Taking Stock 23 December 2021

THE summary of the 2021 calendar year, and its outcomes for retail investors, was addressed last week by Johnny Lee, in Taking Stock, rightly focussing on the NZ financial markets.

The NZX 50 was stagnant, interest rates rose, commercial property trusts languished, and a government dealing with Covid often lost any connection it had with financial markets.

Johnny's summary finished by mentioning the twin dangers looming in 2022 – inflation and rising interest rates.

As the year ends, I look towards 2022 with hope, but with recognition that in 2022 the strategy of buying an index, anywhere, might be increasingly risky.

There seems little doubt that the world will need to re-price risk in the lending markets, credit margins being certain to increase where there is uncertainty, and base rates likely to reflect the need to dampen inflation.

In the context of New Zealand, it seems sensible to expect the cash rates to rise by another 1% in 2022, the swap rates to rise by a similar amount, meaning corporate bond rates might break the 4% ceiling, mortgage rates to leap, perhaps by at least 1%, and long-term bank deposits to rise by at least 1%.

These numbers on their own may sound relatively benign, given that most seasoned borrowers have in recent decades lived with rates of 10% to 20% (even higher in 1983-85), and most investors were used to planning their revenues based on 7% (or much more in 1983-85) bank (no-risk) term deposits.

Indeed between 1987 and 2006, investors could, and did, buy bonds and finance company debentures that sometimes yielded double figure returns, with virtually not a cent lost in that 19-year period.

These returns, without fees, well exceeded the returns of fund managers and led to around 250,000 New Zealanders investing successfully with over-weighted, fixed interest portfolios, that for nearly two decades returned capital in full.

We all know that the rich pickings of those who issued such securities eventually led to all manner of crooks entering the sector, and also led to a sickening deterioration in the standards of those who set out with good intentions, and those who were supposed to regulate, govern, manage or audit the issuers.

Honest people do not set their standards based on what is convenient. Real regulators, auditors, trustees and directors get their job satisfaction by being diligent and competent.

Today, we end the year certain that those institutions with hundreds of millions, or billions, of corporate bonds or government stock, will be calculating the value of those securities on December 31, 2021.

The value will be tens of millions, possibly hundreds of millions, less than the value ascribed to the securities at the last banking accounting date.

The rise in yields makes the bonds worth less. Bank profits will be affected.

If the ANZ in New Zealand makes luxurious profits from lending, it will be deducting perhaps $100 million after completing its market-to-market of its bond portfolio, reducing the almost revolting profits from its lending activities.

Of course, $100 million of losses is irrelevant, in the opinion of some.

After all, ANZ's chairman, John Key will always be remembered for his remark when Prime Minister, that ''$100 million is chump change'', a sneer that should be his epitaph.

The loss of value in the institutional bond market is one of two short-term problems that will surface in coming weeks.

The other loss of value will be in the managed funds and KiwiSaver sector, which will not just be marking-to-market their bonds, but will also be realising these losses, in the case of KiwiSaver managers which are on the list of default providers.

A few KiwiSaver managers have been selected anonymously to manage the money of savers who take no interest in how their savings are managed. The selection process was opaque, many in the sector believing the panellists were duped into silly criteria for selecting the managers.

These selected default-fund managers have since been instructed by a government to sell up bonds and buy more shares, a move designed to shunt the savers into more risk, in pursuit of more return. For context, expect at least $100 million of bonds to be sold to a market that usually absorbs a million or two of sales a day, often much less.

A worse time than now to undertake this change is unimaginable. Again the knowledge of market participants was not sought in an intelligent way.

At a time when foreign investors have withdrawn billions from our (and all) bond markets, and when riskier equities have had the largest bull run in decades, our government is directing that by the end of February 2022, default funds must have shed bonds in favour of equities. What will provide bond pricing tension, as the sellers are forced to sell?

Would you expect the buyers of these bonds to be offering fair prices, knowing the sellers have to sell, in the next 68 days?

And what effect will this have on ramping up share prices? Apparently 14% of most balanced KiwiSaver funds were in NZ equities. Will that figure rise to 17%?

So in the near future we will have compulsory selling of bonds though, thankfully, the Wellington cabal is not enforcing compulsory buying on other bond market participants. (Did they overlook this?)

We will have inflation and rising interest rates.

We are likely to have no foreign buyers offering to provide liquidity. Foreign money has bypassed our bond market, and has been suspicious of our equity market, in recent times.

This sounds to me like a set of circumstances that does not portend well for KiwiSavers or institutions that manage other people's money.

Only a year or two ago foreign investors owned 60% of our bond market and nearly 45% of our equity market.

I have not seen the latest official figures, but I expect the two figures are now more like 10% and 20%.

It will have been KiwiSaver managers who have been the buyers of our bonds as the yields and prospects became unattractive to foreign funds.

The only certainty about sharemarkets (and our weather) is that the swings will be violent.

Whilst rising rates and rising inflation will have implications for retail investors in 2022, the more challenging events may centre on our labour markets.

In effect we have almost immeasurably low unemployment, there being very few people keen to retrain or accept available work.

We have limited access to foreign workers, while Covid and politicians limit the access to our country. The Omicron variant would be behaving atypically if it did not cause in New Zealand fresh rounds of restrictions.

We also are seeing the early signs of what the world describes as The Great Resignation, a phenomenon resulting from Covid lockdowns.

Middle-aged and older people have been either resigning, offering to work fewer hours, or demanding to work mostly from their homes. Younger people are less likely to approach employment in a conventional way. Those who study behavioural trends must be puzzled. Where does all this new disruptive mindset lead us?

Here, we have inexplicable shortages in low or semi-skilled work and easily explained shortages in skilled jobs. I describe the shortage of unskilled labour as inexplicable as my age group would have surged to take on part-time after-hours work when we were trying to get ahead in life.

Most of my clients and my friends recall part-time work as a way of living within one's means.

For today's labour shortage problem the solution to me is obvious; far more part-timers, chasing a second job, sharing the hours, chasing income to improve living standards or service debt.

In the absence of such a work ethic the likely outcome would be regular closures in the café, restaurant, and hospitality sector. Already we see cafes closing at weekends, citing an absence of labour, some potential workers put off by ''bullying'' or other, supposedly modern-day follies.

One certain outcome is wage inflation, driven by wage demands, and, given the new Wellington drive to empower collective action, soul-destroying strikes.

I expect 2022 to be pock-marked by strikes, adding oxygen to the argument that New Zealand risks becoming an angrier and more divided country.

Even here on the Kapiti Coast it is clear Aucklanders are bristling about the behaviour of the country's leadership, and the increasingly politicised public sector.

Wage inflation usually chases general inflation, which then spirals, a sub-optimal cycle.

The concept that the current inflation rate might prove to be transitory encourages optimism. Investors will want to be convinced. Wage inflation embeds ruinous inflation.

If these issues are all alarming, the balanced outlook of cautious optimism can be reached easiest by observing global demand for our premium foods and wine, acknowledging the growth of our ability to sell technology, and the potential growth if New Zealand were to borrow to invest in infrastructure, most particularly building and renovating hospitals, replacing our underground infrastructure, and first repairing, then modernising, our state highways.

Perhaps because of Covid and the inaccessibility of Auckland's bitumen, the SH1, from Taupo to Wellington, is in an appalling condition, a danger to tyres, and a huge risk for motorcyclists. The words ''third world'' spring to mind.

Borrowing to restore essential assets seems a reasonable concept.

It is hard to be optimistic about the Government's declared wish to redistribute the wealth of successful people, as implied by the witch hunt on some hundreds of people deemed by the proletariat to be too wealthy.

Such an initiative surely invites more wasted energy on devising structures or tax havens.

A better, wider, but still fair tax system should be debated before any further surreptitious behaviour is approved. Perhaps the Government will be wise enough to call in Gareth Morgan, who was one of a well-informed group who looked at modernising our tax system.

Another ray of hope comes from the Auditor General who calls for more transparency and accountability on arbitrary handouts from the central pool of funds.

Why do we not know the outcome of each of the projects funded by Shane Jones' Provincial Growth Fund?

How much Crown money is being used to silence public sector people who have been victims of ''retraining''?

It is also encouraging to hear louder voices calling for New Zealand to report on productivity improvements, rather than the sort of simple, banal ''growth'' that Key's government achieved with uncontrolled tourism and immigration, and over-sold permission for ''rich'' barons to buy into our citizenship.

Some of those wealthy newcomers are indeed wonderful people; many are just boring self-praising buffoons, their wealth created by banking bonuses, often referred to in Australia as the unattractive winners from Macquaries Millionaire Factory.

Acceptance of vulgar bonuses is no proof of value-add or intellect. Some say it is proof of nothing other than the sort of entitlement that existed before the French revolution, when the wealthy and the churches paid no tax.

We need such people like we need foot and mouth disease.

When productivity becomes the headline measurement of our endeavours, we will be adding sustainable wealth for the benefit of all who want to have a better life.

For investors 2022 might be a year of defending one's wealth, carefully putting at risk only that money that could be lost without a diminution in living standards. Defending capital AFTER deducting higher inflation will not be easy, except for those who are successful soothsayers.

The year might be the year when financial advisors, sharebrokers, and fund managers adjust their fees to reflect value-add and dispense with the notion that high returns in recent years came from the genius of intermediaries, entitling them to ludicrous bonuses. Those bonuses might have been claimed from money that should have been cushioning falls in bad years, perhaps around the next corner.

To our clients and readers, we extend season's greetings attached to the cautionary note that inflation, interest rates, labour shortages, wage increases, and a year of centralised ''solutions'' will need to be navigated skilfully!

It would be a great outcome if the year of 2022 copes with the problems and brings happiness and good health to our readers.

Thank you to our clients for conducting your business with our firm during a year that had great uncertainties.

We close at midday on Wednesday 22 December and reopen at 9am on Monday 10 January.

We will be able to purchase and sell shares and bonds for you while our office is closed. Please email us chris@chrislee.co.nz with any orders.

If you would like to speak to us via phone, please email us with your contact number and we will get back to you in a timely fashion.

Season's Greetings

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 16 December 2021

THE year of 2021 is nearly over, with the month of December feeling more like a dash to the finish line, as opposed to the quiet wind-down of the holiday period.

Major last-minute deals have kept broking houses busy leading up to Christmas, with a new listing and a very substantial capital raise announcement keeping the industry on its toes.

The market as a whole closed in the red for the year, a statistic that deserves some context. The last week of the 2020 year saw an enormous uptick in the value of some share prices. Contact Energy, Meridian Energy and Mercury Energy all saw substantial share price increases to levels that were simply unsustainable, prompting some to take enormous profits and sending their prices back to earth.

The culprit, an overseas fund with a knowledge gap of New Zealand liquidity, almost immediately sold down its overpriced shares, locking in losses for its investors and leaving behind a windfall for baffled New Zealand investors. This seems unlikely to be a recurring event.

2021 was a good year, overall, for IPOs. The NZX will be pleased to see a number of new companies – across a range of sizes and industries – join the exchange. The latest, Winton Land Development, lists tomorrow and is reported as being ‘’substantially oversubscribed’’.

Chemical manufacturer and distributor DGL Group was the pick of the bunch, more than doubling since its initial listing and using the market listing to fund several acquisitions to grow its business. It has been the poster child of capital markets this year, raising funds to fuel growth, then immediately embarking on executing its strategy, rewarding its new shareholders along the way.

The likes of Third Age Health, Ventia, TradeWindow and Vulcan have also listed strongly, rewarding those who took a chance on a new listing.

Conversely, NZ Automotive, Greenfern Industries and My Food Bag disappointed - My Food Bag in particular.

The My Food Bag IPO was accompanied by a widespread marketing campaign, targeting popular news sites and subscribers of its meal kit service. The timing of the listing proved very fortuitous for the exiting shareholders, as within months market sentiment had changed and the much touted 5% gross dividend yield began to seem lacklustre.

My Food Bag will be an interesting stock to observe over the next 12 months. Publicly available disclosures from major shareholders show they are continuing to increase holdings at these low levels, while profit updates show the company is continuing to meet its forecasts from the listing. The 5% dividend is now nearer 8%, a return that the market seems content to accept for the level of risk.

2021 saw more than its fair share of winners.

One of the best performing stocks on our exchange was technology manufacturer Rakon. After years of underperformance, its share price soared more than 200%, as supply chain issues throughout the year and a surge in growth across fibre networks saw Rakon upgrade its earnings forecasts, before being forced to upgrade its forecasts again later in the year. Management and shareholders will be very pleased with its year, and will no doubt be seeking to capitalise on this momentum moving forward.

In terms of sectors, the retail sector was the star of the year. Michael Hill led the pack, while The Warehouse, Briscoes, Kathmandu and Hallenstein Glasson all saw substantial recoveries while paying healthy dividends along the way.

The banking sector also rebounded strongly – in terms of share price – with Heartland, ANZ and Westpac all trading up for the year. Unfortunately, the Australian banks had something of a year to forget reputationally. Perennial underperformer AMP Group continued its long-term downward trend.

Alternative approaches to finance continue to emerge. ‘’Buy now, pay later’’ schemes saw a rush of popularity worldwide, while cryptocurrencies surged and collapsed and surged again throughout the year. NFTs – Non-Fungible Tokens – captivated the imaginations of some, with millions spent on digital pictures of frogs for reasons beyond the understanding of this writer.

Growth shares had a good performance in 2021.

EBOS Group continued its march up the list of our most valuable companies. Profits and dividends continue to grow alongside its share price, as the company embarked on an acquisition spree across the medical device sector. The most recent acquisition – worth $1.3 billion, more than most New Zealand publicly listed companies – was positively received by the market. This acquisition will be partially funded by a retail placement to occur in January that threatens to be well over-subscribed, should current pricing be maintained.

Infratil’s share price climbed as the company laid forth its plans for the future. The conclusion of the Tilt Renewables takeover was accompanied by a very clear indication of the company’s strategy moving forward. Infratil made a substantial leap into diagnostic imaging – via its investment into Q Scan and Pacific Radiology – while expanding its footprint in data centres and renewable energy through its new stake in UK firm Kao Data and the establishment of Gurin Energy, an Asian renewable energy venture, respectively.

Infratil has long been a company that invests on ‘’themes’’ – sectors or industries that the company views as likely to outperform in the long-term. Healthcare, data and renewable energy are the current sectors it favours, and with consistent outperformance, it would take a brave investor to bet against them.

Infratil was one of only a handful of major companies on our exchange to outperform the gross index for a third year in a row – two others being Mainfreight and Fisher & Paykel Healthcare.

Mainfreight, simply put, had another superb year. The company has now tripled in value over three years, is seeing more business than it can service, and has managed to reward both its staff and its shareholders as bonuses and dividends continue to grow. Capital expenditure planned over the next two years totals half a billion dollars in a bid to improve capacity. Barring a major strategic misstep, Mainfreight investors will be rightly confident in the long-term future of the company.

For Fisher & Paykel Healthcare, our largest company, it marked another year of (perhaps unsustainably) elevated profitability. Last year’s half-year profit jump of 86% barely receded, as its hospital product division continued to see strong demand. Wisely, in my view, dividend increases were modest, and the company refused to provide guidance for the year ahead. The company is clearly positioning itself for long-term growth and acknowledges that the current conditions are simply too unpredictable - and beyond the control of FPH - to be accurately forecast.

A surprising outperformer for the year was Sky Network Television. After years in the doldrums – struggling with competition, a fading demand for live sport, indebtedness and rising costs – the company has recapitalised, restructured its management team with new CEO Sophie Moloney, and seems determine to reinvent itself. The company issued a profit upgrade in early December, and is now planning to unveil a dividend policy.

Not every stock closed the year higher.

One of the most disappointing performances of the year was undoubtedly that of A2 Milk. Everything that could go wrong, went wrong.

Legal action from two separate Australian law firms; a plummeting Chinese birth rate that is now below 8.5 per 1000 people, the lowest in over 50 years; an oversupply of product; and travel restrictions imposed on a key distribution channel.

A2 Milk saw its share price halve over the year, as the years of consistent growth finally came to an end. The company is still profitable, and A2 Milk’s cash balance will ensure the company has ample cushion to endure the changing market. However, shareholders will be nervously anticipating a return to growth in the year ahead, as the company expands its strategic horizons beyond Asia towards North America.

A2 Milk also served as a warning for companies and their boards when faced with handling information that may be worthy of disclosure. While A2 Milk has expressed confidence that it kept shareholders appropriately informed, it remains a timely reminder to all listed companies that their shareholders require and expect timely disclosure of relevant information.

Another stock that struggled this year was Ryman Healthcare.

Ryman saw its first ever decline in underlying profit. While the company is still very profitable, 2021 was the first ‘’speed bump’’ for the company and gave some investors pause with regards to the trajectory moving forward. The company will be hoping for a stronger 2022, as it continues to expand in Victoria and acquire more land to meet the growing demand of an aging population.

The Listed Property Trust sector struggled for most of the year, but saw a late recovery in December. Changing fortunes around interest rate expectations will inevitably put pressure on this sector to raise revenues and distributions. Many spent the year repositioning their portfolios – selling underperforming assets and acquiring new ones – and raising capital to give them greater flexibility. Kiwi Property Group in particular embarked on a new strategic direction, hoping to move into the Build-To-Rent space as it seeks to increase value to its largest asset.

Goodman Property Trust was the stand-out in this sector, as large property revaluation contributed to record results for the first half of 2022, while still managing to acquire significant amounts of nearby land to fund future development.

The medicinal marijuana sector – which is admittedly new to our exchange - grew in number, with the addition of Greenfern Industries late in the year. However, the share prices of these companies faded over the course of the year. It remains a popular sector for traders and crowdfunders, with a number of unlisted companies in this space continuing to plot their own path towards an NZX listing. These new companies will need to clearly differentiate themselves from the current offerings.

As mentioned above, the electricity sector was almost destined to fall this year after an illogical spike at the end of 2020. The bizarre actions of the ETF buyer remind all investors to ensure they fully understand the product they invest in – because it appears the managers of this particular fund did not.

Takeovers were announced, completed and abandoned. AustralianSuper’s bid for Infratil was firmly rebuffed, while Tilt Renewables’ concluded and Z Energy progressed its own. The Z Energy takeover, if it proceeds, will likely be a major story moving into the start of next year. If a public listing of Gull results at the conclusion of that story, investors will have yet another option to consider.

Meanwhile, the tale of 2Degrees and Orcon moved forwards, backwards and eventually sideways, as both sides attempt to manoeuvre a favourable outcome for their respective owners. 2Degrees and Orcon were both seeking a public listing and are now considering a merger – if permitted by the Commerce Commission - at terms agreeable to both parties. One imagines this will be another story that reaches its final page soon.

The likes of Radius, Arvida, EBOS Group, Infratil, ERoad and Trustpower all announced major transactions that will reshape their businesses going forward.

New Zealand Refining – or should I say ‘’Channel Infrastructure’’ - had perhaps the most significant transformation this year, completely restructuring its model away from oil refining in favour of becoming a simple importer and re-seller of fuel. It continues the controversial trend in New Zealand observed across hard commodities (timber, aluminium) of outsourcing value-add to overseas manufacturing networks. The recent squeeze on the global supply chain has perhaps strengthened the argument for maintaining at least some of these sectors on our shores.

There was even something for the gold bugs to consider, with a new gold resource discovered in Central Otago, owned by Australian-listed Santana Minerals. If this project concludes as its owners hope, it promises a rich reward for investors, the Crown and the local community.

Overall, it was an interesting year for investors, with a wide array of new opportunities to consider. Next year, one hopes, will continue this trend.

_ _ _ _ _ _ _ _ _ _ _

ONE thing that is known is that 2022 will begin with a different sentiment to 2021. The Reserve Bank of New Zealand has clearly indicated that interest rates will need to rise to moderate the surge in inflation occurring both domestically and worldwide.

Investors have enjoyed a sustained period of falling interest rates, and the benefits that accompany such a decline. Many have positioned themselves to take advantage of this, buying real assets and locking in long-term returns at relatively high levels. Now, Central Banks are warning that this must unwind.

Globally, inflation seems to be the topic du jour and this will be a prevailing theme for some time. Even in New Zealand, councils are warning that property rates must rise. Cafes are warning that prices must rise. Oil, milk powder, meat, building materials, shipping and housing – the question now is whether wages will rise to match these increases.

A sustained increase in annual inflation will force the Reserve Bank to act, lifting interest rates to ensure that long-term price growth remains within its target band. Investors have already been put on notice that interest rate rises are coming and are likely to conclude with an Official Cash Rate around 2-3%.

This will logically cause a devaluation of some assets, especially within the Fixed Interest space. Some bond issuers – Auckland City Council, Mercury and Chorus spring to mind – will be extremely pleased with their timing of the market this year. Those fearing further rate rises will be keen to lock in long-term rates at current levels early next year – both bond issuers and home buyers.

Another global trend that has emerged in recent years has been a re-evaluation of our approach to labour and the consequences of this. Labour shortages, particularly in sectors which rely on migration to plug employment gaps, has seen those sectors becoming vocal in wanting the Government to take action on this front. Nurses are writing open letters, pleading for greater investment in staff numbers and staff safety. The construction, horticulture, agriculture and technology sectors have all made it clear that there is work to be done if people can be found.

The likes of Scales Corporation have responded by committing to greater automation to help mitigate this risk. New Zealanders seem to be accepting automation well, whether in our supermarket check-out lanes, fast-food chains or petrol stations.

Other changes in employment – remote working and shorter work weeks, for example – have also begun to take form. Whether these are major trends moving forward, or short-term responses to extraordinary events, remains to be seen.

The newfound focus on ESG concerns – Environmental, Social and Governance – has led to a shift in investment approach. Billions are being poured into ‘’Ethical’’ and ‘’Green’’ funds worldwide, forcing companies to trumpet their ESG credentials to appeal to this style of investor. The likes of Rio Tinto and Royal Dutch Shell have been among the companies most aggressively trying to reforge their image, although some investors remain cynical.

Even within the microcosm of the New Zealand investment community, it is obvious that we are giving more consideration to these factors. A growing number of investors are actively excluding certain companies from consideration. Companies like Z Energy (or perhaps Gull instead) and Sky City Entertainment would do well to continue to focus on these considerations if they wish to enhance their pool of available capital.

2022 begins with low unemployment, but rising inflation, rising debt and declining confidence. The costs of living have risen and will rise further, especially among imported goods reliant on a functional supply chain.

Ultimately, 2022 may hinge on the evolution of the virus and the efforts of our wonderful scientists and healthcare workers in their battle against it. If the world is to ‘’open up’’ and ‘’return to normal’’, it will need a safe and reliable environment for people to engage with.

We wish all readers a happy and safe Christmas period and look forward to commencing in the New Year.

Johnny Lee


Year End

Our office will close on Wednesday, December 22 and reopen at 9am on Monday, January 10.

We will be able to purchase and sell shares for you while our office is closed. Please email us chris@chrislee.co.nz with any orders.

If you would like to speak to us via phone, please email us with your contact number and we will get back to you in a timely fashion.

Taking Stock 9 December 2021

Johnny Lee writes:

Land development company Winton Land Limited has lodged its Product Disclosure Statement to raise money from the public, as it seeks to fund its next phase of growth.

It will list on the 17th of this month on both the NZX and the ASX.

Winton is a developer of large-scale residential projects, almost entirely focused within New Zealand. One of its future projects is the well-known Sunfield development.

Shares are being offered at a fixed price of $3.887. Clients interested must respond by 2PM today with their expressions of interest.

The PDS offer document can be found on our website, and advised clients can locate a research article on the private area of our website.

Chris Lee writes:

IF you don't know where you are going, or have no plan of how to get there, do not be surprised if you discover that you are lost.

This old cliché is often cited in business as the imperative for good planning, beginning with aspirational but achievable objectives; deep thinking about the means of solving problems and executing the plan, after acknowledging the hurdles that will need to be overcome.

Years ago I was in Belgium, having gate-crashed a business lunch with some smart European bankers. One of them in a few seconds delivered his view on why New Zealand had so many opportunities that it merited no favoured treatment.

His analysis might have easily been a feature of any plan that a smart New Zealand politician might have presented, a blue print designed to win support from all New Zealanders.

Last week when New Zealand finally discovered it had a real leader of its opposition, a clever analytical, strategic man with high standards, it struck me that he should have been at that lunch, not me.

He might have gained the energy to develop a detailed plan, publish it, be judged by it, and seek support so he could execute it. May I be permitted to offer him some energy.

Dear Christopher Luxon,

I attach the bones of a plan and invite you, with all the diverse resources available to you, to embellish the plan, add to it, delete ideas you dislike, publish it, and see if it can empower you so you can get the plan executed, for the benefit of all New Zealanders.

May I politely suggest you have far better skills and standards than most. You are in a different league from any of your predecessors.

Write the plan, obtain buy-in from your party, publish it, discover New Zealand is serious about lifting the country to a higher, aspirational level, and if you win that support, execute the plan.

Get it done with the flair and wisdom you displayed at Unilever and Air New Zealand, where your successes greatly exceeded those of any business person who has sought political leadership roles in New Zealand. You are genuinely multi-skilled.

So, here's a draft of the plan for you to improve.

Objective: To harness the cooperative advantages of New Zealand, thus lifting productivity, lifting living standards for all New Zealanders, using debt wisely to build New Zealand's society in an inclusive, sustainable way.


NZ's Comparative Advantage

- Temperate climate, reliable rainfall, rich top soil.

- Diverse multi-cultural society, embracing a wide range of skills.

- Space. Under populated. Room for ruminants and forestry and more tourists.

- Uses the international language of English.

- Westminster-based version of democracy, requiring transparency of debate. Minimal political corruption.

- Independent public service (at least by design).

- Judiciary with history of very low corruption.

- Mineral wealth.

- High level of renewable energy including hydro, wind, and geothermal.

- Easily protected border (little illegal immigration).

- Distant from belligerent neighbours (little money spent on defence).

- Brand respect (food, technology, sport, wine).

- Relatively low debt levels (amongst lowest in OECD).

- History of a socialised health and education system, available to all.

- Strong banking sector (supported by Australia).

- Police force largely free of corruption, usually not relying on guns.

- Close relationship with similar democracies (UK, Canada, Australia, Singapore).

- High levels of social support for the needy. High minimum wage.

- Ample potable water storage capacity (but not used).

- Wide access to ultra-fast broadband

- Excellent domestic airline, sufficient deep water ports.

- Capacity to attract tourists to share natural spaces.

- Growing capacity in technology.

- Growing capacity to provide premium food and wine to wealthy countries, based on innovation & science.

- Immense fishing resource.

- Transparent, simple tax system, centred on GST & low levels of tax.

- Universal pension scheme.


- Failure to maintain standards of waterways (wadeable rivers!).

- Housing costs are extreme and building standards have been inconsistent.

- Poor political leadership for several decades resulting in growing inequality, growing family violence and low productivity.

- Health facilities have not been maintained.

- Education system is not aligned to the needs of a multi-cultural country and not aligned to sustainable employment opportunities.

- Prison reform has failed to rehabilitate offenders.

- Coastal shipping has been replaced by largely diesel fuelled trucks.

- Topography ill-suited to rail.

- Short terms of government, resulting in ad hoc political decisions, based on election cycle, rather than on any long-term strategic plan.

- Coastal towns threatened by rising seas (climate change).

- Minimal use made of solar energy.

- Underfunded technical education.

- Inadequate level of social housing.

- Inconsistent immigration policy.

- Inability to add value to our timber products.

- Mental health grossly underfunded.

- Unsolved problem with illegal drugs (amphetamines etc).

- Narrow tax base.

- Relatively high (per person) carbon and methane emissions.

- Vacillating political leadership on historical matters such as colonisation, and indigenous people's justifiable claims of unfair Crown behaviour.

- Unmaintained and inadequate infrastructure (water, safe roads, hospitals, schools).

- Pension scheme not reviewed.

- Concentration of industry in Auckland leading to inadequate focus on building new towns or cities with modern facilities.

- Weak media, reliant on government funding, threatening the media's core value (independence).

- Aid to Iwi not transparent, outcome not adequately measured, resulting in uneven distribution.

- NZ is over-supplied with retail shops, cafes, liquor outlets, and adventure sports operators, too dependent on unsustainable levels of tourists.

- NZ sits on the ring of fire. Earthquake emergencies are inevitable.


- To address carbon and methane emissions with forestry, and new partnerships with productive land owners (farmers e.g.).

- Government intervention in social housing and affordable housing.

- Better and faster resource consent processes, better processes for re-zoning, better town planning.

- Re-alignment of education curriculum, aimed at embracing all cultures and aimed at preparing all students for available and sustainable employment. (Trade education starting at year 8). National focus on reading, writing and arithmetic as the core of early education.

- Use of debt to rebuild hospitals and fully fund Pharmac.

- Broader tax base to address debt servicing (and inequality).

- Incentivise renewable energy projects (solar farms etc) and build more water storage.

- Involvement of marae-based leadership in Maori health, employment, housing, education and tourism.

- Align immigration to skill shortages.

- Government involvement in coastal shipping, aimed at offsetting road and rail inefficiencies.

- Incentivise the restoration of timber processing. Promote timber ahead of cement.

- Establish and build a national roading network that is safer for tourists and will cater for new-era transport (electricity, hydrogen, whatever).

- Cancel the policy of funding the media; maintain independent state-funded national radio and television channel, with impenetrable protections against political pressure.

- Liaise with like countries to formulate effective mental health programmes (housing, poverty, unemployment all relevant).

- Legalise and provide drugs, to challenge the current profit-based underworld distribution system.

- Increase police numbers.

- Retrain defence force to act as civil defence staff during all emergencies.

- Technology, specifically robotic technology, may reduce low paid jobs (i.e. fruit picking).

- Invest in science and technology.

- Abolish student fees and reinstate the practice of bonding graduates.


- Inadequate leadership. Has the Higher Salaries Commission produced wages for politicians that encourages mediocre people to enter politics as their ''main chance'' rather than to serve the country? (You, Christopher, did not enter politics to make money!).

- Pandemic highlights the inadequate planning of our health facilities, and their dependence on goodwill of their staff.

- Central intervention in rural sector highlights the divide between a productive, innovative, hard-working sector and a city based academic leadership.

- China's ability to print and distribute money may erode the strength of our rural sector.

- Immigration eligibility for ''wealthy people'' may have unintended consequences.

- Narrow tax base makes debt-servicing difficult if inflation leads to significant interest rate rises.

- Climate change carbon taxes may disrupt international travel.

- Inequality, poverty, family violence, mental health and illegal drugs threaten social cohesion and social order.

- Low reproduction rates of university graduates is changing the gene base of NZ.

- Shortage of tradespeople results in over reliance on immigrants, exacerbating housing problems.

- Modern trend of one-parent family places pressure on social housing and affordable housing.

- White collar crime and corporate corruption is increasing.

- NZ's ''safe'' image is threatened by rising petty crime, and by the unsupervised lifestyles of those expelled from Australia.

- Focus on Te reo risks alienating various demographics and thus needs to be managed sensitively.

- Public sector appears to be at risk of being politicised, evolving more into a US model than a UK model.

- Lack of police in the community threatens the respectful relationship with many demographics. Uninvestigated crime hastens this loss of respect.

Christopher Luxon, the above one-liners of course do not make a compelling, complete plan, as you will know.

A plan must demand support and buy-in by proving the dimensions of the issues it wants to tackle. It must describe the strategies and tactics that will produce the desired results and can be executed.

You may potentially be the only Prime Minister in my lifetime whose business background implies the level of skill, wisdom, and energy that could add details to my on-liners, delete those with which you disagree, and add those I have overlooked.

You will produce a costed, credible financial budget, a time budget and a resource budget that would spell out priorities and would attract a commitment to get the plan executed.

The goal must be to create a New Zealand that has higher sustainable living standards for all those who want higher standards and that is inclusive of all demographics and cultures.

It should be affordable and achievable under your leadership.

Are you the man to mobilise New Zealand?

If I read correctly your life story (to date), I figure you are our best hope, for many decades.

Before we vote in 2023, please show us your plan.

 _ _ _ _ _ _ _ _ _ _ _ _

THE rich pickings available when companies seek to list their shares on the NZX used to be the preserve, at least predominantly, of the investment banker.

Globally the likes of JPMorgan and Goldman Sachs made, and still make, billions from their supervisory role in new listings, as well as in mergers and acquisitions. In NZ even modest sharebroking talent has attracted some of these rich pickings.

The lush pasture in their paddocks now attracts others, like the major law and accounting firms, which seem to have a growing role in the easier deals.

Lush paddocks excite those with big appetites.

The result of this growing number in the paddock creates a new urgency to find where the pickings are easier.

That quest for easy money will finish up in the funds management sector, whose fees are so obscene they might attract the interest of the Commission for Financial Capability, which displays a fascination with the private sector's income levels.

It should not just be the fees that attract fascination. The bonuses are where the crude fees convert into unrefined obscenity.

Fees plus bonuses convert to extreme wealth for people who vary from skilled investment managers to vulgar car salesmen, like NZ Funds, which trades its investors' money in crypto currencies and claims a bonus ($50 million) when the accounting period coincides with the theoretical gains of such speculation.

As this new search for easy money becomes frenetic, more will enter the game, the latest being Forsyth Barr which, ironically, was an early funds management participant with its ''Thinking About Tomorrow'' product of the 1990s, and its ''Summer'' KiwiSaver attempt.

Those offerings attracted minimal interest, rightly so in my opinion.

Forsyth Barr, Dunedin-based, sought scale by inviting its clients to hand over management of their money, sometime before the global financial crisis, before Feltex, Credit Sails and finance company subordinated notes tested investor appetite.

It has achieved surprising success in persuading its clients and now has more money under the control of its internal people than all bar a tiny number of fund managers, raking in hundreds of millions in annual fees, deducted each year from client accounts.

Perhaps it seeks a wider audience for it has formed a fund, named it Octagon, and will now embark on a programme to test the public's taste for the Dunedin business.

I think it missed a trick by not naming the fund the “Edgar'' fund, in memory of the late Eoin Edgar, whose appetite for wealth is what drove Forsyth Barr from its tiny Dunedin base into an operation that controls tens of billions of other people's money.

The ''Edgar'' fund would have bestowed a sustainable moniker on the ambitious new fund, which will be anxious to prove it is not another ''Thinking About Tomorrow'' or ''Summer'' variant.

Does NZ need yet another ''me too'' fund?

My guess is that the investing public is hurriedly discovering that value has to be added, to offset any fee at all.

Octagon, one assumes, will seek to be judged for value-add over a long period.

The year of 2022 could be a year when value is added by not losing money.

 _ _ _ _ _ _ _ _ _ _ _ _

Erratum: Last week I recorded that Zany Zeus had its cheeses made in Pokeno. In fact, the organic milk is processed in Pokeno but the cheeses are made in a tiny facility in Moera, Lower Hutt, after the processed milk is transported there.

Season's Greetings

Next week Johnny Lee will summarise the calendar year, discussing the challenges of a difficult year, finishing as it does on the brink of a period of ugly inflation.

May I extend season's greetings to all readers of Taking Stock and a final wish for good health for us all, in 2022.

Thank you for reading Taking Stock!

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 2 December 2021

MOST long-time investors will have come through the experience of investing in companies which fail because of over-trading.

The investors will have lost a sleeve or a button but hopefully not the whole shirt while the company founders will have lost their wardrobe.

Over-trading is usually visible in a company that has insufficient capital, insufficient skilled staff, struggles with cash flow, leans on its debtors, and usually is led by a flamboyant character who does not know how to consult with his senior staff before committing to take on new business and accepts impossible deadlines, often on thin margins, in pursuit of turnover.

Here in Horowhenua/Kapiti many will recall how an airhead ruined an important local company years ago, measuring his own acumen not by matching resources to his clients, but by ''winning new business'', and then overruling his production manager, both on scheduling and pricing.

When the shareholders finally accepted their leader was an airhead they discovered he was also a thief.

Sadly, they preferred compensation rather than revenge. The inept fellow went on to cause havoc in other organisations, rather than be marched to the courts and exposed as the bounder he was.

Over-trading is hazardous, a high-risk business strategy.

Also dangerous is under-trading, a condition that usually describes a company with good products or services that cannot penetrate available markets, often because of lazy salesmen, over-cautious business owners, or lack of ambition.

Last week I was delighted to meet with a private company chairman whose company is planning restoration, after failing, perhaps through over-trading, and now recovering, but currently under-trading, because it lacks production capacity.

Such stories are rare. I sincerely hope the recovery occurs.

The company is one whose products are well-known in Wellington, but not so much in other cities.

Its products are European style soft cheese, like haloumi, feta, and ricotta, all made from organic milk, the chief cheesemaker being of Greek heritage. It also sells organic milk and some yoghurt under its brand name, Zany Zeus.

Years ago Zany Zeus from its Taranaki base established a following but did so without sufficient resources and finally expired, despite the high regard for its products.

It now is seeking around $18 million from outside, professional investors, after its original owner and cheesemaker began the recovery with an injection of seven million.

Ironically Zany Zeus is now under-trading, unable to produce enough product to meet with demand.

Its plan is underway and should substantially lift the capacity to meet demand, and be able to meet growing demand.

Currently Zany Zeus buys its organic milk, mostly in the Wairarapa from small producers, and from Manawatu. It then trucks the organic milk several hundred kilometres up State Highway 1 to Pokeno where its milk is processed before being sent to its current small factory in Wellington, where 80% of its sales occur.

In Wellington, around half of its sales are to the restaurant trade, a little is sold through its tiny shop in Moera (Lower Hutt), and the rest is sold through local supermarkets, including Pak n Save and Moore Wilson's.

It simply cannot supply the other supermarket chains. It sells everything it can produce and carries stock of no consequence. It has to decline orders. Sensibly it has no concentration of distributors, its ten biggest clients representing less than a third of its sales.

What it has done to fix its under-trading problem is interesting. I spent an hour or two visiting the new dairy processing factory it is now creating in the old Ford Motor Company building at Seaview.

It has a long term lease of the southern end of the building where milk tankers will have easy access, and small trucks will eventually pick up product for delivery, largely around Wellington.

It has installed top-of-the-range processing plant and expects that the equipment will comfortably produce enough to meet all existing demand. Meeting current demand will triple revenue.

Profitability is expected to be enhanced by switching production to where the market demand is, thus ending the undesired cost of driving to and from Pokeno. This alone is expected to reduce costs by nearly two million dollars.

Zany Zeus has been helped by the building owners, whose building valuation will increase when it has tenants who invest heavily in expensive, installed plant, the various refrigeration units alone costing millions to build and install.

To date it has been helped by capital contributions from prominent, wealthy businessmen, at least one of whom would be well aware of the brand popularity amongst affluent Wellington households.

Zany Zeus has its best sales during Wellington On A Plate month, where large numbers of restaurants and hotels compete to make the most innovative meals and hamburgers.

I will not pretend to understand why but the fanciest haloumi, feta and ricotta all seem to be included in the recipes of the most ambitious chefs.

(Shame on me, I still eat cheddar).

The capital raising for Zany Zeus I had thought would be dominated by crowd funders and Sharesies clients. I was wrong.

The sales document is an Information Memorandum, not a prospectus approved by the Financial Markets Authority, and the sum being raised is well beyond the reach of crowd funders.

Besides, Zany Zeus is hardly likely to cater for 180,000 Sharesies clients each investing $100.

Professional investors must be certified as having sufficient experience and wealth to make an investment without the protection of a registered prospectus. Minimum investment is likely to be around $100,000, though no figure is displayed.

It is rare for a company to collapse through lack of capital yet have such popular products that the company can attract skilled investors offering to resuscitate it.

If the capital is raised, it would be a great acknowledgement of the products and the patience of its investment banker, and current chairman, Andrew McDouall.

If McDouall's programme is met, Zany Zeus products will be created in Seaview, Lower Hutt, in 2023, and will be delivered around Wellington, with minimal effort, in the small hours of each morning.

Ultimately Zany Zeus might be ready to grow demand and reach a scale where its investors may indeed be its retail clients, perhaps operating with an NZX listing. This ambition might be in a 10 year plan.

Zany Zeus wants a long term future and plans to put an end to the days when its production did not equate with full demand.

 _ _ _ _ _ _ _ _ _ _ _ _

IF there are any regular readers of Taking Stock they will have been unsurprised to read that an independent audit of Westpac New Zealand's governance has found the standard of its board was woeful.

Meetings were dominated by trivia; the big issues were not debated fully; regulatory requirements have been treated haphazardly; some board members were not up to the task.

Well, who would have thought!

Taking Stock has often recorded that for nearly 30 years Westpac has been the worst of our banks; arrogant and self-focused; its directors lacking guile.

I recall leaders that were weak; product selling that to be polite, was ill-advised; inter-bank behaviour that was uncooperative; board members whose skill and experience sometimes were not obvious.

We will all recall how in Australia Westpac and CBA were simply exploitative, selling strategies to rival any junk car salesman, fee-charging strategies to rival the worst of crooked receivers or liquidators.

To be fair, Westpac's performance and governance was only marginally more cynical and reprehensible than the other banks.

Few will ever understand why Westpac was selected to perform our public sector's banking. One imagines that the group that selected Westpac was as dim as the group who selected our KiwiSaver default providers. Will we ever be told their names?

Westpac's cynical behaviour was reflected in the ''regional'' boards it set up in New Zealand where a small number of its selected people were not fit to sit on any board.

Those people would strut about, using the ''honour'' as a feature of their CVs. They were stooges, there to look handsome.

Yet I suppose the same could be said about ANZ/UDC, when it appointed sub-boards and chose some people whose corporate reputation had never reached much above the bottom rung.

What is it about banks? Why do they load up on those with a good media face rather than those with personal standards that can be admired?

Banks make bucket-loads of money, simply with their pricing of risk-free loans like mortgages (at sane ratios to value) and they make revolting sums from their credit card activities, collecting fees from the retailers and hefty margins from those who borrow from their cards.

They have long shown disdain for our regulators, often declining to disclose relevant material, such as bank write-offs of executive loans.

The banking regulator is the Reserve Bank whose governor is Adrian Orr, once an executive at Westpac. he did not conduct the recent enquiry into Westpac, but I would guess he would have guided the team who did find the deficiencies, at least pointing them where to look.

Of course I cannot mention Westpac without recalling the list of incompetent lenders, managers, and directors who created the rot that eventually led to South Canterbury Finance's demise.

From memory, The CEO, the COO, seven branch managers, six lenders, one shadow director and one so-called asset manager were all ex-Westpac, as was one of its long-standing directors. The Westpac duds were a high percentage of SCF's team.

That was more than 10 years ago.

Will we see a cultural shake-up this time?

Might Westpac be better to list itself on the NZX, change its name and start afresh?

 _ _ _ _ _ _ _ _ _ _ _ _

 Johnny Lee writes:

MEANWHILE, the buyback of Westpac shares, due to conclude later this month, has created confusion among shareholders.

The offer is complicated, has an unknown price and offers value specific to certain shareholders.

I do not intend to reproduce the 64-page booklet in its entirety. However, the simple answer is that, for most New Zealand shareholders, the offer can be disregarded entirely. It is not intended for you, and the benefits to you will accrue without any action.

The past two years have seen our largest banks take precautionary measures in the face of an uncertain environment. Many suspended or reduced dividends, fearing recession, unemployment, and rapid falls in asset values.

As governments and Reserve Banks around the globe began their stimulus programmes, and these risks began to recede, the banks were left with very large franking credit balances and levels of capital they felt were in excess of their short-term needs.

We have written previously about our preference for banks to retain capital, to avoid simply alternating between buybacks when the share price is strong and issuing new capital when the share price is low.

Nevertheless, Westpac has joined the other major Australian banks in returning capital to their shareholders. It is offering to buy its shares from any willing shareholder - with a total limit of $3.5 billion AUD - at a price per share yet to be determined. The final price will be the average price during the week starting the 12th of December, minus a discount of at least 8%.

The logic of this is that the discounted price includes franking credits, meaning that the overall value to tax-exempt shareholders, such as some Australian superannuation funds, is in excess of the market price.

New Zealand shareholders are unlikely to see any direct benefit from this offer. However, there is some indirect benefit to this process, as Westpac is buying shares back at a discounted price, utilising a mechanism that has no advantage to them. With fewer shares on issue, the remaining shares are worth proportionally more.

There may be an argument for New Zealanders accepting the offer in very niche cases. For example, with very small shareholders, there may be a logic in accepting the offer to avoid trading fees. The number of shareholders with such a tiny shareholding would not be significant.

Westpac Bank will soon be worth a few billion dollars less, while Australian superannuation funds will be worth a few billion dollars more. Metrics like Westpac's Return on Equity– a priority for some shareholders, it seems – will be stronger.

Investors wanting to take part in this offer have until 17 December to apply online.

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

FINANCIAL markets have begun reacting to the news of a new Covid variant – Omicron – which is spreading around the globe and has been labelled a Variant of Concern.

While the news headlines describe a ''plummet'' in sharemarkets worldwide, the drop has been somewhat modest, with the Dow Jones falling a few percentage points since the discovery. For context, markets have returned to September levels.

Markets dislike uncertainty. Uncertainty creates hesitation, both for investors and businesses, and discourages investment.

It is uncertain whether the current array of vaccines will be effective at preventing the spread and the effects of the new variant. The CEO of vaccine-maker Moderna believes its vaccine will be less effective against this variant, but has stressed that there is simply insufficient data to make a conclusive judgment.

It is uncertain whether the Omicron variant is more deadly, more contagious, both or neither. Early reports are suggesting that the variant is, at the very least, more transmissible. Its virulence may be of more concern to governments worldwide.

It is also uncertain whether the new variant will render recent advances from the scientific community obsolete. While the vaccine development and rollout has been well publicised, there has also been progress made on alternative treatments, including pills and nasal sprays, that now have a new problem to address.

It is also uncertain whether the spread will discourage our collective determination to battle the disease. While New Zealanders have been better than most in this regard, sustained lockdowns and constant vigilance around health measures have clearly taken their toll.

What is certain, however, is that should the risk to public health escalate once more, our Government and Reserve Bank have a well-established template for dealing with the financial impact. Lockdowns. Low interest rates. Asset purchases. Debt.

World markets will be volatile as data is collected and analysed. This may be part of the ''New Normal'', as the virus continues to mutate and change.

For now, it is yet another risk we must consider when choosing to invest. Expect the headlines to reflect this.

_ _ _ _ _ _ _ _ _ _ __



Johnny will be in Christchurch on 7 December – this will be the final trip to Christchurch for the year.

Any client wishing to arrange a meeting is welcome to contact the office.

Chris Lee & Partners Ltd

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