Taking Stock 31 January, 2019

 

DISCUSSION regarding the likely consequences of the proposed changes to New Zealand’s banking sector regulations lead to several trains of thoughts.

The first is the inevitable impact on economic growth, caused by the banks decelerating lending and increasing the cost of doing so.  This is discussed in the Reserve Banks Capital Review Paper in detail, and is considered an accepted risk it believes would be offset by the relative strengthening of the financial system.  Arguments that shareholders will accept lower returns in exchange for a “safer” business model seem optimistic to me.

Changing regulations to the banks could also lead to growth in our Non-Banking Deposit Taking sector. When will the next iteration of finance companies appear?

A second train of thought is, if a divestiture of a New Zealand registered bank was being considered as a possible reaction to the new regulations by the Australian banks, what would be the impact on our clients and how would the market respond.

One would assume that moves towards more ‘’local’’ ownership of our nation’s banking sector would be welcomed by more patriotically motivated investors.

Those wanting to invest in large, dividend-paying businesses will be looking at two particular aspects – whether such a sale is priced fairly, and whether the business model is sustainable in the long term.

The second point does not seem in much doubt, so investment demand would rest solely on credible pricing of the banks’ shares.  Isolating an appropriate proportion of imputation credits would also appeal to local investors.

Banks, ports and other infrastructural assets have particular qualities that make them attractive investment opportunities.  They have proven track records, easily understood business models and clear competitive advantages.  Many of them are monopolies.

If the Australian banks were to sell their New Zealand operations, we are confident demand would be strong.

With the likely call (repayment) of Rabobank Subordinated bonds mid-year, opportunities to invest in such businesses might be welcomed by cash-rich investors.

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INDEBTED councils, stretched ratepayers, low interest rates and strong equity markets could lead to outcomes that are mutually beneficial.

The number of ratepayers enthused at the idea of annual rate rises beyond the rate of inflation is likely not high.  Local council rates are one of the fastest growing major components of annual inflation, and are not reducible by changing consumption habits.

A logical conclusion would be dialogue around exactly what is, and isn’t, appropriate to be within a council’s asset base.

Initial Public Offerings occur for two main reasons – firms wanting to raise capital to grow or pay off debt, or owners reducing their holdings to realise the value of a business and redeploy the money.

In the case of Hawke’s Bay Regional Council, the potential sale of a minority stake in the Napier Port makes sense for several reasons.

The Napier Port intends to invest more than $300 million over the next 10 years to improve capacity and construct a new wharf.  In 2019, it expects to turn away seven cruise ships due to capacity constraints, costing the local economy millions of dollars.

If the council was to fund the developments itself, it would either need to substantially increase borrowings, or raise rates by over 50%. The council would then be increasing its risk by concentrating its asset base on one particular asset.

A bad year for the Port would become a bad year for the council and a very bad year for ratepayers.

The sale process has included opportunities for public submissions. The council’s position was that increasing equity investment risks at a greater rate than can be supported by retained earnings and prudent debt levels was less preferable than outside capital.  Public submissions broadly supported that view.

Those opposed to the plan preferred the council to fund the expansion itself.  A small minority favoured no expansion at all.

Hawke’s Bay Regional Council intends to ring-fence the proceeds of the sale to be recycled into other assets, diversifying its investment portfolio.  By holding onto a controlling stake in the port, it can still influence the strategic direction of the company to align with its own objectives and benefit from the value of the capital injection should the strategy succeed.

Port of Tauranga has shown how partial listing of such assets can be beneficial for all parties. The Napier Port is currently enjoying record profits, will prove a valuable addition to our stock exchange, and in all likelihood will benefit Hawke’s Bay ratepayers with greater rewards, sooner.  It will also ensure that the governance of the Port meets NZX standards, a discipline that has benefited the likes of Auckland International Airport.

For reference, the Port of Tauranga listed at a price of $1.05 almost thirty years ago. They are now trading above $5.00, and underwent a 5 for 1 stock split in 2016.

If priced correctly, the shares in the Napier Port should generate strong investor demand.

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NEW ZEALANDERS watching the US government shutdown over the past month will have felt a combination of disbelief at the absurdity of it, and relief that New Zealand’s political regime is relatively drama-free.

Our dramas are at a ‘Punch and Judy’ scale relative to the problems in the US.

While 800,000 US Government employees went without their income during the 35-day shutdown, New Zealand’s most noteworthy news item – if it can be described as such – was an ongoing saga of a family of tourists behaving poorly throughout the country.

In response, the New Zealand public and media had a lot of fun batting them around the country like a pinball, until finally their frustration saw them leave New Zealand without the need for force.

By contrast, the effects of a US shutdown are far-reaching.

Rubbish collection at National Parks was halted, causing rubbish bins to overflow.  Investigations by the Securities and Exchange Commission were delayed.  Flights were cancelled.  Food inspections were postponed.  Museums and zoos were closed.  Presumably, the animals enjoyed their day off.

There is also the economic impact.  Economists estimate that just 10 days of shutdown can reduce quarterly GDP by 0.1%.  The impact of this shutdown has been estimated at more than $5 billion US.

While the shutdown has ended for now, there remains threats from some quarters to force another in a few weeks’ time.

Hopefully, such an outcome will be averted, because from our perspective it all looks like the Americans have taken their eyes off the pinball.

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Cryptocurrencies have found themselves in the news again after Cryptopia, a Christchurch-based company, was hacked on 13 January with an estimated $23 million stolen.

Cryptocurrencies are a virtual payment method that is an attempt to offer an alternative to the currencies of the mainstream financial system.  Of the thousands of cryptocurrencies in existence today, Bitcoin is by far the best known, and makes up just over half of the ‘market share’ (in value).

No institution controls Bitcoin and it is not tied to a country.  Transactions can be performed electronically, without the need for a central issuing authority.  The entire network is maintained by individuals and organisations referred to as Bitcoin Miners, who process and verify Bitcoin transactions through a mathematical algorithm.

Valuing cryptocurrency is difficult, with some saying that is has no value other than what others are willing to pay for it, and others who view it as a commodity and take the cost of mining as its floor.

The latter measure would have merit if the usage of Bitcoin for payment was widespread.  It is not.

Although cryptocurrency has some promising features in the development of blockchain technology, the anonymity that is provided to users has created considerable regulatory challenges.

Governments do not like the anonymity, as it inhibits the policing of illegal activities such as money laundering.

Research has found that illegal activity accounts for a substantial proportion of the users and trading activity in Bitcoin.  One user in four, and close to half of Bitcoin transactions, are believed to be associated with illegal activity including hacking, drugs, theft and even more nefarious activities.

Cryptocurrencies have facilitated the growth of marketplaces in which illegal goods and services can be traded.

Cryptocurrency is anonymous until the conversion point to a regular bank account or a legal asset. There are sophisticated ways for criminals to filter their illegal proceeds in cryptocurrency.  The profits can be broken into small units and run through multiple accounts held by others, each taking a portion as a fee.

These proceeds eventually make their way to an account for conversion into more traditional currency or an asset purchase. The multiple transfers and varying amounts make the proceeds very difficult for law enforcement to trace.

Cryptocurrencies are not in our area of expertise, nor do we advocate their use.  Unsurprisingly, we do not accept them as payment for new investments.

The recent hack and subsequent theft of the currency should remind investors that cyber security is a real and growing risk of investing, especially in the alternative investment space.

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WITH the arrival of February comes reporting season for most NZX-listed stocks (some half year, some full year).

Markets tend to be more volatile around this time, as companies announce their results and issue guidance around future plans to which markets react through price adjustments to the shares. The Air New Zealand guidance this week is an example of this.

This new information can provide a good opportunity to re-evaluate portfolios and ensure they are still fit for purpose.

Last year’s strong performance by A2 Milk and Synlait, for example, left many with portfolios that differed greatly from when they were first created, and with a result that no longer matched their risk profile.

Investment policy rules can be useful in this respect and alert you to when the boundaries of your investments have been breached.

Clients receiving a financial advice service are welcome to contact our advisers if they wish to discuss potential changes to their investments, and to add investment policy rules to our database.

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TRAVEL

Edward will be in Nelson on 19 February, on his second visit to Napier on 25 February, and in Auckland (Remuera) on 8 March.

David will be in Palmerston North and Whanganui on 18 February, Kerikeri on 4 March and Lower Hutt on 20 March.

Chris and Johnny will be in Christchurch on Wednesday 20 February (afternoon) and Thursday 21 February (morning).

Chris may be in Auckland in February - dates to be advised.

Johnny Lee


Taking Stock 24 January 2019

 

WHEN a great Chinese philosopher – perhaps it was Confucius – noted that one should be careful not to be granted what one wishes for, it is doubtful that he was foreseeing changes in NZ banking ownership.

He was probably offering a subtle message to old men who wish their wives would revert to their much younger days.

Confucius, one suspects, was sending out a message that such an idea might not be as pleasing in reality as it seemed in concept.

However his words should be considered by all those who wish that NZ banks were owned solely by New Zealanders.

Right now the return to NZ ownership of our major banks is conceptually possible, though any bookies would still be offering odds of maybe five to one.

There seems little doubt that Reserve Bank governor Adrian Orr is signalling to the Australian parents of our biggest four banks the end of the days of rich dividends, gentle supervision and soft definitions of what comprises ‘’capital’’.

Whereas their NZ returns on capital have been high relative to required capital and real risk, the Aussie returns have been still lofty, but not as extreme.

Lending margins here have not been extreme in areas like housing loans but in areas like credit cards the Australian lenders have feasted, as they have in fee-setting, unsecured lending and in penalty fees.

In addition they have needed very little capital to support activities like foreign exchange, wealth management, security trading and even derivative trading.

Repayable subordinated ‘’debt’’ has been given some of the respect that should be reserved for non-repayable, fully committed capital, a concept that filtered into finance companies, enabling them to leverage off debt, an absurd notion.

Our Reserve Bank governor has signalled to the Aussie banks that they will need to issue ordinary shares, to replace pseudo-capital and to increase their capital levels.

Activities that are of higher risk will be supported by even higher capital requirements.

Only the lowest risk lending will be leveraged at historical rates.

The result for Australians will be significantly lower levels of return on capital.

Many, including Adrian Orr, anticipate that this new regime might encourage the Australians to quit their control of NZ banking, perhaps selling to Chinese, Indian or American banks, or perhaps (better still) selling into NZ investors with listings on the NZX.

Imagine the enthusiasm of the likes of our NZ Super Fund, the ACC, the meaningful KiwiSaver fund managers, and those wealthy NZ investors who complain about the lack of opportunity for sharemarket participation.

Imagine the enthusiasm of Goldman Sachs, Macquarie and FNZC, perhaps even Deutsche Craig, given that they all offer investment banking skills to facilitate public offerings, as they did with the power companies.

We have already witnessed reactions to these imminent changes.

The sale by ANZ of its NZX platform ANZ Securities seemed bizarre, given that its broking arm likely delivered impressive nett profits, based on minimal capital requirements.

Yet ANZ’s broking arm provided services that would have attracted its clients with investment money and provided ANZ with an ear to capital markets with very little risk, given it did not provide advice.  Perhaps ANZ saw compliance risk or reputational risk as being more important than a worthy client service with a thoroughly satisfactory financial return on capital.

ANZ, easily our market leader with 42% of the banking business, is now looking to sell or close down UDC Finance, by some distance NZ’s most impressive finance company.

It is likely to repay all investors early, hopefully at the market value of their debentures where value exceeds par, and is contemplating a sale to replace the transaction that earlier saw a Chinese buyer emerge and then disappear.

Will ANZ list UDC or sell it to the trade?

Given the generally poor premium placed on the value of brands by retail investors, a trade sale might attract a higher price than a retail share offer.

Might GE or the likes see UDC as a cheap entry to NZ moneylending markets, or even a cheap way of gaining a large book of good loans?

My preference would be a sale to the NZ public after gaining a couple of powerful cornerstone shareholders, like NZSF and ACC.

Years ago we might have thought of the reliable, deep-pocketed institutions like AMP, National Mutual, Government Life, or NZI.

None of these have survived the test of time with any style and so, remarkably, our institutional investors are now privately-owned and relatively tiny, like Milford and TSB Fishers.

The question Confucius did not, but perhaps should have, contemplated was whether those who want ‘’NZ’s’’ banks to be self-owned are glossing over the realities of NZ ownership.

My view is that NZ has much to applaud in what the Australian ownership has done for us.

Yes, the dividend outflow has been hefty, though there has been nothing to stop NZ investors from buying bank shares, but those of us who have worked in capital markets for decades will still sweat when they recall the sight of the abyss to the edge of which NZ has often teetered, in almost every decade.

In September 2008, the National Australia Bank wrote a cheque to its BNZ subsidiary in NZ for one billion dollars, to avoid the BNZ defaulting on obligations, and to keep the BNZ functional. The BNZ was equally close to the abyss in 1988. Westpac was alongside it.

Yet the ANZ, NAB and the CBA have often provided crucial support for their New Zealand operations. Perhaps even the ocker bank, Westpac, has occasionally behaved as though its New Zealand subsidiary was not just an East Tasmanian pipsqueak.

Had we owned our banks in 2008, New Zealand would not have survived the global crisis in such style.

In places like Parnell and Epsom it might be romantic to attribute New Zealand’s relatively smooth recovery from 2008 to the public relations skills, media charm, and corporate chairmanship skills of John Key.

Certainly it is true that Key never declined to accept the accolades for our avoidance of a USA-like recession, but my thanks would go nowhere near the fellow nicknamed the ‘’smiling assassin’’.

My gratitude would start with the Australian banks, which continued to lend, albeit cautiously, when the world was observing dysfunctionality in banking markets.

Adrian Orr may deliver to us a return of our banking business, well-capitalised, better regulated and more focussed than it has ever been.

One hopes that if this were to happen, we would have mechanisms to see us through cyclical problems.

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THE Australians have also been extraordinarily generous in feeding money to absolutely useless New Zealand projects.

They have poured money into our media (Fairfax, INL), and may have facilitated investment in many unsuccessful ideas, none being more unsuccessful than the appalling Powerhouse Ventures Ltd (PVL), whose listing was rejected by the NZX but welcomed by the Australian Stock Exchange.

PVL sought to incubate, foster and then monetise great, innovative ideas developed from the research of our universities.

The concept was logical, even exciting.

The execution was so poorly overseen that investors, mostly Australians, have been badly singed, and have not even had the satisfaction of seeing the buffoonish governance and management be held to account.

The mix of commercially experienced directors with naïve and commercially child-like academics led to PVL buying into far too many ideas, with neither the capital nor the skills to nurture them, let alone monetise them or offer them access to expertise.

Several impressive ideas were destroyed by a mix of lack of capital, goofy governance, and inept management. Greed might also have been a factor.

One of the brightest ideas was from HydroWorks, which sought to specialise in highly-efficient, low-cost, low-impact hydro plants here, and in both Australia and South East Asia.

When it needed real capital and underwriting, PVL lent it $500,000 at 48% per annum, and then extracted the money when HydroWorks was failing through lack of cash. What wonderful support!

Well, the good news is that the HydroWorks liquidator has succeeded in claiming back this PVL repayment, on the basis that it made PVL a preferred creditor, as it occurred just before HydroWorks fell into receivership.

One imagines that PVL, itself perennially cash-strapped, has disclosed to the ASX its need to repay the HydroWorks liquidator.

Such a commitment would be highly material for PVL, its cashflow already negative, its reliance on selling assets its only viable means of survival.

PVL has never been attentive to disclosure obligations, nor has the ASX ever seemed interested in the disgraceful standard of information provided to investors, no example worse than its utterly misleading publication of an obsolete valuation of HydroWorks, when PVL listed its shares.

If universities want to claw back value from the mistake they made when they linked with PVL, they could document the dreadful behaviour of PVL and use it as case studies for their MBA students.

HydroWorks’ creditors should not plan to spend the $500,000 being clawed back from PVL. They should wait for the cheque in the mail.

I expect more time to pass before the clawback notion converts to cash.

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THE Auckland show pony/entrepreneur Eric Watson continues with his plan to appeal awards made against him by courts in Britain and in New Zealand, totalling perhaps $200 million.

I doubt his real worth has ever been close to that figure.

Clearly his lawyer/spokesman is leaning towards my view.

He has told the media that Watson now is dependent upon grants from his mother, poor dear.

I continue to ask myself what triggered New Zealand into becoming a country that thought conspicuous extravagance was part of New Zealand life worthy of such phony contrivances as ‘’Rich lists’’.

My father in the 1950s, 60s and 70s had much contact with the likes of Jim Wattie, Wolf Fisher and John Fair, all excellent and successful business leaders.

Our family would have had no idea, nor any interest in, their relatively modest wealth, nor was their wealth important to their relationship with us.  They were never featured in social pages, never arrived by jet-ski, and rarely appeared in newspapers.

Was it the era of credit cards, arriving in the late 1970s, which resulted in our media’s child-like adoration of people who bought expensive champagne and boasted about their gross, awfully gross, assets (but never mentioned their debt)?  Was it credit cards or the surging stock exchange, in the early 1980s?

Something must have triggered this crassness. 

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TRAVEL

Kevin will be in Christchurch next Thursday 31 January.

Edward will be in Nelson on 19 February, in Napier on 25 February and in Auckland (Remuera) on 8 March.

David will be in Palmerston North and Whanganui on 18 February & Keri Keri 4 March.

Chris and Johnny will be in Christchurch on Wednesday 20 February (pm) and Thursday 21 February (am), based at the Airport Gateway Motor Lodge, in Roydvale Avenue.

Michael will be in Auckland on 7 February.

I may be in Auckland in February. If any clients particularly want to see me, please contact our office.

Chris Lee

Managing Director

Chris Lee & Partners Limited


Taking Stock 17 January 2018

Johnny Lee writes:

THE announcement of the closure of several Kiwibank branches in the Wellington region will come as no surprise to readers, who will have seen the concept of banking evolve over their lifetime.

The closures, which inevitably hit the older generation the hardest, are both a consequence and an impetus of a societal move towards a different way of banking.

Increasingly, younger people and new businesses are abandoning their use of physical branches and are choosing to conduct their affairs electronically, relegating branches to those tasks where an efficient electronic solution has not yet been found, such as the sighting of identification.

The idea of withdrawing and depositing, or even using, physical bank notes, is becoming increasingly rare in favour of electronic transfers. Cheques are viewed as almost quaint relics of the past. My eight month old son is unlikely to ever see, let alone own, a cheque book.

The rationale for the latest bank closures, being that the branches are seeing reduced patronage, doesn’t seem to be supported anecdotally, with our local branches seeing queues out the door during busy times. Perhaps this becomes self-fulfilling, as customers choose instead to seek alternatives rather than wait for service.

However, there is still real demand for personal banking services. An opportunity exists for other banks to become involved in this space.

The reduction of ‘customer service’ is, of course, not limited to the banking sector. Supermarkets, petrol stations and even hardware stores are increasingly adopting technology towards a more ‘DIY’ approach to facilitating transactions.

The rollout of the Amazon Go supermarket earlier this year, where customers are billed based on cameras recognising their face and features no human interaction at all, represents an extreme example that seems completely foreign to most of my generation.

Thankfully, by the time this technology reaches our shores, my son will be able to explain to his father how to purchase groceries in the modern age.

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NEWS of the potential takeover of TradeMe in November is both a blessing and a curse for both investors and the New Zealand equity markets.

While shareholders will be pleased with the increased share price, and the NZX will be happy for another success story, its departure from the exchange represents a continuation of recent trends.

Should the takeover proceed and the company be delisted, investors will have lost another investment opportunity and the NZX50 will have seen yet another issuer depart, a mere seven years after it first listed.

Long regarded as a highly cash-generative business, TradeMe has pursued a strategy in more recent times of growing by acquisition, purchasing stakes in established or fast-growing businesses to give them a strategic advantage.

TradeMe is one of New Zealand’s most popular websites, behind only the likes of Google, YouTube and Facebook. This position is unlikely to be challenged for the foreseeable future. Apax Partners, the Group launching the takeover bid, is unlikely to adopt wholesale changes to a model that has seen such widespread dominance.

The bad news for the exchange is the dearth of new listings, an issue of which the NZX and its management team are acutely aware. With interest rates at record low levels, the risk premium between equity and debt is not, and has not been for some time, reflective of actual differences in risk. With the growth of KiwiSaver, the issue is likely to continue until risk premia return to normality (if ever!). Equity markets, appropriately priced, are important for maintaining tension in pricing.

The NZX’s challenge is to foster an environment where entrepreneurship and inspiration can, when combined with capital and oversight, lead to real businesses, real jobs, and real economic growth.

 _ _ _ _ _ _ _ _ _ _ _ _

ANOTHER challenge facing capital markets is the possibility of regulatory change around capital gains.

With the Tax Working Group due to report early this year with their conclusions, the Government will have almost two years to decide whether to make adjustments to New Zealand’s taxation regime.

Two particular areas of concern for our clients will be the treatment of capital gains (either realised or unrealised) and, to a lesser extent, any revision to the GST exemption applied to financial services.

The TWG seem likely to discuss some change on the first point. Although the shape of such change hasn’t yet been defined, if it took the form of a tax applied to unrealised gains, at a deemed risk-free rate of return, it will be important to ensure that this does not produce perverse outcomes, such as incentivising investment in different markets, say Australia.

We look forward to reviewing the findings of the TWG and hope any changes implemented by the Government build on the strengths of New Zealand’s tax system - namely simplicity, predictability and fairness.

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THE one factor necessary to see a change in interest rates will be inflation.

A common perception is that reported inflation often doesn’t correspond with what people see in the real world. That is, that prices seem to be increasing at a faster pace than the 1-2% suggested by official figures.

There are several reasons for this. One is a human tendency to remember price increases more readily than price stability or price falls. The other is that not all inflation is equal, nor visible. This is particularly relevant when applied to expensive items bought less frequently.

Consumers who purchase televisions, for example, buy these items so infrequently that it is more difficult to notice that they have fallen 17% in the past year. However, a 19% rise in your weekly petrol bill will lead to changes in behaviour.

Visibility is also a factor when you consider the CPI is a particular basket of goods, aggregated for the population at large.

A non-smoking person is unlikely to take note of changes to the prices of cigarettes. Vegetarians don’t tend to see changes in poultry prices, and people who own their own home may not necessarily be aware of movements in rents. However, cigarettes and tobacco maintain almost the same weighting as fruit and vegetables.

The Consumer Price Index is an important measure that influences several key inputs for our economy, notably interest rates. The next CPI Data release is scheduled for late January, and is expected to be lower following the recent pullback in oil prices.

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THE recent share price fall in New Zealand banks (and banks that operate within New Zealand) was preceded by the release of a discussion paper from the Reserve Bank, and should serve as a reminder of the relationship between risk and reward.

The proposed requirement for increased capital ratios led to a response from Heartland outlining various methods it could adopt to meet such requirements. This included the suggestion it could raise money through a debt issue. This seems an oxymoron.

The Reserve Bank proposals are designed to create a greater buffer in the event of a banking failure, by forcing the ‘’owners’’ of the bank to have more money at risk before affecting “creditors”.

This could lead to a side effect where banks are less inclined to lend, or to lend at greater margins. This in turn has an impact on economic growth.

The Reserve Bank is currently inviting feedback from relevant parties.

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THIS is my first Taking Stock. In coming weeks Chris and I will write alternate weeks.

He is heavily involved in the process of transitioning his script (The Billion Dollar Bonfire) into an available book. His publishers (BWB Publications) plan to have the book in the shops by April 7.

Clients, users of our firm and readers of this newsletter are welcome to order a copy for mail-out in April. Orders can be sent to Penelope@chrislee.co.nz

TRAVEL

Kevin will be in Christchurch on 31 January.

Edward will be in Napier on 4 February, in Nelson on 19 February and in Remuera on 8 March.

David will be in Palmerston North and Whanganui on 18 February.

Chris and Johnny will be in Christchurch in February, based at the Airport Gateway Motor Lodge, in Roydvale Avenue - dates to be advised.

Chris will be in Auckland in February - dates to be advised.

Michael may be in Auckland in the early part of February.

Johnny Lee

Chris Lee & Partners Limited


Taking Stock 10 January 2019

 

THE chaos in the US government, with hundreds of thousands of civil servants unpaid, might imply that 2019 will start poorly for NZ investors.

Certainly it will be a poor year if the foreign investors who own around 40% of our sharemarket listings should be spooked and quit our markets.

Happily there is no evidence of large withdrawals. Indeed the reverse is the case.  Foreign investors are taking over companies like SLI Systems, Trade Me, and Restaurant Brands, hardly a sign of foreign flight.

In addition the Ardern government plans to restore its billion-dollar contribution to the Cullen Fund, a display of confidence that is likely to add at least a hundred million of demand for our leading stocks.

KiwiSaver funds allocate hundreds of millions to debt and equity assets listed on the NZX so it would require a Hitchcock-like injection of fear to undermine prices.

Yet there are many New Zealanders examining personal portfolios, fearful of a reversal of the gains that most have enjoyed, each year, for many years.

One canny client who has the time to manage his portfolio on an hourly basis wrote to me over the holiday period, highlighting the attractiveness of Exchange Traded Funds (ETFs) that short the Australian Index, a reverse of the more common ETFs, that buy the index at any price.

The ETF that shorts the index loses if markets rise, but obviously makes profits if the market falls.

For retail investors who want to bet on a falling market, this ETF is an excellent means of making the bet.

Generally retail investors do not have the power to borrow shares from institutions to sell now and to repay by returning shares in subsequent months.

Whereas the likes of Milford or Fisher Funds, and most ETFs, will lend shares to credible market players, their appetite for lending small numbers of shares to retail investors is low.

The inverted ETF is a sane answer.

Indeed such a concept might be the product to drive an ETF in New Zealand.

To date our noisiest ETF provider has simply charged a fee to hand NZ investors’ money to a US ETF, a double intermediation process that draws obvious scepticism.

An NZ-run ETF that shorted various indexes might have a value that was real, though scale might be an issue.

I guess some might also see irony in an ETF provider selling the idea of a long portfolio matching the weighting of the largest NZX-listed companies, then using those stocks to lend to a short fund that would be betting stock prices would fall.

Indeed there is irony to this but if there is a quid in it for the ETF manager, he will no doubt tolerate the criticism.

Meanwhile those who want to short the Australian market can do so, quite simply.

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AN American takeover of SLI Systems will not worry too many of those who read Taking Stock.

Listed at $1.50 and supported by the likes of the NZ Venture Capital Fund, SLI slumped to penny dreadful status.

It must have had the nexus of a credible idea to have attracted an American bid but those who bought at the new issue price will be disheartened by the takeover offer, at barely a half of that issue price.

If 2019 is a year when investor nerves are regularly frayed, the investors most likely to endure portfolio devaluations are those with technology companies that aspire to break even, one day.

Frayed nerves are likely to snap under relentless pressure so we urge clients to reassess their tolerance levels and trim or eliminate the stocks that cannot be priced on dividend yield.

We will be trying to persuade all advised clients to develop an investment strategy and monitor it. All clients are welcome to discuss the very practical way this can be done.

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ONE security that was clearly mis-priced last week was the Precinct Convertible Note.

The security converts in two years and offers a one-off bonus should the Precinct ordinary share be trading above $1.40.

For each cent the lead share exceeds $1.40, the note holder gets another cent of value added to his ‘’repayment’’ (conversion).

The ‘’repayment’’ is in shares so someone with 10,000 Precinct Convertible Notes would get a bonus of around $570 worth of additional Precinct shares, if the Precinct share price were to be $1.48 when the notes convert on 27 September, 2021.

Last week the Precinct shares hit $1.48 yet holders of the note were selling the $1.00 notes for $1.03. You could argue that the notes were worth $1.057.

Two years ago I praised the structure of the Precinct note offer.  I am amazed that others have not copied it.

The note pays 4.8% per annum. If the bonus is eight cents, then after four years the early subscribers would have had a 2% per annum boost to add to the 4.8% return.  Our clients were large users of the note.  They will be hoping that Precinct continues to enjoy a rising share price.

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A FEW days of sun on Waiheke Island helps me to the conclusion that the gulf island is drawing a picture of a problem New Zealand will soon face on a much larger scale.

Waiheke has around 9,000 residents but its success in selling its beaches and its vineyards has led to uncontrolled tourism, with up to 50,000 people on the island in summer.

Waiheke cannot support such numbers.  Its water supply is limited, its infrastructure stretched, its roads unsuited to greater traffic volumes, its car parking gets stretched, and the queues grow longer.

Of course visitor numbers produce dollars, with GST getting back to central government coffers.

Those who live on the island but do not sell to the tourists are understandably unimpressed by double-decker buses running on country lanes probably best suited to a hansom, or perhaps an electric bike.

New Zealand as a whole faces the same problem.

To accommodate the nearly four million tourists we simply must provide better roads, with barriers, with passing lanes, or at least with batons to discourage overtaking.

Yellow paint does not cut the mustard!

The GST bonanza has made fiscal surpluses look great but the offset is the need for better infrastructure.

A Swedish roading expert has observed that the way to look after road traffic is to separate those driving in opposite directions.

Barriers, wire or even batons will reduce collisions.

Waiheke is blessed in that the roads dictate slow speed that are tolerated because the island is so small.

Our impressive fiscal strength, almost entirely created by overseas visitors paying GST, needs to be spent, if we are to encourage yet further tourism growth.

Our roads would be a good place to start.

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MY son Johnny joins our business next week. He has had a 12-year stint with ANZ Securities where he led the equity trading desk.

He will usually work Wednesday, Thursday, Friday, enabling me to roam on those days.

Johnny has excellent knowledge of New Zealand and Australian securities and will be a client-first advocate, as we all are.

His father is delighted with his decision to join us!

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TRAVEL

Kevin Gloag will be in Christchurch on 31 January.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a free meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited


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