Chris Lee & Partners Ltd

Taking Stock 14 August 2025

THE hope was that four weeks in Europe with time to meet people, listen, read and discuss with the other three directors of our company would provide some conclusions to the central question - How do we steer clients towards decent returns on their investments that offset the risks of inflation, precariously balanced major economies and general tumult?

If countries cannot afford debt except at minimal servicing cost, yet run deficits and plan bigger deficits (to fund defence and infrastructure), then the politicians will try to crush interest rates - Trump.

Or they will borrow even more to service debt - Trump.

If the cost of money is artificially low, inflation would surge, and the prices of assets would surge. The result would be even more money and assets settling in the hands of the top 10%.

Dare I say it, but at some point, one of two outcomes would follow:

Democracy would allow the other 90% to set the new rules, perhaps a blend of socialism and communism.

The alternative outcome would be signalled by the rising sales of pitchforks.

My sons James, Edward and Johnny, and their families settled on the island of Gozo to ponder a way to deal with all of this, in amongst a rare full family holiday in the sun.

Returns on predictable assets, like bank deposits and bonds, will be somewhere south of 4.5% in NZ, and in most wealthy countries.

Measured honestly, inflation would be a similar figure.

Britain, for example, has huge debt, is running a 50-billion-pound deficit, already has uncomfortably high tax rates, and has a government (Labour) that is being slaughtered, according to the polls.

It has rising unemployment, inflation around 4%, debt rates around 4%, and social problems that seem unsolvable.

In a country with rapidly rising crime rates its police successfully solve just 5% of all crimes reported, down on last year’s figure of 7.5%.

The Police Commissioner, desperate for staff, says that in some weeks not a single applicant registers to join the police force.

Illegal immigration is at record levels.

Wages have stalled.

Like much of Europe, it is now reversing its budgets to decarbonise.

Yet currently its share market is hitting new highs every month, despite its retailers, including supermarkets, being squeezed.

Its publicly listed supermarket, Morrisons, reported a loss for the past 12 months of 500 million pounds.

Yet BP is on the rise, selling oil at ever greater margins, its last quarter profits in the billions.

Investment returns in listed shares have been high.

The movement to high-risk private equity and private credit so far is reporting high returns.

My conclusion: investors are accepting ever more risk to achieve what they regard as acceptable returns. Is this the case everywhere?

It is the case in the US, where just a handful of companies make up the bulk of the value of the top 500 companies, grossly rewarding those who bought the index, despite most of the 500 companies being moribund.

How do global investors achieve satisfactory returns?

They accept far more risk, buying shares in listed companies priced at record multiples of earnings.

Investors must assume that in these over-indebted times, when unsolved problems are simply stored up in the attic, the star companies will enjoy perpetually rising sales and margins.

What does this signal to NZ investors?

Here we have low interest rates, justified by a method of measuring inflation roughly akin to assessing the value of a mystery Christmas gift by the size of the parcel.

If real cost increases in NZ households are less than 6%, then the Presidents of North Korea and the USA really do average six holes-in-one in each of their golf rounds.

But let’s be kind and accept the figures provided in NZ: inflation 2.7%; unemployment 5.2%; crime rates falling; GDP growing at 1.0%; wages growing; house prices stalling; rents falling; school attendance rising.

In this environment how does a wealthy retired person, with savings of $500,000 (top 10% of all retired people), achieve a nett return exceeding the true rise in living costs?

In the past 15 years there have been opportunities to buy subordinated bank securities yielding around 7%, there have been times when property trusts yielded 6% nett, the power generators and the likes of Spark and Chorus have had attractive dividend yields, and there have been many examples of local and foreign listed companies that have grown at attractive rates.

Yet currently bank securities are expensive and low-yielding, and the reliable collectors of income, like power companies, are yielding lower numbers.

Our trip to Malta has been helpful if only in enabling us to observe the as yet unsolved problems facing larger economies.

My conclusion is that an investor whose portfolio is resilient and yields 4% after tax is likely to outperform pension funds, on a measurement of return measured against risk.

We think we have a strategy for the various groups of investors we help.

However, unsolvable problems face many countries, including fiscal deficits to fund defence, infrastructure and embedded social spending, not to mention the need to repair health and education systems.

Clients are welcome to discuss what we have learned.

No investor should overlook the relationship between risk and return. Older investors should never underestimate the value of liquidity.

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WHEN the directors of the aspirational gold-mining company Santana Minerals elected to accept an offer of a large sum of capital last week, by their action those directors were signalling at least one of three things.

The most likely motive was that without any effort Santana could raise all the money it might need to raise, possibly ever.

If this were the logic, the board was being slothful.

If the consenting process is overseen by adults, the Santana share price would soon enable a placement at a much less dilutive formula than applies now.

An alternative signal was that the offeror of the capital, apparently two large global institutions, greatly enhanced the strength of the share registry, providing some future access to large bundles of capital.

A third possible interpretation is that Santana’s board is insuring against a long, slow, expensive consenting process, muddled by the potential delays caused by any science-based opposition (not the empty vessel shrieking of the likes of the Tarras spokesperson).

I guess that a fourth explanation might be that Santana’s directors believe the yields and quantum of gold will be much higher than they can forecast, so the dilution of existing shareholders will be offset by inevitably higher dividend pools.

Perhaps if that were the explanation, Santana would be showcasing the mindset of most Australian discoverers of minerals – that is that “leakage” will be unimportant if shareholders are happy.

Personally, I would have declined the global money (at A$0.58 a share) and patiently observed the consenting process.

If that process is conducted by adults, and is not challenged by real obstacles, the Santana share price might soon have enriched an issue much less dilutive than the issue concluding now.

If it takes an issue of 100 million shares to raise $60 million at current prices, it might take just 50 million shares if the share price doubles, following progress with consent.

Santana’s explanation and behaviour was odd.

Just days earlier, a mining conference in Australia was told Santana was fully funded and that interested buyers should visit the secondary market.

The sun sets a few times, and then we are told of a documented placement, an act of contrariness that needs a better explanation.

As a minor shareholder in Santana Minerals, I expected a detailed summary of the global institutional interest, if not their names.

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THE rising cost of government borrowings is in part caused by the cheap Covid interest rates being gradually repaid, new replacement debt at higher rates.

Long-term debt in many countries is being replaced by short-term debt, in the somewhat forlorn hope that the world can again resort to free money.

More money spent on servicing debt either means new or higher taxes, or less spending.

The United Kingdom is in fierce debate, the right wing calling for more targeted spending, the far-left wing calling for confiscation of wealth by taxing assets that do not produce income.

The debate is vitriolic, if nothing else wonderful click-bait for mainstream media.

So it was interesting to collect some data that might counter the most hysterical voices, such as those we hear in NZ.

In the UK last year, the following data points were verified and published: -

The top 1% of earners paid 20.6% of all income tax received.

The top 5% paid 47.1%

The top 10% paid 58.6%

The top 25% paid 75.6%

The top 50% paid 90.1%

The bottom 50% paid 9.9%

The bottom 25% paid 2.4%

The bottom 10% paid 0.4%

The bottom 5% paid 0.1%.

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Travel

Our advisors will be in the following locations on the dates below.

20 August – New Plymouth – David Colman

21 August – Wairarapa – Fraser Hunter

22 August – Lower Hutt – David Colman

28 August – Christchurch – Fraser Hunter

11 September – Ellerslie – Edward Lee

12 September – Albany – Edward Lee

Please contact us if you wish to make an appointment.

Chris Lee

Chris Lee & Partners Limited

Taking Stock 7 August 2025

Fraser Hunter writes:

AUGUST is when the NZ market does its heavy lifting. More than half the index will report in the next fortnight, with most of the companies reporting full-year numbers. Due to the size and make-up of the NZ market, it is probable that a handful of results will have an outsized impact on portfolio performance through the rest of the year.

After a weak first quarter, the NZ market enters the period on firmer ground and has bounced approx +8% over the past three months. Mid-caps, dividend payers and the property sector have led the charge, reflecting a clear shift in how investors are responding to cheaper money.

New Zealand’s macro picture is improving but still fragile. Falling inflation has allowed the Reserve Bank to cut the OCR to 3.25% over six moves. Long-term rates are trending lower, although progress has been gradual. The NZD has slipped to around US$0.59c, helping exporters but lifting costs for importers. The housing market remains subdued, and household sentiment is yet to recover.

As results roll in, our focus remains on a few key themes: whether dividends are holding, whether cost control has protected margins, whether management commentary supports a recovery narrative, and are boards effectively allocating capital in a lower-rate environment.

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GLOBAL markets have continued to climb, but the rally is increasingly dependent on a small number of stocks and stretched valuations.

The latest round of US company results was highly positive, with more than 80% of companies beating earnings forecasts and profit growth tracking around +10% year-on-year. Most of the upside has come from large-cap tech and communications names, while sectors like energy and industrials have lagged.

Speculative signals are back, with low short interest, increased use of leverage and the meme trade resurfacing.

All of this is happening while core inflation remains sticky and policy uncertainty climbs ahead of the US election. The ongoing tariffs implementation continues to add risk and uncertainty to global supply chains. With the S&P 500 trading above 22x forward earnings, the most expensive level since 2021, sentiment looks stretched and increasingly exposed to surprises.

In Australia, the outlook heading into a large bout of results is more mixed. Softer iron ore and coal prices have weighed on the miners, while bank earnings are being squeezed by margin pressure. However, travel, hospitality and consumer names remain resilient, and bad debt charges are still benign. 

The ASX 200 is trading modestly above its historical average, suggesting some optimism is already priced in. Further upside will need to come from earnings, not re-rating.

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WHEN looking at the NZ market, we don’t have the breadth of companies covering the range of sectors that global markets, or even Australia, has so it is easier to break the market into buckets or styles. This can make it easier to identify and compare companies that have the traits you are seeking (growth/income/low volatility etc), while also providing a blueprint on how a NZ portfolio could be diversified. 

Defensive income – gentailers (Contact, Genesis, Mercury, Meridian)

For income-focused investors, the gentailers remain core to NZ equity portfolios. Their upcoming results will matter less for the year past, but more for what lies ahead.

Contact, having acquired Manawa’s hydro assets, is expected to outline its expanded generation pipeline and confirm the timeline for retiring its gas assets.

Mercury begins FY26 with full lakes and several wind and geothermal projects consented, so initial guidance should be materially stronger than last year’s drought-affected outlook.

Meridian’s headline numbers are likely to be soft, but focus will shift to progress on new developments and its dividend policy now tied to free cash flow.

Genesis still offers the sector’s highest yield, though the timing of its coal exit remains a key variable. The recently announced deal with the other major generators to keep a portion of Huntly available for another decade provides security of supply while it transitions toward biomass.

At the sector level, wholesale prices remain high, domestic gas is scarce and demand is expected to rise as electrification advances. These conditions favour low-cost, renewable generators. Political and regulatory risks persist but remain background noise and are more likely to be raised externally rather than in company presentations. For investors, the focus remains pretty much on four topics: full lakes, new capacity, security of supply and dividends that hold up in what could become a volatile policy environment.

Defensive income – telcos (Spark and Chorus)

Spark’s share price has recovered in recent months, reflecting growing optimism ahead of its result. The company still offers a forecast gross yield near 9%, but this remains contingent on delivering cost savings and offsetting softness in IT services. With economic conditions still subdued, the focus remains on dividend sustainability and the potential for further capital returns from tower-sale proceeds.

Chorus enters the season in a more stable position. Revenues are regulated, capex is tapering, and free cash flow is expected to keep improving. Dividend growth remains the central expectation, along with the eventual return of imputation credits once historical tax losses expire. Any new fibre investment could delay that timing.

Other Defensives - Channel, Chorus, Vector, Port of Tauranga, Auckland Airport

Among infrastructure and logistics names, Channel Infrastructure has shown steady cash flow and throughput. The upcoming capital structure review will guide expectations for potential special dividends, while government-mandated fuel stock levels could add to future storage demand.

Vector continues to deliver stable earnings from its Auckland electricity network, but rising interest costs and heavy infrastructure investment are constraining free cash. Dividend growth is expected to remain modest unless funding costs improve.

Port of Tauranga maintains a consistent yield, with export log and container volumes stabilising. Management updates on trade flows and the timing of berth expansion will shape near-term expectations.

Auckland Airport has reinstated its dividend, though ongoing terminal redevelopment is likely to keep payouts conservative. Investors will be looking for signs that growth plans can progress without increasing balance sheet risk.

Together, these companies form the backbone of most income-focused portfolios. With deposit rates easing and market volatility persisting, investors are likely to reward businesses that continue to deliver reliable, fully covered dividends through a still uneven recovery.

Growth Companies - Freightways, Skellerup, EBOS, a2, Summerset, NZX

Growth opportunities are quite scarce in the NZ market, which is dominated by the previously mentioned defensive names. Also missing from the August results are some of the first-choice investments for growth investors - F&P Healthcare, Mainfreight and Infratil, which have March year ends.

Of the rest, the growth names are divided into two groups: those delivering steady results with clean balance sheets, and those still needing to prove they can execute.

Freightways and Skellerup sit in the first camp. Both have managed to get through the slowdown with margins intact and low gearing. Investors will look for updates on volume recovery, incremental growth through pricing or distribution, and any small bolt-on activity. Expectations are already high, so results will need to show clear momentum to justify further upside.

EBOS results still reflect the loss of Chemist Warehouse, but the look through to the remaining business should be positive. The wholesale business is still running well and the focus is now on new partnerships and margin improvement to sustain mid-single-digit EBITDA growth.

A2 Milk is still highly dependent on China demand. Market share recovery has helped, but questions remain over regulatory access and supply chain stability. Investors will be watching for progress in cross-border channels and early guidance for FY26.

Summerset continues to grow across all key metrics and sales figures to date have held up well. The key markers will be inventory control, gearing, and whether its build programme can continue without falling into the same troubles as the other operators. The sector as a whole continues to face scrutiny and political pressure, as well as battling a soggy property market.

NZX has continued to grow revenue across funds and data, but investors want to see stronger flow-through to earnings. With growth markets remaining competitive, the company will need to deliver higher margins from a lower capex base while continuing to scale. With NZ growth companies hard to come by, credible growth stories will be well-supported, potentially overvalued, but those who disappoint tend to struggle until progress returns. 

Cyclicals – Fletcher Building, Vulcan, Steel & Tube

After two challenging years, the cyclical parts of the market are starting to attract interest again. With rates falling and early signs of economic stabilisation, investors are revisiting names with potential for operating leverage as demand returns. Optimism is still cautious, and delivery will need to be visible.

Fletcher Building, Vulcan Steel and Steel & Tube are all positioned near the bottom of the construction cycle. Volumes remain subdued, but sentiment is shifting from how deep the downturn might be to how quickly activity could recover. Fletcher still carries the weight of past issues, so stability alone would be a positive step. Vulcan looks better placed, with solid execution and exposure to a more resilient Australian market. Steel & Tube has lifted margins and cash flow, but now needs to show it can sustain that improvement.

Other Cyclicals – SkyCity, Air NZ

SkyCity and Air New Zealand are still in a bit of a rebuild phase. SkyCity is working through regulatory fallout and may update the market on asset sales or capital plans. Air New Zealand remains constrained by engine maintenance delays and fuel costs, so guidance around capacity and bookings will carry weight. Neither have appealed as portfolio positions for quite some time and appear more speculative trades for those trying to pick the bottom. 

Primary Sector – Fonterra, Scales

Agriculture and primary sector expectations remain low, but some early signs of stabilisation are emerging. Most companies in the group are still operating under tight conditions, but confidence may be starting to rebuild.

Fonterra has been on the radar of many investors as the primary sector, as well as the regions, have outperformed other parts of the economy. Margins are expected to remain under pressure, with full-year earnings expected to soften, but a key focus will be on its proposed consumer asset sales, performance of the ingredients division and FY26 guidance. A small dividend increase is likely, but balance sheet strength and long-term positioning will carry more weight.

Scales appears well placed for a good result. A favourable growing period and stronger trading in both horticulture and global proteins put it in a far stronger position than this time last year. We’ll be watching closely for updates on export conditions, particularly in the US protein market.

Property Sector – Precinct, Vital, & Property For Industry

After a tough few years, the property sector is coming back into favour, helped by falling bond yields and renewed demand from income-seeking investors. The real estate index is up more than 10% year to date, narrowing yield spreads and lifting valuations closer to fair value. The upcoming results now need to justify that optimism, and how the management strategies adjust to lower borrowing costs and stabilising values will be of interest.

Precinct Properties has been one of the sector’s strongest performers. Investors will focus on leasing progress at Bowen Campus and Commercial Bay, along with funding plans for the next development phase. With asset revaluations largely complete and a new dividend policy in place, the key test is whether recurring earnings are keeping pace with expectations.

Property for Industry remains the most consistent of the group. Industrial demand is still firm, supported by CPI-linked rental growth, but rising interest and tax costs are limiting overall earnings momentum. Management commentary on tenant demand, development timing and capital deployment will help shape sentiment for the year ahead.

Vital Healthcare offers reliable inflation-linked income and long lease terms, but soft valuations in Australia and balance sheet constraints are keeping distribution growth flat. Progress on divestments, partnerships or gearing reduction would be well received.

Property valuations now reflect a more supportive rate backdrop, but fundamentals will need to follow. Consistent occupancy, disciplined capital spending and sustainable distributions will be needed to maintain investor confidence.

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ACROSS the market, repricing has already happened. Bond yields are lower, rate cuts are largely anticipated, and portfolios have rotated toward yield, defensives and early-cycle names.

Valuations are normalising and future value from here will likely be added by sound strategy and execution.

For most retail investors, the key themes heading into these results are pretty clear, with companies needing to deliver dependable earnings and dividends without overextension.

Growth investors are focused on execution. The broader market is seeking clarity on cost control, capital plans and whether recovery is beginning to take hold.

Lower rates have set the conditions for a recovery and this reporting season should hopefully identify a few companies ready to respond.

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Travel

Our advisors will be in the following locations on the dates below.  Please contact us if you wish to make an appointment:

20 August – New Plymouth – David Colman

21 August – Wairarapa – Fraser Hunter

22 August – Lower Hutt – David Colman

28 August – Christchurch – Fraser Hunter

Fraser Hunter

Chris Lee & Partners Limited