The Devon investment process is based upon fundamental research that requires us to spend a great deal of time away from the office visiting many companies, and sectors and across a range of countries. We believe this is the very best way for us to understand and manage investment risk. As part of this research program we have recently had a number of our investment team members in China on different research trips. When managing NZ and Australian investments, it is critical to understand what is happening in this market.

Although we wouldn’t typically write on the same topic in concurrent months, we have just conducted some extensive proprietary research on a2Milk (ATM) in China and we believe it is important to highlight our observations. This document also demonstrates the Devon commitment to developing our own investment views, based on our own fundamental research.

Is it possible that the newly crowned emperor of the New Zealand equity market, ATM has, as Hans Christian Anderson so eloquently put it, “no clothes” when it comes to intellectual property protection?

Air New Zealand's share price seems to have seen little negative down-side from the political stoush between the company and NZ First MP Shane Jones this week.

Jones, who is Regional Development Minister, took aim at the airline's board and chief executive after it pulled out of flights to the Kapiti Coast.

He was quickly shot down by Prime Minister Jacinda Ardern and finance minister Grant Robertson, who has backed up the board's need for independence.

Fonterra's problematic 18.8 per cent holding in China's Beingmate Baby & Child Food, a big legal settlement with France's Danone, and generally higher milk prices are expected to weigh on the co-operative's first half result, due on Wednesday.

Beingmate, which develops and sells children's food and infant milk formula in China, in January downgraded its earnings for 2017 to a loss of NZ$171–NZ$214m.

It's All About the Milk

Last month the New Zealand share market witnessed an extraordinary event. The a2Milk Company (whose NZX code is ATM) announced their first-half result which, alongside a deal with Fonterra, resulted in their share price rallying almost 44%. Across financial markets this type of price performance in itself is not unprecedented, but what is almost unique with this situation is that this jump in price occurred, outside a takeover event, to our largest listed company.

Sustainable Investing 

Over the past 20-years significant progress has been made in the provision of opportunities for investors to access strategies which recognise environmental, social and governance issues (ESG). More than ever people are looking to ensure that their investments more closely reflect their values on everything from good corporate citizenship, workforce and governance diversity, paying fair taxes to environmental practices and limits on carbon footprints.

A Review of 2017

For investors globally, 2017 has been a strikingly positive year. The US S&P500 Index finished the year up over 20%, its best performance in 4-years, while in New Zealand, our S&P/NZX50 Index rallied 22%. Some of the Emerging Markets are also worth mentioning with Brazil up 27%, Hong Kong up 36% and Vietnam’s Hanoi 30 rallying a massive 47%!

The Future Is Bright for Our Renewable Electricity Sector 

Energy demand and consumption is one of the most interesting investment areas globally. There are a number of aspects to energy that mean it is important to have a clear investment view on trends. Energy issues are at the forefront of technological disruptions, carbon emissions, climate change, regulatory and consumer behaviour. In New Zealand the listed electricity sector is also a big part of our stock market, comprising 15.3% of the S&P/NZX50 index.

Pocket Bubble? 

Over the past 30 years we have seen extreme asset pricing bubbles occur on a number of occasions. In the late 1980’s it was NZ equities and Japanese property. In the 1990’s it was Asian property and anything to do with technology shares while in the 2000’s it was US property and financial assets. When we look at broad equity markets today, there are some commentators who believe that 10 years of historically low interest rates and central banks flooding the system with money has resulted in investor exuberance which has led to irrational pricing across the board.

Executive Remuneration - A Runaway Train?

Of all the shareholder governance issues, executive remuneration is the one that arouses the most passion but is often the hardest to evaluate or deal with. News that Fonterra’s CEO (Chief Executive Officer) received over $8.32m, or $160,000 per week, for the year ended July 2017 has sparked a number of headlines and even some political comment. This particular payment was comprised of a mix of base salary ($2.46m), benefits ($170k) and short and long term incentive payments ($1.83m and $3.86m respectively).