Market News – 16 September 2019

For those who hoped Donald Trump would just go away, or look forward to the day it happens, you may be disappointed to learn that financial markets expect him to be around for long enough that they must closely monitor the financial impact of his utterances.

JP Morgan has launched an index that monitors market reactions to his ‘Decrees by Twitter’.

JPM has called it the ‘Volfefe Index’ to tease the President’s unusual use of language, which includes some unrecognisable terms. (Vol is from Volatility, but Fefe is from one of the President’s manufactured words).

You wouldn’t bother making this effort (create an index) if you expected the Presidency to end in 2020.

INVESTMENT OPINION

Fun quote – From the Commerce Commission:

Fonterra's 'Velocity' programme doesn't appear to have delivered.

Small News – but of relevance to ongoing change that impacts us all;

Inland Revenue and Accident Compensation Corporation will no longer accept cheques as a method of paying obligations owing to them.

Having the biggest ‘business’ (IRD) in the country adopt this position will inspire others to follow.

Banks will not fight the development, given the costs of processing cheques and Kiwibank has already confirmed its position of no longer offering cheque books to customers.

This behaviour will undoubtedly be replicated by others.

AML and Capital Markets – Anti-Money Laundering legislation, thrust upon us by the G20 in 2012, is well meaning but has been very disruptive to regular business administration and is often anti-competitive given the new inconvenience for trying to arrange normal business elsewhere.

There was an interesting case on Fair Go last week where a bank thought a person was behaving poorly so the bank simply shut down the client’s bank account and refused to explain why (the AML law demands secrecy!).

As it happens the person was an honest law-abiding citizen and the bank had made an error with their assessment, but couldn’t say that either.

I guess the central bank should, at the margin, be a little concerned about the impact of this bank’s behaviour with respect to financial stability in NZ. It certainly destabilised this particular man’s finances and probably had domino effects to payment of his utilities, rates, groceries, etc. each month.

However, in its defence, the new AML law is effective at uncovering criminals too; witness the ‘surprise’ busts of NZ crime (especially the drug trade) every other week in the news, where you might wonder ‘how on earth did they discover that?’.

A huge proportion of the vital information provided to the Police is sourced to the banks based on their improving AML monitoring and deep knowledge of NZ payments.

Our opinion is that the AML law has created a vast workload for all organisations, multiplied by the fact that all businesses are doing the same things for the same shared customer. This must surely be a meaningful drag on the economy (proportion of time allocated to an unproductive activity).

Meeting one’s AML obligations should be done at a central point (a government organisation) and then shared with the person’s permission because the AML evidence obligations are the same for all of us.

I raise this because I was very pleased to see this ‘centralise AML’ message as one of the recommendations to regulators within the recently released Capital Markets 2029 task force report.

I doubt such a development will happen fast, but if a Minister is bold enough to set it as a strategy, where IRD seems the appropriate catchment organisation, (unless your name is Orwell – Ed) then we can tolerate the delayed delivery of the strategy knowing that a new improved AML process would be on its way.

Segue moment -

Switching to the rest of the Capital Markets task force report;

With our immediate focus being you, the investing public, I was pleased to see other good recommendations from the task force to government that they enable more private investment in public sector assets and necessary infrastructure.

This recommendation should also be read as being directed to all territorial councils and the report takes a firm view on this by also recommending that central government reforms local government law to ensure that councils assess all funding options for necessary infrastructure.

Debt funding may seem fine until you are choking on debt as Christchurch and Auckland would seem to be doing, but at some point the sale of shares (equity funding) will be an appropriate solution too.

Councils would do well to reflect on the recent success by Hawke’s Bay Regional Council and the Napier Port in raising capital for economic expansion in their region, or the government’s success with the Mixed Ownership Model where many of their diluted shareholdings are worth more than the original 100% investment holdings (various reasons).

The task force would like to see the new Infrastructure Commission accelerate partial (or full) private funding solutions for infrastructure projects in NZ.

Interestingly that whilst the task force does make recommendations about the need to increase the number of investment listings on the NZX it does not then link this ideal as a recommendation to try and ensure all infrastructure projects that involve private investment (such as Public Private Partnerships) are listed on the NZX.

I spoke of the value of liquidity from an NZX listing recently after Matt Whineray’s article encouraging the government to enable more Public Private Partnerships (investment in necessary infrastructure). NZX listings provide valuable liquidity and should provide valuable disclosure behaviours from directors of such entities.

Whilst we do not participate in Kiwisaver it is covered well in the report and makes recommendations for what it perceives to be the best moves to ensure this very large savings pool is well directed in terms of its use to the NZ economy.

Kiwisaver is a fast growing but poorly led elephant. Investors and managers are too short term in their focus and thus they remain too liquid, which hinders long term investment in growth assets which demand some stability with funding.

The Reserve Bank has made it abundantly clear that investing in short term liquid securities will be the least reward asset to hold, so it shouldn’t be difficult for financial advisers and investors to conclude that longer term commitments will be rewarding.

Proposal – Kiwisaver fund managers offer fee discounts for term commitments to the management contract (a bit like the days of discounted mobile phones).

A longer term commitment has ‘equity’ value to the fund manager.

A commitment of say three, four, or five years enables that fund manager to determine a scale of funds that can be invested into longer term, developing or less liquid investments that seem likely to add long term value to the fund.

The fund manager’s process should then be no different to the way you manage your portfolio as you assess the amount of money that is ‘probably’ required for repayment over a short time frame, ‘possibly required’ over a short to medium time frame and lastly ‘unlikely’ to be required over a medium to long term time frame.

Given the ongoing growth in funds under management it’s hard to believe a fund manager couldn’t define a proportion of funds that could be invested in good quality but long term and illiquid assets (imagine if Transmission Gully had been offered as an investment).

My proposal would see a fund gaining the highest fee for the investor adopting the shortest term commitment and asking for the lowest risk asset.

My 25 year old son should avoid this choice like the plague; Reducing fees should be as important to him as pursuing some more rewarding long term investment options.

Folk approaching retirement who might be reducing their risk profile and be contemplating withdrawal from Kiwisaver (again a fee reducing behaviour) should not mind paying the higher fee for short term commitment because that cost of that short term will be modest.

(You’re beginning to sound like a Kiwisaver dictator – Ed)

No, just opinionated.

There’s heaps of good thinking in the Capital Markets 2029 report so it is worthwhile reading for those curious about how our markets operate and where experienced professionals believe the resistance points are currently.

Touching on one other commendable recommendation - adding financial literacy to NCEA for the secondary school curriculum; This should be so easy to install and offer to kids for their obvious long term benefit.

It would also be an easy way to gain extra NCEA credits from extra-curricular learning.

One of our kids gained extra credits from a high quality holiday programme in the art/design field that she enjoys. It would be so easy to develop a short, sharp, two week course on financial literacy that could be presented and tested during school holidays. It would help to fill the kids brains with relevant life training skills plus ‘some’ well received extra NCEA points to boost the score card.

Congratulations to Martin Stearne for chairing a successful capital markets task force and the quality of its recommendations.

Here is a link to the document: https://www.fma.govt.nz/assets/Reports/Growing-New-Zealands-Capital-Markets-2029.pdf

AML for Crypto – Facebook’s proposed payment unit, crypto currency, ‘Libra’ continues to make progress and rather than dropping it on the market to see how it goes they are interacting with regulators as they develop what they surely want to be a long-lasting service.

US Regulators have logically demanded that Libra must meet the most stringent of rules relating to money laundering and terrorism finance and if Facebook wants its payment method to be truly successful they’d be wise to allow regulatory influence into its development.

Mavericks like Bitcoin will not be allowed to succeed as very wide use, or legal tender payment methods given their pursuit of operating in the shadows.

I would like to believe that the preferred country of registration for Libra, Switzerland, will result in some more high-quality standards for participation in the financial settlements arena.

Mind you, before Facebook has even expressed a position with respect to working with regulators the French have come out swinging and declared they will block Libra from Europe if it threatens monetary sovereignty (this relates to my oft used points about legal tender and tax collection).

Facebook might be able to temper regulatory concerns if it offers to pass through to governments a modest tax on Libra transactions, a little like the fees collected by Visa and Mastercard but these fees don’t make it to the government purse.

Lastly, of political interest, at present Libra only intends to include the following major currencies (or government bonds) in its asset pool: US dollars, Euro, Japanese yen, British pound and Singapore dollar.

Spot the missing currency.

Cheap Money – Businesses with very long-term strategies, such as Mainfreight’s 100-year plan, must view today’s interest rates as a gift from the gods.

Observe Apple with its holding of US$200 billion cash yet it also wants to borrow money on today’s terms where interest rates are low on a nominal and real (ex-inflation) basis.

The better the long-term planning, the longer the term such businesses can borrow at today’s apparently low cost.

EVER THE OPTIMIST

Poor old Statistics has had a rough time over the past couple of years, losing their Wellington building to earthquake demolition, then a messy Census and finally the departure of their CEO accepting responsibility (for an earthquake? – Ed).

Well, they suffered two earthquakes; one terrestrial and another managerial.

However, my point is that they remain a very good source of data for investors, with last weeks ETO item being their report about NZ tourism.

Some had feared the drop off in visits from those in Asia would finally slow the sector and our economy, given that tourism is now our largest business, however, increase in visits by Australians and Americans have more than filled the gap (gross numbers +2.00% year on year).

Of granular detail to me was the fact that the fastest growing subset was people staying in NZ longer than 15 days, which seems to reflect the demographics of more people in the retired cohort(s) with more time and more money.

So, if tourism folk and their marketing advisers are at the top of their game they will direct more of their budget to seeking out this group and then treating them really well once they get here.

ETO II

I am scraping the barrel a bit here but RBNZ Governor Adrian Orr will be pleased to read that consumer spending was up for the month of August at +5% relative to 2018 spending.

INVESTMENT OPPORTUNITIES

Infratil Bond – new bond offer remains open, but this is the final week.

If you wish to invest please act now. If you need a slight delay before delivering your application please contact us to discuss the options.

On offer are two different terms:

7 years at a fixed rate at 3.35%; and

10 years at a floating rate, reset annually (3.50% for the first period).

Metlifecare (MET) – offer of $100 million senior, secured, bond (MET010) is available to investors.

The term offered is 7 years (2026) and the interest rate will be set on 20 September.

Helpfully, recent increases to interest rates have resulted in a Minimum rate set at 3.00%.

MET is paying the brokerage costs on this offer; however, it is a fast-moving offer (closing on 20 September) so we will issue contract notes to participating investors (no application form required).

The offer document is available on the Current Investments page of our website and with MET being an NZX listed company one can access a long history of public announcements from them.

Investors seeking a firm allocation in this new bond offer are encouraged to contact us now (and no later than 5pm on Thursday 19 September). Firm allocations will be confirmed by 10am Monday 23 September.

Payment will be required by Thursday 26 September.

Kiwibank – last week replicated the behaviour of the other banks and issued $400 million of senior five-year bonds (maturing 20 Sep 2024) to the market as part of its funding programme.

The yield on the bonds was 2.155%, interest paid semi-annually.

These bonds rank alongside term deposits with Kiwibank, even though yields on the two items do not sit ‘alongside’ each other. A five-year term deposit with Kiwibank currently offers a return of 2.70%.

To confound the theorists the additional yield here does not relate to additional risk.

The only meaningful difference between these two investments is liquidity; one can sell a Kiwibank bond but one cannot sell a Kiwibank term deposit (and banks say no to breaking deposits, or penalise harshly if they happen to agree).

Liquidity has a value, but it is hard to price. The price is cheap when you don’t need to sell an asset, but that same price is rather high when the need for a sale becomes urgent.

I think I’d be willing to give up something between 0.15% - 0.25% in yield to accept the Kiwibank bond relative to the term deposit.

I can reduce my need for lower returns via liquid assets, such as bonds, if I maintain higher levels of cash and very short term bank deposits (always plenty of money around me), but as you all now know returns from short term deposits will deliver the lowest returns.

Dairy Farms NZ – Based on stories fed to the media it seems possible that Dairy Farms NZ (a diary farm consolidator) could consider listing on the NZX to raise capital for expansion.

They had been buying up farms with money from private investors but the government’s additional limitations on foreign investors has reduced the pool of wealth to tap into, which in turn has also placed some downward price pressure on the value of dairy farms.

There’s no point in debating land or share pricing here because there is no offer on the table but being able to invest in the land and cows has been very difficult for New Zealanders even though it is one of our biggest sectors of the economy.

I once urged the government to consider selling 49% of its share in Landcorp to provide wider access to our primary industry. Jacinda didn’t even return my call.

Maybe Dairy Farms NZ will present the next opportunity to invest in the sector?

Maybe they are one of the ‘several other possible IPOs’ that NZX CEO Mark Peterson referred to in their latest results report?

TRAVEL

David Colman will be in New Plymouth on 19 September

Edward will be in Taupo 24 September.

Chris will be in Christchurch Tuesday 24 September and Wednesday, 25 September.

Kevin will be in Christchurch on 17 October.

 

Mike Warrington


Market News – 9 September 2019

The UK is a political shambles at present, but I’ll bet the residents of Hong Kong would take a democratic shambles over their own scenario.

Mind you, the UK public may well feel that their government is trying extremely hard not to respect the preference of the majority (democracy).

The majority of UK’s members of parliament are now confirming that they represent the European Council more than their own country, which feels unwise to me given the views expressed by their electorate.

INVESTMENT OPINION

Market Leadership – There are plenty of politicians who yell loudly about the failures of letting the market (aka the people) set the standards, and there are plenty of examples to support their calls.

However, at present I am beginning to read more examples of where the market is setting better standards, and better long-term strategies, than local and central government.

The prompt for this brief thought was Walmart’s ongoing evolution to reduce its distribution (sales) of guns and ancillary products in contrast to President Trump and Congress’s inability to see the obvious.

In NZ, major energy users are discussing grouping their demand to encourage new investment in additional renewable electricity generation to encourage the industry in that direction. This will be far more effective than having our government decide overnight to block new oil and gas mining licenses.

Negative Interest Rates – Are negative interest rates a trap that ‘we’ are unwittingly walking into based on today’s financial strategy of ‘nobody is to be left behind’ and ‘nothing should be allowed to fail’?

Spending less than you earn is to accumulate acorns because ‘winter is coming’ (you couldn’t help yourself could you – Ed).

Saving is a good behaviour. Accumulated net equity (wealth) is to personal financial stability what insurance is to your car.

In my wide observation, once people have a surplus of savings their confidence for spending rises and once a person has a significant level of savings the passive income potential supports more spending, and to some extent charity.

So, saving is unquestionably a wise strategy.

There must be a price, and by price I mean a cost, to a borrower if they are to use the money accumulated by the wise.

When that cost falls to below 0.00% and begins to penalise the wise and reward the unwise (debt for consumption) something is amiss.

I think John Mauldin used an appropriate description recently in one of his articles when he said ‘negative interest rates are a symptom of an underlying disease’.

It is not healthy to explain to savers that they must pay a ‘fee’ for storing their savings and then celebrate with the borrower in the next aisle that they will be paid a fee if they agree to borrow some money.

When a borrower uses money for investment, often the productivity from that investment will serve its purpose of servicing the debt and hopefully repaying that debt (or a good portion of the debt, depending on investment preferences).

When a borrower uses the money for consumption the repayment of this debt is entirely dependent on the income of that borrower, and given that the person’s income didn’t support their desired level of consumption it’s hard to imagine that income repaying the debt and keeping the person in the lifestyle to which they have become accustomed.

After all, this person is borrowing more money to support a lifestyle they cannot afford on their regular income.

You may insert a real person that you know into my paragraph above, or you could insert the Argentina, US, Italy or Greece, the description is the same.

Short to medium term interest rates in Europe are almost entirely negative across the union. We discussed a couple of weeks ago some very long term interest rates are too (Germany, Switzerland).

Last week I read about the first loan to a private company at negative interest rates; Siemens AG borrowed $1.6 billion at -0.315% for a 2 year term (German government bonds are -0.91% at present). Siemens is one of the world’s largest energy and health sector businesses and is clearly respected for its potential to repay this debt.

Siemens has an A+ credit rating from Standard & Poor’s at present and according to the S&P table of default statistics only 0.09% of A+ entities will default on the financial obligations within a two year period.

The fact that investors are willing to pay Siemens 0.315% to hold their money for two years means they are more confident about the company’s finances than S&P’s average failure rate for such a credit rating. (In theory you break even if you receive +0.09% from a vast pool of A+ credit rated entities over a two year term).

In fact, it’s pretty clear that the market thinks there is zero chance of Siemens defaulting on its debt between now and 2021 and for some reason (strange underlying market) are willing to pay for the privilege of having Siemens temporarily use their money.

You don’t find a 0.31% loan repayment failure rate (the same ‘loss’ value as lending to Siemens) until you come down to the scale to the BBB+ credit rating category.

If investors agree to accept negative returns they are free to do so (as in freedom), but with many central banks using tax payers funds to buy bonds, adding unnatural demand to this negative return market place, they are sponsoring a vicious cycle, which cannot be what they intend long term?

Who would pursue a strategy of a vicious cycle?

The Proverbs and Shakespeare state ‘neither a borrower nor a lender be’ describing the differing folly that effects both sides of the equation.

Would they rewrite their scripts if they were around today?

USD – Central bankers, who gathered recently, are again discussing their concern about the dominance of the US dollar in global finance.

Interestingly they are finding reasons to support the concept of digital currency, partly for efficiency, but more so through concern about single currency domination which the US currently enjoys.

They weren’t keen on the private currencies, such as Facebook’s Libra, holding centre court but they are beginning to see more potential to connect technology with legal tender payments, subject to these being controlled by central banks (aka government).

Therein lies a major problem. It’s all nice for central bankers to sit around singing the same theoretical tunes but the music stops when political power struggles to enter the room.

The central bankers meeting quoted these statistics:

The US accounts for only 10 per cent of world trade and 15 per cent of global GDP but a third of countries peg their currency to the dollar, 50 per cent of global trade is invoiced in dollars, two-thirds of global foreign exchange reserves are denominated in dollars and two-thirds of global securities issuance is in dollars.

China may well be enthusiastic about reducing the value of the Yuan to assist with the value of its trade but the stronger USD has other consequences, including strengthening the financial ties between the US and countries that have borrowed money in US dollar terms, where the ‘strength’ rests with the US.

Argentina is a current example.

Argentina has now imposed currency controls, which means they are restricting (US$10,000 limit) the ability of locals to sell Pesos to buy other currencies, where the US dollar will be the favourite.

This reminds me of the eagerness of retailers to ask for USD from us when we were over there last year, in preference to having us pay in local currency. In fact USD settlement of transactions (payment and receiving any change) was as easy as doing so in Argentinian Pesos.

It is also a reminder of the financial trouble that Argentina is in, again, and how they will re-open negotiations with the likes of the IMF to ask for financial support and try to negotiate with other lenders for deferral of payment or new lower interest rates (please).

Argentina’s large volume of US dollar debt makes it impossible for them to escape a financial relationship with the US and the US banking system. You may recall the last time they tried to avoid payment on old USD bonds the US court blocked them from making different payments to different lenders within the same pool of bonds (some agreed to discounted terms, others did not).

The ‘block’ was created when the US court stopped any US bank from settling the proposed USD transactions for Argentina. Agreements made in USD are subject to US law.

Losing access to US banking wasn’t a tolerable outcome for Argentina.

Is Facebook wealthy enough yet to buy up a nation’s US dollar denominated debt, releasing them from the USD stranglehold, on the condition that they make ‘Libra’ legal tender in that nation?

Here’s looking at you Argentina.

The US will not give up its position of financial strength lightly, and given the current trade tensions they are likely to increase their belligerence with respect to threats, not fill in the moat and make it easy for competitors.

The point of this brief ramble is that the trade war and its global trade ramifications are far from over, and are probably just past quarter time. Last week Donald Trump declared that he will be tougher on China in his second term!

Bond Bubble? – Last week I read an article that described bond prices as being in a bubble and I thought, ‘how can that be for an asset that has a finite life?’.

Investopedia defines a bubble as existing when ‘It is created by a surge in asset prices unwarranted by the fundamentals of the asset and driven by exuberant market behaviour.’

A bubble of price excess is prone to burst when the majority opinion changes from one of bullishness about rising price to one of bearishness that expects a retreat in price, the ‘burst’ being the point when such a change in opinion occurs, typically over a very short time frame (think Bitcoin at US$20,000).

I don’t think the use of the term ‘burst’ is appropriate for bond risk really, especially not for bonds from borrowers of low risk (having a high probability of repayment).

Please discount bonds from those who fail to repay from this story. Their failure to repay (collapse in price of the bond) had nothing to do with the movement of market yields, which influence the price of bonds. Failure to repay is a function of a failure in business.

A bond (fixed interest investment) with a fixed term until maturity offers a clearly defined set of rewards over that fixed period. In simple terms it has a $100 cost at the start, defined interest payments during the period and $100 repaid at the end. It all fits nicely in to a clearly defined ‘box’.

The market cannot inflate this price outside the defined ‘box’ (start and finish dates, surrounded by widely shared interest rate pricing influences) so a balloon-like price isn’t possible in my view.

Strange implied returns for the residual period of a bond are possible (for example, negative returns for a 30 year period) and the markets view of returns evolves every day, but it does not ‘burst’.

Today’s negative yields are indeed strange and have temporarily forced the value of some bonds higher than most of us anticipated, but those very low returns are being accepted widely around the globe so they are not a local or isolated pressure point creating a bubble. The market pricing of all good bonds is influenced by these sharp declines in market yields, but those bonds will assuredly repay $100 on maturity date, which is unavoidably moving toward us.

The profile of a bond value over time may look like Mt Taranaki, beginning at $100, rising to $125 (if yields falls) before declining to be repaid at $100.

It may look like the Remarkables with a jagged sequence of price changes, or a glacial valley (if yields rise) such as the one to the South side of Mitre Peak, but the value of such a bond always returns to $100 upon repayment.

The current arrival of negative yields may add a little more altitude to the summit of the Mt Taranaki bond price midterm, but again the repayment value will still be $100.

Please don’t read ‘Bond Bubble’ headlines and react to them by changing your bond portfolio, which I hope was established on the basis of a well-defined investment policy.

Oil – Our Prime Ministers may get lucky on the oil price debate without being drawn too deeply into the fact that most of what we pay locally is tax.

That luck is linked to the international price for oil, which is slipping at present given the concerns about weaker economic activity, alongside robust mining volumes in the US. Under this scenario it would be typical for the price of oil to trend lower.

The weaker NZ dollar is the only problem to this lower price outcome, but a weaker currency is far better for our exporters than debating marginal cents on the price of our fuel.

Standing Proxy – This reminder to investors to offer Standing Proxy (for shareholder voting rights) to the NZ Shareholders Association was prompted by their views about Rubicon (RBC).

Leading into the RBC shareholder meeting, where RBC has asked for high reward for a new director, the NZSA has responded with their assessment:

‘it won’t be supporting Adams’ proposed $137,127 a year pay package, saying it is excessive for a company with a market capitalisation of only $89 million, is not profitable, does not pay dividends and has been a serial destroyer of shareholder value.’

This is a great example of the depth of thought that the NZSA applies to representing shareholders at Annual Meetings (or special meetings, when called).

If you do not exercise your own votes as a shareholder in companies then I strongly encourage you to put a Standing Proxy in place to appoint the NZSA to act for you.

The more of us that do this, the more powerful ‘our’ advocate becomes.

If you’d like copies of the blank forms, and explanations for processing, please email us to request them.

EVER THE OPTIMIST

I hope we can continue to stay beneath the radar of the global trade squabbles.

Lamb pricing reached new highest prices since 1982 (the days of subsidies) enjoying strong overseas demand, and all of this is happening as the NZD dollar is falling to further increase the local currency value of our exports (double ETO – Ed).

INVESTMENT OPPORTUNITIES

Infratil Bond – new bond offer remains open with applications being processed on a first come, first served, basis.

If you wish to invest please act now. If you need a slight delay before delivering your application please contact us to discuss the options.

On offer are two different terms:

7 years at a fixed rate at 3.35%; and

10 years at a floating rate, reset annually (3.50% for the first period).

The offer closes on 20 September so we are now inside the last 11 days of the offer. If you wish to invest and haven’t yet done so now is the time to act.

Metlifecare (MET) – Has finally announced the launch of its $100 million senior, secured, bond (MET010). The term offered is 7 years (2026) and the interest rate will be set on 20 September (Minimum rate defined on 16 Sep); we estimate the interest rate will fall between 2.75% - 3.00%.

MET is paying the brokerage costs on this offer; however, it is a fast-moving offer (closing on 20 September) so we will issue contract notes to participating investors (no application form required).

The offer document is available on the Current Investments page of our website and with MET being an NZX listed company one can access a long history of public announcements from them.

Investors seeking a firm allocation in this new bond offer are encouraged to contact us now (and no later than 5pm on Thursday 19 September). Firm allocations will be confirmed by 10am Monday 23 September.

Payment will be required by Thursday 26 September.

TRAVEL

Edward will be in Napier on 16 September, in Taupo, 24 September and Wellington on 10 October.

David will be in Lower Hutt on 11 September and New Plymouth on 19 September.

Mike Warrington


Market News – 2 September 2019

September already, really?

At least that means it’s a big month for income from dividends and interest payments.

INVESTMENT OPINION

Hydro Climate (not rain) – The decision by Hon. David Parker to decline the proposed small hydro scheme on the West Coast has released a huge flow of previously ‘dammed’ energy on the subject; supporters are offended in the extreme and those opposed are over-joyed.

Society’s propensity to issue opinions with extreme tones dilutes the views of those with genuine concerns. Online portals have made it easy to be a ‘keyboard warrior’ and there’s no putting this cat back in the bag. Facts will be as important as ever for debate to reach good conclusions.

What I see is a nation that is still struggling with its overall strategy with respect to balancing the needs of the population with our impact on the environment and failing resource management regulations.

David Parker would appropriately respond to me that he has taken on the review of the Resource Management Act with a view to making it more ‘fit for purpose’, which indeed he has, but this work won’t be completed during his time in parliament and probably not before I have grandchildren.

‘Don’t hold your breath’, because your reduced oxygen use will not save the planet, or the Minister.

In this case the West Coasters had gained the support of the Department of Conservation, presumably no mean feat, and gained confidence that spending millions in preparation of a proposal was, on balance, appropriate.

It’s hard to tell whether these people have real reasons to be concerned about NZ leadership because everyone on both sides are shouting so loudly.

I am tempted to side with the West Coasters because they have spent a lot of time and real money to put their case. The opposition has not.

However, with insufficient facts I can only repeat that the clearest conclusion for me is one of governing from a position of uncertainty about strategy.

What I heard here was ‘please stop using fossil fuels, ban the issuance of future mining licenses, subsidise electric vehicles, try to establish a high price for carbon to penalise emission and reward extraction, but block credible energy generation from renewable resources’.

Maybe David Parker could replace some of the resistance points within the current Resource Management Act with a clause that demands ‘if not, then what?’; meaning, if this proposal displayed that it was capable of meeting a society need, what concepts will do so after if reject this particular proposal.

We cannot continuously say no to all credible proposals for progress without compromising societal outcomes.

Do I have a point here for investors?

I was trying hard not to stray too far into politics. Yes, if ‘we’ reject good proposals, and do not have better alternative proposals to solve problems, we will slow economic activity, which is not good for society or investors.

I think I find myself siding with West Coasters on this one, as I did when I was disappointed about the cancellation of the water catchment proposal in Hawke’s Bay in recent years.

Misleading – I was unimpressed by the announcement from Metlifecare directors last week when they announced they will not pursue a share buyback but will allocate their spare capital to developing more villages.

I’m not questioning the business strategy of building more villages, it may be the best capital allocation decision, but in my view the market was misled by them when they elected to comment on their share price last year.

In a classic error of voicing an opinion about one’s share price MET stated publicly in October 2018 that it was considering the potential of buying back some of its shares.

‘The share price is too low so we might buy some back’, which is always the cry, unless someone can remind me of an occasion when a company’s Chair lectured the market on its share price being too high?

The directors’ discontent in October 2018 was when the MET share price was $5.98.

Today the MET share price is $4.30, now a 35% discount to the Net Asset Value described for the business.

As I understand it development margins from building new villages come in between 22-27%, so under present conditions the company would extract better value by purchasing some of its own shares than by taking on a new development with the usual risks of such projects.

Accordingly, the share buyback thinking made reasonable sense to me.

Maybe the clue to the changing opinion from directors was observed when they did not update the market in February 2019, as they suggested they would?

Today, the directors believe they can add more value by expanding MET’s property portfolio.

Time will tell.

They have a demographic tail wind. (rescuing them from mistakes? – Ed)

However, my main criticism here is to directors that feel they can influence a share price by expressing their own minority view about that pricing. To then ‘threaten’ a share buyback hoping to add demand to the marketplace is unnecessary, unwise and as I say more than a little misleading if they don’t follow through and show conviction with respect to value.

It is a case of ‘telling’ the market, when ‘we’ are more interested in what the company ‘shows’ us.

Auckland Light Rail – Matt Whineray, CEO of NZ Super Fund will be pleased; Hon. Phil Twyford has nominated ‘NZ Infra’ on a short list of two, alongside NZ Transport Agency, to develop finance and build the proposed Auckland Light Rail service.

NZ Infra is a partnership between NZ Super and Canada’s CDPQ Infra Group. The initials CDPQ stand for Caisse de dépôt et placement du Québec and you can read a little more about them here: https://www.cdpqinfra.com/en

Matt’s schoolboy French language skills must have been dusted off for this negotiation.

Phil Twyford described the two entities as differently funded; no kidding, NZTA is a government agency.

I tried to read more about the NZTA proposal on its website but it shows there have been no new funding decisions (published) since June 2017. Am I unfair to align this with the current period of government and cancellation of various new roading proposals?

Maybe this is what freed up time for NZTA to consider if they should compete to design, fund and build train sets?

Perhaps they could also compete for the supply of electric scooters around NZ too?

Too far. Sorry.

Last week one or two readers weren’t happy with the proposed light rail in Auckland and thus were not happy that the NZ Super Fund would be ‘promoting’ it.

NZ Super is not promoting the light rail concept, this is the job of planners, councillors and government ministers. NZ Super and CDPQ is saying they would like to be the business that participates in design, financing and ongoing management of delivering the project.

Assuming the light rail project proceeds, which I think is a huge assumption, I would like it if NZ Infra wins the mandate. Once the project is completed, and the financial risk reduced, I’d then be pleased if ‘AKL Light Rail’ was listed on the NZX with NZ Infra offering 49% for sale to retail investors.

NZ Infra would then, I hope, be invited by government or councils to recycle their initial capital into a new long-life community asset that required external funding and management.

If we ‘rinse and repeat’ this cycle investors might enjoy new depth to the investment opportunities listed on the NZX, adding visibility and liquidity as benefits.

Postscript: The directors of the NZ Social Infrastructure Fund think I am unlikely to see Public Private Partnerships listed on the NZX. Their recent review of assets for potential sale (or listing) has discovered that private investors are willing to pay far higher prices for assets than comparable market listing proposals.

This removes private asset sales, but it doesn’t block the more publicly oriented sellers that are our government entities (central and local) from NZX listings to share ownership publicly. Perhaps ‘they’ could limit the ownership register to NZ resident investors (or funds acting for the same group).

Kiwibank – Whilst I am on the investment activities of NZ Super, they (alongside NZ Post and ACC) have confirmed they are willing to increase their equity investment in Kiwibank to support immediate growth followed by the new capital demands being proposed by the Reserve Bank.

Last year Kiwibank expanded faster than planned, a good thing, which led to the bank checking with its owners that they agreed to suport ongoing expansion and the higher capital demands this implied. They agreed.

This of course confirms that Jacinda has rejected my proposal to float 49% of the bank on the NZX, without writing to tell me of her decision, but the opportunity is not lost for her.

My strategy remains available. Prior to the ‘expiry’ of the next tranche of Kiwibank subordinated bonds in mid 2020 Kiwibank could, with Jacinda’s permission, offer about $500 million of new shares to the public, representing approximately a 25% ownership.

The government would retain control via NZ Post, NZ Super and ACC channels.

Shall I start a list and invite investors to join?

It could become my passive protest without needing to sit on Parliament lawns for 100 days to deliver the message. I could provide Jacinda with remote access to the list so she could monitor it for ‘political popularity’.

And Jacinda, remember that one of the greatest values of publicly floating a little of Kiwibank is once and for all removing the assumption that Kiwibank has an unwritten government guarantee, something that is reinforced by Hon. Grant Robertson’s plans to install government guarantees across a proportion of bank deposits.

Selling some shares would not only remove the implied ‘100% government guaranteed’ opinion of Kiwibank but it would simultaneously raise new equity, and quite likely do so at a ‘nice price’.

Chat with the Chair of Hawke’s Bay Regional Council and of Napier Port if you are at all unsure how the experience might go.

Just saying. (don’t seem to be able to stop you – Ed)

EVER THE OPTIMIST

Plenty of economic experts are predicting a sharp decline in economic activity for NZ, which makes sense in the currently disruptive global trade and political climate, but it has been nice to read about many good performances from our economy over the past year, such as:

Wine Industry – international demand at an all-time high, which was seen in Delegats’ strong recent results;

New trade records across the Port of Tauranga (and feeder ports such as Timaru) and their credit rating agency S&P liking them enough to increase their credit rating to ‘A-‘;

Scales reports continued strength from the horticulture sector matching its 2018 record crop and expanding sales in Asia and the Middle East have replaced some weakness in European demand.

Especially given that these three particular businesses are all involved with exporting our primary industry products to the world.

ETO II – Actually, what follows should have been the lead ETO item because it is excellent all around.

Some Dunedin based young entrepreneurs from a Venture Up business programme, under the label Spout Alternatives, are trialling delivery of milk to major users in tall kegs (as in very similar to beer kegs).

The initial intention was to reduce plastic use in the milk sector. They quickly passed by the beloved glass bottles from history and realised that the biggest users were throwing out the most plastic and realised a bigger vessel was the answer (the keg).

Simple; but brilliant ideas often are.

If pricing is comparable they will surely take Dunedin cafes and major milk users by storm. I hope they are already planning for sales and service across New Zealand.

If Fonterra was clever (changes its spots? – Ed) they would call these youngsters, buy the rights to their idea for a modest sum, offer to finance expansion and provide assured nationwide milk supply and delivery services to achieve a countrywide service inside 12 months.

ETO III – Usually currency wars result in the NZ dollar being knocked around and often rising in value to the detriment of our export sector, however, at present the NZ dollar is falling in value against the US dollar, Australian dollar and Japanese Yen. We are stable against Chinese Yuan.

These are the major trading currencies for our export products so the weakness is great news for New Zeland’s most valuable businesses (selling to the world).

Share investors can observe the benefit by looking at the share price chart for Fisher & Paykel Healthcare (FPH) last week.

I am reluctant to encourage Donald Trump, but I’m pleased with the current weakness in the NZD. To be fair to our central bank, its surprise 0.50% interest rate cut was the most influential recent driver, and it may well have been the FX market that the Governor was trying to shock.

INVESTMENT OPPORTUNITIES

Infratil Bond – new bond offer remains open and is progressing well with applications being processed on a first come, first served, basis.

If you wish to invest please act now. If you need a slight delay before delivering your application please contact us to discuss the options.

On offer are two different terms:

7 years at a fixed rate at 3.35%; and

10 years at a floating rate, reset annually (3.50% for the first period).

The offer document can be downloaded from the Current Investments page of our website.

Transpower – issued its new 6 year bond last week at a yield of 1.735%.

Thank you to all who participated through Chris Lee & Partners in this very strong (credit) bond offer.

TRAVEL

Edward will be in Auckland (Takapuna) on 4 September, in Wellington on 12 September, in Napier on 16 September and Taupo, 24 September.

David will be in Lower Hutt on Wednesday 11 September and in New Plymouth on Thursday 19 September.

Kevin and Johnny will be in Christchurch on 5 September.

Chris will be in Blenheim 13 September and in Christchurch Tuesday 24 September and Wednesday, 25 September.

 

Mike Warrington


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