Taking Stock 31 August 2023

ALL investors, all creditors and all companies, NZX-listed or private, will today feel comforted by the Supreme Court's recent judgement on the long-standing issue of directors’ liability for allowing a company to trade while it is insolvent. The Supreme Court judgement related to Mainzeal Construction.

The issue made headlines probably because it involved Jenny Shipley, who for a brief period headed the National Government in the 1990s, having rolled the previous PM Jim Bolger.

Shipley, a schoolteacher by background, had various portfolios in government, but was an excellent example of someone who had never had useful experience within a company structure.

Her profile and her ambition were the reasons she came to chair the ugly construction company, Mainzeal, which had stumbled along in the 2000s, surviving – just - but collapsing in 2013, leaving its sub-contractors and creditors to endure a $111 million loss. Its governance had been dreadful and unacceptable, as the Supreme Court has now clarified.

Mainzeal’s appointed liquidators, BDO Spicers, engaged the funding help of LPF, a litigation funder, to pursue compensation from the Mainzeal directors, Shipley, a Chinese director/ shareholder Richard Yan, and two independent directors, Peter Gomm and Clive Tilby.

A further director, Paul Collins, ex Brierley Investments, was not pursued, his directorship coming after the board's errors were made.

The reason why investors should be celebrating is not because Shipley and her crew have been penalised for their incompetence.

The celebration will be because we now have undeniable proof that directors must not behave incompetently, threatening creditors’ money by accepting financial obligations that can predictably be unsatisfied.

The Supreme Court has ruled that directors of any company with solvency problems may be granted time to obtain advice on the problem, but that time must not be unreasonable.

The directors must have a reason to believe that a remedy, such as a capital increase or a collection of shareholder advances, will offset the insolvency issue.

Directors must not take on more financial obligations unless they have well-justified reasons for believing that solvency will be restored.

If they act on hunches, or vague unenforceable promises of shareholder support, or on improbable solutions, the directors will be liable to compensate creditors.

Hooray. Thank goodness this has been clearly defined.

Yan, Shipley, Gomm and Tilby now must front up with around $39 million plus another $10 million of interest, for the benefit of creditors, after paying the cost of having this case brought to the High Court (appealed by Shipley & co) to the Court of Appeal, then further appealed, the Supreme Court being the final arbiter.

Every subcontractor, indeed every creditor, should be celebrating this new clarity that the Supreme Court has delivered.

There are many other changes that the Supreme Court decision may have prompted.

The most obvious is a new mindset from those who seek directorships with no, or inadequate, experience and knowledge relevant to the position.

This will be particularly relevant to politicians, so many of whom wrongly believe that their “profile” adds value.

It is interesting to reflect on the Chinese view on the value of a politician’s profile.

Because politicians in China are so feared - their power to intimidate is seen as a fact of life - the Chinese people often seek out retired politicians in places like NZ to take on directorships. Such deference is simply cynical, in my view. Investors and creditors should reject these appointments.

Former politicians in New Zealand have no useful commercial power, in almost all cases. Nor should they.

Shipley, a schoolteacher and a Beehive person, was by my definition utterly unsuited for any governance role in a construction company, let alone in a company with complex financial problems.

Mainzeal’s problems when Shipley took up her position were obvious to anyone involved in the sector.

The company had been losing money, it had minimal capital and often had negative working capital. It lived off its creditors’ money.

To be fair it was operating in an era when the whole sector was chasing contracts, underbidding often, regularly underestimating delays and cost increases (and thus penalties). Downers, Hawkins and Fletchers were hardly shining lights of good corporate behaviour but Mainzeal was the worst, barely a flickering candle.

Shipley, a sturdy, confident, I would say a blustering, character had virtually no chance of overcoming the issues of the day by drawing on knowledge, experience, or access to the underground.

Whatever skills she had acquired were not obviously relevant to such a demanding role.

Mainzeal was dominated by its biggest shareholder, Yan.

Those whose companies sub-contract to the major contracting companies knew, or should have known, that Yan was an unconvincing shareholder, an unlikely source of capital. They knew Mainzeal was under extreme pressure.

The whole market knew Mainzeal was under pressure. It continually used its creditors’ money to keep the company afloat, was the slowest of the slow-paying contracting sector, and regularly used flimsy excuses to retain sub-contractors’ money.

What made this worse was the reality that the construction sector itself was, and maybe still is, notorious for its unfair, often illegal practices.

Like the fishing industry, the construction sector in many countries condones practices that may be enforced by corrupt unions, some Mafia-dominated.

Deals within deals abound.

I recall that in Sydney in recent years a head contractor constructing a major inner-city building engaged a cement company which was in competition with one whose ownership was linked to union leaders.

When the trucks arrived on site, the union walked off the job, refusing to work with the appointed company. Ultimately, the contract was switched to the union’s preferred supplier.

I recall being approached by subcontractors in New Zealand, shown demands from a head contractor that were clear evidence of quid pro quo behaviour, a senior executive receiving for gratis a new kitchen in his South Island crib, as part of the deal for accepting the sub-contractor’s quote.

Into such a nest of trouble, very few wise people would enter as a chairwoman or director, least of all if they had no experience, knowledge, or contacts that would warn of such evil.

The Supreme Court decision is likely to slow down the retired politicians who shuffle off to corporates, hoping for what might seem to be a fancy fee in return for a cosy role.

As someone who has accepted governance roles, I can be categorical in saying that specific sector knowledge, commercial skills, networks, accounting understanding, and relevant experience are critically important; a political profile has virtually no value at all.

Brian Talboys, an eminent politician, was an example years ago of such a misunderstanding. He accepted a directorship with Pacer Pacific, earlier named Harness Racing; Ruth Richardson accepted directorships with the late Roger Mose’s wildly structured companies; Key has gone on to a Chow board; Fran Wilde and Roger Douglas might wish they'd never joined the Brierley board. Bill Birch, for heaven’s sake, agreed to chair Brent King’s loopy, listed trust Viking Pacific, which lasted about as long as the bird call on National Radio.

The Supreme Court decision surely will remind ambitious public figureheads that reward comes with risk and immense responsibility. For now, Yan, Shipley, Tilby and Gomm are up for about $50 million, of which insurers might cough up around half.

Most of Shipley’s penalty will be covered by insurance. Perhaps $3 million will be her personal contribution, a sum that for most ex-schoolteachers and politicians would be uncomfortable.

Perhaps the Chinese land investment (Richina) held by her family trust from a time that roughly coincided with her Mainzeal role will have appreciated in value to an extent that makes her obligation digestible. That would be useful if the Richina shares, not listed, were saleable. Allegedly, the shares have grown in value in 20 years by a multiple of 300 but are not worth anything if you cannot sell them.  (Yan controls the unlisted company.)

Yan’s obligation to Mainzeal is much bigger. His wealth is extreme. His behaviour will speak deeply to his commitment towards financial liabilities.

The liquidator, BDO Spicers, and LPF will need to extract in full his penalty if they are to receive their full costs and, in the case of LPF, some sort of return for the huge risk they took in funding nine years of litigation.

In my view LPF deserves a generous reward.

The creditors would get the residue. Without LPF, they would have received nothing and NZ would have less clarity about directors’ obligations.

As an aside, the Law Commission and various politicians are wanting to regulate litigation funding, perhaps with the same sort of academic, woolly thinking that encouraged the Retirement Commissioner to politicise the pricing of retirement village dwellings.

Any attempt to set the fees of a litigation funder is highly likely to be unproductive; returns for risk are not generally understood by academics, politicians or public trough habituals.

Should litigation funders be disincentivised to act, the losers would not just be creditors and shareholders who are let down by directors and need funding to resolve complex issues.

Without that litigation funding, cases like Mainzeal would never reach the courts.

We should all thank BDO Spicers and LPF.

Many other examples of unjust outcomes have been allowed to be untested because the receiver/liquidator was either too wedded to the Old Boys Network, intimidated by insurers or simply unable to find the funds to seek justice. 

Last week's release of this Supreme Court decision, brought about by BDO Spicers and LPF’s courage in bringing the issues to a head, has been a large step forward for all New Zealanders.

_ _ _ _ _ _ _ _ _ _ _ _

THE disastrous mistake made by Robertson and Treasury when the Crown underwrote the banks’ ability to make cheap loans and be free of liquidity worries three years ago is going to cost the taxpayer at least $9 billion, but it is doubtful that the public will ever observe the cost in the government's accounts.

A long-term capital market participant of similar vintage to my own has emailed me, discussing how this loss will be revealed.

Rather than display it as a trading loss that followed a clearly careless error, the loss will be merged with other “interest costs” and amortised over the next few years.

It is worth recording the details of the error.

Robertson instructed Treasury to buy back from the banks (primarily) around $50 billion of NZ Government Stock the banks were holding, to ensure banks’ liquidity during Covid, and to ensure there was an ample, cheap pool of money to encourage borrowers.

The stock had a lifetime not published as far as I can tell but probably had an average life span of five years and might have had an average coupon (interest cost paid to the banks) of around 3%.

Treasury agreed to buy the bonds at a yield of perhaps 1%, perhaps marginally less.

If you buy five-year bonds at 1%, with a coupon of 3%, you would pay a 2% premium for five years -  that is 10%, meaning to buy $50 billion would cost you $55 billion (approx).

If three years later you go to sell back those bonds to the banks at the market price (by then, say, 5%) you would sell the 3% coupon stock, with two years until maturity, at a loss of 2% x 2 years - that is a 4% loss.

That is, what you bought for $50 billion would now be worth $48 billion.

In addition, you will have had an opportunity loss to add to that, as the 1% yield you received for three years will have been an exceptionally poor return, certainly for the last year.

No experienced, commercial, thoughtful bond market operator would have bought those bonds as a pure investment.

The motive to buy would have been to help the Australian banks survive a period of potential turmoil, when New Zealand was closing down at regular intervals.

So the wise operator would have said to the banks, something like this:

“You guys have a potential problem that could threaten the banking system if your liquidity (cash) were to be absorbed by a fall in market confidence. We could help you. We could agree to buy some of your bonds for cash now, at market prices, and sell them back to you at the same pricing formula when bank liquidity is no longer threatened, say by 2023, and if liquidity is no longer threatened.

“We might or might not charge the banks an additional fee, if banking profitability exceeds normal levels in 2022/23.

“Do you want us to help in this way? Or not?”

That wise negotiation would likely have meant that the cost to the Crown would have been somewhere between nothing and peanuts.

Instead, the Crown has made a real loss of around $9 billion, by my calculation.

In most organisations with which I am familiar, a loss of even a fraction of that figure, whether caused by incompetence, inexperience, or just goofiness, would lead to a job loss, possibly multiple job losses.

New Zealand’s clumsy, or goofy, errors were replicated in Britain.

It sought to bolster the banks there by buying back about a trillion pounds worth of government securities.

The Bank of England has confessed that it, too, failed to arrange an adult formula for returning the bonds to the banks.

Britain says its loss will be around 150 million pounds, which is around 15% of its average tax take. (Our loss will be 9% of our tax take.)

Sadly, there is little comfort to gain from discovering that taxpayer money was squandered even more foolishly in Britain than it was here. 

To repeat, our loss will probably be hidden in the figure described as debt servicing, over the next many years.

If the NZ Super Fund had made such a tragic error it would have displayed the loss as a trading loss, after marking the bonds to market, each year, effectively revealing the $9 billion loss.

I would guess the goof who had made the error would now be employed elsewhere. The complacent might conclude that this is just another Billion Dollar Bonfire.

_ _ _ _ _ _ _ _ _ _ _ _

THE alternative view to mine (that the Treasury buy-back of bonds was stupidity) is that the $50-55 billion bond buy-back was necessary, and that the immense cost was offset by hidden benefits.

That government acknowledges the loss to taxpayers of what it calculates is $11 billion (I accept that figure, though it is higher than mine of $9 billion).

It justifies this loss by saying that this taxpayer gift to the banks enabled banks to continue lending at a low rate, thus encouraging borrowers whose borrowing helped maintain consumption and underwrote asset prices (like houses I presume).

The Government says by helping to keep interest rates down it made it cheaper for the Government to borrow during 2021. This benefit exceeded the cost of $11 billion, as it states. (This is spurious nonsense in my view.)

It also helped lift inflation from a figure below that targeted (2-3%). Presumably this view explains Robertson’s claim in 2021 that very low interest rates would remain for “many years”, and that we were possibly heading for “negative interest rates” in 2022/23.

Note that summary is not mine.

Forecasting was clearly not a skill displayed by the public sector or Robertson.

Two other recent pieces of data are worth recording. As at March 31, 2023, according to the OECD, of the 42 wealthiest countries in the world, 22 had trade surpluses, 20 had deficits. The OECD noted Norway’s surplus was 17.4% of its GDP. Italy was 21st with a surplus of 0.8% Korea 22nd with 0.6%.

Of those countries with a trade deficit, the smitten Argentinian economy was rated as seventh worst with a deficit equal to 2.9% of its GDP. It has banned beef exports to keep domestic prices affordable for its voters. India banned rice exports for the same reason.

Argentina's overnight official cash rate is 97%, its inflation rate is 113%.

The second-from-worst trade deficit (to GDP) was poor Latvia, doubtless affected by the Ukrainian/ Russian war. Its ratio of deficit to GDP was a bleak 5.8%.

The worst?

Well, that was New Zealand.

Its ratio? Well, um, ah - 8.4% of GDP, half as much again as the second from worst.

There was no accompanying data published on the various fiscal surpluses or deficits, the inflation rates, or the level of debt required to meet obligations. Perhaps that is a blessing.

But Westpac tells us NZ will need to borrow $35 billion more than the $100 billion planned, for the next four years.

Perhaps that new figure will do even more to stimulate consumption. Will it help to reduce interest rates?

Footnote: The $11 billion of losses on government bond buy/sell trading equates to about $5500 dollars for each home in New Zealand. Thank goodness the idea was a good one. Perhaps we need to do it again.

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Infratil 7.5 Year Senior Bonds

Infratil has announced it plans to issue a new 7.5-year senior bond.

The bonds have a minimum interest rate of 7.05%.

This bond offer closes tomorrow at 9am.

Infratil has confirmed that it will pay the transaction costs for this offer. Accordingly, clients will not be charged brokerage.

We have uploaded the investment documents to our website below:


If you would like a FIRM allocation for these bonds, please contact us no later than Friday, 1 September at 9am with an amount and the CSN you wish to use. 


Travel Dates - September

Our advisors will be in the following locations, on the following dates:

1 September - Nelson - Edward

6 September - Auckland (Ellerslie) - Edward

7 September - Auckland (North Shore) - Edward

8 September - Auckland (CBD) - Edward

13 September - New Plymouth - David

14 September - Wellington - Edward

18, 19, 20 September - Christchurch, Ashburton, Timaru – Chris

27, 28 September – Tauranga – Johnny

29 September – Hamilton - Johnny

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Taking Stock 24 August 2023

IF there is a constant theme amongst the world's wealthiest countries it is the common response of governments to keep borrowing more, rather than to limit spending to the gathered revenues.

Debt levels are impossibly high, and getting higher.

After several weeks in Malta, Austria and Germany, and time to read the best suppliers of international financial and political news, I conclude that the politicians and their voting public prefer to procrastinate rather than behave like adults.

This mindset is revealed by the “no more taxes” response, and by the “yes but not me, please” response to suggested new disincentives to pollute. No politician wants to address low-quality, vote-buying spending.

The debt preference has a cost.

In the United Kingdom, for example, the annual cost of servicing its steadily rising debt is now 110 billion pounds, or 10.4% of the total tax take. (In NZ, the cost is an alarming 6% of tax approximately.)

If not one further pound were borrowed by Britain that cost would still rise disastrously when previous lower-cost debt was rolled over at the new higher rate. (Much of the UK debt is inflation adjusted.)

The United States reports an official debt of US$34 trillion, nearly twice its claimed GDP. (The real debt figure is far, far higher, given unfunded obligations.)

The cost of servicing all this debt, as is the case with Britain, must rise, as borrowing costs are now at least three times the rate that briefly applied during Covid’s unprecedented period of virtually free money.

Britain has revealed many other costly obligations.

Its National Health Service last year spent 3 billion pounds settling negligence complaints.

Its housing obligations are also scary.

Britain calculates that by 2033 an additional one million people over 65 will be renters, with an average rental cost of 1273 pounds per month or 15,276 pounds per annum.

Currently the full state pension is 10,600 pounds per year.

Britain says the car industry and the insurance industry are in disarray, cars having to be written off because the auto industry prioritises the building of new cars, rather than providing a parts service.

The additional cost for insurance is extreme.

Britain acknowledges it grossly underinvests in housing and infrastructure.

The Labour Party pledges to borrow 73 billion pounds to build 400,000 more dwellings.

Britain’s under-investment in energy storage is stark.

It has one factory producing batteries to store energy and will soon have two.

Germany has nine, the USA 34, China 283.

By 2030 Britain hopes its battery storage will reach 66 gigawatts.

The US figure will be 1176, Germany 325, according to The Financial Times.

Like NZ, Britain’s Treasury blundered amateurishly during Covid, boosting the vulnerable banking liquidity by buying back an unthinkable amount of British bonds without negotiating a formula for selling those bonds back to the banks when liquidity and profits were restored.

NZ bought back around $55 billion of bonds at a premium price and now is selling these same bonds back to the banks for around $9 billion less than the government paid, creating a loss that has yet to appear in the public arena, perhaps understandable, given this is an election year.

In Britain’s case its Chancellor expects the sell-back loss to be a staggering 150 billion pounds, equal to 15% of all annual tax receipts. It bought back a trillion pounds of bonds.

Did none of these politicians or their public sector acolytes contemplate the Crown's strong negotiating position at the time and arrange a sell-back formula at the same yields as the buy-back?

 If the banks were so desperate for help was there not a case for pricing neutrality, or even a fee for the service?

On the subject of political, public sector, and public financial illiteracy, consider this: of Britain's 60 million people, 5 million claim to be regularly trading cryptocurrencies.

Have a guess how much Warren Buffett invests in crypto currencies!

Britain says it will address its broken National Health Service, which currently endures a hospital waiting list of 7.5 million people.

It will encourage private hospitals to be built so that the well-heeled can seek their treatment elsewhere, reducing the public hospital waiting list.

Currently for every 10 public hospital beds in Britain, there is one private hospital bed.

The comparative figure in Austria is three for every ten public beds, France has four, Germany six, Belgium seven, and the Netherlands ten!

Britain may need more beds than it thinks it will need if its transgender hospital procedures continue to grow. It plans to offer procedures to all people of seven years of age or older. Say again - seven.

The fall in British self-sufficiency is starkly displayed by the number of 25-year-old adults who now remain as permanent guests in the hotel of Mum and Dad. In the past decade the percentage of those young adults who choose to bed down “at home” has risen from 11% to 20%. 

There is a similar increase in the number of school leavers who now select a local tertiary education provider rather than a distant institution and move away from home.

In my years working in London, Oxford Street was the retailers’ jewel, attracting multi-millions of shoppers and tourists every year.

Today, the travails of retailers has left Oxford Street in disarray, major tenants like the House of Fraser long gone, reacting to the new phenomenon of homeless guests at their doorways, empty tenancies, constant shoplifting (with no police interactions), a recent social media organised mass raid by teenage thieves and, most of all, a refusal of Oxford Street property owners to reassess rentals, given the falling revenues, margins, and profits of their tenants.

Marks and Sparks, a Marble Arch icon, now says it plans to move as shoplifting becomes endemic and security costs unaffordable.

The Oxford Street shop owners note that the new trend to fill empty shops with seven-day tenants was the main factor in the 2022 seizure by regulators of 1 million pounds worth of fake Rolex watches. 

The demand for much lower rentals will surely lead to much lower property valuations in a street where, in my day, you wore your Sunday best to do your Christmas shopping.

I am recording all of this after taking extensive notes from Britain’s quality newspapers (The FT, The Guardian, The Daily Telegraph, The Observer and The Times), not because I want to mock Britain but to use its woes as an illustration of what is emerging in wealthy countries whose dreadful leadership has focused on ideology and social goals, without first building the sustainable funding to pay for it.

Governments surely need to begin every programme by obtaining voter consent to raise the money to pay for it.

I greatly admire what Britain has done for New Zealand and personally was the beneficiary of very useful career development in London.

It has often been said during my lifetime, that where Britain goes, NZ will follow.

Please let that thought be paused.

Borrowing more, with no plan to repay, leads to social and economic dysfunction and distortion, as every educated adult should know.

Band Aid solutions, like removing GST on prunes but not on prune juice, are simply evidence of stressed, unwise, perhaps childlike, leadership.

Current evidence seems to suggest that our health, social housing, and education programmes need to divorce, with great speed, from the trajectory that I observe in these areas from the UK.

I observe in Germany many related problems, leading to a somewhat unnerving “Germans First” undertone.

For the past 30 years, with the exception of the Covid years, I have spent several weeks in Europe observing its growth and its innovation. Sadly, the fall in Britain's mojo, and in its leadership, is difficult to ignore.

It probably does not need to be said that NZ has done well to follow Canada, rather than ape the USA's errors.

I attribute these undesirable changes in wealthy country behaviour to extreme stress - Covid, the Ukraine war, weather changes, absurd debt levels, inequality, and braindead political and social leadership.

The obvious solutions appear to have escaped coverage, other than at headline level.

The sages might say: -

Tax wisely and widely, spend other people's money (tax) wisely, programme to reduce debt, lower the expectations of falsely high, unearned living standards, repair broken health and education systems, provide a pathway to recovery for dysfunctional people and families, and encourage innovation and wealth creation.

Exploit your God-given comparative advantages.

NEVER disincentivise those who grow the nation's wealth. Regulate them wisely. Seek their input. Be guided by them.

Are the sages offering thoughts that are too uncomfortable? (with apologies from an alarmed, apolitical GOM, frustrated by the undeniable evidence of dreadful global leadership).

_ _ _ _ _ _ _ _ _ _ _ _

ON the subject of leadership, I note from afar that the controversial short-term CEO of Telecom, from previous decades, Theresa Gattung, has told the media that her legacy will be her work to promote women, where she had made an admired and undoubted contribution.

This seems a sensible self-chosen legacy as her leadership at Telecom lead to the breakup of the group as a result of socially tone-deaf behaviour. Few get to proclaim their own legacy.

Back in the day Gattung’s time at Telecom would have been a disappointing legacy. Fast talking, and a born saleswoman, Gattung has found her niche after making a windfall, tens of millions from helping to build My Food Bag (MFB), then lifting its followers until it was listed at an extravagant price, Gattung selling out at $1.80. Today its share price is $0.20.

She would create a universally-admired legacy if she had the analytical skills, the vision, selling skills, the execution skills, the desire and, mostly, the money to restore MFB to a value ascribed to it when she sold out several years ago, filling her coffers.

Such an act would remind me of the late car dealer and property trader Pat Rippin, who created his legacy by listing Markham Properties during the 1980s property frenzy, and then repurchasing it.

A long-time friend of Jones, (he provided a testimony when Jones received his gong), Rippin watched their 1987 property market collapse, reducing Markham to penny dreadful status. 

To the amazement of all, he made a takeover offer at around three times the prevailing price for Markham, a welcome but highly unwise bid, gratefully received by all of the hapless shareholders of which, I confess shamefully, I was one, having bought in at the collapsed price.

Rippin borrowed the money and soon after was back at the poor house when Markham failed to achieve his vision after he privatised it.

In line with so many other leveraged property companies, Markham succumbed to falling rents, high debt levels, low tenancy rates and, to put it kindly, governance of the standard that prevailed throughout that sector throughout the 1980s.

One would not be certain that the current era would not reproduce similar outcomes, most property owners emotionally unable to see the threat of rising debt costs, banking fear, failing tenancies and subsequently, much lower rentals and property regulations. Those using high leverage may well be absent from “rich lists” in the future.

Oxford Street in London may provide the most useful vision of a future which might look nothing like the pre-Covid past.

 _ _ _ _ _ _ _ _ _ _ _ _

BANKS are likely to provide the impetus for change in property pricing.

Surely their transient executives will see that leverage based on faux capital (faux property valuations) will not be serviceable and will lead to sales at distressed prices. 

Surely banks will not be bullied into accepting bloated valuations from valuers incentivised to provide a valuation in line with the owner’s request, rather than in line with offers from real buyers.

Valuations at brutally low multiples of a downward review of rents will bring many to attention.

Sadly, these lessons are perennially re-learned in Britain, the US, in Vienna - everywhere, as I learned in Vienna last week.

Those who have over-lent in this market should be on red alert. A cynic might wonder if banks will increasingly have the loans repaid by Middle East brokers or private equity funds.

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Infratil 7.5 Year Senior Bonds

Infratil has announced it plans to issue a new 7.5 year senior bond. Full details are expected on Monday 28 August 2023.

The interest rate has not been set but based on current market conditions it may be in the vicinity of 7.00%.

The issue involves two offers:

A Firm Offer: expected to open on 28 August for new investors and expected to close 1 September.

An Exchange Offer: expected to open on 4 September for New Zealand resident holders of IFT210 bonds which mature on 15 September 2023. IFT210 bond holders can exchange some or all of their maturing IFT210 bonds for new bonds.

Please contact us if you would like to be added to the list for these bonds with an amount and the CSN you wish to use and we will pencil you in on our list.

If you are an existing IFT210 bond holder and would like to exchange your bonds please inform us at the time of your request.

We will send a follow-up email to anyone added to our list once the terms of the new issue have been released.

_ _ _ _ _ _ _ _ _ _ _ _

SBS Bank 5.5 Year Senior Bonds

SBS Bank is considering an offer of 5.5 year, unsecured, senior, fixed-rate bonds.

The bonds will rank equally with existing SBS Bonds (SBS010) and are expected to be assigned a BBB+ credit rating by Fitch Australia Pty Limited.

The interest rate has not been sent but based on current market conditions may be in the vicinity of 6.20%.

The offer is expected to open on Monday 28 August 2023.

Please contact us if you would like to be added to the list for these bonds with an amount and the CSN you wish to use and we will pencil you in on our list.

We will send a follow-up email to anyone added to our list once the terms of the new issue have been released.

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Travel Dates - August & September

Our advisors will be in the following locations, on the following dates:

30 August - Blenheim – Edward

1 September – Nelson – Edward

6 September - Auckland – Edward

7 September - Auckland – Edward

8 September - Auckland – Edward

13 September - New Plymouth – David

14 September - Wellington – Edward

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Taking Stock 17 August 2023

IF the world's investment managers were currently pricing global assets correctly there would be much head scratching amongst those many of us regard as sages.

After a dismal year in 2022, global asset prices have surged, even in markets operating in badly-affected countries.

Property prices are rising, labour is enjoying pay increases, commodity prices have continued to rise (though milk is not in this grouping), and equity prices are buoyant.

For example:

Dow Jones

+ 6.00% for the year at the time of writing

S&P 500 (USA)




FTSE 100 (UK)


Mexico IPC


TSX (Canada)


Bovespa (Brazil)


Santiago SE




Euro Stoxx


Dax Germany




Irish Overall


OMX Copenhagen


WIG Poland


Moex Russia




NZX Gross 50


Shanghai Comp


Times must be pretty good or perhaps last year's losses have been forgotten.

You might wonder whether the globe has shaken off its fears of inflation, high interest rates, lower disposable income, mathematically impossible high debt levels, not to mention escalating war costs in Europe, and the biggest threat of all, the cost of defending the planet from rising sea temperatures, and the cost of coming years of rising temperatures.

The worlds sages include the likes of George Soros, Dawn Fitzpatrick, Warren Buffett, Jeremy Grantham and Ray Dalio.

Collectively, they have very loudly opined that asset prices are unsustainably high, not justifiable by future profits or dividends.

Buffett has now shifted US$149 billion into cash and short-term US Treasury Notes.

Another person scratching to explain the pension fund managers’ appetite for assets might be Neil Howe, an historian who has just published his visionary “The Fourth Turning Is Here”, a book seeking to explain the changes he believes will occur in society in the short term, as consumer behaviour and lifestyles are adjusted.

If Howe is puzzled by the fund managers’ dis-concern for what is around us, I might be able to help him.

Sagacity and investment fund manager behaviour cease to be bedfellows whenever prices lose contact with value.

The reason, Mr. Howe, is that fund managers are paid rather well to invest whatever money comes into their coffers, and to invest it to a formula promised by their guiding trust deed, whether or not such investment is logical - let alone wise.

While money pours in, much of that money created by government printing machines, most fund managers will invest formulaically. They see it as their duty to buy at the seller’s price.

They play, of course, with other people's money.

 Their fees and bonuses relate to the volume of money that arrives, hence the disconnect between wisdom and behaviour.

How can we be certain that the sages are observing the right signs?

My few weeks in Europe have given me time to make some notes. I record a few of them below: -

- Britain’s roads, health systems, infrastructure (water, sewerage etc) are more like obliterated than just broken. 

- Seven million people wait for surgery.

- Sewerage spills into lakes, streams and waterways occurred 825 times per day in 2022, spilling for 1.75 million hours. (Thatcher privatised water in the late 1980s, the likes of Macquarie bought the water suppliers and stripped 70 billion pounds from it, underinvesting in maintenance - surprise, surprise - reminding me of Fay Richwhite and TransRail.)

- Germany, the powerhouse of Europe, has achieved no growth, reeling from its loss of Russian gas, leading to lower manufacturing capacity.

- Two million German people (out of 80 million) rely now on food banks. Fourteen million are adjudged to be living below Germany’s defined poverty line.

 - An ultra-right political party now is close to being Germany’s most popular political party.

The EU is struggling to process applications from new members, all of which are relatively poor countries seeking military and financial umbrellas.

The 27 EU members currently have an average GDP per head of €58,000. (New Zealand, despite its absurd method of calculation, has around €40,000 per head.)

The new applicants for the EU membership, with their individual GDP per head displayed, are: -


41,000 Euros

















The conclusion is obvious - welcoming new members will cost the EU and NATO money it does not have. So it will print more.

The EU, struggling with absurd debt, having printed money without constraint, now watches its members like Germany, France, and Belgium, trying to thwart the Russian assault on Ukraine. They borrow the money to provide the support. The cost of supplying Ukraine with armaments and other support is a new cost to taxpayers that was unbudgeted.

Just as one example of the cost to taxpayers, consider the number of drones given to Ukraine, to direct towards Russian troops, weapons, ships and, more recently, Russian cities.

One drone costs 85,000 pounds. A thousand drones costs 85,000,000 pounds.

Russia says it destroys 10,000 Ukrainian drones in just one month.

That sounds as though Russia destroyed 850 million pounds (roughly NZ$1.8b) of drones in one month: surely this is not correct.

Do markets relish this destruction, knowing that every new drone built is part of some country’s Gross Domestic Product?  GDP is a nonsensical construct i.e. destruction contributes to growth!

Britain cares about this cost.

Its leaders are criticising fund managers whose new ESG principles are denying capital to the manufacturers of Britain’s war machinery.

Yet the British people are selective.

They appear to support ESG principles, but they are now rebelling at the frightening costs, and changes in lifestyles, implied by Britain's effort to meet its “Climate Change” goals. They want to defer expensive interference with their “rights”.

The people are saying yes to what they cannot see - the cost of the war - but no to the behavioural changes that confront them, most recently the extreme new charges to be made on those who drive petrol or diesel cars into Greater London.

The current proposal is a daily charge of 12.50 pounds (NZ$25) to bring your non-electric car into the vast Greater London city.

The British quality media argue that Britain contributes only 1% to global warming and thus should not endure personal restraints. (NZ’s figure is 0.1%, perhaps explaining our own similar response to suggested change.)

While asset prices continue to grow, those at the sharp end of deal-making - the private equity funds - are responding to change and do acknowledge the reality of an imminent “fourth turning”, as Neil Howe posits.

Apollo, one of Britain’s largest private equity funds, has switched to long-term corporate moneylending (at 10% p.a.), recognising that the heavily regulated and fully capitalised banks are sidestepping from these loans.

The banks, whose capital underwrites some loan failure, do not trust asset valuations, and do not disregard the prospect of a sharp fall in asset valuation if Mr. Howe’s vision is realised.

Private equity funds have no real capital. They raise money from pension funds and wealthy people and manage it on a “best endeavours” basis. They then leverage that “capital”.

As a rule of thumb, they charge 2% per annum to manage the money and collect “bonuses” of 20% of the surplus that exceeds a prescribed return.

Private equity funds loudly proclaim that equity trading gains are improbable now that the cost of borrowing is high.

So the PE funds are rebating their 2% fees and agreeing to accept lower bonuses to woo pension fund managers. Interestingly, they acknowledge that pension funds seek out this form of investing because PE results are based on estimates of value, rather than proven market value. 

Of course, that opacity enables pension funds to claim theoretical returns that are often not comparable with real returns.

To be curt, the claimed returns are fabricated.

Be unsurprised if the next year delivers a roll call of pension funds that cannot meet their obligations, especially if private equity valuations prove to be false.

Either the sages are right or, at least for now, they are wrong.

They think debt levels are absurd, that interest rates will stay high, that oil and other commodities, and labour costs, will deny any real fall in inflation.

They think war is expensive. (They do not comment on its morality.)

They think the cost of addressing climate change will be in tens of trillions, an impossible sum to borrow.

They think asset prices have not adjusted to inevitable change.

Mr. Howe agrees.

We all hope we will observe high-quality leadership to be a part of the solution.

Is Trump going to be part of the solution?

_ _ _ _ _ _ _ _ _ _ _ _

BNZ Considers Fixed-Rate Note Offer

Bank of New Zealand (BNZ) has announced that it plans to issue a 5-year senior note.

The interest rate has not been announced, but based on comparable market rates, it may be in the vicinity of 5.8%.  BNZ Notes have a strong credit rating of AA-.

BNZ will not be paying the transactions costs for this offer.  Accordingly, clients will be charged brokerage.

More details about the bonds, including an investment statement, are expected soon.  If you would like more details about these notes, please contact us promptly with an indicative amount and CSN you wish to use and we will pencil you onto our list.

We will send a follow-up email to anyone who has been added to this list once the interest rate and terms have been confirmed.

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Travel Dates - August & September

Our advisors will be in the following locations, on the following dates:

18 August - Christchurch – Fraser (FULL)

30 August - Blenheim – Edward

1 September – Nelson – Edward

6 September - Auckland – Edward

7 September - Auckland – Edward

8 September - Auckland – Edward

13 September - New Plymouth – David

15 September - Wellington – Edward

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Taking Stock 10 August 2023

WHEN any country transitions quickly from modest living standards to higher living standards ugly companions will be lurking.

Where there is sudden wealth there will be rapid development, curiously-sourced foreign money, grubby people escaping from mediocre corporate histories, fat development margins and, almost invariably, corruption at both the political and public sector levels.

Anyone doubting this might want to read Mr. China, a non-fiction book written 20 years ago by an early participant in China's transitions.

If they prefer they might want to read about Venezuela’s surge and then collapse as it misused its massive oil funds.

Corruption is an evil international by-product of any get rich quick opportunity.

Under Key’s Merrill Lynch style of leadership, New Zealand sought to lure to NZ those “entrepreneurs” who had cashed in on the pre-2008 bubble.

Key succeeded.

Distinctly-average Brits, Europeans, Americans and Eastern Europeans came here to join the small number of outstanding people who were moving to New Zealand for the right reason.

Money and development went together.

Property prices soared. Tax revenues increased. The NZ passport was effectively sold to fill the country's coffers. 

The naive Labour leader Ardern and her equally naive kitchen Cabinet failed to see the dangers.

Happily, Covid intervened and today NZ is off the list of targets for grubby fast-buck merchants.

Sadly, Malta, where I currently am holidaying with my wife, is not off the list.

When it joined the EU around 20 years ago it gained membership benefits, such as grants to upgrade its roads. It accepted the attached community responsibilities, such as being a party to the EU funding to rescue Greece.

Malta's share of the rescue was in tens of millions, modest by comparison with what China voluntarily contributed (a billion plus), but for a country of 500,000 people, tens of millions was a painful share of Malta’s annual revenue.

As part of its strategy to recover and to improve living standards, Malta chose to sell its passport, enabling Europeans, in particular, to become Maltese citizens in exchange for a million euros, a commitment to buy, build, or long-term rent a house, and a commitment to generate properly paid employment in Malta.

At least 1000 people, many from Eastern Europe, have bought the passport. That is 1 billion euros - serious money.

Around the same time Malta incentivised the world's gaming industry to patriate sports betting on the main island, exploiting the many young, highly-educated Maltese students and graduates who came through the excellent education system.

As an aside, Malta pays university students and charges no fees, providing they pursue useful degrees in areas like medicine, nursing, maths, science, technology, teaching, mechanics, engineering etc.

The students are paid - and bonded.

Around the same time as Malta was attracting the sports betting sector, it was winning major contracts to service Lufthansa’s fleet and it was gaining high levels of support for its bid to sell to overseas students its impressive secondary school curriculum. The offspring of wealthy East Europeans were very pleased to be educated in English, in a “safe” country where the weather is wonderful and where crime levels were low.

All of these strategies led to rising tax revenue, higher salaries, higher property prices - and an excessively fast transition from a sleepy, honourable, small country into a country suddenly besieged by foreign money, some of it money with a stench.

Covid came. A fall in tourism numbers for a year or two resulted.

Despite all these jobs and technology, engineering and education, Malta’s primary revenue gatherer remains tourism. Nearly three million tourists visit the islands of Malta and Gozo every year.

The visitors do not come as soccer fans to have a wild time, over-imbibing and vomiting in the streets. The visitors were, and are, mostly modest, normal, family people keen to enjoy the sun, the sea, and the slow pace of Malta.

Covid slowed the numbers but the foreign money was not deterred. The foreign money identified a country that would be desirable for a wide range of newcomers.

Development continued.

From the farmhouse we rent, I can look across the valley to several villages each housing just a few thousand people, some just a few hundred.

I see dozens and dozens of cranes, far more than one would see in any NZ city. Hotels, apartments, villas, and earthworks for projects that I cannot define stretch across the horizon.

Money has arrived.

House prices have soared, doubling in the past few years.

Wages have soared.

But there are victims.

The country's infrastructure was coping, but only just.

That 500,000 people and the infrastructure could cope with 2.5 million tourists was something of a miracle.

Imagine New Zealand coping with tourist numbers of five times the NZ population.

That would be 25 million tourists.

The empty-headed planning behind Key and Ardern’s governments has left an infrastructure deficit that cannot cater for three million tourists let alone 25 million.

Malta was coping, but only just, before the surge in development.

The labour force had been supported by youngsters from much less attractive countries, happy to work in hotels, on the beach, or in cafes.

Suddenly the wages available in technology, engineering and construction became double, even treble, what the Hilton Hotel, or the Hyatt Regency, could pay, unless they greatly increased their tariffs.

The result, of course, is that young Maltese people no longer work in the tourism sector.

To afford a house they need higher wages, and they need to defer any thoughts of a bambino or two. 

Falling workers in the busy tourism sector might be problem number one.

Problem number two is the exposure of inadequate regulations.

Deaths have occurred when workers have fallen from scaffolding or high rises. The government is accused today of shrouding the number of deaths. The numbers are brutally high.

Enforcement of regulations is an issue.

There are not enough trained to enforce sensible regulations, just as in NZ there are nowhere near enough trained Maori to exercise the new roles in environmental issues.

And then we get to the ugliest Maltese problem: corruption.

Sudden surges of easy money breed corruption.

In countries like Britain, Australia, and the USA such corruption might first be visible in the disgraceful annual gifting of ludicrous bonuses to divisional managers, chief executives, and governors, greedily hogging excessive profits.

In Hungary right now Wizz Air, which hopes to revert to profitability this year, wants to reward its CEO with a 100 million euro bonus. Please, someone, intervene.

NZ has literally hundreds of people falsely enriched by such transfers of shareholder wealth to executive pockets, many of them from an opaque bank, like Macquarie, Merrill Lynch, Citicorp, Barclays, HSBC, Goldman Sachs, etc.

Malta now has such undesirables enjoying its languid warm lifestyle. They bought the passports.

The change in the greed factor is emerging.

The public sector is being “incentivised” to permit developments without much, or any, consultation.

A few politicians have formed trusts, probably not with Panama lawyers, but probably domiciled somewhere with a strange jurisdiction and a large incidence of temporary blindness.

Dirty money begets grubby behaviour.

As a consumer of Malta's tourism attraction, I see little of this. I doubt passing tourists spare it a thought.

As a long-term visitor, with a network of people in business, I hear the stories. When you look, you see.

The Labour Government has ruled for many years, and has undoubtedly been progressive, and undoubtedly has lifted the expectations for those with the energy and skills to exploit the opportunities.

Malta’s social focus largely underwrites better access to health, pensions, and general living standards than does the degraded NZ system, run by our inept politicians.

Perhaps Malta shows us that the way to lift living standards is indeed through wealth creation.

Perhaps it will learn how to control that wealth creation without building an army of people needing their palms to be greased.

Wealth creation AND wealth redistribution are both strategies that lead to corruption if they are not first debated, then implemented with transparency, and then enforced with neutrality.

New Zealand should not snigger, proclaiming itself to be amongst the least corrupt countries in the world.

If we need reminding of the opaque nature of what rarely makes headlines, read Ron Asher’s book, In the Jaws of the Dragon.

If that book has been removed from bookshops by decree, look for Rebecca Macfie’s excellent book on Pike River’s disgraceful saga, or even my own book The Billion Dollar Bonfire.

We should not forget. We should not snigger.

_ _ _ _ _ _ _ _ _ _ _ _

THE global trend to de-bank people with “political exposure” has been attributed to the banking fear of the horrendous fines for breaching Anti Money Laundering requirements.

Any person in NZ, or indeed anywhere, who is “politically exposed” must be subjected to forensic inspection and must be micro-managed by any organisation that intermediates that person’s money. Our company is no exception.

The politically exposed are deemed to be a high-risk category of people.

In Britain the leader of a political party, Nigel Farage, last month was de-banked by Coutts Private Bank, an arm of NatWest Bank (which used to be called the Royal Bank of Scotland, itself a large, failed investor in New Zealand).

Farage was deceitfully described by NatWest's CEO as not having enough money to be a worthy client of an exclusive British private bank.

He had only a few million, poor dear.

The wretched CEO resigned because she was childishly indiscreet in discussing such details with a journalist, and worse, lied. The real reason for his de-banking was the file of his controversial views - his “political exposure”.

Farage was not alone in being scorned by his bank.

In 2016 in Britain 45,000 people were de-banked.

By 2019 that number was 229,350.

Last year it was 343,350 people.

That is a huge number of de-banked people.

My guess is that the British banks are simply deciding that the risk of AML fines must be offset by the profitability of providing a service to each client.

As an example, I pose no risk so the bank can afford to cater for me.

The banks may now be getting to a mindset that if a politically exposed person has “only” a few million, let him bank with an organisation that is not likely to be targeted by a regulator.

Might that mean that, in NZ, we see an increase in the number of politicians banking with Kiwibank?

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Travel Dates - August & September

Our advisors will be in the following locations, on the following dates:

18 August - Christchurch – Fraser (FULL)

30 August - Blenheim – Edward

1 September – Nelson – Edward

6 September - Auckland – Edward

7 September - Auckland – Edward

8 September - Auckland – Edward

13 September - New Plymouth – David

15 September - Wellington – Edward

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Taking Stock 3 August 2023

Fraser Hunter writes:

OVER the past few weeks, Stats NZ released two important data points - the Consumer Price Index (CPI or Inflation Index) and the Household Living-Costs Price Indexes (Affordability Index). These are released quarterly, a schedule that can be somewhat frustrating given their significance and the fact that most developed nations release this data monthly.

Tech-savvy consumers have access to real-time individual data points through NZ apps like Gaspy, Grocer, and Pricespy. These apps provide up-to-the-minute information on fuel, food, and household product prices.

The CPI often gains substantial media attention due to the central role inflation plays in the Reserve Bank's monetary policy decisions. This leads to extensive forecasting by bank economists and widespread media coverage.

Both the CPI and Affordability Index are highly important, contain a lot of the same information and there is a wealth of information feeding into both indices.

From an individual's perspective, especially for those budgeting, negotiating a pay rise, or preparing for retirement, the cost of living information provided by the Affordability Index holds more value.

The Affordability Index incorporates inflation statistics and other data points to try to personalise the cost of living for different demographics. This includes wealth quintiles, beneficiaries, superannuants and Māori.

It offers a more accurate reflection of how changes in the price of essential services and goods affect different segments of society.

Given its personal nature, it is little surprise affordability is now the number one worry amongst NZ households and quickly becoming a key election topic.

From an investment perspective, inflation is often overlooked, perhaps due to its relative absence prior to Covid. However, understanding inflation and its impact on future spending requirements is a critical concept with significant implications for savings and retirement plans.

The challenge of inflation extends beyond keeping up with economic headlines or trying to beat the bank with mortgage rates. It's about securing your financial future and ensuring that the nest egg you've worked so hard to build continues to serve you well, even as the cost of living changes.

_ _ _ _ _ _ _ _ _ _

IN THE July release, the cost of living for the average New Zealand household increased by 7.2% for the year to June. Unsurprisingly, this rise was largely due to a 12.7% increase in food prices. The other key driver was interest rate rises, which caused a 28.8% increase in interest payments and a 4.8% increase in rent.

In terms of the increases across different parts of society, Māori households experienced a 7.1% rise in living costs, while beneficiaries saw their living costs increase by 6.5%.

The most impacted were the highest-spending households, which faced a 7.8% increase, while the lowest-spending households encountered a 6.9% increase. Interestingly, this pointed out that a drop in GST on fruit and vegetables would benefit wealthier households the most.

For retirees, the cost of living grew by 6.8%, slightly below the average. The primary drivers of this increase were food, which rose by 12.8%, insurance, which increased by 10%, and property and rates costs, which saw a 7.3% lift. Interest rates had less of an impact on retirees, largely due to higher levels of home ownership and low mortgage levels within this demographic.

_ _ _ _ _ _ _ _ _ _

FOR all households the biggest and fastest growing costs are food and housing. The cost of housing and utilities has gone from 20% of all household costs in 2008, to 25% currently.

One of the most surprising aspects of the information I could find was how little the cost of health care had grown over the past 15 years. Note, this is the cost to the household, not the cost of providing the service which, as Edward highlighted in last week’s Taking Stock, is becoming a bigger and bigger part of the government’s Budget.

This has benefitted retirees the most, with the proportion of expenditure on healthcare dropping from 7.6% to 4.9% of the cost of living.

This is at odds with the amount of healthcare services used, with retirees currently using 42% of the nation’s healthcare services, with this figure projected to grow to 50% in the next few years due to an ageing population.

 _ _ _ _ _ _ _ _ _ _

INFLATION is not a new phenomenon, nor is it unique to New Zealand. It is currently causing issues across most developed countries, with inflation rates both above and below our own.

Some of this is transitory and showing signs of abating.  The rise in fuel and shipping costs post pandemic, which significantly contributed to the initial inflation, has already started to recede.

Similarly, the spike in specific food prices due to supply disruptions caused by the February cyclones is a temporary issue that will lessen as growers recover and supply returns.

However, other inflationary factors are more deeply ingrained and may not be as quick to subside.

Higher debt levels, both at the residential and government level, are a persistent concern. Wage growth, while beneficial for workers, has also contributed to the increased cost of goods and services. These costs and the price of goods are unlikely to drop back down, even when other inflationary pressures ease.

_ _ _ _ _ _ _ _ _ _

WHILE Superannuation payments are inflation adjusted, at current levels they are not high enough, with Massey estimating the shortfall for an individual, no-frills retirement in the regions, needing an additional $170 per week to get by. This was the low end of the spectrum and required a nest egg of $170k to bridge the gap.

At the top end, a couple intending to have a “choices” retirement, living in a city, was estimated to need a nest egg of $755k ($377k per person).

The key variable in the needs of superannuants is homeownership status heading into retirement. An original premise of NZ Super was the assumption that recipients would be mortgage-free homeowners. In the late 1980s, homeownership for people in their 60s was close to 90%, with mortgages paid off.

By 2018, homeownership had lowered to 80% and 20% of the homeowners still had a mortgage to pay off. Current forecasts project 60% of future retirees will own their own house, with 40% renting.

Given more than half of renters are currently spending more than 80% of their Super on housing costs, this poses a big problem.

KiwiSaver will be part of the solution, providing those who opted in with a nest egg to help bridge the gap, but there is still a need to invest the nest egg wisely to ensure it lasts the duration of retirement.

_ _ _ _ _ _ _ _ _ _

ADDING to our worries is the fact New Zealanders are, by all accounts, terrible savers. According to OECD data, New Zealand ranks in the top five of the world’s worst savers, estimated to save -1.2% of their disposable income a year (i.e., we spend more than we earn).

A recent NZ Financial Capability Survey showed 50% of New Zealanders were either sometimes or constantly struggling to pay the bills, with 55% of New Zealanders often not having money left over. 

It also found 58% of New Zealanders could not cover an unexpected expense equivalent to one month’s income, with 33% of people needing to borrow within the first three months if their income were to drop by a third.

_ _ _ _ _ _ _ _ _ _

SO what are our options?

The introduction of KiwiSaver has helped increase the savings rate for New Zealand. This will go someway to providing a nest egg for retirement, particularly those contributing from a young age. 

The Member Tax credit alone, invested at the age of 20 in a fund returning 5% per annum would create a retirement nest egg of approximately $90k (before inflation).

Increasing the employer and employee contribution rates would also help, as it has in Australia which has an enviable Super scheme that is snowballing in size.

Advising people to spend less, or spending wisely and save more, is good advice and would help solve the issue, but is not overly helpful given the affordability issues and amount of needs-based spending already.

I won’t attempt to delve into the political or economic solutions, as I’m sure they will be well covered prior to the election. Growing household incomes, particularly for the lower-income groups, will need to be part of the solution, whether it is via subsidies, cutting the lower tax threshold, or by making the workforce more productive.

Working more hours or delaying retirement are some of the solutions currently being chosen to make ends meet (as has been done by generations before), but they have limited benefits and I don’t think it is healthy for society.

Given most developed nations are focusing on working less, it would likely cause more emigration from New Zealand. 

_ _ _ _ _ _ _ _ _ _

RESEARCH in New Zealand and Australia has shown that spending tends to decrease as individuals progress through their retirement years. This reflects the changing nature of expenses as people age.

In the early years of retirement, spending is often higher due to increased leisure activities and travel.

However, as retirees age, they tend to become less active, leading to a decrease in discretionary spending. This is often balanced by an increase in healthcare costs, but overall, the trend is generally towards lower spending.

This will provide some buffer against inflation trends, but with the continued increase in needs-based costs such as housing, retirement, and healthcare, I am not entirely sure this trend will carry on into future generations. 

_ _ _ _ _ _ _ _ _ _

FOR existing retirees or those nearing retirement, inflation should be a key consideration of their investment strategy, particularly those with medium to long investment horizons (10 years plus).

Those with the time horizon and the capacity should ensure they have sufficient exposure to shares and property.

Shares and property can provide a hedge against inflation, particularly quality businesses with an ability to pass through costs over and above inflation. Property, on the other hand, benefits from rising replacement costs and growing populations and demand for well-located and utilised buildings, which tend to grow in value and rental income over time.

Fixed income and term deposits offer no protection against inflation, only a secure income stream which reduces in effectiveness over time.

A $10,000 investment in a 5-year bond will, in the face of 5% average inflation, effectively reduce in purchasing power to approximately $7,700 by maturity, a 23% decline in value in real terms. Over a 10-year period, this declines by nearly 40% in value.

These examples are extreme, but not completely unfathomable given inflation has averaged above 6% for the last two years and counting.

Investors wanting income should also be happy holders of NZ shares and property, which provide a tax-efficient income stream (typically exceeding local bonds) but, more importantly, growing over time.

While investors should be mindful that past returns may not reflect future ones, the compounding nature of shares and the impact on income should not be ignored.

Let’s say you invested $10,000 in the NZX50 which delivered 10.3% per annum over the past 10 years. This return is made up 6.5% in capital returns per annum and a 3.8% dividend per year (gross). In year one, you might have got a $380 dividend, by year 10 that annual dividend payment has lifted to $710.

Again, you are taking on more risk, including the risk values are lower in 10 years’ time or a company withholds a dividend (as was common during Covid). Diversification across positions, sectors, asset classes and regions will go someway to minimise this risk.

Betting against the share market, especially over a 10-year period, has historically been a losing  investment strategy.

_ _ _ _ _ _ _ _ _ _

INFLATION is just as much a personal issue as an economic one. By understanding it, we can make informed decisions, secure our financial future, and ensure that hard-earned savings continue to serve us well, even as the cost of living rises.

KiwiSaver balances will provide a future nest egg to help bridge the gap. Current savers need to ensure they are in KiwiSaver funds that are well chosen and are taking on the right amount of risk.

Those with a nest egg need to ensure it is wisely invested to ensure it provides the lifestyle you want and can afford and lasts the duration of retirement.

Financial literacy is a key component in all of this, as is seeking out advice where needed and ensuring you pass on your knowledge to younger generations, helping them to start saving earlier and be better prepared for the future.

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Travel Dates - August & September

Our advisors will be in the following locations, on the following dates:

18 August - Christchurch – Fraser (FULL)

30 August - Blenheim – Edward

6 September - Auckland (Ellerslie) - Edward

7 September - Auckland (Albany) – Edward

8 September - Auckland (CBD) – Edward

13 September - New Plymouth – David

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

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