Chris Lee & Partners Ltd

Market News 27 September 2021

I have added a new employee to my stable. One of the great pieces of advice is to employ the best.

I think Peter Beck is one of the best.

INVESTMENT OPINION

Evergrande – The managed unravelling of the deeply indebted Evergrande property development business in China has begun.

At least I hope the unravelling is being carefully managed. If not then credit rating agencies will be proved correct with their 'near default' ratings for the company.

However, if the Chinese government steps in it will again remind the world that politicians like control and think they can solve all problems, thus confounding the truth of financial risk.

If you have almost enough assets to match with the level of debt (100% leverage) but very little cash, there is a chance of a successful unwind of the business.

It should amaze people that we still allow such financial outcomes for any business, let alone the largest in scale.

One method for settling obligations, when you are short of cash, is to hand over some assets to the creditors and avoid catering to the circling sharks who think you'll be forced to sell those assets. This has been happening within Evergrande's obligations.

It may not be what you wanted as a lender, to receive collateral instead of your cash, but it's better than receiving less, or nothing, in value.

Your lending agreement would need to have stipulated the possibility of an obligation being extinguished via the delivery of an asset instead of cash, but even if it didn't, I suspect most would agree to open supplementary negotiations if it resulted in a better financial outcome.

These two statements appeared recently from Evergrande

''Investors interested in redeeming wealth management products for physical assets should contact their investment consultants or visit local offices.''

''Wealth management product investors can choose from discounted apartments, office, retail space or car parks for repayment.''

This really is teetering on the edge of failure and will require very careful management. It discloses why the Chinese government stepped in during 2020 and introduced its 'Three Red Lines' policy intended to force deleveraging within the real estate sector.

Our 'red headed' governor of the Reserve Bank is keen on some deleveraging in the NZ property market too, as he should. As the NZ government rapidly increases the nation's debt we need to see private debts decline to avoid losing the respect of international creditors, upon whom we depend.

I am making an assumption that even during the aggressive suppression of the wealthy, President Xi won't tolerate an embarrassing financial failure the scale of Evergande, especially given that the financial pressure began with new government initiatives.

Evergrande has 1300+ projects in 280 cities, but also has 80,000 (unhappy) investors, of which some hundreds of them turned up at the company headquarters to demand their money back, lock down or not!

On reflection, maybe the first signs of concern was when the property developer expanded in to electric vehicles, water, banking, insurance and sports clubs!

This lack of risk acknowledgement by some investors will become the world's next significant problem for capital markets when they experience the next sustained decline in pricing.

Professing that one didn't understand the chance of failure, after the event, gains nothing in terms of financial recovery.

It is another reminder that investors should centre their investment decision making on a thorough analysis of risks that may impact them and to use the help of financial advisers so that they understand the impacts on their portfolio from market movement (scale of volatility).

Evergrande's 'decumulation' of assets has only just begun. For the sake of financial stability I hope this process take 2-3 years and not 2-3 months!

Post Script: I hope your eyes are wide open if you happen to be a property owner in Hong Kong at present.

Energy – The world is determined to simultaneously increase the production of renewable energy and to reduce the consumption of energy in the developed world, so as to be able to remove coal from the energy supply chain.

It's a huge expectation, especially the reduced consumption.

Oil based energy theoretically is removed after coal, but not in my lifetime.

Good leadership on matters requires apolitical governance and time frames that a population can evolve with.

Angela Merkel, now retiring, is the only world leading politician I can recall who was simultaneously influential for a whole nation and not a populist. The rest take the path of least resistance to electoral success.

2050 seemed a reasonable focus for performance from the Paris climate agreement in 2015 but having achieved only baby steps during the first 6 years (17% of the time) the inevitable rush for change will make it difficult for consumers to keep up.

I think the world needs to see evidence of a slight over-supply of energy, from new renewable supplies, to enable the progressive closure of coal fired electricity.

We are already seeing signs that we are not getting this mix right through the large price increases for energy in many locations and the political intervention (witness the Russian gas supply) from those who are indifferent to regional impacts (not interested in 'global-think').

Even in the land of renewable electricity, New Zealand (85%), we have an unavoidable need for coal and gas supplies to serve peak electricity demand periods, which lasted an entire year! (and better management by Transpower – Ed)

The subsidised move to electric vehicles, increasing our electricity demand profile, adds to the problem; it doesn't reduce it.

The rising price of oil and fractured shipping services is forcing nations to dip into local oil reserves to meet demand and they certainly do not feel over-supplied with energy, of any type.

The consumer is paying for all this disruption.

Large increases in the price of energy do not encourage less production, from any source.

My point for investors is that energy demand is not dropping, and our collective desperation that economic growth returns to support 'our' emergence from Covid19 disruptions implies 'we' want energy consumption to increase beyond the levels of 2019.

Electricity suppliers are just as essential today as they were yesterday. I could argue more so.

Replacing old with new in any business requires an overlap of capital; new investment into renewables (think Infratil and Tilt Renewables locally) and ongoing investment in the fossil fuel sector.

The fossil fuel sector will have a longer sunset than many hope, which explains why ConocoPhilips was happy to buy Permian Basin oil reserves from Royal Dutch Shell. It also speaks to different fossil fuel pressures being applied in Europe relative to the US.

It is such a big subject that one can't make a simple 2021 investment decision on such assets but be careful not to pay too much to invest in the 'new' or sell for too little to exit the 'old'. (witness the stalking AMPOL).

For the politicians - Increased global demand for energy will make it extremely challenging for the G20 to agree to steep reductions in the use of coal, let alone oil and gas (making James Shaw a bit invisible at COP26).

Online Coordination – I have enjoyed the convenience of online Annual Meetings, and some product presentations.

Have you?

I have certainly 'attended' more Annual Shareholder Meetings.

The quality of online presentations remains good, but they lack the important interaction between the companies raising money and analysts; you can't craft a PowerPoint response for a well-informed probing question.

I was impressed when a client contacted me to confirm they have been making a serious attempt to engage more in the businesses owned via online meetings (they are also stuck in Auckland! – Ed) but they raised a valid question with me:

'Who is coordinating the dates and times of the meetings across New Zealand?'

This person had been disappointed by the clash between Mercury Energy and Stride Property Group, both of which he had investments in.

He amused me with descriptions of trying to attend both meetings via a complex (metaphorical) 'kitchen bench filled with technology' only to be cut off at important moments, witnessing time lags between the presentations (a concept that Einstein would challenge) and discovering qualitative aspects (and the opposite) about his investments.

Covid or no Covid I think online access to meetings is here to stay, and this is a good development.

Therefore, it is very important that businesses recognise that this is a marketing moment, and they must deliver a high-quality multimedia experience. To not do so is to disappoint your audience of investors.

For the record, Mercury Energy should be congratulated on its high-quality Annual Meeting. It was well delivered across the internet, demonstrably 'live', well chaired, informative, good processes for two-way communication with the audience and kept to schedule.

Stride Property Group's meeting was, legally correct, but unengaging and needed more polish.

I attended a meeting (unnamed) and was impressed that a director had been tasked with monitoring questions delivered through the CHAT environment (easiest method in my view) and filtering them (for duplication and relevance etc) prior to delivering them to the meeting Chair for a response.

My next hope is that registries establish live methods for online voting. I still prefer the delegated proxy to the NZ Shareholders Association (*), but some investors wish to submit their votes after the motions are discussed.

(*) If you haven't appointed the NZSA as your Standing Proxy and would like to do so, please ask and we can email you the forms to use with the registries.

My next hope is that all businesses publish the video recording(s) of the meetings on their websites for the convenience of all investors and analysts, not just those who were able to attend live. (Delayed participation is one of the great luxuries of the likes of Spart Sport; start and stop as I wish).

My two messages are:

To investors – take the opportunity to participate in the Annual Meetings of your investment entities and pressure them to improve the quality of the service provided; and

To the NZX and Registries – please contemplate a central calendar for all to liaise with as they plan dates and times for their Annual Meetings, to minimise clashes for investors.

The sector is making good progress with online meetings and presentations and if the coordinators are listening, they have plenty of scope to improve them further.

EVER THE OPTIMIST

The Reserve Bank has explained that they do not intend to shock the markets, or economy, and will increase interest rates more slowly than they decreased them.

The increments will be ''well considered steps'' which are 0.25% increments, although I'd like to see them introduce 0.10% increments also. Maybe this can wait until the apparent ''top'' of this next cycle for interest rate change.

The markets analysts view this interest rate move as making its way to at least 1.50%, and possibly 2.00% to be neutral with inflation targets. That being the case five moves to a 1.50% OCR followed by five possible moves of 0.10% would signal things rather well in my view.

Again, you can see that there is little excitement for fixed interest investors in plans that only move short term interest rate up in alignment with inflation itself.

ETO II – Vaccinations

NZ 1st Jab: 64.5% (total population) 75% (>12 years of age)

NZ 2nd Jab: 34.5% (total population) 40% (>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 – 6.10 billion jabs (volume = 39.5% fully vaccinated)

Total (recorded) Corona Virus cases – 231 million

Active Cases – 18.6 million (unchanged)

Daily rate of new cases – 475,000 (increase)

People in serious condition – 95,000 (decrease)

Daily Deaths (Covid related) – 9,000 (increase, but chart trend is down)

Investment Opportunities

You're being presented with a breather from the weekly flow of new investment offers. Nobody has launched one this week!

New issues, across most of the past few weeks came from:

Wellington Airport – 10-year bond (2 x 5-year periods);

ANZ Bank - Tier II subordinated bond, 10-year bond (2 x 5-year periods);

NZ Government – 30-year bond;

Oceania Healthcare – 7-year bond;

Local Government Funding Agency – topped up current bonds by $170m;

Transpower – 5-year bond;

Housing NZ - topped up current bonds by $100m; and

UDC Finance – issued securitised debt obligations to wholesale investors.

There were also some wholesale only mortgage-backed securities offers.

Most of these bonds are available to investors via purchases on the secondary market.

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

TRAVEL

It is possible to start making travel plans again.

Kevin will be in Timaru on 30 September (afternoon) and 1 October 2021.

Edward will be in Napier on 7 October & 8 October, Blenheim on 13 October, Nelson on 14 October and Wellington on 15 October.

Chris plans to 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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Market News 20 September 2021

This report from the Buy Now Pay Later sector rather sums up the evolving attitude to debt:

Baby Boomers – 10% acknowledged they had made a late payment;

Generation X – 22%; and

Generation Z (Millennials) – 50%!

It doesn't sound like they're all that interested in repaying all that new debt we are layering up for them.

INVESTMENT OPINION

Funding – Continuing on from the opening information above.

You may not agree with the ocean of 'borrow and spend' strategies launched by governments around the world, including ours, but globally investors continue to confirm that they do not mind funding such extravagance.

The NZ government announced the launch of its first ever 30-year bond last week, catching up with the rest of the developed world (nice timing though, at the lows for interest rates) and demand for the bond was immediately a very impressive $12 billion.

The NZ Debt Management Office only wanted to issue a maximum of $3 billion, which they have done. The bonds were issued with a 30-year yield of 2.8575%.

81% of the bonds went to offshore investors, which is great news on two fronts:

Respect from international investors for the governance and monetary regulation in New Zealand; and

We didn't need our own central bank to buy them!

For the curious, here is the geographic split of our supporters:

Asia - 18.7%

Australia - 6.2%

Europe/UK - 30.0%

New Zealand - 19.0%

North America - 26.1%

And the split of investor type:

Asset Manager/Central Bank - 75.6%

Bank - Balance Sheet - 6.4%

Hedge Fund - 11.0%

Bank - Trading Book - 7.0%

It would have been more useful if the Central Bank line above was split out on its own to know how much support comes from their placing of foreign reserves.

The mathematically minded will have quickly calculated that this issue resulted in 75% scaling for bidders, a much tougher result than the recent corporate bonds from Oceania, ANZ and Wellington Airport.

An excess of demand is better than the opposite.

Investors of the world still love NZ and are happy to fund our liberal spending behaviours, regardless of the long-term integrity of such policies.

Dear children of the world, you should be watching these developments a little more closely.

Name and Shame? – It's a little less fun being a fund manager in Australia now than it used to be (see below), and new disclosure pressures are coming for NZ fund managers too.

Whilst increased disclosure obligations should benefit net return outcomes for investors, expectation setting is not as black and white as the regulators might hope.

The Financial Markets Authority (FMA) is described as 'road testing' a review process for fund managers fees and performance. I hope they develop a better mechanism than that which has emerged in Australia.

My opening reference to fund management being 'a little less fun' relates to a very aggressive name and shame stance being taken by the Australian regulator, APRA.

APRA is monitoring performance relative to certain targets and those who fall outside quite tight tolerances (0.50% p.a.) suffer from these steps:

Publicly named as Pass or Fail based on fees versus performance over the past 7 years;

Told they must write to their investors to describe the 'fail' status;

If they appear on the fail list two years in succession they must stop accepting new clients until performance improves; and

If they continue to 'fail' they must offer clients the ability to switch to another 'better' fund manager;

The concept of reducing the impost of fees on savers and investors is unquestionably commendable, however, the measurement filter is fraught and likely to result in a mix of unintended consequences.

I agree with some who are already pushing back, and justifiably highlighting the following:

Our returns have outperformed many other investment opportunities presented to investors by financial advisors both on a risk adjusted basis and long-term reward basis;

Investors are demanding a migration of assets toward environmental and social objectives (ESG) which currently deliver lower risk adjusted returns.

I also quite like the fund manager who pointed out that Warren Buffett fails the APRA test, and thus he would be obliged to contact his investors and encourage them to exit their investment in Berkshire Hathaway.

As we have mentioned occasionally in Market News, the world of finance is moving quickly toward measuring impact on the environment (cost or benefit) as sought by leaders endorsing the Recommendations of the Task Force on Climate-related Financial Disclosures.

So, is APRA guilty of endorsing the commercial imperative ahead of the needs of the planet, and the freedom of choice for investors? Neither stance is appropriate from a regulator.

In theory Emissions Trading Schemes (oops Australia doesn't have one yet) and the pricing of carbon should draw risk, reward and ESG closer together.

As I say, using a simple investment index performance parade to press for lower management fees is not as simple as APRA currently hopes.

Here's another thought:

If is it OK to press for lower fees based on underperformance by a fund manager, why is it not OK for a fund manager to ask for higher fees following outperformance?

My stance – I am OK with outperformance fees so a fund manager can afford the most talented staff in the market. However, the performance benchmarks need to be far more challenging than they are for most funds at present.

Some funds 'only' promise to outperform the 90-day deposit interest rate, which my children could do blindfolded, whilst holding down day jobs.

At the other end of the performance spectrum Morrison & Co (managing Infratil) receives outperformance fees after delivering returns in excess of 12% per annum (Hurdle Rate).

Yes, Morrison & Co stands to earn some additional reward by putting my capital at risk, but this is what I asked them to do, expecting that they will be better at the task than me.

They collect a base fee on the basis that I have contracted them to manage some of my money and if they can exceed a 12% hurdle rate I should applaud the announcement that I need to pay them more.

I think this results in me making a 'President for the Day' determination for the Financial Markets Authority:

Don't set out to suppress the potential for fund managers to perform strongly and earn well.

Focus your energy on defining appropriate performance indices from which fund managers are entitled to secure a range of fees.

Fixed Interest assets: Recorded inflation plus a percentage +/- certain standard deviations;

Property assets: Indices +/- certain standard deviations;

Shares: Global Indices +/- certain standard deviations;

Commodities: Global Commodity Index +/- certain standard deviations.

Outperformance Fees: High nominal performance relative to recorded inflation, and a rising low tide mark to measure from.

Fees must be discounted the following year if performance is below 1 Standard Deviation of average performance targets.

Fees payable can expand once performance exceed 1 Standard Deviation of average performance targets.

The Regulator can evolve the performance indices over time.

Public disclosure of normal and abnormal performance would increase.

Consequence – slightly higher investment performance, or slightly lower fees, but not both.

The other alternative, of course, is to self-manage your investments (excludes Kiwisaver) with the help of a financial adviser!

EVER THE OPTIMIST

NZ Super Fund continues to add billions (+$15bn last year) to the value of the fund and to outperform its performance benchmarks (+$757m or about 5.0% of annual result).

The NZSF has outperformed its reference portfolio by 1.24% which is very impressive over a long period.

I repeat my invitation to Matt Whineray (CEO) to open a Kiwisaver doorway and I am certain that he would attract a large following and contribute to downward pressure to fees charged across the sector.

ETO II

Travel providers are surveying their customers trying to understand their wants so they can plan ahead.

Global platform Agoda says interest in NZ is strong and wants us to be ready to serve from 2022 onwards.

This 'demand building' message is consistent with the confidence of airline owners, one of which tried to takeover EasyJet before Covid19 was resolved in Europe, and of the current takeover attempts being made for Sydney Airport.

Qantas is itching to get moving and Greg Foran has Air NZ well positioned so it seems to me that we are ready to deliver people down-under; are we ready to receive them?

While I am talking about the airlines, it looks like our regulators aren't yet ready for overseeing post Covid business, still resting on their 2019 thinking.

The Australian competition watchdog is concerned that a sharing proposal between Qantas and Japan Airlines will initially have a dominant position on the route and make it difficult for competition.

For goodness sake, surely we should be urging all businesses to take risks again and to move forward into the unknown, giving them a chance to profit. It wouldn't be hard to review such permissions annually as new data emerges.

Our fastest move forward, out of Covid economic complications, is to provide better business opportunities than we would otherwise tolerate from a regulatory perspective. It would be a much better release of value than some of the unproductive billions 'we' have been spending on artificial support mechanisms that have no future in a well-functioning economy.

ETO III – Vaccinations

Great news, we finally have our own focal point – 90%+ vaccination of those aged over 12 years of age (4.2 million people), which is approximately 78% of our total population (4.869 million).

It is a stretch goal, but there's no point in issuing an easy one. I'd prefer that the government also applied a time based goal to ensure two forms of tension are applied to vaccination progress (carrot and stick).

We are about to discover just how collegial our small population can be. The only countries to exceed 90% of total population are small island nations. However, Singapore with a population of 5 million and Spain with near 50 million have reached 82% of total population and are still climbing.

A lot of large nations, including China, have passed above 75% of total population.

Now would be an appropriate time for the Prime Minister to declare 'we've got this' but then take effective action to make it happen. Less talk, more do.

So, I'll record our progress here for a while because it is very important for our local opportunity.

NZ 1st Jab: 60.5% (total population) 69.8% (>12 years of age)

NZ 2nd Jab: 31.1% (total population) 35.80% (>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

Global Data

Vaccination doses delivered – 5.90 billion jabs (42% Jab 1)

Total (recorded) Corona Virus cases – 227 million

Active Cases – 18.6 million (decrease)

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

People in serious condition – 102,000 (decrease)

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

Investment Opportunities

Wellington International Airport – issued its new 10-year bond last week, with two periods of 5 years (2026, then on to 2031).

The interest rate for the period to 2026 was set at 3.32%.

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

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

TRAVEL 

It is becoming possible to start making plans again.

Edward will be in Napier on 7 October & 8 October, Blenheim on 13 October, Nelson on 14 October and Wellington on 15 October.

Kevin will be in Timaru on 30 September (afternoon) and 1 October 2021.

Michael Warrington 

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Market News 13 September 2021

Is it too much to hope that the NZ government and Meridian Energy negotiated an electricity supply price linked to the market price for aluminium?

Maybe with a floor price minimum for electricity and a cap for aluminium, so as not to see a limitless impact on both the user and the supplier.

…… silence

For those wondering why I ask; the price of aluminium has increased from US$1,600-US$1,800 per tonne in 2020 to being US$2,700 now, making business rather more profitable than Rio decried in its recent negotiations.

Price charts would have prepared negotiators for variable price activity.

INVESTMENT OPINION

Dear Bankers – After removing cheque use from the system, I know you have been trying to engage with clients to make more use of online banking and telephone banking.

Well done, but, you're not achieving enough progress based on what we hear from our clients.

May I respectfully suggest that you ponder a new service that makes third party assistance with online banking secure for the customer, so others can help the client.

Almost all of the technologically reluctant have a cell phone, and 95% will be smart phones.

If you push YES and NO choices out to their mobile phones (Like Google, Apple, Xero, etc. do) the client can easily approve third party login to their account and authorize payments set up by the third party.

Imagine the client calls the bank;

Imagine your staff member logs into the client's bank account (triggers an approval request to the client's smart phone – they can click YES);

Imagine the bank staff member sets up the payment sought by the client (triggers an approval request to the client's smart phone – they can click YES).

The client meets their payment obligation and returns to their cup of tea.

Clearly a trusted child or grandchild could replace your staff member and arrange such online banking instructions too.

Core Services – As we toss regulatory ideals around, I do hope that some calm, influential people are ensuring that core services are sustained, under all outcomes.

The electricity blackout that occurred in NZ (Waikato specifically, this time) was avoidable, and we did have sufficient generation capacity at the time.

However, if we rush to block out less desirable generation and waste capital building illogical generation we will end up with unavoidable and recurring electricity supply problems, which should be considered intolerable by all.

The headline that prompted this point, again, for me was the failure of two electricity retailers in the UK. Supplying electricity during periods of large increases in the price of electricity became impossible, exposing that the UK does not have the supply, competitive tension and carbon sustainability balance that it presumably desires.

The UK appears to have price caps to protect consumers, but the failures of smaller suppliers implies to me that the larger electricity generation and retailing businesses find it easy to use prices increases to kill off the smaller businesses.

You won't find this in any corporate strategic plan, but it may well be the unintended consequence of regulatory ideals.

Do we have any such problems in NZ?

The urgent withdrawal of coal and gas from the NZ energy landscape has unquestionably resulted in disruptions to our energy supply and pricing.

Then to food, another vital resource for all.

I was surprised, and disappointed to see a developed nation, Sri Lanka, being discussed as having a developing food crisis as its currency comes under a lot of downward pressure.

The country's foreign financial reserves have fallen dramatically, and banks are reported as having run out of foreign exchange to help finance food imports.

So, it's more of a financial crisis than food alone (all imports are being banned or restricted by their government) but I was surprised that a nation known for fabulous cuisine is now struggling to supply sufficient food to its population.

It highlights for me the importance of good governance, all the time, and using a long lens. We can and will be punished financially if we govern in favour of short term heavily lobbied whims that cause long term damage.

Sri Lanka will now enter a painful period of lifting interest rates to attract money toward their Rupee and the higher cost of money will suppress economic activity.

If you are pondering a silver lining, it will be cheap to travel to Sri Lanka with a pocket full of US Dollars once we are able to do so.

ESG – I don't think investors need to move their savings around in the hunt for better Environmental, Social and Governance behaviour because the fund managers are wisely moving towards you.

Each new survey on the subject now shows a rising number of funds displaying better ESG decision making.

This reminds me of the fund managers presenting at a recent ANZ sponsored event when they said they also didn't feel a need to have ESG only funds because soon all investment decisions would be made with reference to such tensions.

Financiers (those of us in the room) are demanding more ESG measurement and achievement and governments are regulating for it, observe the Emissions Trading Scheme, Zero Carbon Act and now, more importantly the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill.

Under this new legislation Climate Reporting Entities (CRE) include the following:

All listed equity or debt issuers; (why not unlisted entities using public funds? – Ed)

Registered banks, credit unions and building societies, where the entity's total assets for each of the two preceding accounting periods exceed $1b;

Licensed insurers, where the insurer's total assets or gross premium revenue exceed $1b and $250m respectively over each of the two preceding accounting periods; and

Managers of registered investment schemes where total assets under management exceed $1b (i.e. your Kiwisaver and general fund manager).

The reporting will be based on the 2017 recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), a global initiative led by Michael Bloomberg and Mark Carney. We discussed this briefly when it came out.

At the time it seemed hopeful to me, so it is great to see it being cemented in with real effect.

Chapman Tripp estimate that the law will capture 90% of financial assets under management.

Climate related risks are no longer about governance for both public perception and better outcomes, they are increasingly considered from a perspective of being a meaningful financial risk.

Everyone will be onboard, very soon.

Be careful not to waste money on unnecessary transactions changing funds; much better to keep the pressure on your current manager by asking what they are doing to improve.

Interest Rates – They are going up, right?

Maybe not.

The Reserve Bank of Australia isn't as keen as the headlines to increase interest rates; they left their Official Cash Rate unchanged at 0.10% last week.

Their only tilt toward adding monetary policy tension was to agree to reduce their bond buyback programme from A$5 billion per week to A$4 billion per week. This makes it a little like our housing market; still moving in the same direction, just doing so at a slightly slower pace than previously.

Dr Lowe reminded the markets of two things:

The bond buyback programme aims to keep market interest rates and borrowing costs low; and

The RBA would not increase the cash rate until actual inflation was sustainably (my bold) within the 2% to 3% range, being a condition that they do not yet forecast will happen prior to 2024.

They go on to say: Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

You might remember previous commentary from us about the significant shift by central banks from being forward-looking inflation forecasters, moving interest rates on assumptions to now using the rear-view mirror, to observe facts passed, before making monetary policy changes.

Prior to the spread of Covid (Delta) across NSW and Victoria the RBA had concluded the recovery warranted winding back the monetary stimulus. Delta is delaying the recovery but it's good to see them taking a longer-term view and describing the current setback as temporary.

If Australia continues to successfully pinch New Zealanders to work over there, then it's more likely to be us that feels the pinch of inflation due to wage increases than Australia, via scarcity of labour (not productivity increase).

Enjoy the lift in longer term bond yields because it doesn't yet feel like a reliable trend to me.

Employment – I am interested to see whether US employment numbers rise again over coming months.

The emergency payments being made to unemployed and self-employed stopped last week.

It is time to ask the productive economy to provide more of the household income or discover that it is not capable of doing so.

If it is incapable of supporting more employment (across all groups) and higher incomes, then the Federal Reserve may be proved correct with its assumption that current inflation pressure will be temporary.

US employers appear to be trying, reporting their highest levels of job vacancies last week. Let's hope they now find the employees.

From memory NZ also experienced an unusual, or disappointing data point last month when Statistics NZ reported that the number of New Zealanders receiving a benefit had increased at the same time as employment had lifted and many businesses were struggling to find enough job applicants.

Maybe the NZ government should follow the US lead and test which of its benefit payments are needed, and which ones might be holding back potential employees to help drive our economy.

Then, just like in the US, if our economy is not strong enough to employ more of the people currently receiving benefits where will our long-term inflation come from?

Evergrande – This story is about a bad debt problem that might grow.

It is certainly a large domino if it falls, being one of China's largest property development companies (measured by sales).

Clearly sales have been insufficient recently to pay their debt costs.

The credit rating agencies have reduced the company rating into the 'C' zone, which implies imminent default, observing that current cash is insufficient to service debt obligations over the coming 12 months.

The Chinese government has been actively managing 'down' the activities of the country's technology companies. It will now be very interesting to see if they try to manage 'up' the property sector to try and avoid such a significant financial failure.

Local Opportunity – Infratil's announcement that it is to open a beachhead for investment in developing renewable energy in Asia is both exciting and frustrating.

It's exciting for IFT shareholders as the company pushes ahead with investment opportunities that meet the board's threshold for capital return.

However, it is frustrating that their home nation, New Zealand, which claims it wants to expand its renewable electricity generation, is not doing enough to attract more investment from Infratil locally.

I am certain that Morrison & Co is constantly engaging with the NZ government as it looks for opportunities to invest in local infrastructure opportunities but those meetings are clearly resulting in no progress because all recent investments have been made outside New Zealand.

Ironically, IFT actions are creating a nice economic diversity for their shareholders.

EVER THE OPTIMIST

A 'local' (OK, Sydney) start up (SunDrive Solar) is to compete on the market to supply solar panels.

Their use of copper (local supply!) instead of silver may reduce the cost of solar panels even further, which is great news.

It's almost funny, given the conflict between China and Australia, to see an Australian solar panel business seeking to compete for use of local resources for a product that China may have thought they were controlling.

ETO II – Vaccinations

Vaccination doses delivered – 5.65 billion jabs (42% Jab 1)

Total (recorded) Corona Virus cases – 224 million

Active Cases – 18.8 million (increase)

Daily rate of new cases – 550,000 (decrease)

People in serious condition – 104,000 (decrease)

Daily Deaths (Covid related) – 8,000 (decrease)

Good on National Australia Bank (NAB) who have temporarily published their logo as JAB. Nice idea. It aligns with the Australian government's move toward vaccine passports and encouraging their use.

Investment Opportunities

It has been busy recently, and apparently it will continue to be in the weeks ahead. Recent issuers include: Oceania Healthcare, Transpower, ANZ (as noted), Resimac (mortgage sales) and UDC (securitised loan book).

The government is even planning its first 30-year bond (catching up with Auckland Council, and the world – Ed).

Wellington International Airport – is launching a new 10-year bond, with two periods of 5 years (2026, then on to 2031).

WIAL has defined the minimum interest rate for the period to 2026 as 3.25%.

We have a list for clients wishing to place a request for a firm allocation. The list will close on Friday, 17 September at 10am.

 

WIAL has set a minimum investment size of $10,000 and has announced that they will pay the brokerage costs.

 

ANZ Subordinated Bond – ANZ completed its offer of a new subordinated Tier II bond, with a maturity of 10 years and a possible repayment after 5 years (2026).

The interest rate was set at a conversation starting 2.999%

Demand was far greater than the volume of bonds offered, resulting in scaling. ANZ issued $600 million of the new bonds.

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

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

TRAVEL

It is becoming possible to start making plans again.

Kevin will be in Timaru on 30 September (afternoon) and 1 October 2021.

Please contact us if you would like an appointment.

Michael Warrington 

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Market News 6 September 2021

Thought piece #1

For my parliamentary manifesto:

Based on personal experience, Home Detention is not an appropriate sentence for any crime that warrants incarceration.

Thought piece #2

Here’s an idea to scare the Orwellians’:

Add a regulation to the Health Act, that under pandemic conditions the Director General of Health can access mobile phone location data linked to a National Health Identification number.

In return, the government agrees to always pay $5 per month to a phone service provider, or perhaps pay a person’s whole monthly charge only during the pandemic.

Track and Trace sorted.

INVESTMENT OPINION

It’s a collection of small thoughts today.

Colour – Did you see that Genesis Energy has taken Z Energy to court over the use of a colour; orange.

No, not quite as simple as a primary colour debate but apparently we don’t have better things to spend valuable capital on at this stage.

I hope Genesis Energy is clear about the colour that should be used for wood as we search for it amongst the trees we are striving to plant to save the planet.

Silly – Whilst I am commenting on things that are becoming silly, an article in Australia reached ‘peak silly’ for me.

The writer, reports that a leading ethical investor was urging the country’s superannuation funds to use short selling as a tactic to apply pressure to ‘bad’ companies to improve their game with respect to sustainability of the planet (ESG focus).

Short selling is the practice of selling a share you do not own (borrow it to make delivery to the buyer) and hoping to buy that share back at a lower price.

Usually this strategy is a value play, where the seller is convinced that the share price is too high, and it will fall once appropriate value is recognized more widely across the market.

Whether you like short selling or not, trading this way for value at least makes sense.

Selling shares, to pressure a share price lower and attempt to embarrass directors of a company into changing a behaviour is an error of mixing politics with business.

If the upset people truly want to influence the board they would be better served to buy shares (not sell) and to pressure the board to improve ESG strategies.

If they cannot bring themselves to buy shares and apply pressure, surely these folk have better uses for their capital, such as setting up competing businesses with more sustainable governance and if they are correct, the consumers will come and do business with them instead.

Just as bizarre was the revelation that a US hedge fund seems to be claiming that it mitigates its own climate risks in the portfolio by short-selling the companies that it deems to be harming the planet the most. Soon they’ll be claiming this is ESG positive for their business, when it clearly adds no value to the planet at all.

The most effective way to influence business in the right direction, and it is beginning to happen, is through regulatory pressure to report, which enhances measurement, and to apply penalties for poor behaviour (Emissions Trading Schemes, finance costs, investor policy demands etc).

Company directors will respond to these regulatory and financial pressures and consumers will do the rest.

Environment – Change takes time, a lot of it.

Can you remember when the world stopped using leaded petrol?

Shall I help?

August……. 2021.

Algeria has finally stopped supplying leaded fuel. The last nation to do so.

I hope our harmful emissions reduce rather more quickly.

Long-Term Thinking – There have been some good examples for investors of long-term thinking, which is the only way for investors to make portfolio decisions.

Short-term thinking is for traders.

In the midst of many near term difficulties for Sanford, Ngai Tahu has stepped up to try and buy a 19.9% stake. For me, Ngai Tahu has been the most impressive investor from the country’s tribes and iwi, displaying excellent long-term strategies.

You may recall that private equity interests have been trying to buy Sydney Airport, smack in the middle of Covid travel disruptions.

The CEO, and external private equity interests, have been increasing their shareholdings in Sky TV.

US Federal Reserve – Last week the entire world, of financial markets observers hung up on Zoom calls, put down their pens, phones and keyboards and listened to (or read) the speech by Jerome Powell, governor of the world’s most influential central bank.

The speech was made ‘virtually’ at the Jackson Hole gathering of the world’s central bankers. Adrian Orr attended and did not need an MIQ slot to make it home, presumably from his home office, to the dining room for dinner.

We wanted to know when the party was ending, specifically, when will the US Fed stop buying bonds to fund the US government and when will they increase overnight interest rates.

Not now, was the answer.

Powell dangled maybe we will stop buying bonds soon, but it had the same conviction as me saying to my kids that I might subsidise their Kiwisaver someday.

Don’t hold your breath is a lesson that one should pass on.

There seemed to be absolutely no reference to increasing interest rates and Powell was labelled the ‘Uber Dove’.

I found none of this surprising, and clearly neither did the market as it barely moved after the event.

No, my next speculative thought is that we will receive a warning about a change in strategy for the US Fed when the chairman changes.

Jerome Powell will want to be viewed as having successfully steered the good ship ‘USCASH’ through the Covid19 disruptions and not as an unemotional patriarch who made conditions more difficult for the economy.

Powell will not want to change hats.

Another period as chairman (beyond February 2022 expiry) would see Powell with us through until as far ahead as 2026 (his term on the board expires 2028). This aligns well with the next Presidential election in 2025, a person who may push for a change, by 2026.

You may recall me stating at the start of 2021 that vaccination progress and cheap and plentiful money will be the key drivers for the year.

If Powell is retained as the chairman of the US Federal Reserve next February you can be assured monetary policy will not ever be ‘tight’ during the subsequent four year period. At best he may add a little tension.

So, in my view, cheap money prevails for years yet.

Plentiful money is being approved by the President and Senate as you read, so I think you can be assured that the volume of money on the move in the economy will remain high too.

You’ve been reading about company earnings being reasonably strong in 2021 but it will feel odd to predict that share indices may end 2022 higher than they started!

Post Script: A Russian newspaper reported a belief that the US Fed will increase the Fed Funds rate to 0.32% in 2022, then 0.77% in 2023 reaching 1.26% in 2024.

The rate of change seems credible but what I liked most was that they have moved away from the 0.25% increments. I hope the US Fed does too.

If the US Fed finds it hard to make 0.25% step decisions why not drop down to one eighth or 0.05%? This would enable clear signaling but a flight path that was gradual enough to avoid unnecessary economic disruption.

We could do the same in New Zealand.

Emigration – Another grain of sand.

On the basis that Michael Venus could not get back into New Zealand after working internationally (professional tennis) he has decided instead to have his family leave NZ and join him.

It’s just one anecdote, and maybe I am tuned in to those that trouble me, but losing people who would rather be in NZ does trouble me.

International demand for health people will be unrelenting and they will be paying more than we do here. The same will be true of all of the worlds necessary services and most profitable business sectors (think technology).

For a brief moment we thought surely everyone would want to be in NZ, but the world is moving on.

I worry about the impact on NZ productivity, which we need to support employment and the huge increase in our financial obligations.

Solar – If NZ has a policy of wanting to increase the percentage of renewable electricity, especially in the North Island, and to increase total supply, maybe we would be better to direct subsidies to solar panel installation than electric vehicles?

Australia’s electricity market may be reaching a point of being oversupplied and putting downward pressure on fossil fuel energy (gas, and hopefully coal one day). There is evidence of electricity price declines, and the volume of localised solar generation is putting unexpectedly high pressure on the grid.

Unimpressively the corporate response was to seek regulatory permission to charge the small generators more rather than invest to improve the capacity of the grid for this quite obvious future energy source for the nation.

The huge recent increase in the price of coal doesn’t speak well for a planet that claims it is trying to wean itself of this energy source.

Maybe the coal price increase also speaks to supply dropping faster than demand, which would be an optimistic way of looking at it.

Spain will close its last coal fired generator in 2022 and the government and unions have agreed to a shut down the entire coal industry. It seems committed to redirecting the subsidies to the renewable sector, away from the coal industry which had received until this point.

I’m not actually a fan of subsidies as they are sponsor artificial behaviour (regulation should lead preferred outcomes) but where subsidies exist it makes sense to align them with regulatory preference that benefits an entire population.

Australia and Spain seem to be at opposite poles of the coal debate.

I hope NZ (and Flick Electric) is better prepared for when we have many more small generators wishing to supply (and receive) electricity across our grid (Transpower and local distribution entities like Vector).

EVER THE OPTIMIST

Rocket Lab is now listed in the US and next it is the turn of Allbirds, Tim Brown’s shoe business that originated in Wellington after he retired from the Phoenix.

Maybe his namesake, Tim Brown of Morrison & Co (Infratil, Wellington Airport and bus company fame), could put him in touch with Lloyd’s brother Rob and hey presto, Allbirds could become a future sponsor of the Wellington Phoenix football team.

I hope Tim Brown (the shoe guy and footballer) can’t think of a better way to allocate some of his new resources.

A nice way to close the circle, I think.

ETO II – Vaccinations

Vaccination doses delivered – 5.50 billion jabs (39.9% Jab 1)

Total (recorded) Corona Virus cases – 220 million

Active Cases – 18.8 million (increase)

Daily rate of new cases – 600,000 (stable)

People in serious condition – 104,000 (small decrease)

Daily Deaths (Covid related) – 10,000 (increase)

The good news is that all manner of businesses are making Covid vaccination a feature of employment. Sometimes vaccination brings benefits. Sometimes being unvaccinated carries penalties.

Unvaccinated staff of Delta Airlines will earn US$200 less per month following a surcharge announced by the company and it will only pay sick pay for Covid related illness to the vaccinated.

Investment Opportunities

Wellington Airport Bonds – Wellington Airport has announced it is considering making an offer of 10-year senior bonds with the interest rate re-setting after 5 years.

The offer is expected to open as early as next week with full details released then.

We have a list which clients are welcome to join for this issue.

ANZ Subordinated Bond – Next up, ANZ Bank NZ has announced its offer of a new subordinated Tier II bond, with a maturity of 10 years and a possible repayment after 5 years (2026).

The interest rate (until 2026) will be set on 10 September which is expected to be in the vicinity of 3.0%.

They might issue between $500-700 million but demand should again easily exceed this sum. Ultimately ANZ only needs to issue about $2 billion Tier II securities and a mix of maturities will be desired (just like your investment portfolio) so splitting this funding into 3-4 tranches makes good sense. * (Q? below)

If you wish to invest in this bond offer now is the time to act. We have a list which clients are welcome to join by describing a firm allocation request. The list closes at 5pm on Thursday 9 September .

Clients do not pay brokerage. Payment will be required next week.

Clients receiving financial advice from us can access Kevin Gloag’s research article on this bond offer via the Private Client page on our website.

* Would you invest in an ANZ Tier II bond if it had a legal life of 12 years (2033), with a first call date (possible repayment) of 7 years (2028)? You can assume that it would offer a higher interest rate by virtue of its longer duration.

Please let us know so we can discuss demand with the banks.

Oceania Healthcare – Thank you to all who participated in the offer with us. It was a very well supported bond offer, such is the volume of cash in the market at present, resulting in a large scaling ratio.

$100 million bonds were issued at 3.30% and they will begin trading on the NZX next week under the code OCA020.

Transpower – Thanks also to all who participated in this bond offer through Chris Lee & Partners. It too was a popular bond offer.

The company issued $200 million TRP090 bonds in a very successful issue and set the interest rate at 2.047%

This bond will begin trading on the market later this week.

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