Chris Lee & Partners Ltd

Market News 29 November 2021

The pricing for NZ milk, across future dates (months ahead), has exceeded $9.00 for the first time.

This is such good news.

It may belong under ETO (below) but I've elevated to the opening paragraph such is its importance.

Remember to hug a farmer.

INVESTMENT OPINION

ANZ Bank to repay - As anticipated, ANZ bank has announced the repayment of its old Tier 1 securities (ANBHB), which were disrupted by Covid influences in 2020, the year when the bank expected to repay and replace these securities (Optional Exchange Date).

The delay was entirely logical as the Reserve Bank refused to approve repayment under conditions that were highly unpredictable and additional stores of equity were of greater value.

It was an excellent reminder for investors that subordinated securities are not 'vanilla' and grant concessions to the borrowing entity. Whilst it isn't the intention to use the concessions, and disrupt investor preferences, it is always a chance (a bit like an airbag in a car – Ed).

Now that financial conditions are less volatile, the new bank prudential requirements are in place and the ANZ has raised additional capital (Tier II) the central bank has approved repayment of the ANBHB.

Good things come to those who wait

The ANZ loses a portion of the equity recognition from 1 January 2022, but it was still a surprise that they chose New Year's Eve as the repayment date.

Holders of the ANBHB certainly won't run short of cash when they repay their credit cards carrying Christmas expenses, but they'll need to wait until into January before getting back into reinvestment opportunities.

The alternative, if a good investment opportunity emerges prior to Christmas is to use cash from call accounts to make the new investment safe in the knowledge that the call account can be restocked on 31 December.

Unless you want your New Year's resolution to be buying a new boat or car?

US Federal Reserve – President Joe Biden has now announced that Jerome Powell will serve a second term as the governor of the US Federal Reserve (until 2026) and made a hint that Lael Brainard is now in pole position to replace him in future by naming her as vice Chair.

Financial markets have long viewed Powell as reasonably 'dovish', being supportive of the lower interest rate environment, but apparently Brainard is even more dovish!

Interest rates increased following the announcement, in anticipation that Powell will begin to move sooner than Brainard would on increasing interest rates and attempting to remove quantitative easing from use.

The change in perception of Powell is interesting.

Everything is relative and I do not expect Powell to deliver tight monetary conditions during his extended tenure.

In Market News in September, I commented that Powell's speech to other central bankers implies only a modest chance of him increasing interest rates and cutting back on bond purchases. Recent inflation data may force his hand on both, but the pace will be like liquid honey in my view (shallow and slow).

I speculated that the most meaningful policy change will come when the chairman changes, and Biden has just confirmed there will be no change in chairman in 2022.

Powell will not wish to become an enemy of the President (politics) nor business (commerce).

I think he will leave statements about agitating for interest rate increase to the other board members and quietly monitor responses from 'behind the curtain'.

Regardless of one's inflation view I think it is important that the world moves away from the artificial pricing of money that central banks have been running in recent years.

The artificial pricing started during the Global Financial Crisis (with good reason) but then central banks doubled down for Covid (less necessary) and its important that the younger generation are exposed to what the 'normal' pricing of money looks like.

Increasing monetary tension (higher interest rates, less cash supply) is going to be hard enough to achieve (politically unpalatable) so delaying it would be unhelpful and become doubly difficult as each quarter passes.

You may recall me saying that the two biggest themes for 2021 would be vaccination rates and central bank pricing of money. The attempts to reverse (increase) the pricing of money with be one of 2022's major themes for investors to focus on, with the US Federal Reserve bank being the most influential.

NZ Official Cash Rate – I applaud Adrian Orr, governor of the Reserve Bank for his steady, well defined and predictable approach to the latest review of the Official Cash Rate (OCR).

Last week the OCR was increased by 0.25% to 0.75% and he explained that it was (at this stage) very likely that each review ahead would see increases of 0.25% to reach 2.00% by late 2022 and perhaps 2.50% during 2023.

You may recall I think the RBNZ erred when it delayed an interest rate hike in August as we were thrown into the latest lock down. Smooth and predictable is very useful to the economy.

The next review occurs in February (you can have summer off – Ed).

Too much can happen to the 'water flowing under the bridge' for the 2023 predictions to be relied upon much, but the intention is clear; the OCR will be lifted toward a level that the bank considers to be neutral.

I consider 'neutral' to be a 0.00% real rate of return (aligned with the perceived long term inflation rate).

I further believe that regardless of the interest rate levels the lowest interest rate return on fixed interest investments will come from those with the shortest terms.

Unlike most of the world, we seem to be declaring that the central bank has stopped buying bonds to fund government and they will allow them all to be repaid as they mature (not sold into the market) placing a defined pressure on central government to budget for their repayment either from tax revenue or an ability to borrow from real investors at the time.

Variations in central bank policy will be an interesting subject during 2023 and may well become game of a 'snakes and ladders' for investors to navigate.

The rising interest rate track has been well signaled so most asset prices now reflect this influence, but holders of the annual reset securities such as Infratil (IFTHA) and Downer (WKSHA) will be pleased to see the probability of rising income levels from these securities.

IFTHA increased to 3.14% last week for the year to November 2022 and by then may well reset to 3.75% or maybe 4.00%.

WKSHA, with its higher credit margin (+4.05%), is paying 4.42% until June 2022 and by then may reach close to 6% on reset at that point. (a nice reward for the patient long term holders).

I think I asked you this last week: what is your view of inflation, because you'll need one to decide whether a 4.00% longer term interest rate (or higher) is attractive or not.

Something to Ponder - When did Meridian Energy (MEL) make its governance mistake?

Was it when they decided to expand their business footprint into Australia, or now with the exit?

Meridian Energy is surely not in the business of buying and selling assets over the short term; that's more the domain of private equity investors.

In fact, Meridian has entered and exited Australia twice, and on both occasions only seems to have stayed for a period of 2-3 years.

It doesn't look like term strategies to me.

The market was certainly disappointed by the exit, the price, or both.

The other interesting aspects of the sale for me were:

The split between generation assets and the retail customers (as Trustpower pursued with its recent strategy in NZ); and

The buyer of the retail customer base was fossil fuel giant Shell, which rather mimics Z Energy's decision to take ownership of Flick Electric three years ago.

Both are clearly searching for their channel into electricity as an energy service to their very large customer base.

Analysts don't expect MEL to pay a special dividend with the cash.

Wouldn't it be nice if MEL found a way to invest in new generation, or storage, and help expand New Zealand's renewable energy aspirations?

Private Equity – The global push for more merger and acquisition activity continues, and the one that caught my eye last week was KKR's attempts to buy Telecom Italia.

If the reliable cash flow of Telecom Italia is so attractive, why are New Zealand telecommunication companies not gaining the same level of respect for value (notably Spark share price declining).

Infratil also sees value, having purchased Vodafone NZ.

Track records would suggest that I should side with KKR and Infratil.

Bitcoin – The rise of Bitcoin's price, and that of its disciples, has delivered enormous amounts of revaluation wealth to new people (early adopters), much of it transferred from old wealth derived from older productive investment.

Even though I believe there is a conflict between 'wasting' enormous volumes of energy to mine Bitcoin, which offers no productivity to the planet, and asking the world to reduce its energy use I do believe Bitcoin is settling in for the long haul.

Please do not ask me about value.

Whilst China is trying to suppress crypto currencies, presumably disliking the difficulty of regulating use and due to energy waste, the US is pushing to regulate disclosure and collect some tax.

The US behaviour helps to ensure the survival of crypto currencies because it confirms regulatory tolerance of their presence within the open market, and markets have already declared they wish to participate in this intangible asset (commodity).

Interesting statistics – Within the many words that I read last week I stored these interesting facts (error #1 – believing all that you read is a fact – Ed):

US Generation Z is saving 15% of their income into the 401(k) savings plans (savings scheme a bit like our Kiwisaver).

15% is impressive as a savings rate, especially if it is on top of mortgage repayments (i.e. they own a home too).

In New Zealand Kiwisaver contributions started at a modest 3% before we increased the options up to include as much as 10%. Australian superannuation is compulsory at 10%.

On this basis the NZ savings rate looks a bit weak, and that generation Z thinks the Australian compulsory standard will also be insufficient.

Another 'fact' from the same article reported that stock exchange returns have exceed inflation by an average of 6% per annum since 1793 (sounds like the beginning of the statistical database in the US).

This rather portends that after 10 years of share market returns averaging around 14% per annum, or about 12% p.a. over inflation (S&P500), the decade ahead seems more likely to offer returns of between 2% and 5% per annum, which assumes we actually experience average inflation of 2%!

I don't expect interest rates to rise all that far, but it is now unrealistic to expect the price of money (interest rates) to decline, the supply of money to increase (Quantitative Easing should be over) and government subsidies can't get any bigger!

These are three powerful elements driving the share market increases over the past 10 years.

Looking ahead 10 years doesn't feel so powerfully optimistic.

EVER THE OPTIMIST

Great News: Christmas leave for pilots, and cabin crew, and ground crew, and airport staff is cancelled.

The mere hint that the government is finally acknowledging reality and will allow NZ citizens to move around more freely has sent 'us' flooding to the Air NZ website to go somewhere.

Unsurprisingly the most popular routes are – 'Auckland to Anywhere'.

ETO II – Vaccinations

NZ 1st Jab: 3,882,575 = 78% (total population) 92% (>12 years of age)

NZ 2nd Jab: 3,592,142 = 72% (total population) 85% (>12 years of age)

Measured by risk (age) those >50 years are all but 90% double jabbed (>60 years are 90%+).

Youth are gradually catching up.

Once vaccinating 5-12 years is approved parents will ensure similar jab ratios are achieved (90%+).

https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/

https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-data-and-statistics/covid-19-vaccine-data#age

Vaccination doses delivered – 7.9 billion jabs

Active Cases – 19.7 million (increase)

Daily rate of new cases – 556,000 (increase)

People in serious condition* – 82,000 (increase)

Daily Deaths (Covid related)** – 7,000 (stable)

*Greatest impact on health services.

**Proportionate mortality is declining.

Investment Opportunities

World Bank – It was nice to see the World Bank (IBRD) issuing bonds in NZ dollars again, and to see the scale of support from international investors to hold assets in our currency.

IBRD successfully issued NZ$1.5 billion of bonds last week, a record sum in NZ Dollars.

TRAVEL

Edward will be in Wellington on 2 December. David Colman will be in Lower Hutt on 1 December.

Johnny will be in Christchurch on 7 December – this will be the final trip to Christchurch for the year.

Any client wishing to arrange a meeting is welcome to contact the office.

Michael Warrington 

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Market News 22 November 2021

I really hope, for all our sake, that the New Zealand government is observing how 'open for business' the world is quickly becoming.

I hope they establish more effective actions for verifying vaccination status, because others already have, including from international arrivals.

Witness one App branded VERIFLY which has successfully engaged eight major airlines, so far, to ease the presentation of evidence required of travelers, especially across borders.

The International Air Transport Association (IATA) has launched a trial app too, hoping to achieve a similar goal to VERIFLY. At a guess it will also be more effective than our local status process.

Air New Zealand is participating in the IATA trial.

Wouldn't it be nice if the world didn't try to establish dozens of competing solutions.

I see the newly formed vaccine passport in New Zealand has been 'renamed' a vaccine pass because it can't be used to actually cross our border!

It will become a temporarily useful community card really. I say temporary (maybe 12 months) because as time passes the need for a special community filter will wane (vaccinations up, natural immunoglobulin antibodies up, pressure on the health systems down).

Anyone planning to travel internationally will however need a separate International Travel Vaccination Certificate and I think these will last much longer to reflect health and safety obligations for airlines and the many different national expectations placed on arriving passengers.

I don't yet understand why the vaccine status hasn't been included in the NZ Covid tracer app. It would be so simple if it displayed the status immediately after I successfully scan a QR code in the window of a business. (those without mobile phones can print out a hard copy of vaccine status).

Maybe our Ministry of Health should invite applications from the likes of VERIFLY to be linked into our NZ COVID app, giving me the ability to approve the sharing of my health data (Covid Vaccination) with VERIFLY, IATA (or other similar services).

IATA and VERIFLY could then request that I record my travel passport number and alert me to other steps required by the nation(s) I was intending to visit (pre testing, MIQ risks, mask rules, community rules etc).

These things always sound so simple when tapping away at a keyboard. (with a mask on? – Ed)

GREEN INVESTMENT OPINION (written on renewable digital paper)

The term 'green' is beginning to be used rather a lot, and perhaps too often.

Labels fit into the 'tell me' category.

I prefer the 'show me'.

GREEN – The recently completed COP26 gathering confirmed two things, again:

That regulators are trying to steer the world in the direction of better behaviour with respect to the resources available and the impact upon the environment; and

That not everyone is on the same page.

Toyota has reinforced its position of placing a foot in both camps (like most nations – Ed) and that they do not see the headlong rush to cancel internal combustion engines as being appropriate.

Toyota is responding to client demands and regulatory preferences by supplying Battery Electric Vehicles (BEV) to the marketplace, but it has previously stated a view that the evolution of energy sources should be matched by the evolution of engine types, hence their dominance in the hybrid sector.

Armed with my view that the most effective changes to regulations are those that move slowly enough to take people along with them, I think Toyota's stance makes good sense.

Some regulators seem to believe that the world can metaphorically jump from North to South without passing through the equator.

Toyota has put a stake in the ground to challenge such a jump, and they have gained the support of other major Japanese industrials (Mazda, Suzuki, Kawasaki, Yamaha and Subaru) with this stance.

It is beginning to look a little bit like 'Japan versus The World' but in truth I am certain others will be relieved by this display of leadership from Toyoda san (head of Toyota).

I'd be doubly impressed if Toyota approached me and offered to upgrade (at a cost) the engineering of my diesel vehicle to run on 'better fuels' (such as biodiesel) and thus lengthen its life.

Toyota is aligned with the principles discussed by the COP26 talking heads; they do wish to improve the energy performance of their vehicles and follow the evolution of energy sources for transport. Frankly I think Toyota will make more meaningful progress in this area of climate concern than most nations who make hollow promises in the public arena.

From an investment perspective what does this mean?

How many stark changes are occurring, linked to environmental debates, that may disrupt your investment assumptions?

How many of the huge changes proposed by global governments will actually occur, on the time scales proposed?

Coal and oil are theoretically now to be rejected as energy sources, yet many astute looking investors are buying discounted assets within those sectors.

Most of you will not own shares in Toyota or Tesla but this development is throwing up a test; if you could only invest in one of these two companies, and must hold the shares for a decade, which one would you choose?

Both businesses look likely to be successful, in my view, and Tesla has unquestionably caught the early EV wave, but I'd feel better about owning Toyota over the decade ahead based on good governance and good financials.

I pondered which one a professional investor like Infratil would prefer to own, but I am reminded that they prefer to own the 'pub in the gold mining town' with their investments into renewable generation of electricity for the vehicle (beer) and the data gathering from your vehicle (sheriff). 'Buy whatever car you want Mike'.

Yes, you should constantly ponder the impact on your investments based on their exposure to the COP26 subject matter but be careful not to make knee-jerk reactions and aggressive changes to your portfolio over the short term.

Green II – The New Zealand government has joined the trend and launched a green bond programme, to begin in late 2022.

I think it runs a risk of being hollow with its use of the green label.

I am finding it hard to reconcile the government describing itself as having a green bond programme and I'm still trying to ascertain if it will drive beneficial change, lower costs, or both.

Government should set leadership with respect to 'green' (environmentally sound) behaviours through policy, not through the name of its own debt programme.

The announcement includes these three paragraphs, with my thought bubbles:

Sovereign Green Bonds will help ensure high quality Government projects with robust environmental outcomes are financed, delivered, monitored and reported on.

Projects with 'robust environmental outcomes' is nice to observe and showing leadership on how to measure performance will also be good, but most government spending programmes happen because they are necessary (such as the Kaikoura coast transport repairs) or because of political philosophy (Three Waters proposal) and not because they are environmentally robust.

All spending approved by Cabinet will be financed, whether it is green, brown or orange!

New Zealand Debt Management (NZDM) will also be focused on ensuring issuance is consistent with its core objective of minimising costs over the long-term while accounting for risk and that liquidity in all its products is supported.

This is a standard description, although minimising costs is the secondary focus. The primary one is to ensure the government is fully funded.

In addition, the issuance of sovereign Green Bonds is expected to provide further diversification of its investor base and support development in the broader New Zealand sustainable finance market.

It is possible that a 'green' bond programme might entice a new cohort of investors and thus increase demand and lower the cost of government debt, but the cost (reward to investors) is actually measured against risk (primarily default risk, which is nil for our government), not the green behaviour of a proportion of government spending.

I think the government would have been better served to establish Public Private Partnerships linked to projects that would have obligations to deliver against 'green' metrics and assets required under public policy.

For example, a new Auckland Harbour tunnel, with net zero energy consumption.

Morrison & Co could assemble the equity (negotiate return expectations), the government could invite lenders to support the 'green' project (at government bond interest rates) and clever engineers would resolve my net energy expectations.

I see I have strayed into President for a day again, sorry, but I am becoming ever more suspicious of the increased use of the green label again. As was Kevin Gloag in his recent Market News.

GREEN III – And, how on earth does Contact Energy (CEN) help the environment, its customers or the environment by separating out its fossil fuel generation, from its renewable generation, into two separate companies. Do they hope the Companies office can help!

A cynical person might speculate that they wish to borrow money more cheaply (bank loans and bonds) secured against the 'good' company (Renewable Co) and not against the 'bad' company (Thermal Co).

Or, perhaps they want to lobby the government for subsidies (higher short term returns) to run Thermal Co whilst the nation tries to build more renewable electricity generation, which then puts Thermal Co into retirement.

Maybe CEN wants to temporarily turn off Thermal Co during times when there is sufficient renewable electricity being generated and be able to achieve higher average electricity pricing as a result (sorry, the government would rather we didn't turn on Thermal Co under its 100% renewable policy).

You've all seen the much higher electricity pricing over the past two years as a variety of generation units were being serviced, notably some of the thermal generators. Oh, and whilst they were offline, the hydro operators were found guilty of holding back supply too.

Maybe Contact Energy hopes to prompt the government, through higher electricity prices, to build the trillion-dollar Lake Onslow reservoir (oops that Biden's number – Ed) or to hurry them along with the Transpower build of more transmission capacity from the South to the North?

All of my speculation is deniable by CEN but what is undeniable is that putting the same generation kit into two different boxes changes nothing for the environment, but it seems highly likely to change the price you pay for electricity.

EVER THE OPTIMIST

President Biden has finally had his infrastructure spending boost passed into law, after it was diluted to a mere $1 trillion and fueled the now constant blue and red bickering in the US.

This spend is far better than the directionless Covid related subsidies.

 

ETO II – Vaccinations

NZ 1st Jab: 3,838,939 = 77% (total population) 91% (>12 years of age)

NZ 2nd Jab: 3,502,536 = 70% (total population) 85% (>12 years of age)

Measured by risk (age) those >50 years are all but 90% double jabbed (>60 years are 90%+).

Youth are gradually catching up.

Once vaccinating 5-12 years is approved parents will ensure similar jab ratios are achieved (90%+).

https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/

https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-data-and-statistics/covid-19-vaccine-data#age

Vaccination doses delivered – 7.7 billion jabs

Active Cases – 19.4 million (increase)

Daily rate of new cases – 498,000 (increase)

People in serious condition* – 78,000 (increase)

Daily Deaths (Covid related) – 7,000 (stable)

*Greatest impact on health services.

Investment Opportunities

Vector – issued $225 million of its new 6-year bond last week, with an interest rate of 3.69%.

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

The bonds are now available on the secondary market should investors wish to include them in their portfolio.

Investore Property – has made a statement in its annual reporting that it intends to add another bond to its funding.

They currently have bonds maturing in 2024 and 2027. Rather than heading out to 2029, or similar, maybe they could break the mold and offer something a little shorter a 2025 or early 2026 bond maturity?

The speed of issuance now, under the FMCA same class setting, should enable some shorter-term bond issuance. Previously everyone went to longer terms to amortize the higher costs, but costs should now be much lower.

There is plenty of time for them to get such a bond offered prior to 20 December when all will go quiet for the Christmas break. (Common, using the term Christmas in November is like putting the tree up and turning the lights on early – Ed)

 

TRAVEL

Edward will be in The Wairarapa on 24 November and in Wellington on 2 December.

David Colman will be in Lower Hutt on 1 December.

Johnny will be in Christchurch on 7 December – this will be the final trip to Christchurch for the year.

Any client wishing to arrange a meeting is welcome to contact the office.

Michael Warrington 

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Market News 15 November 2021

The Government's announcement about offering to underwrite some of the financial risks of summer festivals makes good sense to me.

It confirms the intention to finally open our country up to more freedom of movement;

It should reduce some of the financial costs currently being carried by Government with its business and employment subsidies, as a result of ticket sales to an actual event; and

It should simultaneously boost economic activity in the areas surrounding such events (again less Government subsidy required).

We need to make a declaration that New Zealand is open for business and this helps.

Then, the bridging finance (or underwriting financial risks) provided by the Government should only take one cycle (say six months of large events) to be effective and then everyone can stand on their own feet again.

Sometimes it has felt like pulling teeth to get NZ open again (incorrect, dentists were off limits – Ed) but it feels like we are so close to a lifestyle with a lot less restriction, which will be fantastic for more normal levels of economic activity.

INVESTMENT OPINION

Central Otago Research – Stage II of my South Island research programme saw me in Central Otago, a place I might describe as my turangawaewae (well, birth place - Ed), and always a pleasure to 'research'.

Traffic levels and general activity levels were far higher than we had witnessed on the West Coast.

The reason Kevin Gloag kindly wrote Market News last week was because I was without laptop, and sometimes happily without internet signal, as we rode the Lake Dunstan Trail, then the Otago Rail Trail (ORT).

Again, we had an excellent time. I thought I knew Central Otago quite well but that was clearly only from a 50-100 kilometres per hour perspective. Seeing it at 15kph, through another channel, was completely different, and for the most part much better.

If you are tempted to ride the trails, now's the time, before Jacinda lets the Aucklanders out (apologies to those of you in Auckland!) We barely saw more than 6-10 people a day on the bike trail.

The bike shops tell us the new Lake Dunstan trail is keeping them busy, but they urgently need the volumes to return to the ORT.

One place we stayed at saw us as the only guests so the owner left us the keys and went home! ('please leave your empties on the bar and we'll bill you later'). You immediately feel part of their community, which is a very pleasant experience.

Just like on the West Coast, you could spot the businesses that had real equity and good financial capacity because they are taking the downtime opportunity to improve their businesses and keep the standards up (I'm looking at you, Chatto Creek Pub, Waipiata Pub, Pitches Store in Ophir, Maniatoto Café in Ranfurly, Hayes Engineering, Hyde Coffee Cart & Store).

The farms looked in great condition. The animals looked in great condition (to a townie – Ed). It's just the humans that need a little more activity in their towns.

As I rode along though, I reflected on the fact that the rail line had 'only' delivered 90 years of service by train. Given the huge expense to build, use and then remove, I doubted that it had ever really paid its way as an asset, until now, without a rail line or train in sight.

It now feels like such an excellent asset, with much lower annual expenses, delivering (normally) economic activity to all of the towns along the line.

It has cost nothing to make it dormant during Covid. It will cost nothing to rev up again.

The John Key government was shrewd when it spent $50 million on cycle trails around New Zealand. I think Stuart Nash (Minister for Tourism) should have aggressively spent another $50 million over the past two years to expand and link up the networks.

Then I pondered, if we built rail lines in the past that were quickly uneconomic, why are we hell bent on building more expensive rail lines in our major cities with the light rail discussions?

If Wellington and Auckland have sufficient space to create dedicated transport channels, why not develop them without rail lines and allow bus and cycle traffic only?

It seems to me that it's the channel that has the value, not the train.

(President, or Mayor for the day again? - Ed)

Yes, I apologise. I really must steer clear of this political stuff.

Central Otago looked in good shape. Its people were realistic about the situation and were either happy, or optimistic; always glass half full.

I hope their extended patience is about to be rewarded with far more travelers in 2022.

COP 26 – The subject is so important, but I doubt we will understand what was agreed, and its ramifications, for many weeks yet.

Nations are attending (in person, or by video) and saying many supportive things but frankly what I see looks more like a game of poker, with unspoken financial objectives, and little collective recognition that we are all 'sitting' in the same nest.

Amongst the many nations at the table, it is clear that some are playing two-handed poker:

'If I scratch my chin with my left hand, you fold, and I'll double down on coal.'

'If I scratch my chin with my right hand, I'll fold, and you press hard for nuclear energy.'

James Shaw (NZ) will either not be at the table or he'll wonder why he is holding the 3 of Spades, 5 of Clubs, 7 of Diamonds, 9 of Hearts and King of Spades.

I think Shaw should be there solely as a student, then bring home all that he has learned for the benefit of New Zealand.

They debate the variety of inputs and schematic outcomes in marginal degrees Celsius by 2050 as if it is a recipe, but if the attendees think they are meeting in a 'kitchen' we are already in trouble.

They can't even seem to accept wording in agreements that refer to reductions in fossil fuel use and subsidies to the sector.

I'd feel more comfortable if they were all in the 'garage' with a map, agreeing on a common direction and tolerating different vehicle types and speeds of travel.

Chinese and Russian leaders didn't even attend.

China says it won't cut methane (and can't yet cut coal without unacceptable compromises to energy supply).

Russia won't cut gas.

India and Australia won't cut coal.

The US won't cut oil.

Everybody is happy to cut trees.

You can see the dependencies.

The world can't even agree that massive energy use to mine and trade unproductive and intangible 'things' (crypto currencies) is an unnecessary part of the demand profile for the earth's limited energy supply, regardless of fuel source.

I don't see collective progress being made within the many things I have been reading, so I wonder if we need to ask nations to look within and try to acknowledge the greater problem and then do the best they can because it is the right thing to do.

New Zealand shouldn't try to tell China or the US what to do to help improve outcomes for the environment, and they shouldn't tell us.

Scientists should continue to provide evidence to all governments and ask that they take what steps they can toward better outcomes.

One thing is clear to me; the cost of doing business is going to go up.

If abusing many of the planet's resources, and its population, was the old way of keeping costs down and extracting commercial value, it is not the way of the future.

There will still be business winners and losers, but the collective economic cost is going to increase and given the very high consumer debt levels held I don't see how 'we' can pay higher marginal prices for the same volume of products, let alone more.

Infratil (IFT) – I encourage all IFT investors to read their latest report covering the half year result (emailed out, and available on their website).

It confirms for you the excellent performance, not only from the past six months, but frankly the past five years after the IFT investment radar was re-focused during the period of plummeting interest rates.

Recapitalising asset values on lower interest rates is fine, but where will the future growth be?

Morrison & Co alongside the Infratil directors are providing evidence of their business and economic analysis skills.

When you reflect on how hard it is to find genuinely fair or discounted assets to invest in, read this paragraph from the report for a second time:

'The market continues to value assets in the digital infrastructure and renewables sectors at significant premiums to Infratil's carrying values. We expect to see a growing awareness that healthcare assets are also becoming the next set of premium infrastructure assets'.

Then, in a world of lower income, be pleased about companies who can make statements like this:

'This approach provides our shareholders with a solid and sustainably rising dividend'.

And, for IFT bond holders, all bank debt has been repaid and the company is currently sitting on almost enough cash to repay all the bonds too! (Not that it will be doing so; it appreciates the long-term support of its bondholders).

You are looking at a company (investor) that is well invested (asset type) and under-leveraged (low debts) and thus has plenty of capacity to take advantage of new opportunities, and to do so very quickly giving it an advantage over many competitors.

Evergrande – The problem that has been developing in Chinese property development businesses has not gone away.

It may become one of the big influences for investors to consider throughout 2022.

Evergrande continues to try and sell some assets to downsize and meet financial obligations but it is quite the tightrope walk and it will need additional equity in my view.

Raising new equity when you are in deep distress is clearly the worst possible time (highest risk) to ask investors to invest more money.

In its biannual financial stability report the US Federal Reserve has made a point of commenting on the potential for Chinese property development business risks to reach the US economy, in a disruptive fashion.

If it disrupts the US, it will be disruptive for all of us.

I don't expect a major moment of distress this side of the new year because Xi Jinping is right in the middle of pressing his case to be 'leader for life' and he won't want major failures occurring during the lobbying.

The impression one gets from the media is that Xi will be successful. However, it is my view that if he is, it will be a failure for China.

A country and its population evolve and so too must its governance. It is egotistical to believe otherwise, and thus not in the best interests of the nation.

Governance of the people, by the people, for the people is just as true in communist China as it is in democracies around the world.

These issues (Evergrande, Xi Jinping, US Federal Reserve) have more influence on you, as an investor in New Zealand, than most of the policy issues debated by our local politicians.

EVER THE OPTIMIST

Have I recorded the new Free Trade Agreement with UK here?

Or have I been distracted by the ongoing success of Rocket Lab and the recent success of Allbirds (shoe company that began in Wellington and is now listed on the American share market)?

Given the disturbances with China, and the lack of diversity in our trading volumes, we need more increased trade agreements like this recent one with the UK.

Maybe more trading diversity will happen as the rest of the world questions aspects of their dominant associations with China.

ETO II

Qantas has confirmed just how willing a population is to travel again, experiencing a surge in bookings as soon as the Australian government approved unrestricted travel for its citizens.

Air NZ will be super keen to see New Zealand make the same changes to free up movement across the border.

 

ETO III – Vaccinations

I'll stop using this data series at the end of 2021.

It has served its purpose which was to track what I thought was one of the two most important influences on your investment decisions this year (impact on economic activity). The second important influence was central bank handling of the supply and cost of money (interest rates).

With many developed nations passing 75% of total population vaccinated, which will rise with approvals for the 5-12 years of age cohort, we are nearly at the exit of the tunnel in terms of control and confidence in forward planning.

Further, new and highly effective Covid19 treatment options are emerging to help reduce the pressure placed on the health system.

NZ 1st Jab: 3,793,380 = 76% (total population) 90% (>12 years of age)

NZ 2nd Jab: 3,403706 = 68% (total population) 81% (>12 years of age)

The young in NZ deserve applause, bringing their vaccination rates up far more quickly than most other age groups. Having been asked to wait until late September they are already at 85% first jab.

I dislike the media focus on the Maori subset. Their most senior, and respected (50+ years) are very highly vaccinated. A logical display of family (whanau) respect and the young will soon catch up.

We are doing well with our vaccination programme, but we are still only 37th on Bloomberg's global list.

Take a look at it if you're contemplating safe places for your first international trip.

https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/

https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-data-and-statistics/covid-19-vaccine-data#age

Vaccination doses delivered – 7.49 billion jabs

Active Cases – 19.1 million (increase)

Daily rate of new cases – 529,000 (increase)

People in serious condition* – 77,000 (stable)

Daily Deaths (Covid related) – 7,700 (increase)

*Greatest impact on health services.

Investment Opportunities

Vector – has launched its offer of up to $300 million senior bonds (VCT100) with a 6-year term (maturing 26 November 2027).

We estimate an interest rate of between 3.50% - 3.60% for this new bond offer, based on today's benchmark rates.

This offer is fast moving (as they all are now), will be booked by contract note (a good thing, as it removes the old cumbersome application forms).

Clients pay brokerage at our normal rates on transactions.

Clients wishing to participate in this offer can contact us to request a firm allocation, no later than 10am on Thursday 18 November.

Contact Energy – Successfully issued $225 million of its new subordinated bond (CEN060) with an initial interest rate of 4.33% until 2026.

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

Auckland Airport – Successfully issued $150 million of its new senior bond (AIA240), with a 5-year term and an interest rate set at 3.29%.

Again, thank you to all who participated in this popular offer through Chris Lee & Partners.

Don't shut down for Christmas just yet, there may yet be one or two more investment offers to consider.

TRAVEL

Kevin will be in Christchurch on 24 November.

Edward will be in the Wairarapa on 24 November.

Johnny will be in Christchurch on 7 December – this will be the final trip to Christchurch for the year.

Any client wishing to arrange a meeting is welcome to contact the office.

Michael Warrington 

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Market News 8 November 2021

Kevin writes:

ESG (Environmental, Social and Corporate Governance)is a term used in capital markets to evaluate a firm’s collective conscientiousness for social and environmental factors and is a form of corporate social credit score.

ESG evaluation includes issues like climate change, waste, pollution, human rights, modern slavery, working conditions, bribery and corruption, executive pay, board diversity etc.

Typically, companies involved in tobacco, weapons, firearms, fossil fuels etc would be taboo from an ESG investment perspective, even if they were actually well governed in other regards.

Responsible investing is an investment process that applies ESG data to investment decision making although how investment managers practice responsible investment seems to vary widely.

I think most people support investment philosophies that deliver positive environmental and social outcomes but are all investment managers and product providers practising what they preach or simply using the ESG label for marketing purposes to gain more customers themselves?

ESG claims made by responsible investment managers are coming under increased scrutiny and while most are publicly disclosing their investment policies less than half disclose their actual portfolio holdings making genuine scrutiny rather difficult.

Responsible investment using ESG data doesn’t require investment in specific products or sectors and leaves a lot of discretion with the investment managers. Better measurement is coming, but it is proving slow to arrive, which delays real tension on climate-related performance improvement.

I am as environmentally conscious as the next person but am unimpressed by fund managers and product providers (Green bonds, Sustainability bonds) who use labels to leverage environmental sentiment for marketing purposes and commercial benefit.

Companies are set up to make profits and reward owners and where people are managing and spending other people’s money they have a fiduciary obligation to focus on economic value, not social value.

When the system is structured to maximise profits and there’s no-one actually validating what it means to be green or sustainable, then every company and investment manager is naturally going to say they’re doing it.

It is going to be a tight line to walk between these objectives (financial and environmental).

_ _ _ _ _ _ _ _ _ _

Interest rates on new-issue bonds have perked up a bit with Kiwibank and now Contact Energy offering rates in the mid-to-high 4%s for subordinated bonds. Further upside seems likely.

Wholesale interest rates (swap rates), the benchmark rates for both borrowing and investing, have increased sharply in recent months on the back of rising inflation data, albeit from extremely low levels.

Rates for 1-year term deposits are now approaching 2% and 5-year term deposit rates of 3.00% are now being offered by most of the major trading banks. It wasn’t that long ago deposit rates for all terms were under 1.00%.

Mortgage rates have also risen, with 1 and 2-year fixed rates not quite doubled from the lows but seeming to be headed that way.

On a $500k mortgage every 30 basis point increase adds about $30 per fortnight to the repayments or $400 - $500 per month on a 30-year table mortgage if rates go back to 6% or 7% as some market commentators are now predicting.

Bank economists believe the OCR, which heavily influences rates for terms out to 2 years, could make its way to 3.00% by mid-2023. It is currently set at 0.50%.

The last time the OCR was 2.00%, average 1-year mortgage rates were around 6%.

After enjoying fixed rates in the low 2%s for the past couple of years the prospect of mortgage rates 6%, or higher, will be a bit scary for some homeowners, particularly those not long in the market.

Until recently banks were being criticised for stress testing a borrower’s ability to service a loan at a theoretical 6.00% level. It’s looking rather appropriate now.

Recent data reported cost of living increases of 5% and wage inflation of 2% for the year ended September 2021.

If the current inflation was demand-driven with a growing economy, improved productivity and rising wages that would be healthy inflation and make things much more manageable for households and businesses in terms of debt servicing.

Unfortunately, this is not the case and most of the current inflation is being imported, driven by supply disruptions, higher shipping costs and rising prices for key commodities including food and crude oil.

Add increases to rates, rent, energy costs, insurances and other non-discretionary items, and many consumers and businesses are already up against it before factoring in higher debt servicing costs from rising interest rates.

Certainly, there will be pockets of workers, like in the construction sector, where labour and skill shortages have driven up wages but equally there are sectors struggling to survive, tourism and hospitality obvious examples.

Household debt in NZ has risen appreciably over the past few decades and is now high by global standards when measured against gross domestic product and household disposable income.

Much of the debt has been invested in residential property which, while driving up net household wealth, has left many mortgaged homeowners very vulnerable to rising interest rates.

Regardless, whether inflation is temporary or hangs around I don’t expect to see a big increase in defaulting mortgagors nor a big drop in house prices because I think the Reserve Bank will move very cautiously with interest rates for fear of tipping things up.

Consumer spending is the biggest component of the economy and, with non-discretionary expenses increasing rapidly, households and Covid-affected businesses simply couldn’t handle a big increase in debt servicing costs.

Apart from a small benefit on imported goods from a stronger currency, which has an equally negative impact on exporters, I don’t see how increasing interest rates is going to address our current global supply crunch inflationary problem other than dampen house prices and, with it, consumer confidence and spending.

Raising interest rates are not going to clear the backlogs in the ports but they will put the brake on capital expenditure in the economy at a time when its needed.

All the focus is on reining in the runaway housing market and while higher interest rates would likely see lower housing prices it would also mean fewer jobs and lower wage growth.

If the Government is serious about bringing down house prices it needs to address structural issues that influence the value of land, including planning and zoning restrictions, not expect the Reserve Bank to do it for them.

The Reserve Bank needs to look at the broader economy, much of which is really struggling, and forget about house prices, in my opinion.

The unemployment rate is extremely low at present, suggesting a thriving economy, but the figures are grossly distorted by our inability to import labour and the growing numbers of people who are either unemployable or simply don’t want to work.

Total hours worked would provide a better guide to the health of our labour market, not the unemployment rate.

The Reserve Bank will be very mindful of these issues and might have no choice but to let inflation run above its target range for the foreseeable future. I suspect this is what other countries will do.

Plenty of noise about higher rates, mostly from bank economists, will only produce modest increases in my opinion.

Ditto for the rest of the world.

One important benchmark, the yield on the US 10-year Treasuries is declining again.

_ _ _ _ _ _ _ _ _ _

Gold investors will be hoping that global Central Banks do sit on their hands in the face of rising inflation as this would push real interest rates lower, which is very positive for gold.

In the US, inflation is rising at its fastest rate in 30 years and it is the same story in Europe, the UK, Canada, Australia, NZ - everywhere in fact.

Politicians and central bank officials are trying to talk down inflation as transitionary and promoting a wait and see approach although pressure is mounting for them to act and tighten monetary policy before they get too far behind the curve.

What many believe, and I agree, is that Central Banks are going to find it much more difficult to exit unorthodox monetary policies than it was to enter them.

While inflation is growing, so is debt, particularly government and household debt, so tighter monetary policy is likely to be cosmetic in nature.

Leading global analysts believe that if Central Banks get serious about combatting price inflation and raise rates back to normal levels, a recession will be inevitable. I agree.

Gold has been trying to break through and hold above US$1800 an ounce for several months but keeps getting pushed back by the prospect of rising rates and a stronger US dollar which are both negative for the gold price.

Even at US$1800 an ounce, gold miners are still making very good margins and profits.

Between 2014 and 2019, when the gold price hovered between US$1050 and US$1350, it was tough going for mining companies and a lot either didn’t make it or sold out, and a lot of exploration was put on hold.

All-In Sustaining Cost (AISC – basically production costs) of US$1000 an ounce, the sector average, and a gold price of US$1100 – US$1200 an ounce simply didn’t work for many, particularly for the junior mining exploration companies who have no income and rely on regularly tapping their shareholders for working capital.

The big positive to come out of 5 years of low gold prices was to force the survivors to improve their operational efficiencies and cut costs to the bone and the result is a leaner, meaner and more resilient mining sector.

When the gold price raced past US$2000 an ounce last year, the producing miners, and their shareholders, had a field day as profits and share prices skyrocketed.

Unlike investing in products which track the price of gold, mining stocks provide leverage to the gold price.

If the cost to get gold out of the ground is consistently, say $1000 an ounce every dollar above, that is profit. When the gold price jumped from US$1200 an ounce to $2000 an ounce the extra $800 an ounce was all profit.

Despite the current gold price of around US$1800 an ounce still producing very healthy profits, a retreat in the gold price of only 10% from last year’s highs has seen most mining stocks shed up to 40% of their market values.

Rising interest rates are supposedly bad for gold, and therefore mining stocks, although history doesn’t support this theory. In fact, rising interest rates, rather than just talk, signals inflation is here and needs attending to and often triggers the next leg-up for the gold price.

What gold really likes is rising inflation, stagnant economic growth and interest rates falling behind the inflation curve as Central Banks fret over high debts levels and economic disruption.

That’s a real chance in my view.

 Investing in mining stocks can be very rewarding but it should be treated as highly speculative and, while it gives you leverage to the gold price, that works both ways.

Hope for the best but prepare for the worst is a sensible strategy.

_ _ _ _ _ _ _ _ _ _

Contact Energy has announced a minimum interest rate of 4.15% for its subordinated Capital Bond issue which opens today.

The Bond supports Contact’s S&P credit rating and will be assigned intermediate equity content (50%) by S&P for rating purposes. The bonds rank behind bank debt, senior bonds, US private placement notes and other unsubordinated creditors.

Although the Bonds have a 30-year maturity they lose all equity recognition with S&P after 10 years, (or 20 years before maturity), and would become expensive debt with limited benefits.

The interest rate on the Bonds resets every 5 years at the 5-year swap plus the margin (to be set 12 November) plus a 0.25% Step-up Margin.

Contact has the option of repaying the Bonds on the First Reset date (19 November 2026) or running an Election Process which involves offering new conditions, including a new margin and interest rate, for the next 5 years.

Investors will have the option of either accepting the new conditions or rejecting them.

Those Bondholders who reject the new conditions will have their bonds repurchased by Contact unless the Election Process is unsuccessful in which case the bonds will remain on issue on the current terms and will reset for a further 5 years as described above, including a Step-up Margin.

The Product Disclosure Statement and Indicative Terms Sheet can be found on our website under Current Investments.

If you would like to join our list for the Contact bond please advise us of your required allocation no later than Thursday, 5pm. Thank you.

Advised clients are welcome to contact us for an investment opinion.

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Auckland Airport has announced the margin on its new 5-year senior bond which indicates an interest rate above 3.20%.

If you would like an allocation of the Auckland Airport bonds, please contact Penelope no later than this Wednesday, 10 November by 9am.

_ _ _ _ _ _ _ _ _

Vector has announced a new six-year senior bond. Vector Limited is an electricity and gas distribution company in Auckland. The offer will be seeking to raise up to $300 million and will have a credit rating of BBB. At this stage the interest rate has not been set but based on comparable market information it is likely to offer an interest rate of around 3.50%. Full details of the offer will be released in the week commencing 15 November 2021. If you wish to be pencilled in on our list for this offer please contact us promptly, with an amount and the CSN you wish to use, and we will contact you to confirm your investment intention once more details are known.

_ _ _ _ _ _ _ _ _ _

 

Travel

Kevin will be in Christchurch on 24 November if you would like an appointment.

Edward will be in The Wairarapa on 24 November if you would like an appointment.

Kevin Gloag

Chris Lee & Partners

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Market News 1 November 2021

For the purpose of informing clients:

Chris Lee & Partners reports that all staff are fully vaccinated (SARS-CoV-2).

We have confirmed our ability to serve clients remotely, so whenever a person (staff or client) is unwell we will be pleased to serve via phone and/or email.

We will monitor any new government preferences and policy obligations faced by our business, before making any decision about any vaccination passport conditions (meetings in person).

INVESTMENT OPINION

West Coast Research – It was time for another research tour, and the West Coast of the South Island seemed to be the most in need of some cash from the North (and the whitebait season had begun – Ed).

Yes, many areas looked well short of a ‘financial quorum’, let alone at capacity, but even without Aucklanders and international tourists the best businesses knew how to operate well; closing times were ignored if customers were in the shop.

Sympathy is unquestionably deserved given the current government policy settings and reduction of local travelers, but the best didn’t want sympathy, they simply wanted a chance to do some business.

They spoke with refreshing honesty about how difficult it was, but how helpful everyone involved with their business was being, especially staff and suppliers. (bankers not so much).

Well managed businesses have often been improving their facilities (maintenance for the most part) during the low demand. Several outdoor activities appeared to have been re-surfacing tracks and cleaning equipment, getting ready for the hoped return of greater numbers in 2022.

I’ll not turn this into a travel blog, or marketing effort, other than to say there are some excellent outdoor activities to pursue and the two best things you can do for yourself if you plan to head down here are:

Come soon because there are so few people down here at present who might otherwise block your access to certain things; and

Stay 2-3 sleeps in each place to ensure you have sufficient time to pursue the many pleasures in each area.

OK, just one favourite then – the West Coast Cycle Trail and the part that follows the Kaniere water race down to the power station at the base (Trustpower). It is remarkable to know that the race was dug by hand to support gold mining before finding a new use in generating electricity.

Actually, a second one deserves a plug (they all do – Ed) – Waiatoto River Safaris, is one of the best jet boat adventures I have been on, and it included hanging out with some whitebaiters and listening to a few yarns. It was refreshing to be so far removed from current politics (other than the person on DoC watch!)

We were told that US demand for possum products (fur and hide) had increased significantly and helpfully driven the price higher too, especially for dark pelts. So, a virtuous situation has developed; possum trappers are earning much more, and are thus incentivised to catch many more and the Rata trees are shining red again. I have long thought that the government could make good use of its conservation budget by making some minimum payment to possum trappers, regardless of market conditions for selling the animal’s pelt.

South Westland Kiwi numbers are expanding (Okarito and Haast sub-species), but it would be nice to also develop a market for stoat pelts!

Small business owners are working hard to meet the Covid imposed restrictions on their businesses, but you can just tell they are very keen to reach the highly vaccinated point of less restrictions.

They just don’t talk about the subject of Covid much, which is refreshing, and they certainly don’t talk about traffic lights. Thinking of ‘traffic lights’, I don’t think I saw one at all during our trip!

Transit (Waka Kotahi), may I respectfully suggest that you make a little more effort to rebuild Franz Josef’s bridge across the Waiho River.  Surely now is the time, both with low traffic volumes and in an area that is well short on spending in the community.

The army built temporary bridge is impressive, but a permanent bridge is surely required, and the town would appreciate a couple of years of revenue from additional residents.

Now’s the time. There are plenty of accommodation options for the workers.

Lastly, but importantly, the Chorus delivery of fibre to Haast is now but a few short kilometers away. They appear to have trenched from Hawea, to Makarora and on over the pass to within sight of Haast, with road sealers applying finishing touches.

The West Coast may be small in terms of business numbers but they unquestionably need fibre based internet and will benefit hugely from it.

One small business that we spoke to had, until recently, been reliant on driving up to the neighbour with the most reliable dial up internet (undamaged copper line) to arrange transactions.

Elon Musk’s Starlink internet service has also reached some, bumping local provider Farmside off its perch as the best rural service. Between Starlink and Chorus, it looks like the West Coast will soon be ‘fully lit’ with high speed internet.

Maybe this will help them to attract a few more of today’s ‘remote’ workers, especially those who like to be truly remote!

So, if you’ve never been to the West Coast, plan a trip. If you have been before, come again and find something you missed last time.

It may not look like the best investment opportunity in the world; or is it? Where else can you buy good assets at discounted prices?

Post Script: Queenstown is displaying some good leadership witnessed by the many infrastructure projects that are underway during the ‘low Covid season’.

There’s plenty of vehicles around, which seem to be contractors, because the shops are very quiet. Accommodation and food outlets will be gaining some cash flow from these many contractors temporarily in town.

Queenstown will be ready for whatever tourist flow occurs next.

VIX – Surrounded by the latest series of scary headlines, not least of all the Evergrande collapse, why is the financial markets global volatility index so calm, sitting at a very modest 15?

The pre-Covid markets appear to have averaged below 15, ranging 10-20, but Covid threw it up to 65!

Like all financial markets charts, you can see continued volatility, but declining like a mountain range, to the foothills of the current level of 15.

The world of finance is progressively seeing through the remaining impacts of Covid and confidence is rising that markets are correctly pricing risks.

You have been learning from me the ever-important rule of not betting against the central bank. However, it is also important not to boldly bet against the collective wisdom of the market, which is deep and broad in its reasoning capacity.

Coincidental data – The US share market is again setting new all time highs, based on good earnings, which is another data point not to ignore.

Fed Says – Speaking of monitoring central bank opinions to abide by: The US Federal Reserve is not yet ready to increase US interest rates (a global influence).

They are however ready to reduce the central bank’s purchases of government bonds (US Treasuries).

Federal Reserve Chair Jerome Powell thinks the tangled supply chains and product shortages are driving inflation (supply shock, not demand driven) and will likely keep inflation elevated well into next year, but clearly he hopes these pressures will settle thereafter.

You know that I don’t view ‘hope’ as a strategy and ‘thereafter’ may not mean inflation conditions settle until 2023 so patience will be firmly tested in the months ahead of us.

Powell is not (yet) prepared to dampen employment and economic activity although he conceded that a rate rise may be necessary during 2022 if bottlenecks continue for too long.

This focus on employment is not by chance, being the preference of President Joe Biden placing workers at the centre of all government policy.

It is beginning to look like a race to achieve full employment before the ‘temporary’ inflation pressure become unbearable (and locked in – Ed).

The political and financial market tension applied to Jerome Powell will become intense as 2022 progresses.

None of this pressure on central banks changes my view that they will hold interest rates below apparent inflation for the foreseeable future and thus they’ll not remove the sea anchor attached to fixed interest asset class returns.

Incongruous – The headline that gave me most reason to pause last week was ‘Elon Musk is worth more than Exxon Mobil’.

For a man who shoots from the lip to be perceived as providing more business value than one of the world’s largest energy providers, carefully governed, is difficult to reconcile.

I don’t doubt the global preference for electricity as an energy source over fossil fuels, but I am inclined to believe that Exxon Mobil will ultimately play a far greater role in the evolution of energy use than Musk or Tesla.

Musk’s moves in electric vehicles and battery storage unquestionably meet with the preference to reduce fossil fuel use, but his inappropriate involvement in Bitcoin using Tesla’s capital links him to one of the greatest wastes of energy on the planet (Bitcoin mining), and it’s the world’s gross scale of energy use (regardless of source) that is the greatest driver of harm to the climate.

It is what it is.

EVER THE OPTIMIST

The new Trade Agreement with the UK is being celebrated by all in the summaries I have read.

All trade is good.

Free trade is excellent.

ETO II

Fonterra, and a variety of forecasters are expecting to match our highest milk pay out in the current year. ($8.40 mid point)

Financial gains, such as this, are so important to New Zealand at a time when we are spending so much more than we are earning.

ETO III – Vaccinations

NZ 1st Jab: 3,266,697 = 74% (total population) 88% (>12 years of age)

NZ 2nd Jab: 1,865,831 = 63% (total population) 75% (>12 years of age)

Excellent news – The US Food & Drug Administration (FDA) has approved the use of the Pfizer BioNTech vaccine for children aged 5-12 years. (I think I read this is a smaller dose for similar efficacy)

https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/

https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-data-and-statistics/covid-19-vaccine-data#age

Vaccination doses delivered – 7.0 billion jabs (volume = 45.5% fully vaccinated)

Active Cases – 18.2 million (increase)

Daily rate of new cases – 425,000 (increase)

People in serious condition* – 74,000 (decrease, even though ‘Active’ is increasing)

Daily Deaths (Covid related) – 7,000 (increase)

*Greatest impact on health services.

Investment Opportunities

Contact Energy – has announced an offer of subordinated Capital Bonds to repay its maturing $150m domestic green bonds, which mature on 15 November, and to fund geothermal development.

The bonds will be assigned intermediate equity content (50%) by S&P for rating purposes and will rank behind bank debt, senior bonds, US private placement notes and other unsubordinated creditors.

The bonds have a 30 year maturity but can be redeemed after 5 years. At Year 10 all equity recognition is lost and S&P treats Bonds as 100% debt in Contact’s financial ratios.

This would be high cost debt with limited benefits so redemption after 5 years or an Election Process offering new terms seems very likely.

Because of the subordinated nature of these bonds we would expect an interest rate of above 4% for the first five years based on current benchmark rates.

The offer opens on Monday, 8 November, when indicative pricing will be announced, and closes on Friday 12 November.

The Product Disclosure Statement and Indicative Terms Sheet can be found on our website under Current Investments.

We have started a list for investors wanting to participate in this new offer. Please indicate your required allocation at the time of joining the list.

Auckland Airport – has announced an offer of  5-year senior bonds.

The offer opens on Monday, 8 November, when indicative pricing will be announced.

We anticipate an interest rate of around 3.00%.

We have started a list for investors wanting to participate in this new offer. Please indicate your required allocation at the time of joining the list.

TRAVEL

Any client wishing to arrange a meeting is welcome to contact the office.

Michael Warrington 

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