Chris Lee & Partners Ltd

Market News 28 September 2026

Johnny Lee writes:

A strong result from Fonterra sent its share price higher last week, as the company produced its first set of full-year financials since the sale of Mainland Group.

The company reported an underlying net profit of $1.2 billion, with earnings of 71 cents per share, up from 54 cents last year. A dividend of 33 cents will be paid on 15 October.

This brings the total dividend for the year to 73 cents, although the company points out that 16 cents was attributable to Mainland, meaning that holders should adjust expectations going forward.

The sale of Mainland was followed by a significant capital return, with $2 per share paid in April of this year. While this distorts the headline figures, the underlying result was strong, both on a nominal basis and as a return on its capital.

The 2026 financial year saw record milk volumes, with 1,571 million kilograms of milk solids collected. Market share remained steady at 78%. Importantly, the company also took the opportunity to deleverage, reducing net debt from $1.7 billion to $967 million, representing a gearing ratio of around 20.8%, well below the bottom of its target range.

Fonterra also outlined its strategy for the years ahead, as it looks to capitalise on its position.

Its short-term plan involves investing between $1.3 and $1.6 billion, annually, into an expansion of its South Island protein network, its energy and wastewater strategy, and a sustaining asset programme.

As part of this, its debt ratios will likely change. Gearing is expected to climb over the next three years, albeit remaining within the lower end of its 30% - 40% target range.El Nino remains front of mind and represents a risk for the business heading in 2027. Fonterra has responded by way of adjusting its forecasts, which includes an earnings per share range of 65 to 85 cents.

Overall, the result left little for the pessimists. Fonterra enters the 2027 financial year with a stronger balance sheet, a strategy for growth, and a smaller, perhaps less volatile business than the year prior, following the Mainland sale. While guidance is particularly uncertain in the face of evolving weather patterns, the reduced gearing gives the company flexibility to approach this as it unfolds.

Fonterra’s shareholders fund, which is available to the public, has had a strong 2026. Indeed, it has been one of our strongest performers – the share price began the year around $8.16, before falling to around $6.15 after the Mainland sale distribution of $2. Now, it has returned to $8.40 while paying healthy dividends, providing ample reward for shareholders.

KMD Brands, formerly Kathmandu, also reported its financial results last week.

It has been a torrid few years for KMD shareholders, culminating in a share consolidation in July which saw every 25 shares become 1 share, lifting the share price from near 8 cents to $1.92 today.

Last week’s result saw some improvement, however, with growth seen across all three business lines.

While the headline result - a $414 million loss - looks dreadful, this does include a $462 million impairment charge mid-year. Earnings otherwise improved, up 138%. No dividend was declared.

Sales rose 6.5 percent year on year. Both Rip Curl and Kathmandu have now seen five consecutive quarters of sales growth, while footwear brand Oboz has been more volatile, although positive over the year. Online sales continue to be a key avenue, with growth seen both in terms of sales, and sales as a percentage of the overall business. 15 percent of all Direct-to-Consumer sales are now conducted online.

The balance sheet has improved. Net debt now sits at $48.1 million, an improvement of $4.7 million.

Store closures continue. 17 were closed over the 2026 financial year, made up 11 Rip Curl and 6 Kathmandu stores, as the company targets “optimal profitability and ROI for store portfolio”. Store numbers will likely remain volatile, as this strategy continues.

Guidance is for a further increase in earnings next year, largely driven by cost-saving initiatives. Like many of its retail peers, cost control has become a huge focus in a difficult economic environment. KMD also reported that the first seven weeks of the next financial year have seen some improvement, particularly for the Kathmandu brand.

Asset sales may also form part of next year’s story. The company had earlier indicated that it was looking to divest its Southeast Asian manufacturing facility, with the intention to move production to a third-party facility over the next year. This process continues.

It has been a difficult journey for KMD Brands and a painful one for long-term shareholders. The good news is that, despite a challenging economic environment, sales are still growing and earnings are growing alongside them. The recent capital raise has seen an improvement to its balance sheet, and while the pathway back to meaningful profits and dividends continues, the current strategy seems to be heading in the right direction.

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Last week also saw an important development for holders of the Kiwibank Perpetual Preference Shares, KWBHA.

These securities were issued back in 2021 at a rate of 4.93%, a significant margin (2.60%) above rates at the time.

Kiwibank has confirmed it will be repaying on the first optional redemption date, on 2 November. While this was expected, it provides holders with certainty that liquidity will be available as we head into the holiday season.

Repayment also comes at a time when interest rates are spiking, with continued upward pressure on the oil price forcing swap rates higher. Recent issuance from Metlifecare and Kiwibank itself were priced higher than initially anticipated, as investors fret over geopolitical factors.

Holders of the Preference Shares should be mindful that the redemption does come during a particularly busy end of the year. Christchurch City Holdings, ASB Bank, Argosy, Auckland Airport, Contact Energy, Infratil and Ryman will collectively be repaying around $1.5 billion to bondholders this year.

Contact Energy has already indicated its intention to issue a new bond to replace the upcoming maturity. Ryman issued a replacement in June. More may emerge.

The repayment of KWBHA was not unexpected, but confirmation is welcome and allows holders a chance to organise their affairs ahead of time. So far, excluding the COVID delays, the Perpetuals have been a success for investors, paying high margins while enabling the banks to meet their funding needs from largely domestic sources.

Six more of these bank perpetual securities exist on our exchange – two from ANZ, two from BNZ, one more from Kiwibank and one from Westpac.

New issues

Lodestone Energy has opened its IPO at an offer price of $2.25 per share, with the company expected to list on the NZX on 22 October.

Lodestone Energy currently owns and operates five solar farms across New Zealand and plans to use the capital raised through the IPO to support its next stage of growth, including the development of additional solar farms.

Investors will be able to find the Investment Statement on our website from tomorrow.If you would like an allocation of shares, please contact our office with the amount you would like to invest and your CSN, and we will send you a contract note.

Contact Energy is expected to issue a new subordinated capital bond in October. We expect the bond to have a term of around 6 years, with an interest rate of at least 6.00% per annum.

Investors who are interested in this potential bond are welcome to contact us with their CSN and an indication of the amount they may wish to invest. We will then contact them once the final terms and further details are available.

Travel

Our advisors have an extensive travel schedule coming up over the next quarter, including the following dates:

6 October – Napier (Mission Estate) – Edward Lee6 October – Blenheim – Chris Lee9 October – Wellington – Gavin Parkes21 October – Auckland (Albany) – Edward Lee22 October – Auckland (Ellerslie) – Edward Lee29 October – Christchurch – Johnny Lee (FULL)

Chris Lee & Partners Ltd 

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Market News 21 September 2026

Johnny Lee writes:

Infratil has lifted its guidance for the year, following its investor update last week. It continues a trend of successive guidance upgrades as the company benefits from relentless demand in the data centre sector. Much of the update was dedicated to its data centre business and the data centre industry in general.

Demand is quite clearly not an issue for the sector. Growth in demand for AI models simply continues to rise, as more students, workers, businesses and systems utilise the new technology.

Instead, Infratil highlighted the current challenges in supplying the market, particularly around physical components. Significant backlogs now exist, from memory chips and resource consent to construction capacity and power supply.

This latter point is proving increasingly relevant to decision-making. US studies are now anticipating a growing shortfall in firm power supply for the data centre sector, as auxiliary sectors run into their own supply chain delays.

This, of course, has ramifications for Infratil’s US energy business, Longroad. Infratil is expecting growth to accelerate throughout the decade, although it highlighted the impact of rising interest rates on the company.

On the balance sheet side, Infratil flagged its intention to pursue further hybrid issues, similar to the IFT380 issued back in June.

These capital bonds carry a long maturity date - June 2057, in this instance - with an option for Infratil to repay them in 2032. If Infratil elects not to repay in 2032, it faces a margin penalty, incentivising it to repay and issue a new bond. 

The hybrid model has been used extensively of late. Issuers will be well aware that meeting investor expectations is mutually beneficial, ensuring future access to funding.

The balance sheet will also be bolstered by Infratil’s divestment plans. Infratil has recently reduced its Contact Energy holding and has placed Australian medical imaging business Qscan on the market. Contact Energy’s status as a listed company makes it an easy option, should Infratil seek to reduce further.

The strength seen in the demand for AI “compute” has kept Infratil busy and led to yet another earnings upgrade. However, challenges still exist in the supply chain and may persist for some years. Infratil’s position as an incumbent affords some advantage, with relationships and reputation already developed. 

For now, Infratil’s focus is on meeting this demand and positioning all its businesses to leverage off the current economic conditions.

Briscoes

Briscoes has provided its half-year results, as the retail stocks begin their own September reporting season.

Net profit fell around 5% for the half year, with net profit of $27.6 million reported. The dividend of 10 cents was maintained.

While sales hit another new record, weakening margins caused by increased promotional activity (sales) meant that the overall result was a modest decrease from the previous year.

Overall, the board was pleased with the result, acknowledging the difficult economic environment and the resulting cautiousness from households. 

Sporting goods, sold through the Rebel Sports brand, outperformed homewares. A number of high-profile sporting events, including the FIFA world cup, led to strong demand from consumers. 

Homewares sales were more sluggish, with the company highlighting weak demand for heating products and luggage sales, due to a milder start to the New Zealand winter and a drop-off in demand for international travel.

Perhaps the most interesting development was the decision to sublet some of its existing shop space to Chemist Warehouse. The long-term sub-leasing deal takes advantage of Briscoes’ national footprint, sharing the benefits of a strong geographical presence with other retailers.

With businesses moving increasingly online, and distribution centres becoming increasingly effective at meeting customer demand, the question then falls on how best to optimise existing floor space. In-store storage requirements have declined and are intended to be reduced further.

Indeed, Briscoes itself stated: “A key strategic objective is to reduce the amount of stock held in stores by holding more inventory centrally and replenishing stores more frequently.”

One wonders if this trend will continue, as a natural consequence of a consumer that is comfortable shopping online, greater use of warehousing, and businesses that are becoming increasingly conscious of floor space utilisation.

With a strong balance sheet and a strategy towards greater efficiency, the missing piece now is the return of consumer confidence. With inflation climbing and interest rates following, this may take longer than initially anticipated.

Seeka

Seeka Limited has also taken the opportunity to lift its guidance, providing a brief update to shareholders last week.

Guidance has been lifted from a midpoint of $41 million of profit before tax for the full year, to $43 million.

The uplift has been attributed to strong trading conditions, continued focus on margins and a growing contribution from its citrus business. 

The original figure was provided as recently as late August, perhaps highlighting the challenges surrounding forecasting at the moment. August’s guidance was itself an increase on the previous guidance. 

Seeka has proven an exceptionally strong performer over the past two years, although the two years prior were particularly poor. Primary sector stocks can see these sorts of swings, as commodity pricing, weather conditions and interest rates fluctuate. 

In Seeka’s case, its focus on net debt reduction over the past few years will shield them from the impacts of rising interest rates. It has decreased its net debt by $50 million over the last two years, while paying strong dividends in between.

With guidance lifted, the company looks well placed to continue this strategy in the short-term.

Precinct Property

Good news for holders of the Precinct Property convertible notes, PCTHB.

Precinct has confirmed its intention to repay in cash, albeit slightly shy of par value ($0.9999). Repayment occurs today (21 September). Repayment in cash provides a simple solution for noteholders and avoids a disorderly secondary market in Precinct shares.

Overall, it was a good deal for investors in the notes. Noteholders ended up receiving an interest rate of 7.56% for three years, before being repaid, virtually in full. 

The repayment of PCTHB leaves one other such instrument listed on the exchange, being PCTHC. These were issued at the same time as the PCTHB and offered investors the choice of a three or four-year term.

The repayment comes at a time when interest rates sit at two-year highs, buoyed by the strong oil price. Reinvestment options have begun to emerge, as borrowers grow increasingly concerned that rates will head higher still.

Holders of PCTHC should not yet assume a cash repayment in 2027. Precinct does retain the right to convert these notes to Precinct shares and will make its decision based on the economic conditions at the time. Indeed, the initial series of these convertible notes, PCTHA, were converted into shares.

Overall, the product was a success, paying a high rate of return before repaying almost all of the initial principal. 

Clients wishing to discuss reinvestment options are welcome to contact us.

Auckland Seminar

Our last seminar will be held this week in Auckland.

The seminar is open to both existing clients, friends, families this year and other investors.

The Auckland seminar will be held at Fairway Events Centre, North Shore, at 11:00am on Wednesday, 23 September.

We will discuss the current investment environment, recent developments across New Zealand and international markets, risk management, and some of the companies and sectors we are currently watching closely.

If you would like to attend the seminar, please contact us by email to reserve a place.

Bond issues

KiwiBank has announced a new five-year senior fixed rate note. This offer will likely offer around 5.00% per annum. Investors interested in this offer are welcome to contact us. Please note that Kiwibank will not be paying the transaction costs for this offer, accordingly, clients will be charged brokerage.

Metlifecare has opened a new 6-year senior secured bond, with a minimum interest rate of 6.00% per annum.

We have loaded the investment statement and presentation onto our website. For those that would like a FIRM allocation, please contact us no later than 11am on Thursday.

Contact Energy is expected to issue a new subordinated capital bond in October. We expect the bond to have a term of around 6 years, with an interest rate of at least 6.00% per annum. Investors who are interested in this potential bond are welcome to contact us with their CSN and an indication of the amount they may wish to invest. We will then contact them once the final terms and further details are available.

Travel

Our advisors have an extensive travel schedule coming up over the next quarter, including the following dates:

24 September – Ellerslie, Auckland – Chris Lee – limited appointments left

25 September – Ellerslie, Auckland (AM only) – Chris Lee - limited appointments left

25 September – Palmerston North – David & Gavin

5 October – Napier (Havelock North) – Edward Lee

5 October – Nelson – Chris Lee

6 October – Napier (Mission Estate) – Edward Lee

6 October – Blenheim – Chris Lee

9 October – Wellington – Gavin Parkes

21 October – Auckland (Albany) – Edward Lee

22 October – Auckland (Ellerslie) – Edward Lee

29 October – Christchurch – Johnny Lee

We will also visit Christchurch, Wellington and Lower Hutt in November. Dates to be confirmed.

Please contact us if you would like us to visit your area or would like an appointment.

Chris Lee & Partners Ltd

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Market News – 14 September 2026

New Zealand investors do not often get the opportunity to invest in a genuinely new electricity company.

That is why we are excited about the recently announced listing of Lodestone Energy, a New Zealand renewable electricity company that has developed from a start-up in 2019 into an operating solar generator with five solar farms, a growing development pipeline and ambitions to become a nationwide electricity gentailer.

Chris Lee & Partners has followed Lodestone since its early days. Some of our clients invested in the company's original capital raise and have watched the business develop from plans on paper into an operating electricity generator.

The proposed IPO provides an opportunity for investors to assess Lodestone’s plans for the next stage of its development.

Its ambition is to become a vertically integrated electricity company, generating electricity from its own solar farms and selling that electricity directly to commercial and, increasingly, residential customers.

The easiest comparison is with Meridian Energy, Mercury, Contact Energy and Genesis Energy. These companies own electricity generation and also sell electricity to consumers, hence the term "gentailer".

Lodestone is trying to build a new gentailer from the ground up, based primarily on solar generation and is already marketing its business in the Hawkes Bay for clients to join.

The company currently has five operating solar farms at Kaitaia, Edgecumbe, Waiotahe, Whitianga and Clandeboye. Together these provide approximately 266 GWh of annual generation. Clandeboye, Lodestone's first South Island farm, produced its first electricity in August. 

What particularly interests us is the repeatability of the model.

Rather than concentrating its capital into a handful of enormous generation projects, Lodestone generally aims for solar farms of around 25 to 35 MW. This is an attractive size because suitable land is easier to find, and the farms can be positioned close to population centres and existing substations which reduces the grid connection cost. 

A typical farm costs around $50 - 55 million to develop and produces around $6 million to $7 million of annual revenue. Lodestone believes it now has the capability to develop two or three of these farms each year, resulting in the businesses tripling over the next 5 years.

The strategy is relatively easy to visualise - find a suitable community, secure land and a grid connection, build a solar farm, contract the electricity to customers and then repeat the process somewhere else.

Lodestone already has a substantial pipeline of identified sites from which to do this.

In simple terms, management is planning to approximately double the business by FY29 and then roughly double it again by FY32.

That is an unusual growth profile for an NZX electricity company, which prompts the question from investors as to where the money will come from.

Building two or three $50 million solar farms each year requires substantial capital. This is where the proposed IPO becomes particularly interesting.

Management's base case is that the capital raised through the IPO, together with cash generated by the growing portfolio of operating assets, debt and potentially some partners, should be sufficient to fund the company's current development programme through FY32. In other words, Lodestone's present business plan is intended to become self-funding rather than relying upon shareholders continually contributing additional equity. 

We regard this as an important feature of the investment proposition.

It does not mean Lodestone will never raise capital again. If an attractive acquisition emerges or management decides to accelerate construction, another capital raising may make sense.

There is also another part of the Lodestone strategy that we particularly like.

The company does not intend to simply build solar farms and sell all of the electricity into the wholesale spot market.

Solar generation is extremely cheap to operate once a farm has been constructed, but it has an obvious limitation in that every solar farm produces electricity at roughly the same time.

As more solar enters New Zealand's electricity system, there is a risk that wholesale electricity prices during sunny periods decline. A solar generator relying entirely on the spot market could therefore help depress the price it receives for its own electricity.

Lodestone will want its generation effectively fully contracted or hedged rather than relying on unpredictable spot electricity prices. 

Its customer strategy is central to achieving this.

One of Lodestone's early innovations was its Virtual Rooftop Contract. Rather than requiring a business to install solar panels across hundreds of individual buildings, Lodestone generates the electricity at one of its large solar farms and contracts that renewable generation to customers as though the panels were effectively on their own roofs.

This model is proving attractive, with well over 300 sites already under this Virtual Rooftop model.

The attraction to customers is straightforward. They can contract renewable electricity without finding suitable roof space, installing and maintaining thousands of panels, or contributing the capital required to build the generation themselves.

Lodestone is now taking this strategy into the mass residential market.

The company became an approved electricity retailer in 2025, has established the necessary billing and operating systems, tested its retail offering and begun building towards its first mass-market customers. 

We think this could become one of the most important parts of the Lodestone story.

Management's ambition is effectively to enter a community, build a solar farm nearby and progressively sell electricity to businesses and households in that area.

If it works, Lodestone will own relatively low-cost electricity generation while also controlling the relationship with the customer purchasing that electricity.

That is the same economic model that has made New Zealand's existing gentailers valuable businesses.

Lodestone is attempting to build a new version of that model, without the legacy generation portfolios of the established companies. It has already shown that it can identify sites, obtain consents, finance projects, construct utility-scale solar farms and attract large commercial customers.

The next test will be whether it can build a residential customer base at scale. That is a different challenge from selling electricity to large commercial customers and will require Lodestone to acquire and retain thousands of households.

The backdrop is favourable. Electricity demand in New Zealand is expected to increase substantially over coming decades as transport and industrial processes electrify, gas availability declines and new sources of demand, including data centres, enter the market.

Lodestone does not need a large share of the market to become a much bigger company. Its current plans assume it can build towards approximately 2% of its addressable electricity market, with a longer-term ambition of 3% to 4%. If it can achieve that while continuing to add generation, the business will look very different from the company being listed today.

That also explains why Lodestone should not be compared too closely with the existing listed gentailers. Its priority over the next several years is growth, with cash generated by the operating portfolio expected to be reinvested into additional solar farms rather than paid out as dividends.

The next five years are therefore likely to be focused on expanding generation and building the customer base. If Lodestone reaches the scale it is targeting, the rate of development could eventually slow and more cash could become available for dividends.

Someone seeking an immediate 6% dividend yield is unlikely to view Lodestone in the same way as Genesis or one of the established electricity companies. The attraction is instead what the business could become if it delivers on its growth plans.

The attraction to this IPO is the potential for capital growth. If Lodestone can continue expanding its generation portfolio, build a meaningful retail customer base and do so without repeatedly returning to shareholders for more equity, the earnings capacity of the business could look very different five years from now.

The final investment decision will depend on the IPO price, forecast earnings, debt, cash flow, development expenditure and the assumptions behind the company's growth plans. 

The Product Disclosure Statement (PDS) will provide the detail needed to assess those factors properly.

In the meantime, clients who think they may be interested in participating are welcome to contact us with their CSN and an indicative investment amount. 

We can record their interest pending our review of the final PDS, pricing and offer terms. This does not commit a client to investing.

The proposed listing is also a welcome development for the New Zealand sharemarket, which has seen too few new companies come to market in recent years. 

Lodestone would bring something different to what has been listed recently, with a New Zealand founded electricity company with operating assets, institutional shareholders, an established development pipeline and plans to build a national gentailer.

Since being founded in 2019, Lodestone has moved from concept to operating five solar farms, constructing a sixth and selling electricity to commercial customers around New Zealand. 

The next phase is considerably more ambitious, with management seeking to expand generation and establish a meaningful residential customer base.

If it can execute that plan, and if the IPO is priced at a level that gives new investors enough upside for the risks involved, Lodestone could become one of the more interesting growth companies to join the NZX in recent years.

We look forward to seeing the numbers when it releases its Product Disclosure Statement.

Christchurch & Auckland Seminars

Following our recent investor seminar at Southward Car Museum in Paraparaumu in July, we are pleased to confirm that we will be holding our last two seminars in Christchurch and Auckland.

The seminars are open to existing clients, friends, family and other investors.

The Christchurch seminar will be held at Burnside Bowling Club at 11:00am on Thursday, 17 September.

The Auckland seminar will be held at Fairway Events Centre, North Shore, at 11:00am on Wednesday, 23 September.

We will discuss the current investment environment, recent developments across New Zealand and international markets, risk management, and some of the companies and sectors we are currently watching closely. We will also discuss signals of distress, aiming to caution risk-takers.

If you would like to attend either of these seminars, please contact us by email to reserve a place.

Bond issues

Metlifecare has announced a new senior secured bond, likely opening next week. 

The bond will have a term of 6 years, with an interest rate of at least 5.75% per annum.

Metlife is expected to pay the brokerage costs on this offer, however this will be confirmed next week once the deal opens.

Contact Energy is expected to issue a new subordinated capital bond in October. We expect the bond to have a term of around 6 years, with an interest rate of at least 5.75% per annum.

Investors who may be interested in these potential bonds are welcome to contact us with their CSN and an indication of the amount they may wish to invest. 

We will then contact them once the final terms and further details are available.

Travel

Our advisors have an extensive travel schedule coming up over the next quarter, including the following dates:

22 September – Lower Hutt – David & Gavin

24 September – Ellerslie, Auckland – Chris Lee

25 September – Ellerslie, Auckland (AM only) – Chris Lee

25 September – Palmerston North – David & Gavin

5 October – Napier (Havelock North) – Edward Lee

5 October – Nelson – Chris Lee

6 October – Napier (Mission Estate) – Edward Lee

6 October – Blenheim – Chris Lee

9 October – Wellington – Gavin Parkes

21 October – Auckland (Albany) – Edward Lee

22 October – Auckland (Ellerslie) – Edward Lee

We will also visit Christchurch, Wellington and Lower Hutt in November. Dates to be confirmed.

Please contact us if you would like us to visit your area or would like an appointment.

Edward Lee

Chris Lee & Partners

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Market News - 7 September 2026

Higher rates, weaker households and the warning hidden in the Reserve Bank’s forecasts

Most New Zealanders will have seen the headline this week that the Reserve Bank increased the Official Cash Rate by 0.25% to 2.75%, however far fewer will actually read the Monetary Policy Statement explaining why.

When preparing the Policy Statement, The Reserve Bank describes an economy with two different stories running at the same time, rather than just that inflation is too high and therefore interest rates must rise. 

It states that the export economy is performing well, supported by high commodity prices and the recovery of tourism. Many regional economies are benefiting from export income, while several of our larger infrastructure and electricity businesses are investing heavily.

However, the other story is that the domestic household economy is struggling. Unemployment is 5.6%, wage growth is low, house prices remain weak, household consumption is slowing and residential construction has struggled.

Into that environment has come another inflation shock from overseas.

Annual inflation rose from 3.1% in March to 4.1% in June, well above the Reserve Bank's 1% to 3% target range. 

Most of the sudden increase in inflation has come from fuel prices. However if you strip fuel out of the CPI then annual inflation actually fell to 2.9% as most measures of core inflation remain well inside the Reserve Bank's target range.

So why increase the OCR if most measures remain inside the target range? 

Its concern is the second-round effects.

A rise in petrol prices initially affects motorists directly. But fuel is also an input into farming, freight, aviation, construction, manufacturing and almost every supply chain, so eventually the rise in petrol will find their way into fertiliser, plastics, transport, food and other goods.

If businesses simply absorb those costs, the inflation shock eventually passes.

If businesses increase prices, employees then demand higher wages to compensate for their higher living costs, and businesses increase prices again to recover those wages. A temporary overseas shock can become persistent domestic inflation.

The wage price spiral dilemma follows!

That is what the Reserve Bank is trying to prevent.

Four of the six committee members believe inflation risks are now tilted to the upside. They are particularly concerned that recent high inflation could influence businesses' pricing decisions and that companies may increase prices by more than their additional import costs require.

The Reserve Bank has therefore concluded that it should begin gradually removing monetary stimulus and has changed the outlook for the OCR to gradually increase to around 3.2% over the next two years.

So another increase to 3.00% now looks likely, however a subsequent move to 3.25% is merely possible, although we think that decision will be much harder to justify unless domestic inflation proves more persistent than currently expected.

Financial markets had already begun reaching much the same conclusion. Before this week's decision, market pricing had shifted to imply an OCR of around 3.00% by the end of this year.

The reason we would be cautious about assuming a much larger tightening cycle is the other side of the story in the Reserve Bank's statement in that the New Zealand economy is not overheating.

The Bank assumes GDP was essentially unchanged during the June quarter. It expects growth to have resumed during the September quarter, forecasting quarterly growth of around 0.5%, but the recovery remains uneven.

Unemployment has increased to 5.6%, and the Reserve Bank believes there is still substantial spare capacity in the labour market.

Wage inflation was between 1.7% and 2.0% in the June quarter, which hardly points to an inflationary wage boom. At the same time, households have continued to spend cautiously.

So, if we do not have a wage boom and household consumption remains subdued, there is a real risk of significantly harming the domestic economy if we get this wrong.

That caution is also reflected in household finances. The household saving rate has risen, consumption has grown more slowly than incomes, and falling house prices have weakened household wealth. The Reserve Bank specifically notes that previous reductions in interest rates did not produce the usual corresponding increase in housing wealth and household spending.

This is where the latest interest rate decision becomes more concerning.

Higher interest rates are bad news for home borrowers.

Many households entered 2026 expecting mortgage rates to remain stable. Instead, rates have risen, mortgage rates have begun responding and the Reserve Bank is now signalling that the OCR itself is likely to rise further.

For a household with a large mortgage, even relatively small changes matter.

An additional 0.50% interest cost on a $500,000 mortgage is $2,500 a year before allowing for principal repayments. That money has to come from somewhere. It generally comes from reduced discretionary spending.

There is also little reason at present to assume that house prices are about to rise.

National house prices remain below their November 2021 peak and have been broadly flat to lower for approximately three years. Housing inventories are elevated, particularly in Auckland and Wellington, and the Bank explicitly acknowledged that rising mortgage rates could push house prices lower.

That creates a difficult problem for recent first-home buyers.

RNZ reported this week that it estimates approximately 4,000 first-home buyers now owe more than their homes are worth. 

One couple described their position as having effectively lost half of their deposit.

Negative equity does not necessarily mean someone will lose their home. As long as a household can continue making its mortgage payments and does not need to sell, it can remain in the property and wait for values to recover.

The difficulty is that negative equity removes options.

A household may be unable to sell without crystallising a loss. Moving for employment becomes harder. Refinancing with another bank becomes more difficult. Borrowing against the property may be virtually impossible.

Banks also become understandably uncomfortable as gearing approaches 100%.

The equity contributed by the borrower provides the bank with an important buffer if the property ultimately has to be sold. This is also a key reason why the Reserve Bank imposes loan-to-value restrictions on banks, as they provide protection against falling house prices and financial distress.

Some recent purchasers may have done everything that was expected of them. They saved a deposit, secured employment, passed a bank’s servicing tests and bought a home.

Yet they could still find themselves with virtually no equity simply because the property market moved against them.

Wellington deserves particular attention.

Homeowners are already dealing with weak property prices and a labour market affected by the reduction in government employment. They are now receiving ridiculously high Tiaki Wai water bills.

The average water bill across Wellington this year is $3,000 - $4,000, although the actual amount varies according to location and property value.

Some households with higher-value properties will pay substantially more.

Councils have removed a small portion of this from home owners rates bill, however, the underlying cost is still increasing as Tiaki Wai decided that the average water services bill will increase by 13.3%, and it has warned that charges will continue to rise as it wants to do a lot of the work now, rather than spread the work over decades.

That adds another pressure to household budgets already absorbing mortgages, insurance, rates, food and energy costs.

There is also political risk.

The Opportunity Party has proposed an annual land value tax and openly states that one of its sole intended consequences is to lower property prices by up to 15%.

That policy is not government policy today, but if a future government required TOP support, then a land value tax could form part of that agreement. So homeowners would have to consider another potentially significant change to property valuations, resulting in significant harm to households.

That becomes particularly important when households are highly geared.

Imagine someone bought a $900,000 house three years ago using a $90,000 deposit.

They began with 10% equity.

If the property has since fallen 10% in value, their entire original equity has effectively disappeared.

As mortgage costs rise and additional expenses such as rates and water bills pile up, further falls in house prices can make the position even more difficult. Eventually, the mortgage could exceed the value of the property, leaving the bank with little or no equity buffer and the borrower facing low-equity margins and potentially higher mortgage rates.

The financial position of the borrower can therefore become increasingly uncomfortable, even though they may still be perfectly capable of meeting their monthly mortgage payments.

But households under that kind of pressure are likely to become more cautious, and spending will slow.

This is why falling house prices should not be discussed as though there are no consequences.

Making housing more affordable for future buyers is desirable, but ideally that should occur through increased housing supply rather than through higher household costs or policies that deliberately erode existing household wealth.

Destroying the equity of people who have only recently bought their first home is something quite different, and it has wider economic consequences.

Housing is the largest asset owned by most New Zealand households. When people believe their wealth is increasing, they generally feel more comfortable spending. When mortgage costs are rising while the value of their home is falling, they tend to do the opposite.

They save.

That appears to be happening already.

The Reserve Bank says household consumption remains weak and saving has increased as households respond to job uncertainty, subdued confidence and declining real wealth.

This creates a feedback loop that investors should understand.

Higher interest rates weaken housing demand. Weak housing demand restrains house prices. Falling house prices reduce household wealth. Lower household wealth suppresses spending. Lower spending hurts domestic businesses. Weaker businesses employ fewer people. Employment uncertainty then makes households even more cautious.

It is one reason we think the Reserve Bank will need to be careful about increasing the OCR too far. If that were combined with government policies that imposed further costs on property owners, such as a land tax, it could become the straw that breaks the spirit for some households.

Interestingly, this same economic story has been appearing in the recent stream of NZX company announcements.

Look first at electricity and infrastructure.

Genesis Energy increased normalised earnings by 11% to $522 million and operating free cash flow by 24% to $322 million.

Contact Energy completed the Manawa acquisition, commissioned its first 100MW battery, commenced construction of another 200MW battery and continued investing across geothermal, solar and wind generation.

Vector reported adjusted earnings of $482 million and invested a record $544 million, much of it into Auckland's electricity network.

Chorus continues to benefit from the structural migration to fibre. Its total fibre connections increased to 1.147 million during the June quarter, while copper connections continue their long decline.

These businesses are not immune from higher interest rates, particularly because infrastructure requires large amounts of capital.

But their demand is relatively defensive.

Households may delay replacing a car, buying furniture or renovating a kitchen. They generally do not stop using electricity, broadband or essential infrastructure.

Compare that with some of the businesses more exposed to the economic cycle.

Freightways said conditions became more difficult in the second half of its financial year and management specifically warned about higher fuel costs causing softer customer demand.

Air New Zealand provides an even clearer illustration of the inflation shock.

Revenue actually increased 3.9% to $7.0 billion, yet the airline recorded a $336 million loss before tax, mainly caused by higher fuel prices, engine availability problems, maintenance expenses and aviation system costs overwhelmed the benefit of increasing passenger revenue.

This is exactly the problem the Reserve Bank is discussing.

Air New Zealand cannot control international oil prices. It must either absorb higher costs, reduce other expenditure or eventually recover more of those costs through passenger fares.

Property companies sit on another fault line.

Precinct Properties maintained occupancy at 97% yet its property portfolio lost $110 million.

That demonstrates how higher interest rates can affect an asset even when its underlying operations remain sound.

When investors can receive higher returns from bonds and bank deposits, the yield required from property also rises. Higher required yields generally translate into lower property valuations.

Fletcher Building's recent trading updates also show a recovery which is still fragile. The company warned that uncertainty around input costs was delaying or cancelling some new projects, particularly in commercial construction.

Summerset's first-half result was more encouraging. Total sales increased 17% and cash generation improved significantly, whilst management itself described market conditions as uneven.

Uneven.

That is probably the best description of the New Zealand economy today.

We do not have an economy collapsing into recession, nor do we have an economy booming strongly enough to make aggressive interest rate increases an obvious decision.

We have strong exporters, improving regional incomes, major electricity investment and infrastructure businesses generating dependable cash flows.

At the same time, we have unemployment of 5.6%, weak housing, cautious consumers, subdued wage growth and heavily indebted households facing the prospect of higher mortgage rates.

The Reserve Bank's problem is that imported inflation has arrived before that domestic recovery has properly taken hold.

Its central forecast says the OCR needs to rise gradually towards approximately 3.2%.

We think 3.00% is increasingly likely.

After that, the argument becomes much less clear.

If businesses begin passing higher fuel costs aggressively through the economy, wage demands accelerate and inflation expectations increase, the Reserve Bank will have little choice but to continue tightening.

If unemployment remains elevated, households remain cautious, house prices continue to struggle and underlying inflation keeps moving towards 2%, the case for considerably higher rates becomes weaker.

Investors should therefore watch more than the headline CPI number. Watch wage growth, unemployment, house prices and household spending.

And perhaps most importantly, watch what companies themselves are saying.

The NZX reporting season is giving us a real-time picture of the economy that sits underneath the official statistics.

Electricity, essential infrastructure and export income remain areas of relative strength.

Property, construction, transport and consumer-sensitive businesses face a much harder environment.

For households with large mortgages, the message is less comfortable.

Interest rates may remain higher for longer, house prices may struggle to provide the capital gains many New Zealanders became accustomed to, and property-related costs will continue to rise.

For some recent first-home buyers, that combination has already resulted in negative equity. That does not mean a housing crisis is inevitable, but it does mean policymakers should understand that there is a limit to how much additional pressure highly indebted households can absorb.

The Reserve Bank is trying to stop an overseas inflation shock becoming embedded in New Zealand but it must now do so without turning a fragile household recovery into the next economic problem.

Christchurch & Auckland Seminars

Following our recent investor seminar at Southward Car Museum in Paraparaumu, we are pleased to confirm that we will be holding our last two seminars in Christchurch and Auckland.

The seminars are open to both existing clients, friends, families this year and other investors.

The Christchurch seminar will be held at Burnside Bowling Club at 11:00am on Thursday, 17 September.

The Auckland seminar will be held at Fairway Events Centre, North Shore, at 11:00am on Wednesday, 23 September.

We will discuss the current investment environment, recent developments across New Zealand and international markets, risk management, and some of the companies and sectors we are currently watching closely.

If you would like to attend either of these seminars, please contact us by email to reserve a place.

Bond issues

BNZ Bank is has announced a new five-year senior fixed rate note. We expect the offer to have an interest rate of approximately 4.75% per annum. 

Please note that BNZ will not be paying the transaction costs for this offer. Accordingly, brokerage will be charged.

This offer is open now, and closes at 10am on Thursday, 10 September.

If you would like a FIRM allocation, please contact us with your CSN and an amount, and we will email you a contract note on Thursday.

Metlifecare may open a new senior secured bond in late September. We expect the bond to have a term of between 5 and 7 years, with an interest rate of at least 5.50% per annum.

Contact Energy is expected to issue a new subordinated capital bond in October. We expect the bond to have a term of around 6 years, with an interest rate of at least 5.50% per annum.

Investors who may be interested in these potential bonds are welcome to contact us with their CSN and an indication of the amount they may wish to invest. We will then contact them once the final terms and further details are available.

Travel

Our advisors have an extensive travel schedule coming up over the next quarter, including the following dates:

16 September – Christchurch – Chris Lee18 September - Christchurch (AM only) – Chris Lee22 September – Lower Hutt – David & Gavin24 September – Ellerslie, Auckland – Chris Lee25 September – Ellerslie, Auckland (AM only) – Chris Lee25 September – Palmerston North – David & Gavin5 October – Napier (Havelock North) – Edward Lee5 October – Nelson – Chris Lee6 October – Napier (Mission Estate) – Edward Lee6 October – Blenheim – Chris Lee9 October – Wellington – Gavin Parkes21 October – Auckland (Albany) – Edward Lee22 October – Auckland (Ellerslie) – Edward Lee

On top of these areas, we will also visit Christchurch, Wellington and Lower Hutt in November. Dates to be confirmed.

Please contact us if you would like us to visit your area or would like an appointment.

Edward Lee

Chris Lee & Partners Limited

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