Taking Stock 7 May 2026

Chris Lee Wrtes:

ANY prudent investor will begin any investment plan by first paying attention to the short-term and long-term issues, here and globally.

Here the short-term is fairly easy to forecast - stagflation. That is, high inflation, falling growth, high unemployment, high interest rates, continuing rise in corporate failures (cafes, restaurants, bars, construction companies, tourism ventures, vineyards etc) and inevitably higher taxes. 

That part of the analysis is foreseeable.

In NZ the long-term is equally linear.

If we are to rebuild our dreadfully-maintained infrastructure (bridges, pipes, hospitals, schools, rail, ferries) and strive to meet minimum support levels for our most disadvantaged people, we will rely on a mix of the following:

- New projects delivering billions (collectively) in corporate taxes (extraction industry, energy generation, technology, etc).

- A substantial reduction in superannuation spending.

- New taxes (realised capital gains, as an example).

OR

- More borrowing (at a horrid cost). Our creditors might have a view on the best option. So might Moodys.

Investors will be aware of this. They will see the bifurcation of living standards; an inevitable rising level of inequality and dysfunction. Nobody will enjoy the result.

So investors will err on the side of caution, focussing on securities issued by companies with government ownership or on securities in companies that have pricing power, such as the energy sector.

While still considering New Zealand they may notice some telling trends such as: -

- Falling birthrates of Pakeha families, leading very soon to quite dramatic demographic changes. (NZ Asians may within two decades have the largest number of voters.)

- Falling education standards in some groups.

- Tech barons concentrating the country’s private wealth.

- Our fabulous rural sector increasingly dependent on immigrants.

- Longevity multiplying the number of people dependent on the tax-payers.

- MMP making our political system highly dependent on successfully managing disparate minority groups, leading to political instability and solutions that are sub-optimal.

- Shrinking of middle-income jobs (AI).

- The ultimate mix of these trends quite quickly leading to a version of democracy that will welcome any damage to capitalism, encouraged by the sub-standard media.

- Weather events accelerating the need to retreat, leading to expensive development of inland settlements.

It is easy to conclude that in anticipation of this environment there is a likelihood of an investor retreat to capital protection, followed by planned use of capital, rather than accepting the risk of uncontrollable capital loss, to avoid capital consumption. Growth may be an objective for the rich, and maybe the optimistic, educated young.

I will revert to a likely strategy later in the article.

When looking at the global scene, investors cannot help but focus on:

- Territorial warfare, some based on the wish of the most powerful to control transport fuel.

- The new emphasis on military might rather than the agreed order of international law.

- The vulnerable trade agreements, with contrivances like tariffs being imposed arbitrarily for reasons as quixotic as disagreeing with a powerful country’s vainglorious president.

- An uncomfortable trend to grossly inflate defence (attack?) budgets, the US, as an example, seeking an NZ$5 trillion budget for next year, three times the bigger budgets of previous years.

- Continued unmanageable illegal migration to wealthy countries.

- Continued growth in mind-destroying illegal drugs.

- Falling birth rates, pretty well everywhere in the Western world.

- Extreme inequality in major economies, displayed by all-time highs in the US stock market, blind faith in the certainty of AI bringing wealth to the world.

- The end of US hegemony (the enforcer role).

- Growing unwillingness to reduce the weather changes that are related to human behaviour (pollution of waterways and the sea, as an example).

The global picture is uglier. The trends seem harder to reverse.

The value being created by new pharmaceuticals, by analytics, by data collection, by super computers, by new health solutions, and by pooling knowledge is being offset by military power, exploited by the likes of the US and Russia, with slightly lesser powers (Iran) keen to impose its ideology.

Readers will note I have not singled out China as a threat. It may be a part of the solution.

(I note its leadership in many new potentially advantageous technologies and a rather more subtle approach to international relationships than the US.)

So investors, having considered these and no doubt other difficult issues, then have to settle on an honest assessment of risk tolerance, sculpt an asset allocation that fits that risk profile, and then choose individual assets (or ETFs or fund managers) to meet their goals, probably with the help of the best available advisors.

Having ploughed through all those problems, investors are entitled to some help.

In New Zealand the current government has realised that for many older New Zealanders like me, part of the answer lies in sidestepping incalculable risk.

Twenty years ago, in pursuit of extra returns, some 250,000 mostly older investors used the non-bank deposit-taking sector (mortgage trusts, finance companies, credit unions etc). They, like me, believed that there would be enough meaningful supervision, and enough hefty disincentives, to ensure the information they were served up in investment statements could be usefully analysed, and could be trusted, as they made their selections.

There were government regulators (Securities Commission, Justice Department, Registrar of Companies).

There were auditors.

There were directors subject to company law.

There were trustees, legally tasked with monitoring company behaviour.

There were executives, subject to law, backed by penalties.

There was a Minister of Commerce (Lianne Dalziel).

Perhaps there was a marine college teaching jellyfish to behave intelligently. If there were such a college it succeeded in its task much more obviously than any of the above groups succeeded with their highly-paid roles.

Their performance was disgraceful, yet few were challenged in court.

By 2010, more than 50 of the country’s 60 finance companies had failed, mortgage trusts made ridiculous loans and defaulted on withdrawal requests for years, and investors lost in total nearly half the money they had invested in these ways, despite a belated and poorly constructed and dreadfully supervised Crown Deposit Guarantee.

Encouraged by international banking groups like the Bank of International Settlements, today the NZ government has a group of privately-owned finance companies that it guarantees unconditionally, up to $100,000 per investor, per company.

Presumably the idea behind this was to build a group of non-banks that could do second and third tier lending at the sort of scale that would need retail investor funding. More lenders create diversity.

Probably uncertain about the short and long term stability of national and international markets, investors would have a safe option when pursuing a higher margin, if the reinvention of this sector produced higher, safe, returns, the Crown guaranteeing repayment up to $100,000 per investor per company.

Investors would be solely dependent on the benign tax-payers who underwrite the risk, while investors harvested better rates.

A free lunch had been restored as the guarantee was implemented.

My view is well known. I view this as madness and presented my views that the Crown guarantee should be priced to reflect risk.

I figured 2% – 6% depending on company resilience. The Crown decided on a universal rate of less than 1%. Madness.

Finance companies are generally geared at rather more than 10 times capital, and anyway their capital is often exaggerated by under-disclosing bad loans, inflating paper profits (and retained earnings).

Finance companies are not usually listed and are unlikely to have much luck in raising capital when it is desperately needed. Worse, the finance company would exploit the guarantee, seeking to attract retail money at the same rates as the far better governed and managed well-capitalised banks.

My opposition was heard but discounted.

Many investors are at least temporarily aiming to preserve their capital and obtain fair quarterly returns.

The new Crown-guaranteed finance companies, some lurking behind the new right to call themselves banks (eg Welcome), do not provide anything close to value for risk, if one removes the shelter of the taxpayers' beneficence. 

The guarantee is a contrivance.

The investor who is, say, 70 plus, and has enough capital to amortise over his likely life span retains the option of the banks, where rates are currently lean.

To where else may that investor turn?

The bond market is functional and to date has been well-priced. There are no guarantees, outside of Government Stock.

To be fair, the 10-year Government Stock seems a much better return for risk (at 4.6%) than any finance company. Most listed bond offerors are far stronger and less geared than any finance company.

Furthermore, the bond market is liquid on a daily basis.

But the term is long, so one needs to assess the risks of meaningful rate rises on the horizon.

Shares in stable companies with pricing power, like the energy companies, offer higher returns and lower price volatility than most listed shares.

Box-ticking robots will not be much help in understanding the nuances of each bond on issue but experienced, client-focussed advisors would help.

Selecting the individual bonds is the last step of investing. Help is available. 

As this item makes clear at its opening, the prudent investor follows a logical process, beginning with some deep thought about the extremely rapid changes occurring in our financial markets, and the even faster changes clearly visible overseas.

One of the country's wisest capital market heads, now a veteran, stated over a coffee that the speed of change is now maybe 10 times what it was a decade ago.

My suggestion is to construct a portfolio, find knowledgeable advisors, put aside time to consider the big picture, and follow a logical process.

As our chairman, James Lee, noted recently, you do not have to invest. If you are not convinced that an asset makes sense to you, do not buy it!

My final thought is that it will take some extraordinary programming of a machine to absorb all the market nuances, and the true characteristics of the investor, to match personal financial advisors trained to ignore fast profits, preferring long-term client satisfaction. Machines will always be a short-cut.

SANTANA’S consent process is now moving into a stage where media access is more limited. While the process has been open to media to date, the Fast-track panel’s role was not to explain technical information to reporters, nor to ensure balanced reporting. As a result, some commentary has presented claims as fact without sufficient context or scrutiny.

If somebody records that they like listening to the hills singing to each other, and that a mine would mess with the rhythm of the music, the Fast-track panel had no obligation to do anything other than record the submission. 

It had the right to question the submitter but, in just such a submission, it would not be likely to learn much more of any relevance.

Nor would it listen to those who claim a tailings facility would have a 10,000-year life; utter nonsense, but reported as though 10,000 years was the truth. 

The Fast-track panel has to follow the law that created the panel.

It has sought submissions, politely asked questions to ensure the panellists were hearing correctly, and from those interactions has created a whole list of questions it will want to put to Santana, to learn the engineering and science of a successful mine, and how risk is mitigated.

It will then have a list of issues that cannot be mitigated (bulldozers running over lizards for example) and will then weigh the cost of these issues against the credible benefits of the project.

For example, if every square metre of the mine path houses a lizard, there might be 600,000 lizards, of which only a low percentage might be found and moved to a protected area.

The Fast-track panel might then ask if the project is to deliver $3 billion to the Crown, are 600,000 lizards worth $5,000 each? Would the Crown buy a lizard for $5,000?

Before November the panel will deliver its verdict.

If it errs in points of law, its verdict might be challenged. 

It might make a consent conditional on new conditions. For example, it might require Santana to employ Guardians of the Clutha River who might independently measure the water quality every day, week or fortnight.

It has made it clear it will respond to evidence-based claims.

What is absolutely clear is that within a few months new legislation will rule out some of the expensive and time-consuming practices like cultural reports, that are not required by covenants or legal identification of real problems.

The new practices may also require regional and local councils to compensate those land-owners who are subjected to unnecessary, expensive, conditions imposed on the land-owner.

My hope is that in coming weeks the runanga will find an offramp that leads to polite discussion on how they can help the project and benefit from it, acting cooperatively with Santana.

A great outcome would be Iwi buying a shareholding and obtaining a board seat.

If the media, other activists, and the opposition do manage to stall the consenting process, Santana investors should be aware that the company's cash on hand is around 20c per share, and that it holds data that cost Santana $100 million, identifying where the gold lies. The cash and the data would not be worth nothing.

A delayed or even denied consent would not lead to a wipe out of share price or the value of the project.

I continue to believe that both major political parties are well aware that the modelled revenue and jobs must be an important part of political party plans to enable NZ to meet its obligations to its people and its creditors.

Moodys will agree with me.

Travel

28 May - Kerikeri - David Colman

29 May - Whangarei - David Colman

9 June – Nelson (am) – Chris Lee

9 June – Blenheim (pm)- Chris Lee

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