Taking Stock 17 December 2020

Johnny Lee writes:

TWO THOUSAND AND TWENTY is drawing to a close, marking an end to a year of extreme challenge for many. The year was a testament to the adaptability of the human condition, as young and old alike banded together to fight a common, invisible enemy.

2020 was a year of significant disruption, both to our lives and our financial affairs. A record number of new investors poured into our sharemarket. Young people, empowered by online sharetrading platforms and an almost nihilistic tolerance of risk, clambered into everything from medicinal cannabis to Blackwell Global – the company responsible for the now infamous decimal point error.

Some older investors, seeing their income materially decline from term deposits, also dived back into the sharemarket.

Shares in reliable, blue-chip industries saw their share price soar as maturing bonds and term deposits sought homes returning similar yields, ultimately resulting in a shift in the risk continuum towards shares.

Fortunately, many who took their first foray into the sharemarket this year have been rewarded for their risk-taking, in some cases building up significant gains to provide a buffer during the inevitable downturn, as normal market cycles bring periods of asset appreciation and asset devaluation.

Overall, our sharemarket index has climbed, up about 10% for the year including dividends as at time of writing. Some companies performed extraordinarily well, despite difficult conditions. Others even saw a benefit to the virus.

Some long-term trends were accelerated – others reversed course. Investors have endured a bumpy ride but have largely survived to tell the tale.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

AS discussed previously, Pacific Edge was the star of the year.

While it is too soon to label 2020 as the breakout year, it is clear that boxes are being ticked and objectives are being met. After beginning the year in the doldrums of our exchange, hovering around 10 cents, the price doubled in June, doubled again in July, before doubling once more over the second half of the year to now see its share price at over a dollar a share.

The company was buoyed by an injection of capital from the ANZ New Zealand Investments team, at 65 cents per share, as well as commercial agreements being signed with major US healthcare provider Kaiser. While the company is not yet profitable, the dim light at the end of the tunnel seems to be drawing nearer.

The sharp leap in share price gives long-term investors the opportunity to take some profit off the table if they choose, a rare luxury in the stocks history.

E-Road was one of the top performers of the year, growing despite difficult conditions. The company is producing a profit before tax, has strong shareholder support and significant cash reserves. The company's forecasts are for continued growth in all three of its major markets, with new products coming online generating more revenue for the company. With its share price at record highs, shareholders will be reassured that the company is continuing to move from strength to strength.

Fisher and Paykel Healthcare, the stock with the highest weighting on our index and one of last year's top performers, had another fantastic year. Somewhat perversely, the outbreak of Coronavirus saw some benefit to the company, inspiring a surge in demand for its respiratory devices. The company saw almost triple-digit growth in its Hospital Products group, while net profit grew 86% for the year, leading to record dividends for shareholders.

The share price tapered off slightly towards the end of the year, as developments for a vaccine evolved. Fisher and Paykel expects some moderation to its profitability assuming the health impact of the virus begins to wane. However, the circumstances surrounding 2020 have allowed the company to gain significant footprint and connections with the rest of the world.

Infratil, of all companies, saw itself subject to a takeover. Although this story is still ongoing, this has significant implications for the investment community. If the takeover proceeds, billions of dollars will return to the market in search of a home.

The takeover also has implications for holders of the perpetual securities. Indeed, the discrepancy in value between the shares and the perpetual securities provides an unusual scenario, where holders of IFTHA may have the greatest incentive to ensure the takeover of the company.

There are no guarantees of the takeover proceeding at this level. Infratil has already disregarded it, stating the price significantly undervalues the company. This is normal. Infratil will be trying to extract the best possible outcome for its shareholders, either by retaining the assets, or extracting the maximum price possible.

A slightly more uncomfortable conversation will eventually need to occur regarding Wellington Airport. Shareholders of Auckland Airport will recall the takeover offer from the Canada Pension Plan, in 2008, of $3.60 a share. This offer was terminated by the government at the time, citing the strategic nature of the asset.

If this is to be the final full year of Infratil's tenure on our exchange, one must applaud the enormous contribution the company has made to our stock exchange. Shareholders have seen extremely impressive gains, both in the form of dividends and share price performance. A new standard in shareholder communication has been achieved, and a significant reshaping of our bond markets occurred. New Zealanders have a very strong appetite for investing in core infrastructure – making Infratil a very popular name among the retail investment community.

Mainfreight was another winner. Starting the year at fresh highs, the company reported pleasing results and was rewarded by an extraordinary ascent in market value. The company has gained over 40% this year, despite struggling in some of the sectors it operated within. Even the most ardent supporters must question how much stronger the share price can go. Two years ago, the share price was only $30.50 – with many wondering if the company was overpriced. It is now over double this figure.

For the second year in a row, sharemarket operator NZX Limited was one of our top performers, its share price almost doubling in that time period. Demand for monopolies and core infrastructure remains elevated among investors, and several key investment themes are spurring growth at our stock exchange operator.

Low interest rates are prompting people to engage with the stock market at a level not seen for decades. Even the most conservative investors are being forced to consider small allocations to shares, as term deposits lose viability as a source of income. For young people, traditional savings accounts yielding a return below 1% offer little value outside of capital preservation.

The structural separation of the NZX's regulatory and commercial activities puts an end to concerns within the sector around the potential for conflicts of interest in this space. Previously, NZX Limited effectively regulated itself – or rather, a division of NZX was a regulator for all listed companies – but last week's developments move the regulation arm into an independent space.

If, for example, the NZX failed to meet its Continuous Disclosure Obligations, the previous model could have created a perception of a conflict of interest. The change to a structurally independent regulator model may appear to be minutiae, but blunts a criticism many commentators have observed over the years, and aligns our market closer to global standards. One also imagines that the management team at NZX would rather focus on the commercial side of the business.

The NZX also saw some new entrants to the exchange – ranging from retirement villages, to medicinal cannabis, to rural land. The pipeline of listings is strong, creating some optimism among the trading community.

The electricity sector again greatly outperformed the market. The conclusion of the election, coupled by assurances from the Powers That Be that the Tiwai Point smelter would continue operations, saw share prices of our Government-owned assets reach dizzying heights. Trustpower, controlled by Infratil (for now) lagged the index, but still saw share price gains. Conversations now turn to profit-taking, as soaring share prices prompt some to diversify outside the sector.

More than a few retail investors, especially those with nary a toenail initially dipped in the water, will now be sitting on an exposure to the electricity sector that warrants thought. Last year's developments at the smelter show that no sector is immune to volatility.

Other strong performers this year include Chorus, Summerset and Briscoe Group. Briscoes is perhaps the most surprising, considering the relatively poor performance of its peers. New Zealanders' willingness to spend, and adopt new ways of spending (shopping online), was impressive to observe and shows that companies which invest early in these platforms will see rewards.

2020 ends with the market close to record highs, driven by cheap money and a dissatisfaction with investment alternatives. However, 2020 was also a year of significant challenge for some.

_ _ _ _ _ _ _ _ _ _

SKY TV, again, struggled. At the height of the pandemic panic, even Sky TV bonds were trading at perilous levels, as concerns arose surrounding the viability of international sport and customers' willingness to continue paying $100 a month during an economic downturn. Some investment banks baulked at the thought of allocating client funds under management to the perennial underperformer.

In the end, a group of brave investors saved the company, injecting $157 million capital to keep the company afloat, trusting the vision set out by new Chief Executive Martin Stewart.

Stewart left the company shortly afterwards. The share price, which had been collapsing faster than a West Indian batting order, stabilised and even rebounded somewhat, providing a return for those risk-taking investors.

Bondholders, after a wracking few weeks of uncertainty, can now feel more confident that next March's repayment will occur as promised.

One wonders if a share consolidation is planned in the near future - the company now has over 1.7 billion shares on issue.

Subscription television is a competitive field in today's era, with the likes of Netflix, Disney, Apple and even Amazon demonstrating a willingness to play the long game in this sector, losing billions in the process.

With exclusivity remaining the most effective tool in its toolkit, Sky TV has found itself spending enormous sums to secure broadcasting rights. The challenge moving forward is to profit from these rights.

Both Air New Zealand and Auckland Airport faced immense difficulties amidst the pandemic, for obvious reasons.

Auckland Airport raised an enormous sum during a difficult period, demonstrating one of the key benefits of public ownership.

Recent developments regarding the opening of a tourism gateway between New Zealand and Australia are a positive first step for the two companies. Air travel will no doubt return and flourish internationally, but our willingness to open borders and re-engage with the global tourism market will not be particularly enhanced by the conduct of our American peers, many of whom appear to be treating the virus in a way that does not align with our own approach. The next step, logically, will be the rollout of a vaccine and a method of ensuring those we welcome into our country are not a risk to our own people.

Z Energy was also hit hard by the pandemic – more specifically, by the lockdown. With New Zealanders locked inside for several weeks in April, fuel consumption saw dramatic falls, while aviation fuel saw similar levels of decline.

Z Energy is another company that may see a share price recovery if a vaccine rollout is conducted smoothly and further lockdowns are avoided. Conversely, reinstatement of lockdown processes would be disproportionately damaging to the company. Ultimately, petroleum will remain an essential part of our short-and-medium-term future.

The banking sector struggled, both with company performance and company culture.

AMP Group, after an extended period of flogging off assets, finally reached a state that enticed a takeover bid, ending the misery of long-term shareholders.

The main Australian listed banks, ANZ and Westpac, saw reduced or cancelled dividends amid plunging profits. Heartland Bank saw far less impact on its profitability and was rewarded with a late rally in its share price. It may end the year down but will hope for a stronger 2021. A renewed focus on improving shareholder communication would also not go amiss.

Ryman experienced an uncharacteristically poor year, although one could argue it ended 2019 on a particularly high note. The sector should be commended for its conduct during the crisis, which saw exactly zero deaths from any of the listed company retirement villages. Ryman's Australian expansion, unfortunately located at the worst hit part of Australia, will resume anew in 2021.

A2 Milk, despite seeing gains of almost 50% during the year, gave up those gains and will likely close down for the year. Record results were achieved, with the company firmly in the black. Today's announcement, that the company intends to revise its guidance, will introduce some volatility late in the year.

The Warehouse and Kathmandu both underperformed, with Kathmandu ending the year significantly down, dividends cancelled and a new breed of shareholder owning the company. With its massive capital raising earlier in the year, a large number of shareholders sold their shares, paving the way for those more tolerant of risk. The share price has not yet rebounded like the rest of its major peers, and those willing to ride the ups and downs of the retail sector will be hoping for a global recovery in 2021.

Other companies that lagged the index during the year include Synlait, Sky City and even Port of Tauranga. Port of Tauranga shareholders will not be panicking, observing that this marks perhaps its first year of share price depreciation in over a decade.

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

GLOBAL sharemarket indices followed a similar path to our own, with most marginally up in a world awash with cash and low fixed interest returns.

Gold had a strong year, closing the year up around 20%, although it has come off its highs. Oil fell significantly but saw some recovery towards the end of the year.

US markets were up, although the story was starkly different depending on which sector was telling it.

The likes of Chevron and Exxon Mobil dropped sharply, amid plunging global oil consumption. The banks and airlines struggled immensely.

Conversely, technology flourished. Major companies like Apple, Amazon and Microsoft carried the market, while little-known names such as Zoom saw opportunities and took them. Zoom, the communications technology company now installed on millions of devices around the world, has become so prevalent it has found itself as part of our everyday vernacular.

Tesla is now, somehow, the most valuable automaker in the world. The company's value has been judged to be greater than half a trillion dollars - more than almost every other manufacturer combined.

What can only be described as insanity permeated the US IPO market.

Doordash, a food delivery service, was valued at over 50 billion US dollars by the market, roughly the same as the ANZ Bank. AirBNB, a popular accommodation renting service, was trading at a value of close to a hundred billion US dollars. Companies that may have once remained in private ownership, becoming profitable and proving resilience to market cycles, are instead rushing to market, capitalising on a flood of cheap money. There appears to be no shortage of investors willing to buy these assets, selling them on market days later to those unable to access the IPO market.

However, behind all this madness is a huge injection of liquidity into financial systems seeking a return. Whether in the form of quantitative easing or direct cash stimulus sent to American citizens, the value of cash is diminishing, and the value of assets – whether shares or real estate - is soaring.

New Zealand faces the same challenges, as people accept higher levels of risk and volatility in the hunt for return.

Investors, faced with an environment so vastly different from the theories within economic textbooks, must navigate a world where the risk-free return is virtually nil, or indeed, negative in some countries.

It is these market forces which will drive us into 2021. Investors should remain discerning, investing in companies they trust and in sectors likely to thrive.

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

THIS marks the final edition of Taking Stock for 2020. The office closes next week, reopening on Monday 11 January.

We will be monitoring email traffic and are able to call clients who require urgent assistance.

The team at Chris Lee and Partners wishes all readers a relaxing and safe Christmas period, and looks forward to what 2021 brings!

_ _ __ _ _ _ _ _ _ _ __


Edward Lee will be in Auckland on 28 and 29 January, in Nelson on 3 February and in Napier on 11 and 12 February. Please contact our office for an appointment.

Merry Christmas

Chris Lee & Partners Ltd


Taking Stock 10 December 2020

BEFORE presenting a review of 2020, one must acknowledge the late arrival of the takeover offer of the year and probably, for New Zealand, of the decade.

The Australian Super fund has sought to buy Infratil for a mix of cash and Trustpower shares, valued at $7.43, roughly 50% higher than the issue price of Infratil’s share placement just a few months ago.

Clearly the most excited people when this offer was revealed would have been the perpetual bond holders (IFTHA).

About 10,000 people invested around $230 million in this re-set perpetual bond, which was either wilfully or carelessly created with no margin review, a design error that has led to them being priced as junk.

Infratil ought to be embarrassed by this market contempt.

None of some dozens of offers of bonds and capital raising, except these perpetual bonds, have been regarded so negatively.

Prospects of a takeover provided the potential solution.

A condition of a change in Infratil's ownership implies the right of all bond holders to demand the repayment of the face value of bonds. The IFTHA bond has in recent times traded around 63 cents. Repayment at $1.00 would provide a handsome Christmas gift.

Sadly, the takeover offer is likely to involve gamesmanship and be aimed at forcing Infratil to divulge its valuations of its assets, perhaps with the goal of lifting Infratil's share price.

The Australians have very little chance of acquiring a company with a contracted link to the management company Morrison & Co.

Morrison & Co receives a monstrous fee, tens of millions a year shared by a small number of people, and more importantly, has a legal right to even more in bonuses, should any of its overseas investors obtain a valuation of Infratil's overseas assets that might imply unrealised pricing gains.

There will be some who regard this reward as being mundane and fair, though I have to say that those in that camp must be in a secluded part of Fiordland or the Ureweras, as I have not had the chance to meet them.

Given Morrison & Co's direct link with Infratil, its representation and informal control of the Infratil board, the chances of Infratil recommending the offer seems as remote as any hamlet in the Ureweras.

If all the offer achieves is a large increase in Infratil's share price, the offer will have done all shareholders a favour.

Regrettably, we will have to wait for Infratil to observe the flame from the nostrils of its original perpetual bond investors before the company will consider repaying the money it has held for around 14 years, priced on a formula that was either cynical or poorly-conceived.

It would be a miracle if the Australian bidder were to find a price that led to Infratil recommending the takeover.

Any such sale would be a sad loss for fixed interest investors who enjoy the reliable stream of properly-priced Infratil bond offers.

_ _ _ _ _ _ _ _ _ _

WHEN one reviews a year which for investors must have felt a little like a novice feels on a bungy jump – terror, then relief – one cannot forget the free-market falls of the past, and then the recoveries.  The major market events of the past are relevant.

In the mid-1970s, when my career was beginning, New Zealand lived through a moribund period, stupefied by the oil price rises which fully justified the newspaper billboard in 1970 warning that petrol was heading for a rise to 25c a litre.

New Zealand's loss of Britain's buying of our meat, cheese, and butter, as it entered into the European community, cast a long shadow.  Low growth, fear, higher unemployment, and fiscal deficits resulted ultimately in higher use of personal debt, made easier by the banks' introduction of credit cards.

For a while Prime Minister Muldoon sought to command the economy, legislating interest rates, exchange rates, and wage increases, and attempting to dictate monetary growth by manipulating the levels of credit growth, forcing financial institutions to invest in low-yielding loss-making government and local authority bonds, effectively a tax on lending.

In effect, Muldoon believed he could run a command economy without resistance from capital markets. Perhaps that was the origin of the Tui billboard.

By 1984 this over-regulation had led to a 360-degree reversal of policies after Roger Douglas gained the reins of David Lange's government.

Douglas floated the NZ dollar, abolished virtually all financial market regulations, sold assets like Telecom, and left a clear path for cowboys to take charge.

Completely unaware of the need to round up those who would exploit insider trading opportunities and would exploit our extraordinarily naïve business media of the era, Douglas opened the door to a new generation of deal-doers and wealth-seekers.

People like Brierley, Renouf, Judge, Petricevic, Henry, Rippon, Fay, Richwhite, Hawkins, Reynolds, Francis, Hancox, Collins, Stratford, Jones, Philpott, Philips, Thwaites, Virtue, and Farquhar dominated the business news, granted guru status as they briefly thrived in a buoyant, unregulated environment, cheered on by the then guileless media, and fast-buck sharebrokers and bankers.

In 1986 we had roughly 400 NZX-listed companies, many of them based on no better plan than to invest in the shares of other start-up companies, some simply trading assets between themselves at inflated prices, creating ''profit'' from thin air while destroying balance sheet credibility.

A memorable crash in global asset values occurred in October 1987, in our case a crash caused by easy credit, dreadful business practices, hydraulicked property prices, awful governance and of most relevance, appalling regulatory oversight.  Please ink in those clauses.  They will recur in this newsletter.

Literally dozens of finance companies closed down, curiously virtually all able to repay investor debt, in contrast to what happened in 2007-2009.

The banks were crunched, BNZ perhaps the worst.

We then move to the second bungy jump, also built on easy credit, the hapless practices of the NZX, credit raters, the regulators, the trustees, the auditors, the losses initiated by dreadful governance standards.

This era had produced a new breed of common wide boys who pocketed dividends not from ''profits'', but from ''surpluses'', calculated by idiotic accounting standards, allowing dividends to be paid from ''paper'' profits (that never eventuated).  Their goal was not excellence, or value-add, but simple personal greed for excessive wealth.

It is important to inject into this train of thought now that inadequate regulations had again bred an opportunity for that relatively small group of people who glamourise their role by calling themselves insolvency practitioners, a better title than repossession agents with Steptoe-like qualities.

I will illustrate later why most of these people should be seen as part of the problem, not the solution.

So by the end of 2008, property prices had again slumped, and five dozen or so finance companies that emerged in the 1990s and survived till 2006/7 had collapsed, with serious issues of governance, transparency, honesty, and bad law.  Many fund managers, including AMP, were revealed as being lazy and unskilled, as were most financial advisers and many second-tier sharebrokers.

The Crown sought to rescue the banking system by guaranteeing the surviving finance companies and banks but achieved only a deferral of the evil day.

Empty-headed politicians with a collective bank of intelligence, knowledge, and commercial nous of not very much at all, then allowed larceny to occur.  Investors lost a total of a few billion dollars, and once again we were shown to have had hopeless oversight of the paddocks in which cowboys rustle.  These causes were similar to the causes of the ’87 crash.

The world shared many of these problems, the greed gene prevalent most of all in Goldman Sachs' America, but all countries were suffering from a plague of selfish, greedy, psychopathic people, in politics, moneylending, and in commerce.  Unbelievably, the banks were amongst the most corrupted by greed.

This is not a pretty picture, yet by printing trillions of funny money, eliminating the value of money, and forgiving those who had over-borrowed, we then had nine years of fun, market serenity, asset prices blown up, at the cost of inequality, thus breeding the environment for civil and trade wars.

Those years have ended.  We have yet to pay the price.

Yes, the funny money has again inflated the balloons but that could not prevent a virus, Covid-19, from piercing the balloon to reveal our unwise practices, possibly all stemming from the weapon of potentially mass destruction – the concept of robotic index investing.

In March 2020, asset prices collapsed, leaving funny money again to address the problem, banks saved by regulatory concessions and ''quantitative easing''.  The bungy jumping recovery was again premised on unsustainable witch doctoring.

Unsurprisingly, the mess today is not much different from what was left behind in 1987 and 2007/8.  Carnage follows crazy behaviour. The political decision to print trillions, pumping up asset prices, has an unconsidered victim – the person who has few assets yet shares the new debt obligation of the nation.

The greed gene and the gross incompetence of so many law-makers, regulators, and business governors may not be as much of the problem as was visible in the 1980s and in the years leading to 2008's collapse.

But the stench is still discernible.

The greed gene has not been re-engineered, the competence and apparent omnipotence of our politicians, law-makers and regulators must again be questioned, governance standards, at least here in NZ, are often of ''muppet'' status, and we now have revised law again ensuring the process of sorting out failures will be performed without transparency, and in many cases, without conscience, or honour.

The day of the plastic bag may be gone but nothing has been done to limit the use of brown paper bags.

I would define the suspicion of such bags as stemming from the legal right for those who take charge to sell other people's assets without transparency, without adequate consultation, the process sullied by absurd fees authorised or captured by people who take because they can.  Solicitors, trust companies, banks and insolvency practitioners have formed a lucrative, unchallenged, alliance.

Years ago, one large national real estate agency, according to its Wellington lunchroom, had a supply of large paper bags.  I have no knowledge that that supply was ever redirected to insolvency practitioners, so I make no accusation, but there have been multiple examples of excessive insolvency charges, tantamount to theft in my opinion, completely inexplicable decisions to sell assets at heavily discounted prices, with very little transparency or accountability.

The 2020 market contortions were the result of a pandemic revealing how frail our economies are; how little most homes and businesses have put aside for emergencies; how inadequately our supply chains are protected; how fickle the wealthy can be; and how foolish all investors are, in allowing robots or any greedy fund managers to take command of our savings.

Our market fell by around 30% in the month after the reality of Covid-19 was recognised.

It has since lifted by 50% from that low.

How do real people, with precious savings, cope with that volatility?

Once again our global markets were shown to be extremely vulnerable because of excessive debt, greedy financial market practices, regulations that are unfit for purpose, safeguards conducted often by weak people, and remedial processes run by opaque systems and unaccountable, greedy people. The exceptions to such poor operators have been rare.

This may seem to imply a criticism of virtually every segment of the financial, legal, and supervisory sectors.

So be it. There are some outstanding people in small pockets of capital markets but there are still front-runners and weak people visible.

Just last week a former market regulator, in response to my litany of criticisms, asked of me the rhetorical question: Why do you think I left?

Yes, the market prices of securities have largely been restored, pumped up by ''free'' printed money.

No, the underlying problems have not been adequately addressed.

Anyone would say that self-interest preserves the status quo.  Yet again, no meaningful repair work is being undertaken.

Some would argue we need a reset and might argue that such a process would be possible if a government had the freedom to change all the settings without the need to compromise.

Of course such a commitment to reform would need a government comprising accomplished, experienced, intelligent people willing to allocate time to extract knowledge from any socially-minded market participants.

I observe no government, certainly not in the Southern Hemisphere, with the bank of talent, experience, and commitment, to undertake such a reset.

Just two glaring illustrations of the void in social and intellectual intelligence of politicians, regulators and corporate governors were provided by the Pike River tragedy and the Billion Dollar Bonfire of taxpayer wealth at South Canterbury Finance, both completely avoidable had our country been blessed in its leadership.

Our nation's leader at the time described a hundred million dollars as ''chump money'', a self-defining expression but one that reflected our malaise.

Such a mindset has no place in leadership of any aspirational organisation, in my view.

So we must prepare for settings that may incur only tinkering and we must respond by practising our whistle-blowing.

The great people in financial markets will always do good work, the great leaders will produce superior companies, the monopolies, duopolies, and market dominators should thrive and should have reliable revenues.

But there are major issues overhanging markets, any of which could lead to the need for a reset.

Debt is one; free money is not a solution; it is a temporary painkiller.

China is a threat; the Chinese can enforce a command economy (no one to eat meat – capital punishment for offenders).  NZ should have credible contingency plans if trade is disrupted.

Climate change will dominate policy-making. The policies will be funded with even more debt.  Expect a new kerosene tax to end the days of cheap air travel.

Inequality will lead to disruption; civil war would be inevitable if we do not address the causes. We are heading towards the appalling metric of 90% of the world's assets being owned by just 5% of the people.

Identifying such issues is not just the meanderings of a dreamer, a naïve old fool, or a ''boomer'', as some in Parliament might screech.

We reset intelligently now, or the coming generations will face unaffordable cost, and society will face forced change, unable to afford the obligations of access to health, education and shelter.

The year of 2020 has made many, including our clients, wealthier on paper, our houses worth 20% more than they were pre-Covid, our share portfolios up by more than 10%, yet again. For nine years in a row, clients have had returns of 10% or more (and much more, often).

Trump has gone, the vaccine is promised to be effective next year, and we are re-importing labour to ensure our crops and primary industries have produce to export, though the labour force will still be inadequate.

Please enjoy the holiday and festive season.

But do not kid yourself. The status quo is not an option.

 _ _ _ _ _ _ _ _ _ _ _ _

OF ALL the changes that we face, one of the most baffling has been revealed in the USA by, of all people, the psychopaths who run Goldman Sachs.

Last week Goldman Sachs announced it would no longer provide investment banking services to companies aspiring to raise capital unless at least one of their directors had disclosed their lifestyle choices and recorded they were in the LGBT grouping.

Quite how one can be requested to discuss such a matter without a breach of one's privacy is not a minor question.

Since when did religion, gender choice, anyone's DNA, ever become an essential discussion before selection to any board?

We all are told that a diverse group of people often produce better solutions then a group lacking diversity, but have we forgotten our rights to privacy?

It is not fashionable to point out that Singapore's astonishing transformation did not result from any committee decisions but because of a benevolent dictator.  But the new Goldman Sachs edict takes this debate to a level that my generation would not have contemplated.

I suspect my generation will not be asked to run the process that would implement such a proposal.

 _ _ _ _ _ _ _ _ _ _ _ _

IT IS reasonable to conclude a review of the last year and discuss a ''modern'' conundrum by speculating on what faces investors in NZ.

Covid-19 has still to be addressed so we must assume our border will be guarded, and that tourism/ travel and entertainment will be constrained.

Of much greater immediate importance is our ability to trade.

In the months to come, we will be facing shipping/ freighting problems which will affect all sectors, particularly retail and those who export perishable goods. The stocking of our retailers, and endless delays with Amazon freight, will change outcomes for retailers.

There is risk that crops will not be picked, a testimony to the decision to de-link education from vocation. When will we rediscover the need to match aptitude and career options with the subjects taught to teenagers?

The dairy industry faces constraints from new measures, some of which are characterised in-house as stemming from David Parker's unbridled power to exercise knowledge he does not have.

Our quarantining process will be challenged by the commercial sector, which faces labour shortages.

Free money and constipated consent processes will hinder those who seek to solve the housing price dilemma.

Our universities, schools, and other educational institutions will be forced to cut costs.

From all this uncertainty one would expect financial market pricing to abate, risk being more important than return.

Yet free money, leading to slack lending policies, might continue to underwrite activities, leading to revenue increases in many sectors. Can we believe that a mad experiment – give everyone a million – can solve problems largely caused by greed, laziness and incompetence?

Increases in minimum wages and grants for those in poverty might help at the margins but I would not want to be a retailer in Lambton Quay, Wellington, in 2021.

Food producers will be watching China with alarm. Its ability to command its economy, and disclose nothing to anyone, makes it a risk.

I expect investors will be looking for a government bank deposit guarantee scheme to arrive in coming months. That should appear soon.

Perhaps from all these confusing thoughts, one might conclude that the sectors being fed by free money might do well but in general we may face resets and changes in mindset that might reverse the trajectory of prices in recent years.

Printing money cannot be the perfect panacea, can it?

Heaven help our grandchildren if we continue to measure our wealth on exponential housing price increases and annualised 10% growth in our KiwiSaver funds, or managed funds.

The sound of galloping hooves from the beasts that signal inflation may soon be audible even for the hard of hearing like myself.

But despite all of this, one retains the hope that the season will be fun and that the next year will bring good health.

Not so sure about good financial returns! One will need deep thought and perhaps widespread discussion to deal with doubt.

An optimist many conclude ''more of the same''. The cautious may be on red alert.

Chris Lee

Managing Director

Chris Lee & Partners Limited


Taking Stock 3 December 2020

INVESTORS may feel spoilt for choice by the current flush of corporate bond issues but their first point of reference should be their personal investment rules.

All investors should set guidelines on how much or how little they are willing to invest in the main asset classes, how much any one investment should be, and how much exposure they should have to any company or any sector.

The December offerings will provide an opportunity to apply that process.

Fixed interest remains important for balanced or conservative investments. It should provide known future value, a feature not provided by shares or property.

Bonds should provide extra return (over cash), they should provide virtually certain liquidity, and there should be a minimal level of default risk.

In December, Infratil (3% yield, six years), Ryman (unknown rates maybe 2.25 – 2.5%) and Kiwibank (maybe 2.5%) are offering bonds.

They will each raise different questions for investors.

Infratil may already have reached a maximum exposure for many investors. And it should be noted that in times of market panic, as we had with Covid in March/April, Infratil's bonds were hard to sell at a fair price, so liquidity is sometimes poor.

Ryman's offer will be the company's first bond issue. It will be secured by real estate but offers a lean margin over bank rates.

Kiwibank's offer has flexible repayment dates (at their option) and is subordinated behind other debt. Many investors have rules about the ratio of senior debt to subordinated debt, typically limiting their use of subordinated debt to around half their use of senior debt.

None of these three offers pose unusual default risks. But all might be hard to sell in a market downturn.

Investors generally want certainty about liquidity for at least a percentage of their portfolio.

Personally I loathe the low rates on offer for long periods but I accept that the world is committed to Zero Interest Rate Policies, a commitment that acknowledges that the level of sovereign, household and corporate debt worldwide could never be serviced at rates set by the credit margins of my days in money markets.

It is hard to swallow, but my wife and I grin when we review our portfolio and find securities paying 4 or 5% for years to come.

To me, the big issue is liquidity, once the rate has been accepted, and the question of credit default risk has been addressed.

Always there will be a credible daily market in sovereign and local authority debt, and generally that certainty can be applied to securities with an investment grade rating.

The problem is that much corporate debt, even securities issued by the likes of Kiwibank, is credit rated at levels below investment grade.

So what can be done to create liquidity?

In many countries, notably the USA, the central bank (Federal Reserve) now buys unrated bonds to create liquidity.

Our Reserve Bank does not.

But there might be room for compromise.

Imagine if the NZX set up a listed bond fund, managing a spread of corporate bonds, and attracted Reserve Bank funds to invest in such a fund.

The level of liquidity required might be minimal relative to the funds the Reserve Bank is committing to higher risk support for the economy. Nor would the Reserve Bank need staff to monitor performance.

Corporates, of course, will be issuing bonds in recognition that the banks might soon use their leverage to out-manoeuvre the Reserve Bank, on matters like capital requirements for business lending.

If the Australian banks elected to play mobster, they might reduce their commitment to fund New Zealand's corporates.

They have done this before, and currently do not exhibit leadership that implies commitment to long-term objectives.

Our corporates are behaving logically by issuing bonds for long terms to retail investors.

It gives the corporates flexibility when they negotiate with banks.

Infratil has been an excellent leader in this area, realising 20 years ago (or more) that its long-term assets needed long-term committed debt facilities to enable Infratil to make strategic decisions that might need time to succeed.

Ryman Healthcare has long-term assets and also could gain from funding certainty.

It is regularly criticised for its debt levels, as it borrows hundreds of millions to build villages, taking years to complete them.

What the critics overlook is the massive incoming cash flow when a village is completed, its villas all settled, usually within a year, leaving the village without debt, having contributed a development margin to the group.

Whilst this model continues to be misunderstood, Ryman displays wisdom by reducing its dependence on banks.

Kiwibank will be raising debt that it can describe as capital, at least for a while, enabling Kiwibank to grow despite its owner, the Crown, being unwilling to provide a bigger equity base.

For that reason its offer is ''subordinated'', effectively hybrid capital dressed up as debt to meet the capital requirements of international regulators and credit-raters.

Having a simultaneous offer of three such bonds is rare, rich pickings for fixed interest investors.

I say this with difficulty, recalling no part of my career when 3% was ever a good return for long-term debt.

But neither had I ever tried to curl my tongue around such words as ''negative interest rates'' or ''zero interest rate policies''.

Most of us have to have some fixed interest allocation to provide income, liquidity, and ''certainty'' about future value.

Perhaps the Reserve Bank should talk to the NZX to ensure we can be fairly certain about liquidity.

 _ _ _ _ _ _ _ _ _ _ _ _

MAJOR Clifford Hugh Douglas and Vern Cracknell would be animated in the conversation behind the pearly gates when they look down on what governments and central banks are doing to all the textbooks on money creation.

Douglas, of course, is blamed for the promotion of the wacky notion that money can be printed by central banks and dished out to governments or councils to build infrastructure without interest rate cost.

The textbooks say that such money creation inevitably creates hyper-inflation, and therefore encourages excessive consumption.

Cracknell led the Social Credit Party in New Zealand with some grace, indeed distinction, once winning the seat of Hobson and later observing Social Credit win a share of election votes that rivalled the share the National Party achieved a few weeks ago – early 20s in percentage.

Cracknell, of course, had to compete in a First-Past-The-Post environment so was never a serious candidate for power.

But he argued that no-or-low cost money was logically printed by the Reserve Bank.

What do we have now?

Finance Minister Robertson guarantees printed ''funny'' money for bank use, and effectively authorises more tens of billions to be printed as ''quantitative easing''.

He also talks of allocating free money to ''shovel ready'' projects.

Surely Douglas and Cracknell would be contorted with laughter as they watch today's authority trying to argue that there is a difference between their ''funny money'' and the proposals of the Social Credit Party.

That stored deposits today receive in effect no return (definitely no return after tax and inflation) is a phenomenon no textbook contemplated, making Social Credit's low interest appear normal.

Indeed the phenomenon explains why ''free money'' is seen as a solution to a grossly over-indebted world.

Yet as at today it is hard to hear the rumblings of the hooves of galloping inflation, as the textbooks would predict.

Or are we just hard of hearing?

 _ _ _ _ _ _ _ _ _ _ _ _

INVESTORS have long been curious about the German-born Peter Thiel, now a NZ citizen.

Allegedly he now holds shares worth more than $10 billion, an allegation that fascinates those who are fixated by other people's apparent wealth.

Indeed Thiel now is the target of public bar vitriol, stemming from the inaudible and invisible process through which Key's government spirited him into New Zealand.

Well, there was a reason for his welcome other than his money.

Thiel co-founded the now US-listed public company Palantir, an organisation that uses advanced technology to assist governments to identify and neutralise threats to national security.

For example it is said Palantir's electronic eyeballs led to the murder of the terrorist, Osama bin Laden.

New Zealand needed Palantir in 2011 when it was preparing to stage the Rugby World Cup. The threat of terrorism hovered over the staging of the Cup.

Throughout the event crowds were under the scrutiny of Palantir's electronic systems, examining eyeballs and faces, seeking to identify those who might match Palantir's definition of a security threat. We will never know if any matchings were mysteriously extracted from crowds, but the event was completed without a terrorist incident.

Palantir is used by the military, the police, governments, international organisations, and even companies.

It is now a US-listed company with a value of more than double New Zealand's largest company ($40 billion).

As a result Thiel is a genuinely wealthy fellow probably further enriched by the NZ investment he was obliged to make, (he chose Xero), when he was granted citizenship under the ''high wealth'' banner.

Logically, he is a very private citizen.

Social media critics, one suspects, will not draw a response from him.

 _ _ _ _ _ _ _ _ _ _ _ _

Johnny Lee writes:

ONE of the most satisfying investments that can be made is the one that is both financially successful and makes a demonstrable improvement to the lives of others.  Fisher and Paykel Healthcare is a gold standard to this, handsomely rewarding shareholders while improving lives around the world.

One company that will be hoping to replicate this success is cancer diagnostic company Pacific Edge (PEB).  PEB's best known product is CXBladder, a urine-based test for bladder cancer.

Few companies are as divisive as PEB among investors, as many a shareholder has wavered between belief and impatience with the stock.  PEB has a long history of false starts and capital raisings, diluting investors while the share price oscillates between 15 cents and $1.50.

On the one hand, an argument could be made that the constant need for capital has put a ''lid'' on the share price, as investors were less inclined to buy stock in a company that they knew would be offering those same shares at a discounted rate in the near future.  On the other hand, the staggered nature of these offerings allowed a ''proof of concept'' period for investors, who are able to commit increasing amounts of capital to a company that is gradually achieving its goals. 

And the company is achieving these goals, albeit slowly.  Revenue is growing.  Expenditure is being restrained.  The cash reserve the company has amassed from its shareholders may sustain it for a few more years at its current rate of cash burn.  A growing number of US healthcare providers are reaching agreements to use Cxbladder as a diagnostic tool for their patients.

Major, well-known institutions are also acquiring shares in the company as these boxes are ticked.  ANZ's purchase of 33 million shares in July, at a premium to the share price at the time, was a huge injection of confidence in the company.  The share price has since plateaued, as the spread of Coronavirus continues to rage across PEB's largest target market.

With limitations on in-person meetings, the expansion of Telehealth is becoming an increasingly relevant trend of 2020, and one that should continue to grow.  Even in New Zealand, Spark has highlighted Telehealth as a major focus for the company moving forward, allowing doctors and specialists to conduct virtual meetings, increasing access to healthcare for those either too distant, too immobile or too infirm to travel to a medical facility.

For PEB, Telehealth provides an avenue for continued sales, as in-person meetings stall and the US healthcare system struggles to control a more pressing crisis.  The unfortunately titled Patient In-home Sample System has allowed Pacific Edge to ramp up throughput after a difficult April, and suggestions are that the second half of the financial year has started very strongly for the company.  If a vaccine to the Coronavirus was to arrive in the New Year, one imagines the benefits of freeing up healthcare resources will flow through to all healthcare providers, including PEB.  At the same time, pressure is mounting in the US to reform its healthcare system, which may remove another obstacle to PEB's progress.

Another development this year has been PEB's late inclusion into the NZX 50, replacing Metlifecare. Funds that are restricted to investing only within this grouping are now able to include the stock for consideration, and those robotic passive funds that mimic the index will see a small amount apportioned to the company.  One of the gripes made by smaller companies listed on our exchange is the difficulty of gaining traction among larger investors and institutions.  PEB has entered and left the index before, but will be hoping its most recent addition is permanent.

Pacific Edge has, by far, been the star of 2020. After beginning the year in the doldrums at a mere 12 cents per share, it now trades around 75 cents, the largest percentage gain in the index.  Its market capitalisation now exceeds half a billion dollars, with some research houses forecasting a future price at almost double its current level.  The company has its fair share of believers, but an even greater share of those eagerly waiting to become shareholders once the company can produce consistent, recurring revenue.


Our remaining visits for cities for 2020 now have been booked out. We will resume our city visits in January and February, 2021.


Our offices close on December 21, but transactions may continue via e-mail. Chris will respond to cell phone messages (021 83 85 61 and 0274 83 85 61) during the holiday season.


Next week Chris will review the year, comparing it with other transformational years like 1987 and 2008. The following week will mark the final edition of the year.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

This emailed client newsletter is confidential and is sent only to those clients who have requested it. In requesting it, you have accepted that it will not be reproduced in part, or in total, without the expressed permission of Chris Lee & Partners Ltd. The email, as a client newsletter, has some legal privileges because it is a client newsletter.

Any member of the media receiving this newsletter is agreeing to the specific terms of it, that is not to copy, publish or distribute these pages or the content of it, without permission from the copyright owner. This work is Copyright © 2022 by Chris Lee & Partners Ltd. To enquire about copyright clearances contact: copyrightclearance@chrislee.co.nz