think investment markets will be pleased once the election is over and seem to be factoring in a highly probable new round of financial support for the economy, regardless of who is selected as President.

More cheap money will likely sustain current high asset prices.

Harvest – NZ students should be flush with cash when they return in March 2021.

Finding a summer job was once a difficult task for many students but this should no longer be the case given the demand for 'bodies' to work in the horticulture sector.

Exportable productivity, filling the pockets of those paying to fill their minds sounds like a virtuous circle to me.

GDP Live – I really like this service. I hope it finds financing to survive.

After a -15% quarter immediately after our Covid19 lockdown it looks like the current quarter will be 'only' -1.20% but we need to remember this included a second lockdown for Auckland, our largest regional economy.

I accept that we likely still have some negative results ahead of us but I hope business leaders are already plotting how to stop the decline and define strategies for future growth.

I am hearing, and experiencing, anecdotal evidence that is not helpful to business, namely the stark change to transport product into NZ both for business and consumers.

An importer friend is regularly bumped off shipping slots, presumably by others paying priority pricing. He once thought he had too much inventory, but now worries that replacement stock for Christmas sales will arrive in February!

I bought a couple of items from the mighty, all dominating, Alibaba recently. My previous purchases arrived in 48 hours; quicker than I could have driven to the shop and collected it locally when I factor in work commitments. These recent purchases took five weeks.

I assumed two weeks was MIQ isolation for my parcels but three additional weeks speaks to global issues with manufacturing (staff presence?) and shipping options.

I wish I could say the government is onboard with steering toward economic growth locally but at present only three sectors are reporting growth in the current year and the largest is public administration (good grief) up 10.4%.

The other two are utility services such as electricity, water and gas (+2.90%) and construction (+1.0%).

Messages:

Investors should not be surprised that interest rate forecasters are still looking toward 0.00%; and

Christmas shoppers should be taking action now both for online purchases overseas and for claiming items from local shopping outlets.

Velocity of Money (VoM) – If central banks have pumped so much money into economies world-wide why is the velocity of money falling so fast?

VoM is defined as the frequency at which one unit of currency is used to purchase domestically.

Imagine, if you can, how often 'your' $20 moves through the economy in say one week after you buy brunch with it on Monday morning.

I am looking at a chart of VoM produced by the Federal Reserve Bank of St Louis (US): https://fred.stlouisfed.org/series/M2V

After very long periods of stability (30 years between 1960 – 1990) VoM rose during the 1990's before beginning an as yet unstoppable decline until it fell off a cliff in response to Covid.

Why?

The only cause I can think of for the decline is the increasing presence from central banks thinking they can rescue an economy from itself by constantly cutting the price of money (interest rates), increasing the supply of money and widening the range of borrowers they will lend to (and then actually buy shares! – Ed).

Is a central bank still a regulator if they become so deeply involved in the cogs of the economic gearbox?

They are no longer watching, but being tossed around by the machine that surrounds them.

The only thing that thereupon aligns for me is that providing an excess of cash at unrealistically low cost to an economy makes the use of those funds 'lazy'. Neither price of, nor access to, money create an incentive for the efficient use of funds.

I'm not telling you much here, sorry, other than I do not believe 0.00% interest rates on oceans of cash will solve the current economic difficulties.

However, as we have stated a few times now, the wild increases in the scale of debt use, especially by government, means they have become hyper-sensitive to the interest rates set by central banks and anyone who thinks central bank independence is real presumably thinks Donald Trump is a role model for delegation.

It is a frustrating thought that an excess of cheap money may be what threatens to suffocate us.

Infratil Expanding – After re-focusing the central theme for its investment portfolio three years ago Infratil (IFT) is now expanding its portfolio foot print again.

25 years ago Lloyd Morrison's focus was on essential utility businesses with highly reliable revenue streams and profit margins (think Trustpower and Wellington Airport).

He (IFT) dabbled in a few other ideas along the way contemplating their possible roles in integrating with such essential infrastructure (Snapper cards, public transport etc) but they were always reminded that essential is better than discretionary.

However, as interest rates fell toward the rate of inflation pressing the value of essential businesses ever closer to a logical ceiling (90th percentile), IFT, by then led by Marko Bogoievski, began to pursue more risk to find more reward.

Morrison & Co (HRLM) is paid well by IFT and the manager needed to show they could find additional value for IFT Investors.

More exposure to risk demands more assessment of the things that help to reduce those risks and I enjoyed the investor days where the likes of Paul Newfield and the team of HRLM analysts provided us with confidence that they understood the additional risks and felt they were positioned downwind with a well-managed spinnaker set.

Johnny discussed the main mega trends IFT sees in Taking Stock last week.

HRLM had worked harder than most to identify highly probable influences (demographics, regulations, government spending etc) that were likely to reduce immediately obvious risks for investors, consider the following:

Expansion into building renewable electricity generation (Tilt, Longroad), with risks reduced by government policy trends toward renewable generation obligations across the economy;

Ownership of a data centre business, with risks reduced by the huge expansion in obligations of data capture and its commercial merit. By owning best of breed they are capturing the business of government, which is unquestionably a long term client in this field collecting more data than most;

The investment in Vodafone seems to relate to the essential (utility like) role that communications play in connecting consumers, service/product providers and data storage businesses;

Retirement villages, with their risks reduced by the increasing scale of potential residents. However, this item is a reminder that sometimes well thought out dominoes (risk management plan) can actually be a little out of line and thus risks are higher than intended. Retire Australia isn't performing as well as they hoped;

The latest investment in a medical scanning business (QScan Australia) appears to also be setting sail with the tail winds of demographics and the volume of the population needing such care services. I look forward to gaining a better understanding of this new investment over the months ahead.

This new health sector investment by IFT seems to reinforce the good story surrounding Wellington based business Volpara Health (breast health scanning technology) and their recent win of the Supreme Award at 2020 business awards locally. VHT is (sadly) listed on the ASX, not the NZX but is an impressive Wellington based business.

In fact, now that I have typed ASX there is a rising trend occurring here; I see there is ever more investment by IFT in Australia, or via Australia's capital markets, and not into NZ.

This may simply reflect our small scale as a nation, but it might also reflect some of our current regulatory settings.

Infratil investors should tune in for the next business update once the health scan business is confirmed and IFT executives can offer us deeper explanations about the value they see.

Some of you have been investors in IFT for so long that they are part of the 'family' in your portfolio so understanding the evolution of this 'child' is a good thing to do.

'Special' Interest Rates – A client called last week wanting me to lodge a complaint with the Commerce Commission about the banks being misleading and deceptive.

So soon, after the last banking review?

'Yes, they had the nerve to tell me that 0.75% is a SPECIAL interest rate!'

Fair point.

Since when is an interest rate with a negative real return 'special'?

A word to the wise though; don't be expecting the Commerce Commission to ride in on its steed and rescue your investment returns.

Government Bonds – yields on government bonds may only be 0.35% but demand remains extremely high, which is primarily because everyone knows the central bank will buy any surplus supplied!

Last week's offer by the government to issue additional bonds for their series maturing in April 2027 attracted demand for $14.4 billion.

I remember a time when the annual funding programme was $3 billion!

So, access to funding is easy for the government and the cost is almost nil, but when will we again allow the actual market to set the pricing and the supply constraints to finance our government spending?

Strange times mean you should maintain your 'strange' investment rule settings.

Turkish Lira falling – Elevated political tensions is still a concern for investors.

Making grandiose declarations is not a form of good leadership in my view. We all know Donald Trump is guilty of this behaviour but so too are many other leaders; in this case I Include President Erdogan of Turkey.

Erdogan seems to be doing quite a lot of damage to a once admired country and economy. His behaviour and then Covid19 were directly responsible for disrupting one of my next research trips.

The value of the Turkish Lira has been enduring a constant decline in value (relative to USD and EUR) over the past 10 years, which overlaps Erdogan's time in power (Prime Minister then President).

The 10 year decline is from 70 US cents per Turkish Lira to now only 12 US cents. The sharpest slump (40% in a month) was when Erdogan became more of a dictator, believing he was the only one who could lead Turkey properly, a little like Putin in Russia.

In response to Erdogan ratcheting up his angry rhetoric against many nations during 2020 the Lira has fallen 40% again in a short time frame (17 US cents to 12 US cents).

Currency pricing comes and goes but the rate of change, and the ongoing trend in a single direction are not good signs for the Turkish economy.

I doubt though that egotistical leaders look at market pricing signals before or after opening their mouths.

 

EVER THE OPTIMIST

The US Food & Drug Administration (FDA) has approved Remdesivir as the first fully approved treatment option for Covid19 patients.

The breadth and depth of work being done by the world's scientists make it likely that many more will be approved as the months pass.

ETO II – The stay at home nature of the pandemic globally seems to be helping NZ wine exporters, but oddly not helping most other wine exporters!

NZ has enjoyed increases to both volume and value (In the eight months to August 2020, the volume of New Zealand wine exports rose by 10.7 per cent and the value by 9.7 per cent in comparison to the same period last year.)

If you prefer pictures, take a look at the Delegat Group share price!

Investment Opportunities

Property Syndicate – TWC Quantum is proposing to issue shares in a recently renovated building in Wellington, converted into residential apartments.

The projected income, after expenses, should allow for quarterly dividends at a rate of 7.50% per annum.

It is proposed that the building will be funded by 50% equity and 50% debt with a proposed minimum investment size of $10,000.

Clients are welcome to join our list to hear more once the formal offer is made (expected in mid-November).

TRAVEL

Kevin will be in Christchurch on 27 November.

David Colman will be in New Plymouth on 3 November and in Whanganui on 4 November to meet clients.

Johnny Lee will be in Christchurch on 25 November.

Edward will be in Auckland on 20 November and will see clients in the CBD.

Please let us know now if you would like an appointment in your town.

Thank you.

Mike Warrington


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