Taking Stock 5 November 2026

James Lee writes:

“It doesn’t matter until it matters.”

I was sitting with a CEO, discussing their leverage ratio and trying to convince them that a central purpose of capital markets is to give companies the ability to raise equity. High debt is a financing tool. It should not become a permanent condition simply because management dislikes issuing shares.

Somewhere in that conversation, I found myself repeating something the team at Soros used to say: it doesn’t matter until it matters.

Debt can sit comfortably on a balance sheet for years. Earnings cover interest, banks renew facilities and shareholders enjoy enhanced returns. Eventually, the absence of a problem becomes evidence that there never was much to worry about.

Then, on a boring Tuesday afternoon, something changes.

Earnings disappoint. Projects take longer, cost more and distract from the core business. Funding becomes more expensive. Your relationship banker calls the risk team, and refinancing arrives at an inconvenient time. Suddenly, investors focus on the ratio that barely warranted discussion and react with outrage. But the debt was there throughout. All that changed was their willingness to accommodate it.

By then, management has often squandered its choices. Equity that could have been raised on reasonable terms becomes expensive or unavailable. Lenders start making decisions that boards should have made years earlier.

That is a failure of leadership and risk management, compounded by investors failing to pay attention. None of us is immune from mistakes, but repeating the same mistakes is far too common. Incentives drive behaviour, and too often they reward expansion while shareholders carry the consequences.

The same mistake is being repeated across markets and politics: we are treating continued tolerance as evidence that the underlying risks are acceptable. Just look at what we are now prepared to accept.

Anthropic is coming to the market with hundreds of billions of dollars of computing commitments, dependent on future growth and further capital to fund them, yet generating little cash relative to those obligations. Meanwhile, a single share held by the founders’ company will carry 50.1% of the voting power on matters submitted to shareholders generally.

Investors are invited to supply the money while the founders retain control. And among the risks disclosed is that sufficiently advanced AI, without appropriate safeguards, could pose an existential threat to humanity. Usually, the prospectus explains how you might lose your investment. This one reminds me of Oppenheimer: developing and detonating the atomic bomb despite understanding the terrible risks that accompanied it.

Michael Saylor’s Bitcoin financing machine is moving preferred securities to daily dividends. Strategy says this prepares it for a financial system operating around the clock. I find myself asking a simpler question: why does attracting capital increasingly require paying investors more frequently? At what point does the appeal become getting your next payment before something goes wrong?

Trump’s war against Iran has helped drive fuel prices higher. His response includes temporarily lifting sanctions on Russian diesel, allowing purchases that help fund the country still waging war against Ukraine.

Finally, Microsoft has offered voluntary redundancy to approximately 60,000 employees, more than a quarter of its workforce. These are offers rather than confirmed departures, but the scale should stop us in our tracks. Microsoft made US$130 billion last year. At what point is enough enough?

Yet the market shrugs.

At this point, I half expect Trump to announce that the interest on America’s US$40 trillion debt will be paid in shares in Venezuelan oil companies. That is a joke. The uncomfortable part is how little it would now surprise us.

Absurdity has become familiar. Familiarity has become acceptance. Neither makes the underlying risks disappear.

Three views have run through my recent columns. Historical research suggests nearly half of listed companies experience a catastrophic share-price loss. Boards should treat that as a warning about what they are there to prevent. Index funds have distorted markets by allocating incoming money according to rules, without asking whether the next purchase represents value.

And the world is changing faster than many businesses, investors and political leaders are prepared to acknowledge.

These views are playing out in real time. They create opportunities for investors prepared to distinguish between businesses that can adapt and businesses that should concentrate on their core and return capital. The challenge is knowing which management teams deserve your money.

These are no longer future risks. The much-touted Firmus IPO, an AI data centre float, was pulled. I would expect ASIC to examine the process. NEXTDC, another data centre operator, lost approximately 42% in one session after electricity infrastructure delays forced it to revise its outlook. Intel fell about 29% in a day.

Google’s parent, Alphabet, is roughly 30% below its peak, representing approximately US$1.5 trillion of market value. Oracle has experienced a drawdown of around 60%. Meta, IBM and Micron are also substantially below their highs. These are names as familiar as Kodak, GE and Cisco. Familiarity did not protect their shareholders from enormous losses, and it will not protect ours.

Investors who thought they owned the future have discovered just how much they paid for it.

The headline market can shrug while individual shareholders suffer. Index flows and a handful of enormous companies support the headline numbers while losses accumulate underneath.

An index fund does not stop buying because a valuation is absurd. Its purchases follow its rules and the money available. That continues until the flows change.

The familiar response to a falling price is to keep averaging down. That can work if the business remains sound. It can also increase your exposure to a business becoming permanently worth less. In my view, the previous high provides no evidence of present value. What matters is the cash the business can produce from here, the capital it requires and what shareholders are being asked to pay.

AI makes that judgement particularly important. We need to stop discussing its arrival as a future event. Around US$2 trillion has been spent so far, 70% of the Nasdaq is directly exposed, and it has become the dominant investment theme for many of the world’s largest funds.

AI has already changed the world, and the change is profound. It has altered how work is done, where capital is invested and the competitive advantages on which businesses depend. Its consequences will take longer to become fully visible.

The question is who benefits, and what happens next.

My concern is that, managed poorly, this change could be profoundly negative for the general population and hugely positive for a very small group. The owners of the technology, infrastructure and distribution platforms may capture extraordinary wealth, but that has not been proven yet. Workers and taxpayers, however, are absorbing disruption through lost employment, weaker bargaining power and greater demands on public finances.

A company can increase profits by replacing employees with technology. When thousands of companies do it, lost wages become lost household spending and somebody else’s revenue problem. Government debt then constrains the capacity to provide support.

I understand the argument that the economy will adjust, as it has to previous technologies. But adjustment takes time, and people still have mortgages to pay. Workers cannot instantly retrain for the jobs the new economy requires. An office employee losing their job cannot become a qualified high-voltage electrician next Monday because data centres need one.

Rapid displacement and lengthy retraining are a difficult combination. The world’s largest economy already borrows trillions each year. It has little room to absorb a prolonged disruption in employment and tax receipts. Unfortunately, productivity gains are no guarantee of prosperity for the people whose work is displaced. Nor does the success of AI guarantee a return for those financing it.

To compound the issue, much of the infrastructure supporting this change is being built with debt. During October, the cost of insuring Oracle’s debt against default rose sharply, while yields on CoreWeave’s unsecured debt reached approximately 16%.

That changes the economics. Construction delays leave interest accumulating before revenue arrives. Customers postpone requirements, cash flow falls short and lenders demand more protection. The company then needs equity when shareholders are least willing to provide it. NEXTDC makes the point brutally clear, with its drawdown approaching the scale described in J.P. Morgan’s research on catastrophic losses.

Enthusiasm does not pay interest. Forecast revenue does not service debt.

Compounding these events, oil and interest rates remain, in my view, the two most important prices in the global economy. Their increases transmit pressure through household budgets and business costs. Households cut spending, businesses delay investment and the next earnings disappointment follows.

The risks are increasing and interacting. Our willingness to shrug our shoulders does nothing to reduce them. The outcome will depend on who makes the decisions, whose interests they serve and whether they act before their choices disappear.

That is why leadership matters.

At its core, leadership is stewardship. You are entrusted with something that belongs to other people, and you are responsible for what happens to it. R. Edward Freeman’s stakeholder theory recognises that businesses depend on employees, customers, suppliers, investors and communities. Hanna Pitkin’s work on political representation connects leadership with acting in the interests of those represented while remaining responsive to them.

That responsibility extends beyond protecting your position and satisfying your loudest supporters. It is why I find the US midterms and our own election campaign so frustrating. Too much is about mobilising a faction, vilifying opponents and defending an ideology.

In New Zealand, the procession of parties announcing whom they refuse to work with has become a farce. Disagreement is inevitable. Refusing even to consider compromise before voters deliver their verdict is a choice.

I would see leadership in Chris Hipkins and Christopher Luxon joining hands, agreeing on what New Zealand needs and considering whether they could build a government capable of delivering it. If another partner were required, choose one that supports that programme. Such a government would need a credible mandate, a coherent programme and accountability. But those are challenges leaders should be prepared to confront.

Nelson Mandela helped unite a deeply divided South Africa by including people who had opposed him. Abraham Lincoln appointed political rivals to his cabinet. They understood that leadership required building beyond their own supporters.

The same responsibility belongs in a boardroom. A CEO must hear disagreement, abandon a cherished strategy when the evidence demands it and put shareholders’ money ahead of personal reputation. That is why I would almost never invest in a company with a first-time CEO and a first-time chair simultaneously. When the choices become difficult, I want experience somewhere in that partnership.

So, what do you do as an investor?

Back companies that have demonstrated they can innovate successfully. There are relatively few of them. Otherwise, back companies concentrating on their core business, protecting their balance sheets, removing waste and returning surplus capital.

Management must earn the right to reinvest your money.

For shareholders, stewardship comes down to what management does with the next dollar: invest it where the company has demonstrated an advantage or preserve it and return the surplus.

Years ago, someone at Macquarie described its approach to me as throwing spaghetti at the wall. Try a range of things in small amounts, cut off those going in the wrong direction and support the ones that work. The discipline makes it work. Experiments remain small until evidence justifies more capital. Failure is recognised. Successful ideas receive support.

Infratil has demonstrated an ability to build businesses, bring in partners and recycle capital.

That record gives shareholders something concrete against which to assess its next decision.

For companies without that capability, focus is the better strategy. Maintain the core business. Defend your competitive position, remove waste and reduce excess. Repay debt where necessary and return the surplus. Shareholders can invest their dividends elsewhere. They do not need management teams with no record of successful innovation to experiment with their savings.

Sky is a useful example. Its enormous destruction of shareholder value over the longer term cannot be ignored. But its recent focus on cash generation and distributions deserves recognition. FY2026 normalised free cash flow was $58.9 million, and its annual dividend increased 45% to 32 cents a share.

Precinct has just provided a clearer example of leadership. Last Friday, it announced it would not proceed with the Downtown Car Park development under current market conditions. Higher funding costs, inflation and increased return requirements meant the project no longer justified committing shareholders’ capital.

It will retain the site and operate the car park. It also announced a $103 million capital return and an on-market buyback of up to $50 million.

I rate Scott Pritchard, and Friday’s decision strengthens that view. A management team prepared to stop when the numbers no longer work earns greater credibility when it subsequently asks shareholders to support a project. If conditions improve and Precinct decides the development makes sense, I will have more confidence in its judgement because it was prepared to say no today.

The distributions use existing debt facilities, so the resulting leverage still needs scrutiny. But stopping the development demonstrates the principle from my opening conversation: make the decision while it is still yours to make.

Fletcher Building shows how expensive the alternative can become. Billions were committed to Formica, Crane and Higgins amid considerable fanfare. Write-downs and disposals followed, accompanied by another round of strategic explanations. All three investments returned less than Fletcher Building’s cost of capital.

They were failed investments.

I am sure there are some lovely homes in Matakana and Remuera built on the fees generated by Fletcher’s acquisitions and disposals. Executives collected their salaries, advisers collected their fees, and shareholders were left with inadequate returns. Getting bigger was rewarded. Creating value proved rather more elusive.

If Fletcher generates sustainable cash, strengthens its balance sheet and returns the surplus, I will take another look. If it uses that cash to launch another diversification programme, it remains an avoid.

I am still looking to invest. But management must earn the right to retain my capital.

Demonstrate that you can innovate or run the core business properly and give the surplus back.

In either case, preserve the ability to make decisions before your lenders make them for you.

Before investing, ask whether the company can fund its plans without a friendly market, whether management has earned the right to reinvest your money, and what return you receive if the valuation multiple never rises.

It doesn’t matter until it matters.

The opportunity is to act while you still have choices. 

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New Issue

Auckland Airport is issuing a 5-year senior bond (rated A-) this week, with a possible interest rate of around 4.80% per annum.

Auckland Airport will not be paying the transaction costs for this offer, so clients will be charged brokerage.

Investors who are interested in these bonds are welcome to contact us with their CSN and an indication of the amount they may wish to invest. Offer is expected to close 6 November.

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Travel

16 November – Wellington – Gavin Parkes

17 November – Lower Hutt – David Colman

17 November – Christchurch - Chris Lee

18 November (am) – Christchurch – Chris Lee

18 November (pm) – Ashburton – Chris Lee

19 November – Timaru – Chris Lee

Investors who would like an appointment to meet are welcome to contact us.

James Lee

Chris Lee & Partners