Taking Stock 21 December, 2022


Hi all,

Chris and the team have kindly allowed me the opportunity to introduce myself during the final newsletter of the year.

I joined the staff in early December, and it’s been a great time of year to get to know the team and interact with a few clients.

A bit about myself: I’ve worked in the investment markets pretty much my whole career to date, firstly as a research analyst for Forsyth Barr and more recently with Trustees Executors, managing their investment team and investment funds. In between, I did the customary working holiday in the UK for a couple of years.

I live in Wellington, with my wife Lizzie, and young children Henry (6), Alex (4) and Lucy (2 in Feb). Wellington has always worked as a nice midway point for Lizzie and me, her family being from Taranaki, mine from Otago, but it has now become home, though I still struggle with the thought of raising my children as Hurricanes supporters.

I have a passion for anything sports, with a particular soft spot for the oval ball. I was fortunate to get through 35-odd seasons as a player and hope to get through a few more yet as a coach.

I hope you have a safe and enjoyable Christmas and I look forward to getting the opportunity to meet many of you in the New Year.  



Wrapping up 2022

This year has been another volatile one for share investors, with returns mostly to the downside. At the start of the year the global economy was in full re-opening mode. This speedy recovery was highly positive but quickly sparked inflationary concerns with demand for almost anything generally outstripping supply. The Russian invasion of Ukraine and its repercussions threw fuel on this inflation fire, disrupting global financial and commodity markets, while also damaging millions of livelihoods.

2023 looks poised for more volatility, hopefully to the upside, but many of the questions puzzling global leaders and investors are yet to be resolved.

Inflation is here to stay

Some of the highly inflationary impacts, such as higher oil, gas and other commodity prices, may wear off over time, which should flow through to lower inflation numbers.

One of the issues that may not be so quick to pass is the move back to de-globalisation, at least in some form. The failure in global supply chains highlighted the massive risk in running capital and inventory-light business models with the reliance on single suppliers or lowest-cost labour markets. As we saw with Russia (and to a certain extent China), globalisation doesn’t always work in times of geopolitical turbulence.

As a result, the changes are long term and likely to be inflationary. Things like Europe’s move away from Russian oil dependence, or the gap in global wheat production lost in Ukraine, cannot be replaced overnight, but the buyers of these products are likely willing to pay more for the security of supply.

Just this month the world’s most valuable company, Apple, announced moves to accelerate its diversification away from Chinese production, which was ironically the key to its previous success. For now, these are a handful of examples, but given the impact globalisation has had on lowering the costs of a lot of day-to-day goods, it stands to reason that trend could be reversed.

Market performance has been weak

Markets have been weak since Reserve Banks began tightening, causing the rapid repricing of bonds and equities. There have been few places to hide, with nearly all asset classes (except cash) highly correlated in the first half of the year. The biggest fall has come from the reversal of the growth trade, which had benefitted from declining interest rates and cheap access to capital for the best part of a decade. Valuing companies using sales growth multiples has quickly gone out of favour, with allocators returning to more fundamental metrics such as profitability, cash flow and asset backing.

While the music stopped for growth stocks, ironically it was some of the ''old world'' value stocks that bucked the trend in 2022. Sectors like oil, gas and even coal (or buried sunshine as it used to be called) were among the top performers for the year to date, underpinned by spikes in demand through the northern winter, continued supply issues and low valuations based on the assumption the world was going to move to cleaner technologies seemingly overnight. While I don’t expect this golden run for these sectors to continue long term (I expect it will accelerate the transition), it does highlight how long and how difficult the transition can be and unfortunately how good intentions can take a back seat to survival.

At the time of writing, the NZX50 has returned -12% including dividends and is -14% off its peak in September 2021. This was outdone by the tech-heavy US S&P500 which is down -20% for the year to date (after being more than -24% earlier in the year). Australia has been one of the better-performing equity markets globally this year, down just -1% for the year to date, with the resource sector doing nearly all the heavy lifting.

Growth stocks have performed poorly. However, we have also seen some of the casualties of quickly tightening liquidity, with FTX’s rapid demise in November. Private equity valuations have been questionably stable in the face of falling equity markets and asset valuations in general.

Recently we have seen Blackstone, a major global Private Equity and Property player, limit redemptions from one of its funds to avoid the forced sale of some of its assets.  While this could yet all play out happily, it is another example of the mismatch in liquidity and transparency requirements between some of the alternative asset classes and their investors.

Interest Rates

NZ Bond returns in 2022 have been satisfactory relative to other global markets. The Reserve Bank was one of the first to begin hiking, and much of the repricing in local bonds was done last year. The NZ Corporate Bond index has returned -1.9% for the year to date, not ideal for investors required to sell them, but the capital swings in bonds are typically one-offs and can largely be ignored by the buy-and-hold to maturity investor.

One key positive is that we are now seeing new bond issues at a level not seen since 2010, offering equity-like returns.

The impact of rising interest rates has been widespread, from asset values falling, and bonds being repriced due to the paltry levels of interest rates over the previous years. Interest rates have risen sharply, causing capital losses for traders of bonds, however the new issues brought to market later this year are at user-friendly rates.

Latest reporting season

In November we had financial results from 24 of New Zealand’s listed companies, providing a recent yardstick for how companies are performing in the current environment and discussing their expectations for the year ahead.

Results have been positive, lifted by higher revenues, however the tone of outlook statements was gloomier, with headwinds of higher interest rates, rising wage costs and heightening recession risk in 2023 resulting in downgrades to market expectations for next year.

Economic Data

Other data points were consistent with this trend. There look to be some signs of consumers slowing down. November's Electronic Card Sales showed weaker-than-expected transaction volumes and values. November is now NZ’s biggest month of the year for retail sales, due to Black Friday sales and well-organised Christmas shoppers, but sales have underwhelmed. Perhaps the RBNZ’s pleas for households to tighten their belts are finally starting to sink in.

NZ housing values continue to weaken, with the REINZ index falling -12.4% for the year to November 2022. November is typically a strong month, with transactions quietening down over the Christmas and New Year period. However, there is no sign of any positive bounce and the RBNZ continues to talk up further rate hikes. House prices have been forecast to keep falling through next year.

November – Monetary Policy Statement

In November the RBNZ released its semi-annual MPS statement, which included 4 key themes.

1) Demand in the NZ economy continues to hold up well – This was reflected in the company results mentioned above. Households have to date been able to keep up with demand due to employment security, pent-up demand from lockdowns and supply shortages, high savings levels, and the persistence of cheap money. Strong demand drives higher interest rates.

2) NZ employment remains tight – While this has some positives (households have money coming in, which maintains the demand mentioned above), a national shortage of workers is holding back output and driving up costs due to wage-price inflation.

3) Global events remain threatening - contributing to higher inflation in NZ and weakening the economic outlook as major global economies try to resolve their own economic issues (inflation, labour shortages, supply chain issues).

4) Interest rates are going to rise – Given the RBNZ’s dual mandate of inflation and employment sustainability, and the fact that its main tool is interest rates, the RBNZ is expected to continue increasing interest rates until inflation reaches a level it is comfortable with.

The speed at which interest rates have risen has been spectacular, and while there has been some doubt about the ability to keep hiking at such a speed, this has been the driver of some of the brief market rallies. Reserve Banks have subtly switched the narrative away from the speed of interest rate rises, to the level they will settle and the duration of higher interest rates, if inflation remains sticky.

The media made the salacious headline last month of Governor Orr manufacturing a recession next year, a threat that is very much being signalled by the interest rate yield curve, which is inverted at levels not seen since the GFC. Inverted rates signal short-term inflation but long-term falls in growth.

Main questions heading into the new year

A recent survey of global fund managers highlighted their top risks for next year. Not surprisingly, the two most common themes by a large margin are ''stubbornly high inflation'' and ''a global recession''. Further down the list was further escalation in Ukraine and geopolitical events between the US and China. This sets the tone for most global markets.

For the NZ investor, I think the focus early next year will be determining where interest rates end up and the impact of these rates on businesses and households. There is an argument that they cannot go much higher due to our high household debt levels, but the Reserve Bank seems comfortable to keep lifting rates until we see evidence of such a constraint. Higher mortgage rates result in increased risk of loan defaults and even further stress fractures in society.

Interest rates will be connected to inflation, as they are the tool of choice to bring down inflation. With oil already falling significantly and the NZD strengthening, part of the inflation equation (imported inflation) should already be falling. The stubborn bit for NZ will be the domestic (non-tradeable) inflation, which is rising due to drivers like supply shortages, excess demand, and higher wages. This is what troubles the RBNZ.

The remaining question is how large this recession will be (assuming we get one, given they’re backwards looking we may already be in one) and what the impact will be. Given the odds of a recession are already well factored in, the yield curve is currently inverted to a level not seen since the GFC. The yield curve isn’t a fool-proof signal but often shows what the market or weight of money is predicting.

Recent polls imply that it is looking more and more likely we will see a change in government next year, so it will be interesting to see what election changes and promises will arrive.

Once again, we wish you a safe and happy festive season. We look forward to hearing from you all again in hopefully a more prosperous 2023!

Office news

I am booked to travel to Christchurch on January 24 to join Chris meeting clients. I am looking forward to this.

Chris will then move on to Ashburton and Timaru on January 25 and 26.

Edward Lee will be in Auckland on Wednesday 18 January (Wairau Park), Thursday 19 January (Ellerslie) and Friday 20 January (Auckland CBD).

David Colman will be in Palmerston North on Wednesday 25 January and in Lower Hutt on Thursday 26 January.

Johnny will be visiting Tauranga on February 22, seeing clients at the Mt Maunganui Golf Club. He will be visiting Christchurch on March 22, seeing clients at the Russley Golf Club.

Clients are welcome to contact us next year to arrange an appointment.

Fraser Hunter

Chris Lee & Partners Ltd

Taking Stock 15 December 2022

PRESUMABLY as a bit of harmless fun a group of people get together each year to make a list of books for summer reading, preparing the list for politicians like Jacinda Ardern.

In her case, one imagines she has little need for guidance.

If the list was to prompt attention for financial market regulators, and for investors who query my disdain for bonus-enriched international bankers, then I might have a book for the list.

I have just read Dark Towers, written by the New York Times financial editor, David Enrich. It is an analysis of the degradation of what in 2007 was the world’s biggest bank, Deutsche Bank.

Dark Towers unravels the evil and nauseating bank cultural change of Deutsche Bank, beginning with its admiration of the culture and behaviour of the American bank Merrill Lynch in the 1990s.

The book encapsulates all that is rotten about banking. Its relevance to New Zealand is that, until very recent years, Deutsche Bank was present in New Zealand after buying a half share of the provincial sharebroking firm, Craigs. (It has since sold back its share, leaving Craigs under New Zealand control, thank goodness.)

The cultural switch from a staid, formal, some would have said constipated, German bank, into an aggressive, deceitful, law-breaking, profit and bonus-driven investment bank began when its senior people in the 1990s looked on with envy at Merrill Lynch, then an aggressive American investment bank, boldly accepting high risk with dominant, apparently profitable positions in derivative markets.

Merrill Lynch was seen by the Germans as leading the way in achieving high profits, shared by way of massive bonuses to those executive and staff employed to take risks with other people’s money. (Why does a bonus emerge from this?)

Deutsche Bank set out to woo Merrill Lynch’s best people and succeeded, enticing more than a hundred such traders to bring their skills to Deutsche Bank, as the German bank chased global success.

One star trader agreed to switch only if the multi-million salary and bonus was enhanced by the keys of the boss’s armour-plated BMW.

Dark Towers traces how Deutsche Bank became the principal lender to one D Trump, beginning with a loan to enable Trump to buy an ill-fated casino in Chicago. Trump could not and did not repay the US$400 million loan. Default equates with write-offs.

One might have thought that experience would have discouraged the German bank from further follies in engaging with the cretinous Trump.

Instead, different divisions of Deutsche Bank agreed to lend Trump and his family hundreds of millions in loans, making Trump one of Deutsche Bank’ s biggest clients. You can guess the outcome.

That no other bank would lend to him did not deter the German bank.

Deutsche Bank gorged on derivative trading, the most dangerous sport for bankers. It amassed trillions of dollars in derivative positions, hiding losses and fooling markets when the bank sailed through the 2008 crisis apparently in good shape, its internal valuations of its derivatives book claiming profits that offset other losses. (Of course, the losses emerged later.)

Deutsche Bank engaged in many other boneheaded games in pursuit of profits that on one occasion led to one of its traders being granted a bonus of US$100 million – for gambling with other people’s money.

It was the bank for Russian oligarchs, including Putin, helping them launder hundreds of billions, switching Russian currency through London and New York, eventually to Cyprus, where the rubles became euros, and later pounds and dollars, money ‘’laundered’’.

It helped countries like Iran, Libya and Syria break free of sanctions in exchange for huge fees.

It devised and managed tax structures to deprive governments of revenue, the British Government cheated of billions.

It marketed to guileless pension funds and various sovereign wealth funds, various securities, which were threatening to undermine Deutsche Bank’s loan book.

Readers of Taking Stock may recall the era of Collateralised Debt Obligations, where dangerous loans were spliced into multiple parts rather like a first, second, third and fourth mortgage.

The German bank, along with the likes of Goldman Sachs, Merrill Lynch and others, dumped the worst of these securities on their own clients before the 2008 crisis unfolded.

And Deutsche Bank played a leading role in manipulating the Libor (London Interbank Offered Rate) to enable it to create profits aimed at impressing the world and lifting bonuses.

Happily, as the author reveals, the hapless regulators in Germany and the United States eventually penetrated all this corruption.

Deutsche Bank, whose real capital was meagre, low tens of billions, eventually was fined multiple times, totalling many billions, all but bankrupting the bank.

At one stage it faced 7000 different claims from regulators.

Just seven years ago Deutsche Bank’s shareholders had seen enough. The bank was cleansed of some of the people who drove the crazy pursuit of super profits, and chief executives were ‘’allowed to retire’’.

Deutsch Bank began its recovery. Its share price had fallen to almost gutter level but is now on the rise. It closed its rotten Russian branch.

It is not clear whether it managed to exit its relationship with Trump.

The bank is no longer geared at 50 to 1; that is just one dollar of capital for every 50 dollars of assets.

But be warned: this book cannot be read without concluding just how unethical, greedy and stupid the banking sector can become when the directors and executive are not caught, jailed, and stripped of their wealth by the regulators and courts.

We were all disgusted with Volkswagen, BMW and Mercedes Benz when their faux laboratory results on car emissions were exposed.

Dark Towers puts those atrocities into perspective.

Deutsche Bank’s foul behaviour far exceeds the appalling behaviour of Germany’s auto industry.

Hopefully, Dark Towers will be read by all those who aspire to leadership roles in the banks.

Hopefully they will learn that the pursuit of false profits and absurd bonuses prohibits access to anywhere that has a sniff test for honesty, integrity and social conscience.

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THE aspiration of the low-cost securities platform operator Sharesies will be tantalising for its various private shareholders.

Sharesies now contemplates a capital raising to enable it to develop a KiwiSaver role.

It announced these aspirations earlier this month, disclosing that its 500,000 retail clients collectively own $2 billion invested in largely NZ, Australian and UK securities.

This figure of $2 billion is not the fund manager industry’s equivalent of funds under management but more accurately is a figure of funds held under a custodial agreement, rather than under management.

Yet it has still been an impressive achievement to locate 500,000 mostly young people, each having, on average, $4000 to invest in funds and securities.

The recent TradeMe valuation of its 13.5% holding in Sharesies of $7 million was a valuation for balance sheet purposes based on a calculation of its cost price minus its share of losses to date. This made the figure quoted unhelpful in guessing what TradeMe thinks the asset is worth.

Valuations are, of course, a guess. Other shareholders like Pathfinder guess the company might be worth $400 million.

No doubt these sorts of valuations will be adjusted once there is universal acceptance that the era of free money has gone and with it has gone the willingness to value loss-making companies based on the hope of exponential growth.

If Sharesies’ clever technology can enable it to speed into forming a financial supermarket offering a wide range of services, then its next year or two would be critical, as would its next, presumably imminent, capital raise.

TradeMe is unlikely to take up the next rights issue but theoretically, if 500,000 retail investors all kicked in $100 the capital would increase by $50 million, a pretty decent figure for a new market entrant that last year lost $23 million.

Whatever, Sharesies has created a footprint that is visible. Indeed the footprint is growing. One imagines Sharesies will ensure the footwear it buys will be boots that accommodate the foot size.

Readers may recall how in Australia, retail investors, given autonomy over their subsidised superannuation, have the right to invest wholly in cryptocurrency platforms, one of which has recently imploded.

If we are to have a new type of KiwiSaver fund that allows investors to select their own securities, one hopes that this process would be subject to advice from people who are accountable.

Perhaps Sharesies should be contemplating this issue.

Sharesies’ supporters are to be admired for their drive, their passion, and their willingness to enter the markets in difficult times.

Dark Towers might be useful summer reading to remind the Sharesies’ directors of how to sidestep the corruption in that sector.

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THIS is my final Taking Stock for this year. My next newsletter is timed for 12 January.

Next Wednesday, our recently-appointed adviser, Fraser Hunter, will be writing Taking Stock.

I will not follow the previous pattern of finishing with a forecast of financial markets for 2023, except to stay that investors who begin 2024 with the same sum with which they ended 2022 should be congratulated.

I hope that some fund managers will have achieved the same feat in a year when rising debt costs and sticky inflation will affect consumption, margins, profits and dividends.

Season’s greetings to readers. May good health and good fun abound.

We close next Wednesday 21 December at 5pm and re-open at 9am on Wednesday 11 January.

If you would like to buy or sell investments, please email us and we will place the order as soon as we can. Clients wishing to urgently speak with an adviser are asked to email the office to arrange a time for us to call.

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Edward Lee will be in Auckland on Wednesday 18 January (Wairau Park), Thursday 19 January (Ellerslie) and Friday 20 January (Auckland CBD).

Chris will be in Christchurch on Tuesday 24 and Wednesday 25 January (am), in Ashburton on 25 January (pm), and in Timaru on Thursday 26 January.

David Colman will be in Palmerston North on Wednesday 25 January and in Lower Hutt on Thursday 26 January.

Anyone wanting an appointment is welcome to contact us.

Chris Lee

Chris Lee & Partners Limited

Taking Stock 8 December 2022

THAT the NZX plans to cater for retail investors with a spread of low-cost managed funds and exchange-traded funds is news that should please investors and all sharebrokers.

It might also please the Financial Markets Authority.

Within a year or two the NZX should achieve scale and should be forcing down the excessive fees and ugly bonus schemes that infest the managed fund sector.

It is clear to me that the NZX's continued foray into managed funds is a signal that it is targetting a sector where margins are too high and profits are excessive.

When one reads that distinctly ordinary groups of private individuals, such as those who built the NZ Funds Management group, can attract money from intermediaries to put into a cryptocurrency trading fund, then one finds it easy to conclude that the retail investing public has yet to reach a mindset that is shaped by wisdom.

NZFM paid itself tens of millions in a windfall bonus based on the distorted values of crypto funds, a distortion that has partly been reversed by the collapsing prices in the past 12 months.

Bonuses and excessive fees are a blight on the KiwiSaver and managed fund sector, as the FMA has regularly stated.

By entering the sector, the NZX clearly threatens those who feed off the small print that discloses the fee-grasping formulas for bonuses.

The biggest of our fund managers, Fisher Funds and Milford, are amongst the heavyweights in fee collection, fuelled by their successes in bull market environments.

Their active management has produced results that so far diminish the relevance of their fees but the whole sector has had perfect growing conditions, the world printing money that inflated asset prices.

It might be interesting to observe the outcome of an era of austerity, as central banks lift interest rates, reverse their quantitative easing, and thus squeeze asset prices.

Will fees be reduced to reflect the consequential results?

The NZX is exactly the right player to set a new tone. Its exchange traded funds have minimal costs and should set fees in stark contrast to other operators in the KiwiSaver and funds management sectors.

That the NZX has bought Quay Street's range of managed funds suggests to me that the NZX will engage with competent managers who actively manage retail investor money.

The logical pursuit of scale will surely be driven by lower fees, more transparency and NO bonuses.

The rest of those who make their luxurious living from fees and bonuses will surely need to respond to the advantage of their retail clients.

Clearly, that will be painful for the fee collectors. A previous fund manager of the unloved Macquarie brand, and a manager at the high-fee Fisher Funds, is now running Hobson Wealth, a growing and busy recent addition to the sharebroking fraternity.

That man, Warren Couillault, has queried the need for NZX to spread its flock into the next lush paddock and is calling on the NZX to ''stick to what it is good at''.

I hold the opposite view.

As a shareholder in the NZX and someone who admires its Chief Executive Mark Peterson, and as someone who is adamant that those bonuses are completely inappropriate, I endorse the NZX decision.

If the NZX succeeds in providing a range of low-cost funds to retail investors, gathers momentum, and challenges its competitors to reduce fees and eliminate bonuses, then the NZX will have achieved what the FMA has sought to do.

The squeals from the sector can be expected.

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

ANY day soon the public is likely to hear that Tiwai Point at Bluff will continue to operate an aluminium smelter indefinitely.

After years of squeezing concessions from the electricity providers, the Tiwai owners, NZ Aluminium Smelters, controlled by the mining giant Rio Tinto, has conceded that the smelter is highly profitable and is gaining kudos by producing aluminium from ''green energy'' (Lake Manapouri).

Its cheap electricity in NZ ends in 2024. If it were to close, its legal responsibility would be to restore the site to its original state, a clean-up costing hundreds of millions.

My expectation is that in coming weeks we will hear that Rio/NZAS has agreed to accept a much higher price for its green electricity, has committed to long-term use of its plant, and has agreed to isolate many hundreds of millions to clean up the mess, should it ever be required to address that mess.

My guess is that at long last Rio Tinto wants the operation to continue more fervently than the electricity power generators want to sell the necessary electricity to Rio.

This may not be good news for other retail users of electricity, the aluminium smelter excess not converting to a short-term surplus for the whole country.

Hopefully, this will mean the end of the Lake Onslow project, aimed at addressing a future shortfall.

With Tiwai's agreement locked in, the generators should now be planning to build generation, knowing with more certainty what future demand might be.

Uncertainty is the mother of excuses and procrastination.

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MANY years ago, perhaps 37, I was in a party of financial market people who visited various central banks and financial hubs, in places like Basel, New York, Hong Kong, London, Luxembourg, Paris and Brussels.

At one of these visits, to Basel, the central bankers spoke with Swiss-like precision about the maximum levels of debt that a country could service with income (rather than more debt to service existing debt).

A country whose combined government, corporate, and household debt exceeded 180% of its gross domestic product (GDP) was regarded as a country that would have a highly-constrained living standard. The Swiss assessment was that 180% was the absolute maximum.

Last week I read some statistics from the world's biggest economy, the USA.

Three years ago, pre-Covid, its combined sovereign, household, and corporate debt was around US $45 trillion, approximately 300% of GDP, impossibly higher than the Swiss calculation, though in fairness, the US debt level had an interest-servicing cost of barely 1%-2%. (It is now 4%-6%.)

The figure I saw last week calculated the US total today at 420% of GDP, the highest ever.

I imagine the various earthquakes around Taupo were initiated by the combined weight of Swiss bankers crashing to the ground, fainting when they heard the news.

Globally, the average figure in the wealthier countries is 350%! (NZ is still in the 200s, still far too high.)

China sits at 330%.

By 2020 the world had issued US$17 trillion of negative-yielding public debt.

Stagflation seems an obvious outcome – that is, no growth and persistent inflation.

I recall stagflation in the 1970s, when my career was in its early stages. It was a time when stress levels were extreme; strikes mundane.

The difference was that debt levels then were well below the figure cited by the Swiss as being the maximum that could be accommodated.

Expect more earthquakes!

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ONE inevitable outcome of excessive unaffordable debt, is more debt.

Households will borrow more to cope with inflation. So will governments.

Politicians know that to be re-elected they need to defer pain.

A cynic might say that higher salaries for politicians guarantees bad or mediocre leadership and more spending funded by debt.

Corporates will know that in tough times banks naturally, and correctly, defend their ability to survive, with austere lending policies.

In this environment the best corporates will switch to the retail funding market, and to borrowing from fund managers who, of course, have no capital of their own but are lending money belonging to other people. Fund managers will become moneylenders.

Expect a continued flow of retail bond issues.

A cautious investor will want advice from experienced operators before taking up offers.

For any who do not see the inevitability of this, read the announcement of Deutschebank, which has advised it again intends to sell mortgage-backed securities, just as the Americans did in 2006-2008 during that period of awful practices which led to the global financial crisis.

Banks sell mortgage-backed securities to enable them to reprocess their capital – a logical aspiration – and to escape the consequence of their own loose unwise lending.

When those loans are sold, and later default, the agony falls on retail investors who have little insight into growing default levels and buy securities, believing the banks will have lent cautiously.

For all those reasons, banks have survived for centuries, despite often dreadful, greedy leadership and management, especially in the USA and in countries where politicians intermingle with banks (ie China).

In 2023 bond issues in New Zealand will be plentiful. I suggest each issuer should be examined before being accepted by investors.

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Travel dates for next year are available on our website here:


Chris Lee

Chris Lee and Partners Limited

Taking Stock 1 December 2022

THE interaction with the media of our wealthier and most skilled investors is rare, but if they were willing to talk, they would tell you that knowing when to sell an asset is at least as important as knowing when to buy.

Timing their sales wisely comes from their acceptance that, when markets are facing stress, those who want to roll the dice on another wave of price increases are welcome to take the risk of chasing a return. Markets need such optimists.

The smartest and wealthiest are those who see the coming storms earlier than the television weather forecasters and act decisively.

They know that once everyone is enduring the storms there could be mass selling. They prepare for the day when dark clouds produce awful conditions.

Foreign money will depart first. If you wonder about this, research the dramatically lower levels of foreign ownership of our equity and debt markets. Foreign ownership of our bonds and shares fell dramatically three years ago.

Meanwhile, banks rush to defend their balance sheets, focusing on survival.

Lending rules get tougher, covenants tighter, fees and margins higher.

Salesmen and those who are not accountable, like media commentators, will preach the ''do nothing'' philosophy, the salesmen motivated by self-interest, the media commentators fed by salesmen (and advertisers). One wonders what they do with their personal portfolios.

The past 12 months have illustrated this pattern, foreign money leaving NZ, banks withdrawing, the salesmen still urging people to accept growing losses.

Meanwhile the stock pickers, looking for the strongest performers in a falling market, differentiate themselves from the index-huggers.

There are a few useful examples of the different outcomes achieved by stock pickers, observing share prices over the past 12 months when our market has fallen by 17%:

Retail stocks

WHS - The Warehouse minus 21.64% over 12 months (to 27/11/22)

BGP - Briscoes minus 25.11%

KMD - Kathmandu minus 25.34%

Retirement villages

RYM - Ryman minus 43.39%

OCA - Oceania minus 39.53%

ARV - Arvida minus 40.41%

Property trusts

KPG - Kiwi Property minus 20.18%

ARG - Argosy minus 16.20%

PCT - Precinct minus 27.47%

All of these sectors are troubled when interest rates rise, as they either depend on (the falling) household discretionary spending, or they depend on valuation gains to bolster profits, balance sheets, and thus borrowing margins.

Now compare that with essential goods or service providers with pricing power:


SPK - Spark +19.15%

CNU - Chorus +24.77%


WBC - Westpac +14.67%

ANZ - ANZ Bank +6.02%


GNE - Genesis -8.16%

MCY - Mercury -6.84%

CEN - Contact Energy -5.12%      

I am cherry picking to illustrate the difference, my argument being that wealth accrues to those who look for the first sign of a storm, and act. The index funds cannot react. Their rules prevent such decisions.

Equally obviously there will be days when traders and people investing other people's money will buy, creating what some in the market describe as ''noise''.

In the USA the false dawns are driven by the sales industry and attract media excitement. When those in charge reiterate that the remedial actions have barely begun, the noise abates (until next time).

As we approach the holiday season and reflect on the next stages of the remedies (to solve years of price distortions caused by ''free money'') wise investors will be paying attention to central bankers, not traders. There is a difference between value and price.

The central banks have the heavy artillery.

The market traders who make the noise have jumping jacks and double happys.

The heavy artillery wins over those with firecrackers.

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

THE retirement village sector has been repriced not because its market has vanished or its future is in doubt.

The likes of Ryman and Oceania have seen their share prices badly dented from two years ago, Ryman hitting $16, now trading at less than $7.00, Oceania having tumbled from $1.50 to 78 cents.

The obvious explanation for the price fall is the combination of the rising interest rates, resulting in asset devaluations. House prices had risen every year, fed by free money, until money became more realistically priced, house prices naturally retreating.

For Ryman and Oceania that meant:-

1. That residents intending to sell their private homes and buy a licence to occupy had less money, so margins were threatened. As sales of houses slowed, it took longer to settle the purchase of a licence to occupy. Ryman's sales not yet converted to cash have increased by 20%.

2. Retirement villages buying land to build more villages to meet anticipated demand borrow to buy and build. They produce nice margins, but higher debt servicing costs affect profit.

3. The valuations of property inversely correlate with rising interest rates. For years Ryman, Oceania etc enjoyed unrealised property valuation gains; they now endure unrealised property valuation losses. Those valuations become realised if the value of the licence to occupy falls to the new valuation figure.

4. General costs for the likes of Ryman and Oceania have risen with inflation. Food prices, power prices, insurance, rates, and labour costs have risen. Not all costs can be passed on.

5. The shameful underpayment by consecutive governments for those people who are referred to the village operators have worsened. Nurses are essential. The government deliberately underpays the village operators for nursing, making the services they offer to government-subsidised residents uneconomic. The retirement villages have been hindered by oafish immigration rules, forcing many smaller operators to close, unable to find (or pay for) the necessary nurses, or endure the subsidies implied by government underpayments.

A further reason for the loss of value of retirement villages might be based on lack of knowledge.

The likes of Ryman and Oceania accrue ''deferred maintenance costs'' which, in effect, is the subsidy offered to residents, reimbursed by a payment extracted when the residents die.

The typical retirement village new entrant is aged around 79, and lives for a few months more than eight years after entering the village.

So in effect, an eighth (12.5%) of residents come to the end of their life every year.

The village operator then collects the deferred cost, on average around $150,000, and resells the licence for a profit of perhaps a similar amount.

So if the village operator, like Ryman, had 8,000 residents, 1,000 would die each year, leaving Ryman to collect the deferred cost ($150 million), and then sell at a profit of a similar amount, adding $300 million of cash (and profit) to its coffers.

Currently, this offsets the subsidies granted to each resident and funds growth. For as long as Ryman and Oceania keep growing – demand reflecting demographics – the organisation is growing and strengthening the balance sheet but will attract headline criticism.

Funding the new villages involves debt and takes time. I describe this as ''good'' debt.

If Ryman chose not to grow – not to build any more villages – it would soon be inundated with cash, unless residents found a way of living eternally.

A strategy of ''cashing up'' would be sensible only if the retirement village sector was over-supplied.

Currently I often hear market noise that Ryman has too much debt. That would be true if it had trouble selling its licences to occupy. It would then be asset-rich, cash-poor, and have cashflow problems.

It does not have trouble selling.

It is in my view a cash machine, one that chooses to keep growing, based on strong evidence of ongoing demand.

There may be one other dopey reason for the share price weakness of this listed village operator.

Various public sector goofs have alleged that the likes of Ryman are profiteering, or are duping their residents, or not properly explaining the conditions of the sale of the licence to occupy before a resident arrives.

This is nonsense – insulting – but the pressure for an enquiry may have frightened some investors, and thus led to share sales. The truth is that every prospective resident is required to obtain independent legal advice before signing a licence to occupy and committing to the conditions offered.

It seems insulting to allege that senior citizens do not understand the conditions before they sign.

My summary is:-

1. Growth companies always do best when debt is free. Debt is no longer free, so progress may be slower.

2. The demographics are obvious. No government will provide geriatric care. Personal security is increasingly a concern for those in open communities. Demand for the best villages is certain to rise. Dysfunction in our society will accelerate demand.

3. The financial model allows residents to have access to more of their capital. Their estate pays for the privilege when they die. The model is balanced and fair.

4. One day a government will behave intelligently. It will fully compensate for the real cost of diverting citizens to private sector care. It will introduce wages that encourage people to nurse. It will alter immigration settings to attract foreign nurses and treat those newcomers with respect.

5. The best retirement villages will continue to build value. The worst, thank heavens, will fail. Ryman, Oceania, Summerset, and now Arvida all behave with commitment, and treat their residents with respect. The government needs to be equally as respectful.

I write this having had nearly three decades chairing a debt-free retirement village in Waikanae, that chose not to grow, while competing with the publicly listed villages.

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LAST week the American owners of Trade Me disclosed that they had a carrying value of the securities platform Sharesies at just $52 million (taking into account what Trademe paid, minus a share of its losses).

Trade Me owns 13.5% of Sharesies. The Americans have a carrying value for their 13.5% stake at just NZ$7million, meaning 100% of Sharesies would be valued around $52 million (which is unlikely to be the true market value).

Sharesies last year raised money at a price that valued the company at $500 million.

The market believes Sharesies' revenue is around NZ$20 million but that in the past year its expenses, which might include capital expenses, are perhaps double that.

Perhaps like many other start-ups its backers had a view of its future value that now takes account of the cost of money being no longer ''free''.

When Sharesies was making normal start-up losses, it was said to be worth $500 million. That price exceeded the value of profitable sharebrokers, like Forsyth Barr.

How could that anomaly be explained?

I conclude that the $500 million valuation assessed for Sharesies was based on unrealistic expectations, and the true market value is likely be much lower than this.

I admire their people, their passion, and their desire to help people to achieve investment wealth. This should be praised.

Those admirable qualities are still a long way from producing a business with sustainable profits.

I expect its next capital raise to be priced rather more wisely than the last.

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Chris will be in Taupo Dec 4-16 and could meet by arrangement.

Anyone wanting an appointment is welcome to contact us.

Chris Lee

Chris Lee & Partners

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