Taking Stock 8 May 2025

James Lee writes:

"Give me a view. It's what I am paying you for. "

I was sitting at dinner with a CEO of a company for which we were trying to launch an IPO. I replied, “How honest do you want me to be on a scale of 1-10?” He said 10, so I didn't hold back.

To this day we have a very honest and direct relationship based on two key concepts - respect for each other's capabilities but more importantly a shared understanding that being clear with your views, whilst awkward, if done with respect, will generally improve a situation. 

When I look across the market today, I worry that the advice industry has become so careful with its language it is nearly impossible to know what is being said.   The more cynical side of me wonders if for some people it's easier to position your view so carefully that you haven't actually given a view, perhaps because you actually don't know what you are talking about. 

Unfortunately it matters a lot because over the past four months investors have been exposed to probably one of the most wild rides in human history, driven by a group of powerful people whose logic frankly can't be explained.

Whether it's the tariffs, the Ukraine war, China’s economy, Musk’s foray into politics or the Germans’ fundamental shift in approach to debt, investors have no place to hide.

At the start of the year most banks forecast that the S&P500 would be at 6500 by year end. Today they are forecasting a significant chance of recession. Most will tell you to be passive because markets are efficient, while others (me included) believe markets are materially inefficient in the short term because of their structure.

Some will tell you that you can't time the market, others will highlight that Warren Buffett has proven that to be nonsense. 

With all that, how should the average investor form a strong view given even the “experts” don't? 

Usually I would say make sure you get advice, but given some of the gobbledegook I have seen recently I can empathise with the sense of caution some have. So instead I will say, please go to see someone willing to give you advice and to listen to your exact risk tolerance. 

We all have to accept that an opinion is just a view in an uncertain world, but don't fall for the “buy the index and it’s all going to be okay” nonsense. 

If any adviser were to tell me that time in the market was more important than price, or that over time markets always recover, or that no one can predict markets, I am pretty certain that I would walk out. Such salesmen’s guff is not advice that adds any value.

Markets do not always go up; prices do not always recover; and I would be paying to receive a valuable view on the markets. 

I do believe however that markets are always rational eventually and generally look out only nine months so you can beat the market if you are right with your analysis and your ideas.

Recently I read that if you missed out on the 17 best days in the history of the markets your returns would be materially worse; sure, but equally those 17 days mostly followed the 17 worst weeks in history. Avoiding the worst weeks is important.

I might have missed the S&P going up 10 percent in a day last month, but the S&P is still lower than it was on January 1st,a time that clearly preceded a risky quarter.

That said, every opinion is awesome in hindsight, but some of the best educated people I know in markets are terrible advisers because they miss the single most important part of advice - actually understanding the client’s risk tolerance. 

You will get bored with me saying this but the most important thing to do is get your risk tolerance and time horizon right. This is why being told you can have five different, largely passive, asset allocations of model portfolios isn't advice. It's the human form of robo investing and, at its most simple, is just an attempt to avoid accountability. 

Setting your goals and your risk 

It is only once you know what you want to achieve from your wealth then you can make a portfolio. As I don't want to venture into the world of advice today, I will just tell you how I do it for me personally, openly acknowledging everyone's risk tolerance and goals will be different. 

I start each year looking at where the market is in terms of risks, geopolitics, macro and leverage vs where it has been.

I then look at how I think this year and next year might go on balance of probabilities compared to current market expectations (i.e. market pricing).

I then decide what my liquidity requirements might be over that period, and what my income needs might be, then decide how much cash/ bonds or private credit I should have to meet that income part of my portfolio. 

Whatever is left over I then put into growth assets. I choose what market is more likely to perform based on the trends in economic data, and then I choose some sectors that should do well in that environment, and pick some companies based on their board / management. 

I finally look to see how expensive a company is relative to its peer group/ history and finally how expensive it is in absolute terms.

How does that work right now?

Let's take the US. The market is within a few percent of where it started the year. Its growth will be impacted by this tariff war. It is also a mathematical certainty that US growth will be slower than previously expected because investment decisions are being paused, and consumers, after the initial surge, will worry that US leverage will continue to grow so interest rates are unlikely to fall unless/ until the economy tanks, meaning the market is already expensive. 

New Zealand on the other hand will see the benefit of lower rates flow through and Christopher Luxon will create new jobs with the fast-track projects. New Zealand has a tonne of savings to invest in infrastructure and the RBNZ is likely to cut banking capital requirements to stimulate lending growth. The property market appears to be stabilising. Tariffs in NZ are a non-event relative to elsewhere and the market pricing is largely where it was in 2022. 

I use these two markets as my starting points because, as a New Zealander, my dividend returns are improved by imputation credits and the US covers 70 percent of the world, so I have all my growth available to me by looking at that one market. 

So once I have formed a view on the world, I think what would a good return be this year and I think what I would be happy with over the next year. 

This year looks to be one where, if I can get a positive return of 6-8 percent, I am going to be happy, but next year I think the New Zealand market is likely to do okay as the economy improves so I need to look at what parts of the market I want to be exposed to. 

In the short term I think the US market probably struggles, as the data in the next few months gets worse, and I think next year returns are more likely to be negative than positive as all of this uncertainty will slow down decision making, and possibly consumption. Domestic consumption is what drives the US economy. 

I accept that if Trump and Xi agree a compromise the market might bounce on sentiment, but I have more confidence that risk-adjusted NZ will meet my investment needs next year with less risk than the US. 

Now I have decided that, I think 6-8 percent this year would be good, and that I want some exposure to a bounce in the NZ economy for next year.  I structure a portfolio of companies leveraged to that theme, that are paying a good dividend to cover me through this year and whose management I respect. I accept that investors must rely on the advice sector to form a view on management. I hope my background will help our clients in this assessment.

I write my plan down with catalysts and then write down what I think these investments might be worth at the time of the catalyst and compare back to this on a regular basis.

The good news for me is I can't really quibble with my financial adviser if I get it wrong! 

Summing this up:

Right now it's ok to feel confused, as markets are really hard. You do not have to be invested in high-risk assets to generate a sensible return in this environment. 

Before you agree to paying an adviser to help you manage your money make sure you understand your own risk tolerance and cash flow needs, and make sure your adviser understands these issues. 

Finally agree a plan and review that plan regularly 

Our team is equipped to help.

Editor’s note: James was previously CEO of investment bank Jarden and is, from July 1, CEO of the Canadian listed company Healwell AI Inc, a health software provider, now the owner of the NZ- formed company Orion Health. He became chairman of Chris Lee & Partners Ltd on 1 April  and chairs the investment committee of our company. 

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Chorus – New Capital Note Offer Pending

Chorus has announced that it is considering an offer of up to $170 million of subordinated capital notes.

Further details are expected to be released during the week of 19 May 2025, with payment likely due by the end of May.

It is anticipated that Chorus will cover the transaction costs associated with the offer, meaning no brokerage would apply. This will be confirmed once the offer formally opens.

While the interest rate has not yet been disclosed, comparable securities in the market are currently trading around 5.00% per annum, so we expect the offer to be in that range.

Investors wishing to be kept informed or pencilled in for this offer should contact us now to register their interest.

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Travel

New Plymouth – 9 May – David Colman

Nelson – 12 May – Chris Lee (FULL)

Blenheim (pm) – 13 May – Chris Lee (One appointment time available)

Auckland (North Shore) – 26 May – Chris Lee

Auckland (Ellerslie) – 27 May -all day & 28 May (am) – Chris Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners