Chris Lee & Partners Ltd

Market News 25 October 2021

If you wondered why achieving global agreement on climate matters is difficult, Bloomberg reported that the following single sentence in the summary of the August 2021 IPCC report required unanimous approval, word by word, from 195 nations!

There is a near linear relationship between cumulative anthropogenic CO2 emissions and the global warming they cause.

I'd wager that the oxygen wasted, and carbon dioxide breathed out, debating this single sentence did more harm (delay and expense) than your average NZ dairy farmer over the same time frame.

INVESTMENT OPINION

Retail Sales – Judging by US data, and the risks of not actually finding the product that you want in December, investors in New Zealand's retailers should start watching sales data for September, October and November.

70% of US shoppers expected to have completed their Christmas shopping before December arrives.

Usually, the sales spike occurs in December, but they may not be possible this year.

Consumers, start your engines, and don't be waiting for deep discounts on price.

Aucklanders, hoping to rely on couriers for delivery should already be underway with their Christmas shopping.

Cash Flow Matters – Surely I have said this previously?

Regardless of market conditions, private equity investors continue to stalk businesses with the most reliable cash flows, hoping to buy them.

I thought owners of successful supermarkets never sold them, the cash flow and profit margins are too reliable, but surprisingly the owners of Morrison's supermarket in the UK have agreed to sell the business.

The buyer is, unsurprisingly, a US private equity fund.

They know the value of highly reliable cash flows and armed with the assistance of some deeply experienced people from the supermarket sector they will know where to invest new capital for modernising the business.

I don't know who is on the Morrison's share register but the evidence (to even be considering a sale) implies it is an example of a business that is still in family control (started in 1899 by William Morrison, then run by his son for 50 years) and the business is becoming short on capital for new investment needs.

At 122 years of age I'd guess the shares are now spread too widely, and none of the holders wish to invest new capital to improve the business? (they prefer to spend dividends on yachts and other such fun – Ed).

The same problem was experienced locally at Lion Breweries (then Campbell & Ehrenfried) before Doug Myers bought out smaller family interests to consolidate the ownership and move ahead into the Lion era. Had he not done so it seems likely to me that Lion Breweries would never have developed. (No Steinlager, No Peter Blake, no America's Cup win? – Ed)

The difference in Lion's case was an ambitious family member existed. Clearly there's no such family member shareholder in Morrison's supermarket company.

My opening point leads to my conclusion, that regardless of market conditions it is good to own businesses with high cash flows and reliable profit margins. Don't let them go easily.

Z Energy springs to mind.

Inflation - As the commentariat increase the volume about inflation and its many influences, which are for the most part truths, and predictions of sharp increases to interest rates, I'll offer an alternative thought.

Central banks will not increase interest rates to rest above inflation during 2022 and maybe not during 2023.

I remind you that most central banks declared over the past couple of years that they have moved strategy from pre-empting (inaccurately – Ed) forecast inflation and now intend to respond to actual inflation, after the event.

They have also said that they will be considering average inflation over extended periods of time, which means many quarters of data as a minimum.

Confidence in this new backward-looking strategy will last, until it doesn't!

However, you can be assured they will try it on during 2022, and maybe into 2023 if they are a chance of retaining regulatory control (financial and monetary stability).

If they seem to be losing control of the inflation data they will start highlighting the importance of full employment.

Lastly, if the inflation fight is mismanaged a little, central banks won't mind if asset prices rise a little further and thus make our debt ratios look a little more comfortable (asset price up, nominal debt stable); think Loan to Value Ratios (LVR).

This will not, of course, reduce the scale of the enormous debt on issue. (Until we sell the house to the grandchildren – Ed)

Conclusion – don't be expecting exciting real returns from the interest rate market during 2022 and 2023.

Repay? – Owners of the Tier 1 subordinated notes issued by ANZ (ANBHB) and Kiwibank (KCFHA) in 2015, who were anticipating possible repayment in 2020, should again be considering their reinvestment options for 2022.

The large demand profile for investing in last week's new Kiwibank perpetual preference shares (KWBHA) indicates to me that some KCFHA investors were pre-investing the funds that they expect to be repaid in the months ahead.

Those of you who followed closely the Reserve Bank's regulatory evolution for bank equity this year (too funny – Ed) will have seen that the rule changes have been viewed as a Regulatory Event by ANZ and Kiwibank and thus both expect to submit a request to the central bank for permission to repay ANBHB and KCFHA securities.

Without that approval ANBHB are heading for conversion into ordinary shares of ANZ bank and KCFHA can theoretically be perpetual.

It would be a nonsense for the RBNZ to deny repayment of KCFHA because the central bank has already (unhelpfully) declared that they do not respect KCFHA as equity on the bank's balance sheet; forcing ACC and NZ Super to invest more money in the bank.

After the successful completion of the Kiwibank perpetual preference share issue last week, the bank can easily evidence both an excess of Tier 1 equity on their balance sheet and a receptive market for providing such capital.

The ANZ will also confirm an excess of Tier 1 capital and ongoing equity support from its Australian parent. The ANZ can also confirm that the market is willing to support Tier 2 capital requirements based on its recent issue of $600 million of these securities.

Both ANZ and Kiwibank have lodged declarations that a Regulatory Event has occurred.

Both banks currently have an excess of Tier 1 and Tier 2 capital relative to regulatory obligations, and those of the immediate future.

Evidence exists that both banks can raise the necessary Tier 1 and Tier 2 capital from shareholders, retained earnings and market issued securities.

The RBNZ does not like the old generation of Tier 1 securities.

I think the probability of repayment is reasonably clear, and in ANZ's case action needs to be taken prior to May 2022.

Factor it into your planning.

China – The ongoing clampdown on business freedoms by President Xi has resulted in Microsoft reducing its activities in China; they will shut down LinkedIn in the country.

They politely use the euphemism 'challenging operating environment' as the reason for the closure.

Microsoft hopes to replace it with a simpler job seeking service branded 'InJobs'. Hopefully Xi won't mind them attempting to help people find employment.

For those who don't recall it, around 2010 Facebook and Twitter were banned in China and Google withdrew in response to hacking and censorship issues.

De-globalisation continues, sadly.

Evergrande – Whilst I am 'in China' the latest update on Evergande's (property developer + more) financial collapse doesn't inspire new confidence, but it does make it clear that the Chinese government is at the wheel.

From a Western perspective it is odd that creditors and shareholders have not heard from the Chairman of Evergande during a period of such duress, but speaking out is difficult if you are in a 'little room with a padlock' (metaphor if you wish) somewhere in China and confirms to me that the government is issuing all instructions.

CEO Xia Haijun has been dispatched to Hong Kong to discuss 'asset sales, restructuring and re-financing options', under code name 'Project HELP'.

This does not mean that creditors will be repaid, especially not international creditors, but it does mean to me that a sequence of dominoes will not be triggered that ends in collapse.

If international creditors are left out in the cold, relative to parri passu lenders within China and Hong Kong (same same – Ed) it will harm the pricing of many other settlement agreements between China and the rest of the world (think Import and Export payments).

Yet more evidence of de-globalisation.

COP 26 – I don't think James Shaw is going to enjoy attending COP26.

It is hard enough to get nations to agree on global matters at the best of times.

Politically, we are not in the best of times around the globe at present.

An enormous part of reducing the world's impact on the climate is a need to reduce gross energy consumption levels.

Energy consumption levels seem to be growing faster than the rate of new renewable energy generation, so it is impossible to reduce the use of fossil fuel for energy generation, without asking people to reduce their well-being.

That's not going to happen, and frankly no political leader will support increased poverty risk.

The current spike higher for pricing of coal, oil and gas is encouraging more mining, not less.

Even if President Xi agrees to attend COP26 he will make no promises that James Shaw will want to hear.

China, and many other nations, are currently in the grip of energy shortages. They will solve this via any means, including increased use of fossil fuel resources. China is already trying to re-open Mongolian coal mines to avoid backing down in their argument with Australia.

Global agreement?

The chance is nil, sadly.

Meanwhile, here in NZ, we should continue to pursue strategies for improvement because increasingly the world is trying to influence trade agreements by linking them to carbon priced emission reductions.

As a minnow, New Zealand is a price taker, not maker, so we must be one of the best environmental performers to gain ''handshakes'' in trade with more dominant nations.

I am sure there is merit in being 'in the room' at COP26 but I genuinely think our government will achieve more by staying and delivering effective policy here.

EVER THE OPTIMIST

As difficult as 2020 and 2021 have been, credit rating agency Fitch Ratings has returned Australia to its top shelf AAA (neutral) credit rating status.

Fitch says the upgrade reflects its confidence in the Australian economy in the aftermath of COVID-19-induced economic woes and that lockdowns in New South Wales and Victoria are likely to simply delay Australia's economic recovery rather than expunge it.

Australia is a long-term ally of New Zealand, and we would do well if we manage to return to a position where they were also our largest trading partner.

ETO II

This may help to explain a 'why', for the news above:

The NSW government will approve five days paid leave (over and above holidays) for public servants to go and assist the state's growers with the coming harvest.

Ignore the fact that this might confirm the NSW government is over-resourced (!!) and focus on the merit of the action.

ETO II – Vaccinations

NZ 1st Jab: 3,266,697 = 72% (total population) 85.4% (>12 years of age)

NZ 2nd Jab: 1,865,831 = 57% (total population) 67.4% (>12 years of age)

This vaccination theme saw me rummaging around until I found an old Plunket booklet buried deep in the 'file drawer' at home. I was trying to remind myself how common the health action was.

Sure enough, before I knew the sun set in the West, and long before adventurous travel required even more vaccinations, I had been a pin cushion for the following:

Tetanus, Diphtheria (with a silent 'h' no less), Pertussis (Whooping Cough), Influenza, Rotavirus, Hepatitis B, Polio, Measles, Mumps, Rubella, Pneumococcal disease and I think I was relieved of one needle and taken to a 'Chicken Pox' party instead.

We are making a big deal about the Covid19 vaccine not because it statistically causes more damage than other illnesses, but because we are trying to vaccinate 100% of a population inside 12 months, not just the 1.10% born each calendar year who are guided by mothers and doctors with early life health decisions.

Parents will understand the progressive loss of control of child's decision making from about 7 years of age! It's no wonder vaccinating an entire population is so difficult.

The new traffic light system announced by Government last Friday finally clarifies the vaccination target required to end the current alert level system although localized lockdowns would still be in the toolkit.

As expected, there are strong differences built in for those who are vaccinated and those who are not.

So the target of 90% fully vaccinated is set, the ground rules for each light clearly spelt out (Red, Orange, Green) the only unknown now is when. Reaching 90% fully vaccinated is going to be a challenge for many areas.

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 – 6.75 billion jabs (volume = 44% fully vaccinated)

Active Cases – 17.7 million (decrease)

Daily rate of new cases – 400,000 (unchanged) moving average

People in serious condition – 77,000 (decrease)

Daily Deaths (Covid related) – 6,500 (unchanged) moving average

Investment Opportunities

Christchurch City Holdings (CCH) – has announced they intend to offer a new 5-year bond next week.

As a strong, council controlled entity we expect an interest rate close to 2.70%.

We have a list open for investors wishing to participate in this bond offer which closes at 12pm on Thursday 28 October.

Contact Energy (CEN) – has announced it is considering an offer of green Capital Bonds.

No indicative maturity date or interest rate has been provided as yet with more details expected later this week.

We have a list open for investors wishing to participate in this bond offer.

Kiwibank – successfully issued $250 million of Perpetual Preference Shares last week to add to the Tier 1 capital of the bank.

The interest rate was set for the period to 2026 at 4.93% helped higher by the large CPI reading immediately prior to the issue.

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

TRAVEL

David Colman will be in New Plymouth on November 1.

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

Michael Warrington 

Chris Lee & Partners

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Market News 18 October 2021

I like it when people can put a humorous spin on otherwise serious matters, so I enjoyed Roger Partridge's (NZ Initiative) conclusion that Covid lockdowns have proved that our roading network is suitable only for lockdown level 3 traffic.

INVESTMENT OPINION

Inflation – Today's inflation announcement for the September quarter of +2.20% (Annual now +4.90%) will add more energy to the public debate.

Financial markets analysts have been debating inflation risks for months now, and guessing at transitional or permanent nature of it, however, the markets were collectively surprised by this data witnessed by interest rates increasing by about 0.15%.

The clearest position you can take, in my view, is an ongoing sequence of 0.25% increases to the Official Cash Rate in NZ, on up toward 2.00% (estimated neutral).

This will not be seen as disappointing news by fixed interest investors.

No – I seem to be saying 'no' to client enquiry more often at present, which warrants explanation because we surely do enjoy receiving new clients and helping all clients to reach 'yes'.

My more frequent use of 'no' as a response seems to relate to me being asked – 'how about this deal?' as each new opportunity glides past investors, and there have been many deals come to market over the past 12 weeks.

The two biggest drivers are:

The quality of client portfolios, being managed by them with ever improving skill level, leaving less and less gaps for alterations (the portfolio matches asset allocation rules); and

Value. Every new investment opportunity (risk) seems to be priced (reward) close to perfection (always an improbable outcome).

I am pleased that our clients' portfolios do not have gaping 'holes' in them because it relieves them from any pressure to rush and accept 'any old investment' to populate an incomplete portfolio.

By way of example, with all due respect, Vital Healthcare Properties (VHP) latest placement of more shares to raise money and buy yet another building is being done at a share price matching the Net Tangible Asset value (no discount) and the higher asset values are being influenced by very low capitalisation rates (based off very low interest rates).

It may well be a good building for VHP to purchase, but other than diversity it doesn't appear to add financial value other than provide even more fees to the external manager.

Then we have complex bonds with low credit margins and lower real returns than were available for investment grade senior bonds within my 'recent' memory.

I'm not trying to deny that the offerings are being made 'at market pricing' (witness the successful completion of deals), however, remind yourself that for the first time in a long, long time we witnessed a deal failure; that of Stride Property's spin off of Fabric (CBD buildings).

Fabric's failure to launch a pretty simple transaction should hold your attention for longer than just the two weeks between the open and close of this idea, or the time it takes to read Market News.

You may not know all the background details, but you do know that the market rejected either the risk, the reward, or both. In my view the risk was simple to understand, so it was the reward that tripped the deal up.

Given that most people find it harder to say NO, than YES, now would be a good time to brush up on use of the former.

Yes – By extension from above, why are the directors of Z Energy so keen to say yes?

I think the AMPOL takeover offer should be much harder to complete than the directors are making it seem.

The pending independent valuation report will be very useful to either put me in my place (expecting a higher bid) or putting the ZEL directors in their place (to show more respect for their work, and value added).

Interestingly ACC who held a blocking stake of 12% has recently sold 5% of its holding implying that it is either satisfied with the price or keen to move on. Not a good look from an environmental perspective maybe? (ESG)

Government Finances – Last week the government reported its latest set of Crown accounts and boldly (deceptively – Ed) lined the red carpet with trumpets and horns.

The accounts are $11 billion better than expected they said.

Tax revenue is up, and spending is down they said, whilst failing to report clearly that these optimistic announcements were relativities, not absolutes.

I doubt the Financial Markets Authority would tolerate such misleading nonsense.

$11 billion better than forecast was still a $4.6 billion fiscal deficit.

Deficits happens at times (being in overdraft) but this huge increase in long term government debt is not a sign of financial strength, especially when the public was simultaneously increasing private debts.

Tax revenue was higher than expected. Well, so it jolly well should be if you inject billions of dollars into consumers' hands.

Spending was down. Nonsense.

Then, the worst nonsensical, or unhelpful, item of all – ''Crown net worth increased by 37%''

The lion's share of this increase in the value was the government housing portfolio.

Even if it is true for an accountant, it is not a success story for the government to claim financial progress from higher valuations on houses that it owns.

It is a large font, underlined, headline of policy failure!

We, New Zealand, are not winning financially until the government can return to a balanced budget, and possibly modest surpluses, funded by trade surpluses (scarcely ever happened in my lifetime!).

For a modicum of balance, governments, blue and red, are to be credited with the decisions to ensure ACC had sufficient assets to match liabilities, and the establishment of the NZ Superannuation Fund (to fund future liabilities); their investment portfolios enjoyed significant increases in scale, through performance (mostly invested outside NZ! – Ed)

I know it's easy to shoot arrows from the sidelines, but it doesn't help the public if parliament issues such misleading headlines about the country's financial position.

Energy – 2021 has proved that the only way the world will meet its targets for reducing harm to the climate is if we lead people toward less consumption.

The BP executive who protested 'not on my watch' should we remove fossil fuels until we can at least replace its energy supply from renewable sources was, and is, correct; there is too great a connection between increased energy supply and declines in poverty.

Some combination of Covid disruption, environmental preferences and increased consumption has made it impossible to aggressively remove old forms of energy supply.

The cost of oversupplying the world's energy needs, solely with renewable generation, is proving very difficult regardless of whether it is private or public money as the driver.

We would witness one measure of success if we reach the point of observing Joule's used per capita stabilizing and then declining.

As much fun as the crypto currency era has been, we could reduce the population's use of energy by an enormous proportion if we ''switched this unproductive service off''.

The global surge in the price of energy should be used by all consumers to discover what proportion of their energy use is discretionary, then contemplate strategies for elements of that demand profile that can be removed permanently.

Businesses that can achieve this (and thus report to clients and investors) will be successful in the years ahead as energy regulation costs rise.

In the past businesses became progressively better at understanding their nominal energy use, because of the on or off cost situation; now those businesses need to discover what marginal energy consumption can be permanently removed.

What can I turn off at home?

What will I turn off at home?

You can be sure that governments of the world will not fight against the higher energy prices. Putin is loving the revenue, James Shaw loves that it encourages less consumption, Grant Robertson loves the GST, private companies love the potential return on capital.

No government wants to explain the lights going out and dinner going cold.

No government wants an increase in poverty pinned to their brand.

Energy businesses are an essential service, and always will be, and coal won't stop being used as a resource as quickly as political figures may wish.

Tiwai Point – Speaking of energy options.

The music may have stopped but the dancers have not left the room.

Rio Tinto's new Chief Executive Officer has met with our Prime Minister and the wording is very commercial in that it leaves the door open for the possibility that Rio might continue to operate the Tiwai smelter beyond 2024.

Certainly, the high prices for Aluminium today, if maintained, would justify a continuation. As might any penalties Rio suffer through fossil fuel sourced electricity once Australia gets around to developing an emissions trading scheme.

I'm reasonably sure the Prime Minister, and Meridian Energy, will have retained our Market News item from 2020 when we were disappointed that NZ continued to discount electricity for the sole benefit of an Australian corporate entity, so they'll view my current stance as unsurprising.

Finish the upgrades to Transpower's network (Roxburgh to Benmore and Cook Strait poles) so we can shift Manapouri's electricity further North at a better market price and to a local audience.

Then, any negotiation with Rio Tinto will set an electricity price based on the marginal cost of removing such renewable power from NZ based consumers (private and commercial) at new 'Upper South island', or 'Lower North island' pricing (higher than 'Lower South island' has been in the past).

In the latest negotiation about possible closure, Rio gave up on its price until 2030 of $50 per MWh and accepted an offer of $35 per MWh until 2024.

A rough average wholesale price over the past 3-4 years was $100 per MWh! (Residential customers are paying more like $175-200).

At the very least, Meridian should charge Rio $57.50 per MWh per annum beyond 2024 being the difference between the old contract of 9 years at $50 relative to the 3 years at $35.

However, even $57.50 is well below reality because if Rio comes back, it will be on the back foot, hence my view that the opportunity cost for MEL (and Contact Energy) should now be the marginal sale price further North (let's call it $100).

If Rio Tinto rejects such as price, so be it, I actually want them to leave town and for NZ to make better economic use of the renewable energy supply. It's certainly a better outcome, by many multiples, than building storage capacity at Lake Onslow for additional generation. (and I don't need an $11m fee for that opinion)

Even though the records show that Rio has met with ministers and the Prime Minister, in my opinion the only action our government needs to take is to enforce the clean-up of the Tiwai site.

Leave the supply and price negotiations to the market generators.

Debt Management – On the subject of using price to drive outcomes:

If public debts are on the rise (they are), then perhaps the RBNZ should increase the Official Cash Rate even further than planned to press private borrowers to reduce debts.

We certainly can't have both increasing their debt profile at the same time!

EVER THE OPTIMIST

Big Ups to Vodafone for handing $100 to all staff and encouraging them to get outside and 'pay it forward' by immediately spending it in the community.

Others (such as NZME) are doing the same thing.

Good on you all.

 

ETO II – Vaccinations

Excludes the Vaxathon weekend. (adds about 39,000 1st jab and 91,000 2nd jab)

NZ 1st Jab: 3,266,697 = 70% (total population) 83% (>12 years of age)

NZ 2nd Jab: 1,865,831 = 52% (total population) 62.0% (>12 years of age)

85% vaccination in NZ looks odds on now, but the clash between the ideal of 90% or a date for wider freedom of movement will be politically difficult to navigate.

Mandates and conditional access will clearly be required in NZ over the next 6-12 months to lift vaccination further (a better option than immunity via illness).

Light in the tunnel – the NZ government is addressing home isolation and other forms of testing to enable more movement both domestically and internationally.

Switching to a traffic light system for alerting New Zealanders about the risk in their immediate locations appeals to me. Replacing the now confusing four level system with decimal fractions!

Let's get moving and provide good rules and good information so the population can make good decisions from a position of self-responsibility.

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 – 6.66 billion jabs (volume = 43.3% fully vaccinated)

Active Cases – 17.8 million (decrease)

Daily rate of new cases – 400,000 (unchanged) moving average line

People in serious condition – 79,000 (decrease)

Daily Deaths (Covid related) – 6,500 (decrease) moving average line

By the way, I expect to remove this section completely from Market News in 2022. It will become yesterday's story from an investment risk perspective.

Investment Opportunities

Kiwibank – offer of Perpetual Preference Shares is open (closes this week).

These securities represent Tier 1 capital for the bank under the new regulatory rules for bank equity capital.

The interest rate will be defined this week but based on current market conditions (base rate and defined margin range) it is likely to fall in this range: 4.60%-4.85%.

We have a list for investors wishing to participate in this new offer, which closes at 5pm this Wednesday.

A research article and investment opinion on the Offer has been posted for advised clients.

Auckland Council– issued their new 6-year bond (20 October 2027) at 2.411% (NZX code AKC140).

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

If you missed out on this AKC140 bond offer and would like to add it to your portfolio please contact us as we can easily buy them for clients.

LGFA – The Local Government Funding Agency also issued some new bonds last week, including:

15 May 2028 maturity with a 2.25% interest rate; and

15 May 2035 maturity with a 3.00% interest rate.

LGFA now has a long series of bonds maturing across 12 different calendar years (something to suit everyone – Ed).

We can help you to buy LGFA bonds from the secondary market anytime.

Christchurch City Holdings (CCH) – has announced they intend to offer a new 5-year bond next week.

As a strong, council controlled entity we expect an interest rate close to that achieved on the recent Auckland Council offer (circa 2.40% last week).

We have a list open for investors wishing to participate in this bond offer.

TRAVEL

Johnny intends to be in Tauranga on October 21.

David Colman will be in New Plymouth on November 1.

Edward Lee will be in Wellington on November 12.

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

Michael Warrington 

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Market News 11 October 2021

This week's awesome news is that Captain James T. Kirk is going (back) to space.

I love how this blurs the lines between fantasy and reality.

I do hope that Elon Musk has the good grace to name the craft the Space-X Enterprise and to embroider LIVE LONG AND PROSPER on the space suits.

Ooh, and here's a Star Trek quote that seems entirely suitable for today:

Things are only impossible, until they are not.

INVESTMENT OPINION

OCR – The Official Cash Rate is finally on the move upward (+0.25% to 0.50%), toward some new 'neutral' setting, which not even the Reserve Bank is brave enough to define.

I don't blame them; It really is a 'who knows' interest rate level on a seascape that is unusually volatile at present, being bounced from all points of the compass, and is likely to remain so throughout 2022.

I suspect the Reserve Bank would like the regulatory targeted central inflation objective (of 2%) to hold true as a focal point, and to not experience inflation above that level for long periods of time.

Working from that assumption, I currently view an OCR at 2.00% as being a neutral target, being neither a positive nor negative real return for investors who park unused cash in the banking system.

Analysts, and the market 'distillery', currently conclude that the central bank will lift the OCR as far as 1.50% during 2022 (the 1-year benchmark rate is 1.05% today), but 'we' are happy to change that opinion tomorrow morning if different news comes to hand (when – Ed).

I agree with the analysts calling for another +0.25% in November, then February 2022 and I'll lobby for April and May 2022 also. Let's front load this tightening of monetary policy to create some scope for movement lower if (when – Ed) we run into our next moment of financial difficulty.

Four increases of +0.25% by May 2022 only lifts the OCR to 1.50% which is hardly laden with tension at a modest 0.50% below the 2.00% inflation target and the expectation of 4.00% Inflation during 2022.

In theory, inflation protected assets should still move forward in value even if the RBNZ is successful in increasing the OCR to 2.00% during 2022 and perhaps on into 2023.

The RBNZ stated that it was aware of businesses that are finding trading very difficult under Covid19 restrictions but in my view many such businesses wouldn't (or shouldn't) be carrying large proportions of debt (thinking food and entertainment sector).

I'd hope that these businesses were gaining support from central government fiscal spending schemes. The level of the OCR, and 0.25% increments of change is irrelevant to businesses under the most pressure driven by cash flow, not by the price of money.

I was pleased to see that this forward-looking institution (RBNZ) has started referring to Covid19 in endemic terms.

Use of the term pandemic remains appropriate during the rest of 2021 as we push vaccinations up to levels that give us more control of assisting the unwell, but to plan ahead requires leadership on best practice under endemic circumstances, albeit immediately post-pandemic.

Other central banks are progressively moving, or planning to move, interest rates higher. Poland has finally broken away from Euro-speak and increased its cash rate from 0.10% (where it sat for 9 years!) to 0.50%.

Good on them, but frankly I think they missed several opportunities to increase the interest rate by 0.10% increments and send ongoing signals to their market, without dramatic changes to the price of money.

Our central bank will be hoping that more countries do get on with the job of increasing interest rates, especially our major trading partners, so as to avoid disrupting the value of the NZ dollar (NZD) too much, which would happen if our interest rate change occurs faster than that of our trading partners.

We may have a small problem there though; Australia still claims no change until 2023-2024 and China looks a serious chance of needing to ease monetary policy again soon.

Financial markets were expecting last weeks +0.25% interest rate change in NZ and thus very little happened on financial markets and the value of the NZD did not change.

As for its other obligations, the Reserve Bank of NZ shouldn't have any trouble maintaining maximum sustainable employment because as the borders open, I suspect a rather large volume of skilled workers will depart in pursuit of higher wages and better conditions.

New Zealand will need every available person on the job!

Then, the housing focus; If the risk of net emigration comes to pass, it too may help ease the net housing supply crisis, but it would be a rather ignominious way of gaining control of that problem (losing our best people overseas).

To investors, what does the RBNZ action mean for you?

Well, you may recall one important rule: 'Don't fight the FED' (aka the central bank), so acknowledge their preference for increasing interest rates and adding some monetary tension back into the economy.

However, I don't think you should feel rushed to change your portfolio because at the moment the Reserve Bank has only donned the flyweight gloves and they are practicing every move in front of you prior to execution.

You will earn a little more on your call account, and short-term deposits, but not enough to get excited about.

Roll on November for the next increment.

Global Tax – The global overhaul (140 nations) of corporate taxation appears to have settled on a 'minimum corporate tax rate' of 15% and that taxes should be paid where they are earned.

136 countries, including Ireland, have agreed. Kenya, Nigeria, Pakistan and Sri Lanka have not yet signed.

The 'at least' wording was removed from the definition, which is helpful because using such imprecise language introduced a risk of future arbitrage between nations.

I don't know the corporate tax rates of all the world's developed nations (average is reported as being 23.50%), but I know this development caused the most angst for Ireland who host many of the world's largest companies and tax them at 12.50%.

Once Ireland increases its corporate tax rate to 15% there is surely a reasonable chance that companies like Google will quickly agree to pay 15% tax at point of sale.

On that point, the rollout is likely to take many years.

The 15% global minimum immediately forces nations like NZ, with our 28% corporate tax rate, to contemplate how we will manage the difference, especially between international and domestic companies?

I saw the New Zealand flag fluttering in the breeze behind the proud dignitaries after the signing, so we are clearly onboard with the development.

15% tax from Google is better than we currently collect.

Then we need to contemplate how to stop, say, F&P Healthcare from relocating to Ireland (anywhere else – Ed) to reduce its total tax obligations.

Is New Zealand per chance to debate making our corporate tax rate to 15% and compete globally, but retain the obligation to withhold 33% from the payouts to owners (imputation at 15%, Withholding Tax at 18%)?

If this leads companies to distribute less in dividend (more retained for growth), so only 15% tax reaches the government, the Minister of Revenue will need to return to the tax working groups efforts to address the next evolution of our tax base.

Personally, I think this leads to lower personal tax rates to support low-income levels and the offsetting introduction of land tax (for all) and estate taxes. We have to pay for spending some way.

During the years of accumulation, I'm sure I would have rejected estate taxes but an industry friend once asked me 'why do your beneficiaries need any more of your money than a sum that covers the cost of a home each and a little cash to improve their lifestyles?'

As a parent you have demonstrably provided for your children.

He wasn't proposing the evaporation of estate assets, just a meaningful tax rate on the value over and above a defined amount (evolving) that offered significant support to my beneficiaries.

If I wanted to make donations and control the reduction of my overall wealth, why wasn't I doing it whilst alive?

If I wanted to support children's debt reduction or business growth aspirations, why wasn't I doing it whilst they were at greatest financial risk (years ago)?

As it happens, I am seeing a lot more of this behaviour now; grandparents and parents passing equity to the next generation but doing it whilst the are alive to enjoy the process.

I have been inspired by those pre-emptively passing equity between the generations. Well-functioning family units and communities' matter.

Maybe most of us do not need the government to tell us what good behaviour looks like, but estate levies might encourage a little more to look in the right direction before their final days.

I have strayed a little from the point, which is that I think the global 15% corporate tax rate looks likely to force another round of tax think.

Technology – I have a renewed sympathy for those who are skeptical about technology's reliability after reading the news about Facebook's failure last week.

One of the world's largest technology service providers failed to operate, then managed to lock out its staff (swipe cards wouldn't work) and the fix was one that we all use once we reach the point of ultimate frustration – switch off, wait five minutes, switch on.

Seriously?

First, they leave the business vulnerable to such a failure; and

Second, they pay people enormous sums to switch off/switch on.

I happen to think the world would have been a better place if Facebook stayed offline for a year.

China – Evergrande has been joined by Fantasia in the category of 'failed Chinese property developers'.

Trading in shares of such companies is being halted.

The Chinese government appears to be taking steps to avoid a contagion that damages its public confidence, including those who have been buying properties, but I agree with the analysts who conclude they are unconcerned about financial losses for international investors, and the wealthy Chinese elite.

President Xi is set on a path of migrating wealth from what was becoming a 90:10 situation (10% own 90% of assets) to a desired setting of 55:45 (where only the members of the CCP are allowed to hold an excess!)

Financial markets are updating potential losses for international investors live (by the minute), so I don't expect an unmanageable contagion, however, the political concept of forcing a renewed balance in assets across the country (communism – Ed) implies a reasonably stark drop to China's potential economic growth rates.

Over the past 20 to 30 years the world has enjoyed, and then become dependent on, China's growth to support their own.

If China cools off, who will step into the economic breach?

EVER THE OPTIMIST

Did I say Captain Kirk is going back to space!

Following his return to earth Rocket Lab should invite him on to their board of directors as an honorary observer.

ETO II

Westpac is forecasting an $8.50 /KgMS for dairy farmers in the year ahead.

This is excellent news and is revenue that the country definitely needs.

Hug a farmer, regardless of what the government says!

ETO III – Vaccinations

NZ 1st Jab: 3,266,697 = 68% (total population) 80% (>12 years of age)

NZ 2nd Jab: 1,865,831 = 43% (total population) 50.0% (>12 years of age)

The sub-category numbers are becoming more promising when you assess them under the 'risk based' lens that led the rollout of New Zealand's vaccination programme.

65 years+ - 93% first jab, 85% 2nd jab.

I hope those with health-related fragilities have accepted medical advice and been vaccinated (if able).

I hope trusted people are helping the Maori communities, especially the young, to understand the science of the vaccination option.

I think the 'stick' (no Rhythm and Vines without vaccination – Ed) will help the younger folk to make progress.

Whilst I acknowledge freedom of choice, here's a comment that displays my bias (for the vaccine):

It would be nice if we could look back from 2022 and see that we managed the health risk well during 2020 when vaccines weren't an option, and then once they were, we set and achieved a target of 90%+ vaccination in short order to maintain our excellent health management programme.

At the beginning of 2021 I expressed a view that vaccinations and cheap money would be the biggest influences on investors risks and returns. It has been demonstrably true, and it continues to be.

The scale of the risk from the virus is declining (as vaccinations rise) enabling increased economic activity and more importantly an ability to smooth out the disruptive economic forces (think shipping at 10x pricing and 50% delivery!) and energy supply.

Energy disruption is a clear and present danger, of more influence on daily lives than our forward-looking climate goals.

Many of our environmental ambitions are dependent on being able to settle back into more efficient routines (community and business).

Keep your chin up, have confidence, because we are getting closer to the light.

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 – 6.45 billion jabs (volume = 42% fully vaccinated)

Active Cases – 18.0 million (decrease)

Daily rate of new cases – 400,000 (decrease)

People in serious condition – 84,000 (decrease)

Daily Deaths (Covid related) – 6,000 (decrease)

Daily death ratios throughout 2020 were about 5,000 per day. Fingers crossed that vaccination ratios will bring the current daily rate below the 5,000 level.

Investment Opportunities

Auckland Council – is offering a new 6-year bond this week (very strong borrower).

The interest rate should be a little above 2.00%.

Clients will pay brokerage on this transaction.

We have a list that investors seeking firm allocations are welcome to join.

Kiwibank – will be the first bank in NZ to issue a Tier 1 subordinated security under the new regulatory rules for bank equity capital.

They intend to issue a Perpetual Preference Share (PPS) next week. I have made the term perpetual bold intentionally, so it cannot be missed.

On occasion people have asked me what perpetual means in the investment world. I respond with the dictionary definition; it is possible that the securities will remain on issue forever.

Practically speaking, this hasn't been the market experience, but if repayment occurs it only does so for the benefit of the borrower or in this case the central bank (not for the investor).

Nonetheless, subordinated securities with complex terms and conditions offer higher returns for the additional risk, which will appeal to some.

Kiwibank is yet to define the returns and dates, but you can be reasonably assured they will pay the brokerage costs for the investment offer and based on similar securities in Australia we expect a return in excess of 4.00%.

We have started a list for investors wishing to participate in this new offer.

Kevin Gloag is preparing a research item for the offer, which will be placed on the login page of our website for those receiving a financial advice service from us.

2 Degrees IPO – This potential share float appears to have been postponed so it can discuss the concept of merging with Orcon to become a larger, combined, telecommunications sector offering.

This implies that any listing will not occur until 2022, so perhaps you can amuse yourselves over summer by throwing up suggestions for a new, merged, company brand name.

Orcon2, 2 Orci, 3 Degrees?

Z Energy – Directors have supported AMPOL's takeover offer to the extent that they have entered into a Scheme Implementation Agreement at a price of $3.78 plus a $0.05 dividend for the current year, and recommend that shareholders accept the offer.

I am a little surprised by the directors' enthusiasm.

If any other suiters are stalking such a high cashflow asset now's the time for them to show their hand.

TRAVEL

Johnny intends to be in Tauranga on October 21.

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

Michael Warrington 

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Market News 4 October 2021

I have lifted this comment from the Vaccination section below to this opening section because it deserves additional respect.

Congratulations to the BNZ for finding ‘carrot’ methods to encourage staff vaccinations and show leadership in the community. Sticks can come later, which I see Air NZ is defining 2022 as an appropriate start point for using the ‘stick’ (I agree – Ed)

BNZ will pay for a vaccination in low-income countries for every BNZ staff member who gets vaccinated. That’s in excess of 5,000 people.

May I respectfully launch a ‘Telethon’ campaign and ask that all other banks and major employers make the same offer to their staff.

Then, BNZ, I have another follow up idea for you, as we are running into vaccine hesitancy:

You’ll donate yet another vaccination to low-income countries for every customer that presents you with evidence of being vaccinated (2nd jab) themselves, beyond 15 October.

Or (all banks), if you’d like a more ambitious idea, ask the Ministry of Health to sponsor a $50 credit to the personal account of a vaccinated person (evidence provided via National Health Number). The credit drops to $25 on 15 November and NIL from 15 December.

At a glance you might think this will cost $200 million or so, but it won’t. The credits will reach those with the greatest need. Many people will not pursue the credit.

It’s a lot cheaper for the government to offer such credits than borrowing $1 billion per week to finance lock downs.

INVESTMENT OPINION

Self-Govern – You must get tired of constantly reading headlines from commentators predicting turning points in the share market, and interest rates, with the loudest being the gloomiest, glass half-empty folk.

The solution to the unnecessary anxiety is to have a good plan and ignore them.

Sweeping financial market predictions are less accurate than a coin toss (50%) and the certainty of the meteorological ‘winter is coming’ (100%). So, if financial predictions rate at less than a 50% chance of occurring they become possibilities, not probabilities.

How do you successfully counter possibilities?

By confronting them with control of your probabilities.

A. If you have a known, or unavoidable, liability (-1), you place a reliable asset against it (+1). Think of shelter and food costs.

B. If you then have a probable liability (-0.80), you place a reasonably reliable asset (+0.95) against it. Think of transport costs, social events,

C. Thereafter your remaining liabilities have more discretion (say -0.60) in liability terms, so you can pursue a little more risk with the investing (say +0.40). Think luxury travel, luxury food consumption, financial gifts to family.

The more reliable assets held under A) and B) have lower rewards. Assets held under C) offer the most potential for higher rewards.

When considering the structure of your investment portfolio, under no circumstances should market volatility disrupt A) above. I hope that typically National Super will meet the costs of A).

Next, there really shouldn’t be a market state that stops you from meeting liabilities under B) either. Everyone’s preference is that this income arrives from recurring interest and dividends, but a belt and braces approach will ensure capital is available for spending too (think maturing fixed interest items over the years ahead).

On the basis that you have discretion over your spending under C) you can invest in the pursuit of more risk, and hopefully higher returns. On balance, this should play out well, but it will involve moments of financial anxiety (such as a 30%+ decline in the value of the share market).

The critical point is that you can confront the anxiety under C) and not be pressured into a decision by the market, but rather as a result of reasoned conclusions with financial advice.

The scale of one’s wealth influences the ratios held in A), B) and C).

All the way ‘up’ the glass half empty folk predict a fall in the share market. After 12 years of rising, they must be tiring of their own voices even though the chances tilt a little more in their favour as the altitude increases.

Then, when share markets decline, they spend years saying ‘I told you so’ ignoring the extra-ordinary movements in value that they haven’t participated in, in either direction.

The appropriate approach, after ignoring emotive headlines, is to have a plan for control of the situation.

When the Night King (market volatility) arrives be sure to have a plan (and a financial adviser – Ed) and hold a Valyrian steel dagger (volatility neutral portfolio).

Evergrande – The share market is telling us that we may be passing the point of most intense financial pressure for this company (code 3333.HK) with the share price lifting from the depths of $2.40 back up to $3.00.

Evergrande was temporarily ‘rescued’ by a state entity buying from them some shares (US$1.5 billion) in a bank that it owns part of.

The alternate view is that speculators buying the shares will now hold their breath and hope President Xi agrees to step in with some more assistance.

What I found more interesting was the view when I expanded the time frame for the share price chart to 12 years and witnessed the surge from $6 to $30 in 2017 which on its own reveals an instability.

Upon reading reports from 2017 you discover a mix of analyst excitement about Evergrande’s scale of property development outside the major cities, urged on by central government stimulus, but also of a business that was using debt to also buyback shares and (my interpretation) trying to squeeze out the naysayers who were short selling shares and predicting doom for the company (due to building unwanted apartments!)

You’ve heard the phrase that ‘timing is everything’, and it’s as true in finance as it is in comedy.

Time (4 years) is proving the naysayers correct. Government stimulus was poorly applied. The economy and its residents weren’t ready for the product or service being supplied.

The share price has spent the past four years making its way back down, to below $6.00 (There’s no holding back the truth – Ed). From what I see there is no way the share price belonged as high as $20-30.

If Evergrande’s major shareholder and chairman (Hui Ka Yan) is genuinely wealthy and doesn’t want to end up in a Chinese prison, he’d be wise to inject some new capital, meet some debt obligations, and deliver homes to Chinese people.

International investors holding approximately $20 billion of the $300 billion company debt may well be in a spot of bother and will likely lose money.

Either the chairman will begin negotiating write downs to international debt obligations, or Evergrande will default, and China will use selective financial support as an international weapon by only assisting Chinese creditors, particularly those waiting for a property to be delivered.

If they are willing to arrest innocent people based on political spats, they will surely not care about legal action threatened from abroad.

A failing, or failed, property company may not be the item of greatest concern to New Zealand investors, other than if it is one of the canaries in the mine?

Like many nations China has been providing artificial financial stimulus to its economy.

If Evergrande is an example of how artificial and misdirected stimulus plays out (failure) then investors should be considering what it will mean if Chinese economic growth slows, followed by all other nations providing artificial financial support (including NZ – Ed).

China – of greater concern for those watching China and its economy should be the power shortages they are now experiencing, which is impacting both industrial and residential consumers.

One of the problems is self-inflicted with a shortage of high-quality coal for electricity generation, having attempted to punish Australia by rejecting its coal supply.

Photos of near empty coal storage facilities are easy to find. Apparently, they only have sufficient in reserve for two weeks electricity generation.

I doubt that the Chinese population will link their suffering (less energy supplied) to the political egos of its government.

A second, and probably silent, problem might be energy demand from Bitcoin miners. I say silent because this activity is now banned in China, but what other increased energy demand is there in a nation that has been reducing its steel making and its building sector activities?

Maybe the market knows about the energy problem, and China’s reliance on imported coal as an energy source, because the market price for coal has jumped from a once relatively steady US$50-60 per tonne to US$220 at the time of writing.

I think Australia’s new order for nuclear submarines is a distraction from the real war in the Pacific which is being fought out across trade.

It’s the only sensible explanation for the radical pricing volatility being experienced on many vital products around the world.

I guess it is naïve to suggest that politicians simply meet in the middle, apologise for their egotistical and selfish recent behaviours and return to more harmonious business settings?

Energy – whilst I am talking about energy issues, here’s an awkward headline from the UK amongst their difficulties with energy businesses failing and others stepping in to serve the customers:

Shell Energy takes on 255,000 customers from collapsed rival ‘Green’.

Trustpower (TPW) – Then, on the subject of the evolution of who serves the customer, NZ is about to experience what I think is the largest transfer of a customer base from one business to another with the Commerce Commission agreeing to Trustpower’s sale of 234,000 residential consumers.

The remaining condition is the restructure of the TECT community trust which requires a High Court hearing in mid-November.

TPW is keeping its generation assets and its commercial and industrial electricity user customers.

It’s been an interesting strategy for me to get my head around.

TPW, like most businesses fought hard to build an ever-larger retail client base, being the first to prove the value of multiple household services from a single provider, and now they wish to sell that group of clients (demand profile).

It seems an especially bold move by TPW given the strong parochial following that it enjoyed from its Tauranga customers (home province).

It’s nice to know that there was a market for such a transaction; willing seller meets willing buyer (Mercury Energy - MCY).

Mercury clearly has different strategic goals.

I am sure that both TPW and MCY have very long-term horizons for their decision making. I hope they are both pointing North, or perhaps NNE for one and NNW for the other?

Who else might be considering the business separation of product from serving a customer?

EVER THE OPTIMIST

Synlait Milk (SML) and New World are introducing (going back in time – Ed) a returnable milk bottle, made of aluminum.

We all remember the era of milk, in glass bottles, at our gate right?

ETO II

Pfizer BioNTech confirm trials are delivering ‘robust’ immune responses from children aged between 5-12 years of age.

ETO III – Vaccinations

Dame Sarah Gilbert, lead scientist to the Oxford/Astra Zeneca vaccine, (summarised in a speech) that society already lived with four different human coronaviruses that we don’t think about very much… and eventually Covid-19 will become one of those.

I far prefer to hear from scientists than politicians.

I’m pretty keen to see FDA approvals for vaccinating 5-12 year old children soon, followed by <5 years.

NZ 1st Jab: 3,266,697 = 66% (total population) 78% (>12 years of age)

NZ 2nd Jab: 1,865,831 = 39% (total population) 46% (>12 years of age)

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 – 6.30 billion jabs (volume = 41% fully vaccinated)

Total (recorded) Corona Virus cases – 234 million (removing this next week)

Active Cases – 18.4 million (decrease)

Daily rate of new cases – 450,000 (decrease)

People in serious condition – 89,000 (decrease)

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

Investment Opportunities

Auckland Council – is next to offer a new bond, with a 6-year term.

They are marketing the issuer this week, which seems to imply investment decisions will be next week.

Bonds issued by local government fall under the extremely strong category for default risk (low) and will have an interest rate north of 2.00%.

We have a list for investors wishing to invest in the offer.

2 Degrees IPO – The company has confirmed that it intends to float on the NZX before the end of this year.

TRAVEL

Edward will be in Wellington on Friday, 15 October

Johnny will be in Tauranga on Thursday, October 21.

Chris will be in Christchurch on Tuesday October 26 and Wednesday (am) October 27.

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

Michael Warrington 

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