Investment Outlook February 2021

The Delicate Transition

NZ Equities Australian Equities Global Equities

BUY AFT, BUY Appen, BUY Alphabet, Heartland, Mainfreight Harmoney, Ramsay, BlackRock, Micron, Pushpay, Z Energy Wisetech Salesforce, Walt Disney Investment Outlook February 2021 Jarden Overview

February 2021 A year on, the impact of the Covid-19 pandemic continues to dominate investors thinking. The big difference between now and then is that mankind currently has several vaccines available to prevent its spread, with more vaccines in the pipeline. Consequently, we can now see a time, probably in a years’ time, when the restrictions which currently impede people’s movements and activities can be lifted and life without pandemic restrictions returns to the developed world. Developing countries are likely to lag due to issues which impede achieving the desired levels of vaccinations in their populations.

However, this positive outlook is not without risks. Close attention will be paid to the progress of the vaccine’s deployment, particularly as the number of vaccinations deployed ramps . There have certainly been some early issues, which have been put down as the typical teething problems that could be expected when starting such a massive undertaking.

In response to the impact of measures taken to control Covid-19, central banks and governments took unprecedented action to support the people and businesses adversely affected. None more so than in the US where an additional US$0.9 trillion support package was announced after Christmas and a further US$1.9 trillion support package is in the process of being approved. Such massive stimulus has caused investors to start thinking about when the US Federal Reserve (Fed) and other central banks may start to reduce support. We explore the potential impact on financial markets.

In this edition of the Investment Outlook, we profile Darrin Grafton, the CEO and co- founder of travel booking company Serko. While Serko has a fascinating future in front of it as it expands globally and rolls out new technology designed to improve people’s travel experience, the adverse impact of Covid-19 on its revenue has been extraordinary. Under Darrin’s leadership, Serko has met these challenges head on and continues with its expansion plans.

As noted in our last edition Jarden has made a significant investment in establishing an Australian business. A key part of the business is the establishment of a research team under the leadership of the highly respected consumer analyst Ben Gilbert. We take this opportunity to introduce Ben to you and discuss the new approach to research that he and the extensive research team will bring to you. With the research team now largely complete evidence of their work will become increasingly evident in the coming months as they ramp up research coverage of the Australian equity market.

John Norling, Director, Head of Wealth Research

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Contents

The Top Five Issues for 2021 ...... 4 Asset Allocation – Caution May Reign Until More Confidence Returns ...... 8 Company CEO – Darrin Grafton, Serko ………………………………...... 13 Introducing Ben Gilbert, Head of Australian Research ……………….……………………...... 15 Top Stock Picks - 2021 ……………..………………….………………...…...... 17 New Zealand Equity Metrics ...... 27 Australian Equity Metrics ...... 28 Global Equity Metrics ...... 29 Interest Rates – Coming to the End of the Road ….…..….……………...... 30 New Zealand Dollar – Well Supported …...... 31 To Rebalance or Not to Rebalance? …...... 33 Reminder – New Regulation on its Way ……...... 34 Importance of Being Independent …...... 35 Jarden in the Community – Surfing for Farmers .…………...... 36 Calendar ...... 37 Your Local Jarden Team ...... 38

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Investment Outlook February 2021

The Top Five Issues for 2021

Key Takeaways The Vaccine Game Changer

• Investors expect While the Covid-19 pandemic was the worst thing to come out of 2020, the rapid vaccines to put an development of effective vaccines was the biggest positive. Vaccines have provided a end to the Covid-19 much more certain outlook for many companies. However, it will not be until herd immunity disruption as herd is reached in early 2022 that large scale testing, mask wearing, and tracking will end, and immunity is travel restrictions will be lifted allowing borders to reopen. achieved Herd immunity is achieved when a sufficient proportion of the population is simultaneously • The risk of higher immune to prevent sustained virus transmission. The chart below illustrates how different inflation re- levels of natural immunity in the population, the vaccine’s efficacy and the proportion of the emerging is being closely monitored population vaccinated achieves herd immunity. For example, herd immunity can be achieved with 90% efficacy,10% natural immunity and 65% vaccine coverage. The one • A gradual reduction variable which affects herd immunity not shown below is how infectious the virus is. The in excess liquidity more infectious the virus, the greater the proportion of the population that needs to be should see equity vaccinated or have natural immunity. This is the concern with the new strains of Covid-19 valuation multiples ease from the United Kingdom and South Africa. Compounding the problem is that it gets increasingly difficult to vaccinate additional people as the proportion of the population • Concerns about vaccinated increases. regulation resurface • House price growth is expected to dwindle as underlying fundamentals soften

Achieving Herd Immunity Source: McKinsey

Things to watch which could undermine the achievement of herd immunity: 1. Significant supply chain or manufacturing delays. 2. Unexpected safety issues with the vaccines. 3. Shorter than anticipated duration of immunity after being vaccinated. 4. A slower than expected rollout of the vaccination. To date, where this has been the A slower than expected case it has been dismissed as teething issues. vaccination rollout 5. Problems arising from each vaccines dosing protocol not being followed correctly. 6. Not getting a high enough proportion of the population vaccinated. 7. More infectious strains of the vaccine arising.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 4 Investment Outlook February 2021

Inflation and Employment

Despite recent subdued inflation globally, investors’ expectations of future inflation are trending up. This has become apparent as investors have raised expectations of future US

government spending in the wake of the Democratic Party winning the US presidency and gaining a slim majority in Congress. In the short-term, inflation is likely to rise modestly because prices were so depressed amid pandemic lockdowns last year. Investors appear to be expecting higher inflation to persist. Is this justified?

2.0 US Market 5-Year

Inflation 1.8 Expectation 1.6 Source: Bloomberg % 1.4

1.2

1.0 Jan-20 Apr-20 Jul-20 Oct-20 Jan-21

A possible omen of higher inflation is the combination of extremely loose monetary policy and substantial increases in government spending. Once countries are sufficiently vaccinated, with all that money sloshing around there is a risk people go on a spending spree. Supply of goods and services may struggle to keep up, thus stoking higher inflation. A bit of extra inflation The US Federal Reserve and other central banks have clearly indicated they would be will keep central banks happy to see inflation moderately above 2% before they even consider tightening monetary happy policies. They will almost certainly not react as prices rebound from depressed levels a year ago.

There are counterforces at play, however. Unemployment in major developed economies is likely to remain significantly higher than pre-pandemic rates and spare capacity will take But relatively high time to dissipate. This will continue to dampen prices, particularly for services which unemployment will typically drives inflation. Unemployment may well persist above pre-pandemic rates for a prevent inflation from considerable period if a spending spree does not eventuate and firms cautiously re-employ surging… workers. Secular forces such as e-commerce growth, outsourcing production to countries with cheaper labour, and consumer preferences for experiences over goods keep inflation

low. Finally, future Inflation is influenced by past inflation, so subdued inflation will likely

persist.

…and central banks will There will also be a limit to central bank tolerance for higher inflation. Experience has shown have a limit to how that once the inflation genie is well out of the bottle it is difficult to put it back in again. much inflation they will Although central banks have committed to keeping policy interest rates at current low tolerate levels for an extended period, possibly until 2023, they will start to ease back on asset purchases much sooner. The Fed will likely start tapering its asset purchases by the end of 2021, with other central banks following in 2022.

Turning off the Liquidity Tap

There is a strong relationship between the expansion and contraction of equity valuation multiples and the level of excess liquidity in the economy (defined as the difference Equity valuation between the money supply growth and nominal economic growth). In recent times, the multiples are affected amount of excess liquidity in the economy has been massive. Consequently, interest rates by growth in excess have fallen even though governments have significantly increased spending, as the debt money supply issued has been bought by central banks. These two factors have caused valuation multiples to expand to very high levels and credit spreads on investment grade debt securities have contracted to very low levels.

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Investment Outlook February 2021

Currently there appears little risk of the liquidity tap being turned off now as inflation is low,

unemployment is high (therefore there is spare capacity in the economy) and central banks There appears little risk have openly stated that they expect to err on the side of too much inflation rather than too of the liquidity tap being little. This reflects the failure to meet inflation objectives over many years. turned off now… However, this scenario has recently being called into question following the announcement of an additional US$1.9 trillion of fiscal stimulus. This has seen 10-year US Treasury bond interest rates rise 0.2% to 1.1% and some commentators forecast that the Fed will start …although some tapering its bond buying program by September 2021. Tapering is expected before any commentators expect change is made to the Fed Funds Rate. As noted above, whether this occurs will depend on the Fed may start inflation being comfortably above 2% and unemployment falling. We expect that any tapering its bond change in policy will be very gradual and well telegraphed to financial markets as the Fed buying program by will not want to spook investors like it did in 2013. This being the case, any resulting September 2021 valuation multiple contraction is likely to be largely offset by higher earnings growth. The net result being lower returns being generated by equities, but not losses.

Regulation Emerges From its Den

Regulation has again risen up the list of investors’ concerns. This reflects numerous concerns around the big technology companies and the election of Joe Biden as US President combined with the Democrats gaining control of both houses of government. There is a risk that the huge market shares gained by the big technology companies (for example Google has 92% share of internet search in the US and 75% of US households Technology companies’ have an Amazon Prime account) ends up working against them. While large market shares large market shares are partially due to their popularity with consumers, there are real concerns surrounding may work against them some of the technology companies’ actions. Some examples include failing to take an adequate ‘duty of care’ for the content published on their sites and the pre-installation of their applications on hardware they sell. It should be noted that the concerns do not just come out of the US with regulatory action recently being taken in regions including the

European Union, United Kingdom and . However, typically the probes which result

in new regulation take time to complete and generally result in incremental change. There China’s large is greater concern in China where a probe has started into Alibaba’s activities and the technology companies Peoples Bank of China has issued an order requiring Ant Group to return to its payment appear to be making the services roots. It appears that the Chinese big tech companies are getting too big, too Chinese government quickly and are gaining influence over the population, which is making the Chinese nervous government nervous. While the outcomes are uncertain, history suggests that resulting actions will be manageable for the companies affected and may slow growth somewhat, but not stop it. A Democrat government in the US poses risks for some US companies in the energy, healthcare, technology, and communication services sectors. However, it is worth remembering that the Democrats have a very large list of items they want to tackle. Top of the list is to stop the Covid-19 pandemic followed by the implementation of as much of their $1.9 trillion fiscal stimulus package as possible. Also high on their agenda is getting the US back into the Paris Agreement on Climate Change and a focus on green energy. Over time this will be a headwind for the oil and gas industry. Although to date the only change is to no longer issue permits for fracking on government owned land. Other key issues include reversing Donald Trump’s isolationist foreign policy, combating racism and undoing Trumps’ migration policies. The healthcare sector is expected to see a cap on drug prices and reduced health insurance premiums as all Americans are given the ability to enrol in a public health insurance plan. However, there is little time to achieve them with the mid-term elections due in 2022, where the Democrats tenuous grip on power may be lost, thus making policy/regulatory change very difficult.

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Investment Outlook February 2021

Finally, it is worth remembering that regulation can be positive for some companies. The Regulation can be expected focus on climate change and clean energy will benefit companies looking at positive for some hydrogen as a fuel, wind generation and companies making home insulation products. The companies clean energy thematic has already received much attention as evidenced by the dramatic rise in the iShares Global Clean Energy Fund.

A Cooler Housing Market

The housing market has surged since July, with accelerating sales and price increases. This Monetary and fiscal defies earlier predictions that the local housing market would be hampered by Covid-19 stimulus and lack of lockdowns and closed New Zealand borders. The spark for the housing fire has been the housing supply have “go hard and go early” monetary and fiscal policies of the Reserve Bank of New Zealand boosted house prices (RBNZ) and the Government. A housing shortage has fanned the fire.

25.0%

20.0% New Zealand House Price Index 15.0%

Source: Real Estate New 10.0% Zealand 5.0%

0.0%

-5.0%

-10.0% 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020

Recognising that the hot housing market presents a growing risk to financial stability, the Loan-to-value RBNZ recently announced it will reinstate loan-to-value restrictions on bank mortgage restrictions will start to lending from March. However, the major banks have already instituted the proposed loan- take heat out of housing to-value limits as they recognise the dangers of liberal mortgage lending in a climate of market… rapidly rising house prices and uncertain economic prospects. We expect the loan-to-value limits will start to dampen housing activity from March 2021.

By March, the housing market is likely to be cooling anyway. This reflects New Zealand’s border being largely closed until early 2022, which will limit the number of migrants and … at a time the housing overseas students. With the government wage subsidy scheme now ended and unlikely to market is likely to be be replaced, unemployment is set to rise. In the past, significant rises in unemployment cooling anyway have tended to dampen house prices as incomes stagnate and people worry about their jobs and businesses. At the same time, house building has been continuing at pace, which is steadily increasing the supply of houses and easing the pressure on house prices. Still, low mortgage interest rates and the prospect of a post-pandemic economic activity will provide underlying support for house prices. Therefore, annual house price inflation is likely to ease to around 0-5%.

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Asset Allocation – Caution May Reign Until More Confidence Returns

Key Takeaways A Global Economic Recovery Remains on the Horizon

• Low interest rates The surge in Covid-19 infections and reinstatement of lockdowns of various degrees of likely to continue stringency in large, developed economies means a weaker prognosis for the global despite a surging economy in the first quarter of 2021. Unemployment has flatlined at levels above those post-pandemic prevailing prior to the pandemic and retail activity has been in decline in recent months economy. after a strong initial bounce off the first wave of lockdowns. • Recovering economies and 7,000 low interest rates likely to provide 6,000 support for 5,000 equities. • Uncomfortably 4,000 high inflation is the biggest risk to 3,000 equity valuations. 2,000

US Initial Jobless 1,000

Claims 0 Source: US Department of Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20 Oct-20 Labor, Bloomberg

In the US, much of the recent pull-back in household spending has been due to job losses and the expiration of previous government income support under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. However, with the recent passing by the US Congress of $US900 billion in additional support, and $US1.9 trillion more support promised by the incoming Biden administration, fiscal policy will substantively compensate for declining wage income until the US economy normalises. Elsewhere in the world, governments have indicated that they will similarly stoke spending to compensate for short-term loss of wage incomes and to ensure households keep spending.

Eventually, vaccinations will reach a point where a high degree of community Covid-19 immunity is achieved. However, it will take a while to vaccinate on a sufficient scale to allow a full return to normal life in the world’s largest economies, probably towards the start of Households have built 2022. By this stage, governments are likely to have started pulling back from large-scale buffers to spend post- fiscal support. Households have significantly increased their savings during the pandemic pandemic and are in positions to increase spending when the time allows it. However, after an initial surge in spending, a degree of spending caution may reign for a period as people regain confidence to mingle in the post-pandemic world. This could delay a return to pre- pandemic levels of activity until at least early 2022.

Inflation could spike Despite economic light on the horizon, central banks are unlikely to materially reverse their up in short-term but ultra-accommodative policies in the foreseeable future. Although there could be a unlikely to be a temporary spike in inflation as prices lift from depressed levels experienced last year, problem longer-term elevated levels of unemployment and peoples’ entrenched expectations of continuing low inflation is likely to lead to only moderate inflation in the foreseeable future.

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Investment Outlook February 2021

In any case, many central banks have made it clear that they will tolerate higher rates of In any case, central inflation than their mandated targets of around 2% to make up for persistently low inflation banks will tolerate in recent years. This means central banks will keep low interest rates and accommodative higher inflation monetary policy settings until there is clear evidence of achieving 2% inflation and, even then, will be careful about removing stimulus too soon. Global Equities Supported in the Medium Term

On a short-term basis the risk of an equity market correction is increasing as investors factor in a solid run of positive news, which has left limited space for disappointment. To a large degree, the positive outlook hinges on a successful Covid-19 immunisation campaign. It will be important to monitor progress as the campaign ramps up.

However on a medium-term view, rock bottom interest rates mean that investors seeking Equities appear regular investment income and/or who seek to protect the inflation-adjusted value of their investments have been forced to look at riskier investments, like equities. Equity valuations, attractive compared to bonds therefore, compared to their traditional investment alternative, debt securities, continue to look attractive on a medium-term horizon.

On a shorter horizon, US money supply has rocketed up over the past year due to large- scale US Federal Reserve asset buying, as shown in the chart below. We expect the Fed will Fed likely to reduce its recognise the need to ease back on its bond buying by the end of the year as the economy bond buying recovers. However, it will also be wary of sparking a sharp rise in bond interest rates, as gradually but money happened in the disruptive 2013 “taper tantrum”. Therefore, reductions in Fed asset supply will increase at purchases are likely to be signalled well in advance and be relatively gradual. Money a good pace supply growth will likely continue to be strong, which has traditionally been supportive of equities.

70% US M1 Money 60% Supply – Annual Percent Change 50%

Source: US Federal 40% Reserve, Bloomberg 30%

20%

10%

0% 2014 2015 2016 2017 2018 2019 2020

There is still a higher degree of anxiety amongst equity investors about the short-term outlook than existed pre-pandemic. This is reflected by a higher level of the VIX Index, Still room for equity which is an indicator of US equity investors’ expectations of market volatility over the next investor nerves to three months. Lower levels of the VIX are often associated with higher equity valuations, so calm a reversion to calmer market prices as economies recover from the pandemic could see further support for equity valuations.

A combination of improving economic growth, low interest rates, and surplus financial Cyclical stocks could market liquidity will favour equities of a more cyclical nature relative to more defensive parts outperform more of equity markets. These will tend to be the stocks that have largely underperformed the defensive areas of rest of the equity market in recent years, such as those in the financial, energy, materials, equity markets and industrial sectors. In contrast, stocks that have substantially outperformed in the period of low and falling interest rates, Covid lockdowns, and uncertain growth prospects, such as the large technology companies, may struggle to keep pace with the market overall.

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A key risk to our constructive outlook on global equities is a sharper rise in inflation than Uncomfortably high central banks are comfortable with. Central banks will be quite happy to see inflation lift inflation is a relatively moderately above 2% for an extended period. Inflation in the 2-3% range has historically not low probability but been detrimental to equity valuations, as the following chart shows. However, when could have major inflation has risen above 3% it has tended to coincide with lower equity valuation multiples. effects on equities if it This is likely because central banks often must sharply raise interest rates to get inflation occurs back under control, which hurts equity prices.

20

18 US Price-to- Earnings Multiple 16 and Inflation 14 Source: US Bureau of Labor 12

Statistics, Bloomberg earnings multiple -

to 10 - 8 Price 6 -1 - 0% 0 - 1% 1 - 2% 2 - 3% 3 - 4% 4 - 5% 5 - 6% 6%+ Inflation

Have New Zealand Equities Run Out of Puff

New Zealand equity The New Zealand equity market has outperformed many other developed equity markets valuation ratios have a in recent years. This is largely due to the outperformance of growth stocks such as Fisher tight relationship with and Paykel Healthcare and high dividend yield stocks such as the electricity generators. long-term interest The share prices of companies in the retirement village sector have benefited from rising rates house prices. Performance in these parts of the market have been driven by low and falling interest rates, which makes stocks in them more attractive. The chart below shows the relatively tight past relationship between New Zealand equity valuations, as measured by price-to-earnings multiples, and the 10-year government bond interest rate.

40 New Zealand 35 Price-to-Earnings current Multiple 30 Correlates with 25 Long-term earnings earnings multiple Interest Rates - 20 to Source: Bloomberg - 15 Price 10 0% 1% 2% 3% 4% 5% 6% 7% Government bond interest rate

Looking ahead, we expect long-term New Zealand interest rates to gradually rise. Based on Local equities are past relationships, higher interest rates will be more of a headwind for New Zealand equities vulnerable to than for global equities. In addition, the New Zealand equity market is not significantly underperformance as leveraged to the global economy due to the largely domestic focus of New Zealand listed interest rates rise companies so probably will not benefit to the same degree as more cyclical equity markets from a revival of global economic activity once the Covid vaccines take effect.

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Cyclical Exposure to Benefit Australian Equities

In contrast to New Zealand equities, the performance of Australian equities have lagged the performance of many other developed equity markets over the past year. However, the Australian equity market is well positioned to take advantage of the global economic upturn Australian equities brought on by Covid-19 vaccines and moderately rising interest rates. Australian equity could benefit from a valuation ratios are not generally as high as markets like the US or New Zealand. Because global upturn and the Australian equity market has a relatively high concentration of listed companies with higher interest rates positive exposure to commodity prices, like iron ore and copper, that should perform well as the global economy recovers. In addition, the Australian equity market has a relatively high proportion of bank stocks, which are expected to perform well as interest rates gradually rise. Furthermore, the Reserve Bank of Australia has materially lifted the cap on the level of dividends the banks can pay their shareholders.

Forecasts

Economics As at 28 January 2021 Fiscal Balance % GDP GDP Growth % Inflation % 3 month Libor % 10 Year Government% 2020E 2021F 2022F 2020E 2021F 2022F 2020E 2021F 2022F Spot 3mth 12mth Spot 3mth 12mth New Zealand -8.5 -7.7 -10.2 -4.7 4.5 3.3 1.4 1.5 2.0 0.3 0.3 0.3 1.1 1.1 1.4 Australia -8.0 -7.2 -7.3 -2.9 3.6 3.0 0.7 1.5 1.8 0.0 0.1 0.1 1.1 1.1 1.3 US -15.6 -16.0 -9.7 -3.5 4.1 3.4 1.2 2.0 2.1 0.2 0.2 0.2 1.0 1.1 1.3 Japan -13.0 -11.9 -7.5 -5.3 2.6 1.9 0.0 0.1 0.5 -0.1 -0.1 -0.1 0.0 0.0 0.0 Europe -9.5 -9.6 -5.0 -7.3 4.3 3.9 0.3 0.9 1.2 -0.5 -0.5 -0.5 -0.5 -0.4 -0.2 United Kingdom -18.7 -13.9 -7.2 -10.8 4.7 5.7 0.9 1.5 1.9 0.0 0.1 0.1 0.3 0.4 0.8 China -6.7 -6.7 -5.9 2.1 8.2 5.5 2.6 1.6 2.3 2.6 3.0 2.9 3.1 3.3 3.3 Source: Jarden, Bloomberg (* actuals) NZ and Australia fiscal balance is 30 June NZ is the 90-day bank bill yield

Equities and Commodities Foreign Exchange Spot 12 mth forecast Past Past USD NZD Month Year Australia – ASX 200 6,770 6,590 - 7,280 1.4% -4.4% Spot 12mth Spot 12mth Emerging Markets 1,401 1,410 - 1,560 10.5% 22.3% NZD 0.72 0.74 - - Europe – Stoxx 600 411 410 - 450 3.8% -3.1% AUD 0.78 0.80 0.93 0.92 Japan - Topix 1,850 1,900 - 2,100 3.1% 6.0% EUR 1.22 1.25 0.59 0.59 New Zealand – NZX 50 13,026 12,800 - 14,140 2.7% 10.9% JPY 103.5 102.0 74.7 75.5 UK – FTSE 100 6,740 6,950 - 7,680 3.2% -11.9% GBP 1.37 1.37 0.53 0.54 US – S&P 500 3,852 3,760 - 4,150 3.8% 15.7% CNY 6.46 6.50 4.66 4.81 Oil Brent USD/bbl 56 54 - 60 7.3% -5.4% Source: Jarden, Bloomberg Gold USD/Oz 1,872 1,900 - 2,100 -0.5% 19.9% Source: Jarden, Bloomberg

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Investment Outlook February 2021

Asset Allocation February 2021

Based on the Asset Allocation discussion on pages 8-11, we have not made any changes to our Tactical Asset Allocation. The Strategic Asset Allocation represents the average weighting over the long term (circa ten years or an entire economic cycle). The Tactical Asset Allocation represents a deviation from the Strategic Asset Allocation to take advantage of expected changes in asset class returns over the short term (say 6 months plus).

% Strategic Allocation Tactical Deviation % Income Assets Growth Assets Conservative

Cash 15 -2 +1 NZ Debt Securities 55 +2 Property 4 -2 NZ Equities 8 -1 Australian Equities 3 +1 Global Equities 12 +2 Alternative Strategies 3

Balanced/Conservative

Cash 11 -2 +1 NZ Debt Securities 44 +2 Property 5 -2 -1 NZ Equities 12 Australian Equities 6 +1 Global Equities 18 +2 Alternative Strategies 4

Balanced

Cash 8 -2 +1 NZ Debt Securities 32 +2 Property 6 -2 NZ Equities 16 -1 Australian Equities 8 +1 Global Equities 25 +2 Alternative Strategies 5

Balanced/Growth

Cash 7 -2 +1 NZ Debt Securities 23 +2 Property 6 -2 NZ Equities 20 -1 Australian Equities 10 +1 Global Equities 29 +2 Alternative Strategies 5

Growth

Cash 5 - 2 +1 NZ Debt Securities 15 +2 Property 6 -2 NZ Equities 23 -1 Australian Equities 12 +1 Global Equities 34 +2 Alternative Strategies 5

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Investment Outlook February 2021

Darrin Grafton – Serko

CEO & Co-Founder

It is quite conceivable that Darrin could describe his place of residence as “no fixed abode” given the huge amount of travelling he did prior to the Covid-19 pandemic. He fully expects this to be the case again once the pandemic is brought under control and travel restrictions are lifted. He notes that while applications like Zoom have been a great solution to the immediate problem of travel restrictions, humans are social beings and thrive on face-to-face connections.

Growing up in Waimauku Darrin Grafton Darrin’s life started on the family’s Waimauku dairy farm on the outskirts of Key Takeaways Auckland. Being the eldest son, he helped out on the farm before and after school from a young age. This instilled in him a strong work ethic, tenacity, and problem- • As a boy, Darrin solving skills. Darrin recollects that at school he was good at maths, really enjoying developed acute solving mathematical problems and looking for patterns in data. While he typically problem-solving did well in school exams, his school reports had a continual theme – “could do skills which have served him well. better”. Looking back, he thinks he must have been a rather disruptive child to have in the classroom, due to his constant chatter. • Darrin loves to set and achieve Living close to Muriwai Beach it is little surprise that Darrin enjoyed surfing in his extreme goals. spare time. In addition, from the age of fifteen he took up Kung Fu, training five • Serko’s goal is to nights a week for eight years. make business travel an easy Leaving school in the sixth form Darrin got his first exposure to computers at stress-free Carrington Polytechnic (now Unitec Institute of Technology). Having had no prior activity, exposure to computers, he was selected as one of a handful of successful particularly when applicants based on an aptitude test. Initially he found the course content unforeseen challenging and was assisted by a teacher who, on his own time, came into the disruptions occur. polytechnic each weekend to help Darrin’s learning. This resulted in a light bulb • Darrin is moment when all the concepts being taught fell into place, from which point there passionate about was no holding Darrin back. New Zealand Inc It was at Carrington that Darrin first met his lifelong business partner Bob Shaw. Darrin and Bob have had and continue to have numerous business ventures Darrin met his lifelong together including jointly founding Interactive Technologies in 1994 (which business partner Bob became Gullivers Travel Group) and Serko in 2007. On completing their studies Shaw at Carrington both ended up working for IMaCS creating corporate accounting software using Polytechnic in 1985 Cobol.

In his spare time Darrin loves boating and fishing. Being on the water is the trigger

for him to switch off and relax. Despite being deeply involved in his work Darrin puts family first. His family is very important in keeping him grounded, which is important as he has a habit of setting extreme goals.

Darrin as Serko’s CEO

Darrin has a mantra of executing on what you say you will, and never to hype Customer loyalty is expectations. He also believes that honesty, helping clients during a crisis, humility, reflected in Serko’s and trust build loyalty. Customer loyalty is reflected in Serko’s high retention rate. high retention rate Many loyal customers also become your advocates.

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Investment Outlook February 2021

Darrin enjoys nothing more than dreaming up solutions to problems. The ultimate

problem, and Serko’s reason for existing, is to make travel an easy stress-free Solutions are backed activity, particularly when unforeseen events disrupt travel plans. The solutions he up by rigorous data dreams up are backed by rigorous data analysis and are then brought to life by analysis Serko’s super talented and diverse staff. Having great staff allows Darrin to comfortably relinquish different aspects of his responsibilities as Serko grows and

he finds that he is doing too much. To ensure that he is up to the task, Darrin sets aside time each day for himself and ensures that all emails are answered each day.

In running the business, Serko and Darrin have received numerous awards. Darrin is most proud of being selected as one of the world’s top 25 most influential executives by Business Travel News in 2014 and Serko being recognised as the 2020 HiTech Company of the Year, a fitting tribute to the success of the Serko

team.

Covid-19 Travel Restrictions Bite

Covid-19 travel restrictions have dramatically impacted Serko’s revenue and earnings. In the six months to 30 September 2020 the number of travel bookings

fell 77% and total revenue fell 66% before factoring in any government grants.

Looking to the immediate future it is worth remembering that 93% of Serko’s revenue is generated by domestic business travel in New Zealand and Australia. New Zealand travel New Zealand bookings have quickly recovered, currently nearly 90% of pre-Covid bookings are now at levels. Australian bookings have been slower to recover due to successive Covid- nearly 90% of pre- 19 outbreaks leading to travel restrictions. Eventually, New Zealand’s dramatic Covid levels recovery is expected to be mirrored in Australia. While the impact of Covid-19 on travel, and Serko’s revenue, remains highly uncertain in the short-term, Serko expects to be able to manage its costs in line with the level of revenue which

eventuates and thus achieve its earnings target.

“Cash is more When it comes to managing a company’s cash position Darrin quips, “cash is more important than your important than your mother”, as a company without adequate funding has few mother” options. Consequently, Serko is constantly running scenarios to test that it has adequate cash, with adequate being at least $16-18 million (following the recent

equity capital raising Serko had over $90 million cash). The business cases for the different development projects are also regularly tested under various scenarios, with immediate action taken whenever necessary to get a project back on track. The issue which keeps Darrin awake at night, is not the pandemic, but the ability to

employ enough staff with the required skills and experience. Since September

2020 Serko has employed over 50 new staff and expects to employ 50-100 more in 2021. Serko’s medium-term goal is to achieve $100 million revenue. There are several paths Serko can take to achieve this. They include expansion in Australia, North America, and Europe, rollout of Zeno and through the expansion of Bookings.com for Business powered by Zeno. achieving the goal does not require all of these to Zeno Travel eventuate. Success could come via one or a combination of partial successes.

The Vision for New Zealand Inc

Darrin’s goal is to see Darrin is passionate about New Zealand, which includes keeping Serko listed here. New Zealand become Through mentoring of tech start-ups, it is Darrin’s goal to see New Zealand become a global technology a global technology hub. In time as the value of Serko grows Darrin expects to hub gradually sell down part of his interest in Serko so that he can further assist new companies establish themselves by providing them with capital.

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Investment Outlook February 2021

Introducing Ben Gilbert – Head of Australian Research

Jarden has made a significant investment in Australia. A significant part of this investment involves the creation of an extensive research capability which will benefit our New Zealand Wealth Management clients. This process started with the appointment of Ben Gilbert as Head of Australian Research.

Since starting in September, Ben has initiated coverage on the Australian food sector and employed a research team of nearly twenty analysts, who all will have commenced work by early February. The research team will be completed once a couple more analysts are hired. As shown in the graph on the following page, by the middle of the year we expect Jarden’s coverage of Australasian listed companies to rank in the top Ben Gilbert three of all equity research teams in Australasia.

Key Takeaways A Proud South Australian

• During his school Ben was born and bred in Adelaide. He was educated at St Peter’s College, a highly years Ben proved regarded boy’s school in Adelaide. There Ben undertook the International Baccalaureate himself to be multi- diploma program which involved a broad subject matter – chemistry and economics at talented both inside which Ben excelled plus English, maths, art and Chinese. Ten years of studying Chinese and outside the culminated in a trip to China which included staying with a family in Shanghai for a classroom. period. Outside the classroom Ben enjoyed skiing, qualifying as a state representative. In • Ben has almost relating to this achievement, he adds with a wry smile that being in Adelaide the skiing completed building was all indoors. Ben also played AFL although switched codes in his final year to qualify a new Australian for the first eleven soccer team and go on a trip to New Zealand where his team played equity research against five different North Island schools. Despite this temporary change in sports, Ben team with the future firmly in sight. remains an avid AFL fan and supporter of the Port Adelaide Power. To ensure that his five-year-old son shares his passion for the sport he recently signed him up to AFL

Auskick, which teaches kids fundamental motor skills and what it means to play as part of a team. These days Ben enjoys the occasional ski, running and is very keen to get a Jarden netball or soccer team going in the Sydney office.

Off the sports field Ben was a successful debater. He always went as the third speaker of the debating team. Being the third speaker it was his role to attack the substantive arguments raised by the opposing team, which allowed him to hone his skills of thinking

on his feet. In a similar vein, Ben also enjoyed mooting (an oral presentation of a legal The loss to the legal issue against an opposing counsel) where he represented his school in state fraternity is a gain to the competitions. This raises a question as to why he chose a career in investment research equity research rather than law. For him, the answer reflects the action and dynamic nature of financial profession markets. Consequently, on leaving school Ben headed for the University of Sydney to study finance, accounting, and economics rather than staying in Adelaide to study law. While Ben recounts that he was more focused on having a good time at university than his studies, he clearly did well, first gaining an internship at KPMG and then an internship

at UBS.

The next fifteen years of his career were spent at UBS, where he was Deputy Head of Consistently ranked as Research and led the consumer research team. Since 2015, Ben has consistently ranked Australia’s number one as Australia’s number one consumer analyst in multiple surveys across the retail and consumer analyst food/beverage sectors. In addition to the dynamism financial markets dish up constantly, Ben finds significant satisfaction in being able to build a unique helicopter view of the sectors he analyses. The unique view that equity analysts can develop reflects the wide range of stakeholders that analysts get to speak to, many of whom do not or will not speak to each other. For example, in the consumer space Ben speaks to company

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Investment Outlook February 2021

management, competitors, suppliers, landlords, consultants, regulators, developers of new technology, industry bodies, and investors, all of which have a unique picture of the consumer sector. Furthermore, many of these contacts have overseas connections which give a perspective of developing trends which are yet to reach Australian shores.

Building a Formidable Research Team

Ben has hired the best Ben is excited to be leading a new research team, which can be constructed properly people from a diverse with a medium-term view of the future. Building a new team has allowed Ben to hire the range of backgrounds best people, from a diverse range of backgrounds, who have different perspectives on the world, a passion for their research, and who have a shared vision of Jarden research.

Ben observes that the nature of research is changing as the sectors and factors that produce the next generation of returns will invariably be different to those of today. Jarden’s objective is to lead the change. This will be achieved by:

1. Focusing on collaboration across the research team. 2. Utilising data, with an emphasis on differentiated and proprietary data sets. 3. Having research which is easy to digest. 4. Utilising external partnerships. 5. Having an agile approach to company coverage.

Identifying new themes Consequently, the Jarden Australia research team will spend more time on producing early and challenging differentiated research and less on maintenance research, which simply extrapolates current thinking will be a what is currently happening adding limited value. Identifying new themes early will be hallmark of the team’s critical and challenging current thinking by looking at it from a new perspective will be a research hallmark of the team’s research.

Coverage Target Jarden’s Near-term Target will put it in the Top 3 by Australasian Research Coverage Source: Jarden

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 16 Investment Outlook February 2021

Top Stock Picks – 2021

Key Takeaways New Zealand Equities

• NZ Equities: AFT Pharmaceuticals (AFT.NZ) Price $5.13 Rating: Outperform - AFT - Heartland Why? We have higher confidence in AFT’s organic growth outlook, in particular the - Mainfreight continued momentum across the Maxigesic product suite and steady growth in the - Pushpay Australasian product portfolio. The simplified capital structure also helps to underpin - Z Energy strong valuation support. • Australian Equities: Investment thesis? Management have maintained guidance for FY21 EBIT $14-$18 - Appen million despite the challenges so far. A more exaggerated skew to 2H21 is expected as - Harmoney Covid-19 complications from a disrupted 1H ease. Importantly, the monthly run-rate in - Ramsay early 2H was up on the previous year. We also expect the company sales pipeline to build - Wisetech with an acceleration in the number of new countries AFT is selling into. Furthermore, - Maxigesic IV is now registered in 20 countries (up from 17 in March 2020) but currently • Global Equities: only sold in 3. This is expected to underpin robust revenue and earnings growth over the - Alphabet medium term. Another pleasing development is the company intends to start paying - BlackRock dividends in FY22 after achieving target net debt of $25-$30 million. - Micron Catalysts? News flow on outlicencing deals, uptake of Maxigesic IV and new - Salesforce developments of platforms NasoSurf and Pascomer, 2021 profit result in May 2021. - Toyota Motors - Unilever Key risks? Out-licensing execution, clinical trials, regulatory change and competition. - UnitedHealth - Walt Disney

Note: Prices as of 28 January. Heartland Group (HGH.NZ) Price $1.88 Rating: Neutral

Why? The outlook for the bank continues to improve with lower impairments (versus prior expectations), solid cost control and higher interest income all supporting a strong recovery in earnings. Investment thesis? Heartland’s New Zealand business offers continued growth through Motor, Business and Reverse Mortgages, while further growth in Australia is anticipated on the back of expansion in Reverse Mortgages (currently 26% market share), Business and Consumer activities. Digitalisation is expected to underpin the Bank’s offering, having launched a residential mortgage platform that enables it to offer interest rates at materially lower levels than the larger, more traditional banks. We expect this strategy to help build

scale and drive net interest margin expansion. Heartland now trades at a price-to-book value multiple of 1.4x with a forward return on equity of 10.4%. This compares favourably to the larger banks at 1.3x and 8.4% respectively.

Catalysts? Removal of the RBNZ’s dividend suspension, Australian Reverse Mortgage growth, NZ credit/deferral progression, 1H21 profit result in February 2021. Key risks? Resurgence in Covid-19 impairments, RBNZ capital adequacy rules, low interest rate environment slowing retail deposit growth which pushes Heartland towards

higher cost wholesale funding.

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Investment Outlook February 2021

Mainfreight (MFT.NZ) Price $68.40 Rating: Outperform Why? Mainfreight is a high-quality business with solid operating momentum and a defensive balance sheet. The thematic appeal is Mainfreight’s exposure to the global economic recovery through increased freight activity. Investment thesis? Mainfreight has been a major beneficiary of the pressure put on the freight industry during Covid-19 driven by substantial share gains, greater essential business mix, better line haul utilisation (especially on Australian regional routes) and good cost control. As a result, the company reported underlying net profit growth of 23% in 1H21. We expect ongoing growth for Mainfreight over the near-term, albeit with FY21 profit growth moderating to 11%, reflecting a combination of increasing network intensity and utilisation, along with freight verticals exposed to better-than-expected underlying consumer demand. In addition, European margins should benefit from a normalisation in warehouse utilisation following a period of inventory contraction in this business. Unsurprisingly, given the disrupted Covid-19 backdrop in the US, this business is likely to remain the key detractor to overall group performance. We expect these headwinds to subside in 2021 as progress is made on the vaccine rollout and activity levels recover with the US election now in the past.

Catalysts? Interim trading updates, 2021 profit result in May 2021.

Key risks? Covid-19 lockdowns, an unsuccessful vaccine roll-out.

Pushpay (PPH.NZ) Price $1.68 Rating: Outperform

Why? We see Pushpay as well positioned for a structural growth opportunity driven by the increasing share of digital payments in the US faith sector where it has a dominant share Investment thesis? 2020 was been remarkable for Pushpay with Covid-19 significantly accelerating the shift to digital giving, effectively compressing 3 years’ worth of growth into one. As such, the company delivered 1H21 processing volume growth of 45%, revenue growth of 53% and earnings growth of 178%. The key earnings driver has been margin expansion which has grown to 31%, from 17% a year ago. This highlights the significant operating leverage in the business. Given the strong cash generation (forecast FY21 free cash flow yield of 3.5%) and expected pay down of debt, we forecast Pushpay will return to a net cash position by 2H21. We are also optimistic on Pushpay’s more targeted focus on the Catholic church segment where it is underrepresented and consists of around 17,000- 20,000 churches.

Catalysts? New customer wins over the next 6-12 months and continued traction in selling its integrated Church Management Software product.

Key risks? Slowing new customer growth, decline in US giving market, processing fee compression, governance concerns, increased uncertainty surrounding the Huljich family stake of 15.7% after Peter Huljich resigned from the board.

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Investment Outlook February 2021

Z Energy (ZEL.NZ) Price $3.06 Rating: Outperform

Why? We are becoming increasingly confident in the new strategy management are executing which should lead to a turnaround of the business.

Investment thesis? We believe the key reason why Z Energy appears so undervalued is the low confidence investors have in management’s ability to execute. We are becoming increasingly confident that management are now executing a strategy that should reposition the business to return to earnings growth going forward. Recent trading updates have confirmed our view with volumes tracking well (despite the lack of international tourist demand), broadly steady margins and cost-out delivering. The company has reiterated FY21 earnings guidance of $235-$265 million. While it has left the door open to a possible 2H21 dividend, we believe the company would need to produce FY21 earnings of $285 million to satisfy its debt covenants, which feels like a stretch. Hence, the likely resumption will be after its 1H22 result in November. We believe the prospect of a FY22 dividend of 24 cents per share (resulting in a gross forecast dividend yield of 10.6%pa) will be the catalyst for the market to re-rate the share price.

Catalysts? Monthly volume data, 2021 profit result in May 2021 and any guidance around dividend.

Key risks? Competitive pressures from the continued expansion of low-cost operators, discounting and lower petrol margins. Other risks include Z Energy’s ability to retain cost savings and NZ Refining’s desire to fast track the conversion to an import terminal.

Australian Equities

Appen (APX.AU) Price A$22.94 Rating: Neutral

Why? Appen collects and labels image, text, speech, audio, and video data used to build and improve the artificial intelligence (AI) systems of its corporate (Facebook and Google) and government customers. The big opportunity is more companies deploying AI or complex machine learning algorithms.

Investment thesis? Appen’s market-leading scale positions the business well to capitalise on this rapid sector growth. Covid-19 significantly disrupted Appen’s customers, particularly in California, and new projects commencing. This resulted in an earnings guidance downgrade in December to A$106-$109 million (from A$125-$130 million).

However, the industry backdrop remains favourable and we expect growth momentum to bounce back over 2021-22. There remain short-term uncertainties over Appen's sales pipeline however this appears factored into its lower share price which creates some buffer. Furthermore, the 32% increase in the number of new and early-stage projects from key customers is a testament to Appen's market-leading credentials. Catalysts? FY20 profit result in February.

Key risks? Concern about Appen's lack of earnings visibility compared with domestic tech peers.

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Investment Outlook February 2021

Harmoney (HMY.AU) Price A$2.62 Rating: Buy

Why? Harmoney’s innovative marketing strategy through the advanced use of Google smart bidding allows a targeted approach which yields significantly better returns than traditional ad placements. This combined with its repeat customer program, sees it well positioned to capitalise on the ongoing structural shift towards non-bank lenders. Investment thesis? Harmoney is a leading personal lender in Australasia, providing unsecured loans directly through digital channels. Harmoney’s share price has underperformed since listing, potentially reflecting a more modest near-term growth profile versus peers. The company made a conscious decision in the early Covid-19 period to limit originations in response to economic uncertainty. With originations having bottomed in July 2020 and Harmoney reporting 2Q21 growth of 47% on the previous quarter (NZ +44% to $89 million and Australian +69% to $27 million), we believe the volume recovery is tracking very well. Harmoney has also derisked the funding side further by securing a second NZ warehouse funding facility, increasing total capacity to $264 million. Increased wholesale funding at a lower cost should underpin margin expansion, allowing reinvestment into loan growth through sharper pricing. The company’s customer acquisition process should continue driving operating leverage with approximately 60% of originations coming from existing clients with lower acquisition costs and impairments, therefore accruing significantly higher incremental margins.

Catalysts? Sustained volume recovery in line with peers and 1H21 profit result in February. Key risks? Covid-19 led economic headwinds impacting volumes and impairments, reliance on wholesale funding and higher interest rates over the medium term.

Ramsay Health Care (RHC.AU) Price A$63.89 Rating: Neutral

Why? Whilst we expect Covid-19 to continue impacting private health participation in a negative way over the short term, we are more confident in the inevitable volume recovery over the medium term and Ramsay’s ability to generate solid earnings growth through brownfield developments, potential acquisitions, and cost savings. Investment thesis? We remain confident Ramsay is well positioned to benefit from a sustained pickup in elective surgery volumes over the next 1-2 years. Furthermore, elective surgery wait list pressure in the public system could result in increased outsourcing of work to private providers such as Ramsay, where capacity is not constrained. The volume recovery in the UK and Europe is likely to be hampered given the second wave of Covid-19 infections, but we expect government support programs to be extended into 2021. Catalysts? Further government support programs, a successful Covid-19 vaccine rollout, 1H21 profit result in February. Key risks? Execution on brownfield developments, changes to government policy, structural change of industry growth rates relative to history and unexpected tariff cuts.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 20 Investment Outlook February 2021

Wisetech (WTC.AU) Price A$33.98 Rating: Neutral

Why? We believe the disruptions caused to the freight forwarding industry by Covid-19 has structurally accelerated demand for logistics software. This adds to the attractive long- term opportunity for Wisetech and its industry leading platform, Cargowise. Investment thesis? We expect Wisetech’s 'best-in-breed' offering to drive continued market share growth through new customer wins and growth from within existing customers. The platform is currently used by 40 of the top 50 global third-party logistics providers, while the broader industry is expected to grow at 5%pa. This should support its FY21+ sales pipeline. As the platform builds scale, we would expect margins to increase over time (from circa 30% to 38% by FY25) as investment becomes a lower proportion of revenue. While we acknowledge Wisetech’s acquisition strategy has been aggressive, we believe it has merit. Not only is Wisetech acquiring customers, but the geographic expertise and product knowledge to further develop the platform. Importantly, Wisetech continues to produce an attractive amount of organic growth to support cash flow generation.

Catalysts? 1H21 profit result in February, recovery in shipping volumes and further acquisitions. Key risks? Competition, acquisition integration, fluctuations in customer activity and customer perception.

Worley (WOR.AU) Price A$10.18 Rating: Neutral

Why? Climate change, the energy transition and the emerging circular economy are issues that are impacting Worley's traditional end markets in Energy, Chemicals and Resources. As a result, the company has made a strategic pivot into sustainability where it intends to exploit its expertise in capture and storage, renewable project development (i.e. offshore wind) and hydrogen. Investment thesis? Sustainability is becoming an increasingly important part of Worley’s core business model. Offshore sub stations and marine design are two key areas in the wind space. Worley is also a major player in supporting the world’s largest hydrogen project. Worley has made notable contributions in the circular economy space, playing a major part in a significant number of renewable fuel projects in the US. Finally, Worley’s involvement in the engineering and design of various carbon capture units which will help accelerate the growth of carbon capture technology, is a crucial step to satisfying the Paris Agreement. While only a relatively small component of Worley's business right now (30%), sustainability activities are set to grow as capital is deployed to develop low-carbon projects. While Worley’s share price remains heavily influenced by oil price movements, we think a greater appreciation of its increased diversification should see that relationship diminish, i.e. exposure to upstream oil expenditure is now only 20% of revenue (was 65%), while recurring operating expenditure has increased to 45% (was <10%). Catalysts? Resumption of operational and maintenance (O&M) projects after Covid-19 delays, contract wins, achieving/exceeding cost-out targets. Key risks? delivery of synergies and other cost savings, decline of global oil and gas capital expenditure and volatility of crude oil prices.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 21 Investment Outlook February 2021

Global Equities

Alphabet (GOOGL.US) Price US$1,908Rating: Outperform

Why? The positive outlook for Alphabet remains predicated on strong top-line revenue growth from its core search engine business, with incremental contributions from non- search assets and long-term optionality from new initiatives. Investment thesis? Alphabet is expected to continue delivering robust top-line growth as the company makes monetisation improvements in search advertising through product updates such as Expanded Text Ads and Individual Bid Adjustments. In terms of Alphabet’s non-search assets, the focus is on improving YouTube and Google Play’s advertising capability, which are both expected to drive meaningful revenue growth and margin expansion. Alphabet also offers an embedded option value for shareholders from its new monetisation initiatives such as Maps as well as the eventual commercialisation of other initiatives. Catalysts? Lack of identifiable catalysts apart from quarterly earnings updates. Key risks? Privacy and regulatory overhang may persist for some time, timing unclear on disclosure of incremental new initiatives.

BlackRock (BLK.US) Price US$700.12 Rating: Outperform

Why? BlackRock’s global and diverse investment platform, differentiated technology offering and best-in-class ETF business is expected to continue producing faster earnings growth than other traditional asset managers.

Investment thesis? BlackRock owns the largest exchange traded fund (ETF) manager in the world, iShares, which has dominant market share across all key product segments and in most geographies. We expect this segment of the market to continue to be well supported in the low interest rate environment, especially in the ESG space where the company has excelled having gathered US$33 billion of funds from 2017 to 2020, including $14 billion in the first four months of 2020. We continue to view its Aladdin business as an important competitive advantage in the technology segment. BlackRock revolutionised the business into a technology and risk management business, which currently generates US$1 billion in revenues. Its customers are asset managers, banks and wealth managers who use it for alternative investment holdings and data at the fund level across private equity, real estate, private debt and infrastructure. We think BlackRock will continue to grow its tech and solutions capabilities through further acquisitions as well as organically. BlackRock recently acquired Aperio, a fintech firm that builds and manages custom portfolios of public equities for financial advisors across a range of factors (tax, risk, values = direct indexing). This emerging segment potentially offers more attractive returns for both retail and institutional investors. It also provides Blackrock with a hedge if direct indexing starts to take share from its core ETF business. Catalysts? Quarterly flows, integrating recent acquisitions and further acquisitions. Key risks? Market demand driving negative mix shift and continued low interest rates which negatively impact securities lending revenue.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 22 Investment Outlook February 2021

Micron Technology (MU.US) Price US$79.51 Rating: Outperform

Why? As a chipmaker, we expect Micron to be a key beneficiary of the accelerating demand for increased computing power driven by the increased importance of analytics and decreased cost of production. For a broader exposure, we like ASML. As the dominant supplier of machines to chipmakers, it tends to be a more stable exposure than a single chip manufacturer.

Investment thesis? Micron’s products are positively exposed to cyclical end markets such as mobile, autos, industrials and computers which should benefit as business and consumer sentiment recovers post Covid-19. New memory intensive applications like Cloud, Artificial Intelligence (AI) and 5G should support significantly higher returns for Micron. By way of example, the memory-to-logic ratio in consumer devices is 1:1, enterprise servers is 6:1, hyperscale servers (data centres) is 12:1, and AI servers is around 35:1. As memory products capture more of the value chain, Micron should see valuation upside. With regards to mobile, the next generation 5G network promises throughput up to 50x faster than existing 4G networks. Micron’s products provide the sophisticated speed and storage requirements to enable this transition to take place. Furthermore, a flattening cost curve and customers becoming less price sensitive as minimum memory requirements increase should also be supportive to company earnings.

Catalysts? Trading updates from Micron and its peers to assess industry growth and extent of demand acceleration.

Key risks? Global macroeconomic and accelerating supply growth from Chinese producers (which causes pricing volatility).

Salesforce.com (CRM.US) Price US$226.26 Rating: Outperform

Why? Covid-19 has resulted in a significant change to certain behaviours such as working, learning, shopping, and general interacting. This has led to a substantial increase in digital engagement. Salesforce’s market position as a leader in digital transformations and ability to execute should underpin its outperformance in 2021.

Investment thesis? Salesforce provides cloud computing application software to businesses. We expect cloud adoption to accelerate driven by the need to meet end user demand through digital channels and provide more workplace flexibility. In a recent US business investment survey, customer engagement and business-to-business e- commerce were listed as the top digital transformation initiatives for businesses. Ultimately, we see this continuing to benefit cloud native disruptors like Salesforce, which in the same survey was named a key strategic vendor to businesses, behind only Microsoft and Amazon AWS. While the market still appears disappointed by the Slack acquisition, we believe the share price will re-rate as the integration progresses. Salesforce’s acquisition track record is generally strong. The other key concern has been the lack of meaningful margin expansion despite the company’s scale. While this needs to be addressed, we think the stage is set for a robust recovery in demand and therefore revenue growth that will take centre stage.

Catalysts? 4Q21 earnings result and updates on Slack acquisition.

Key risks? Execution challenges, integration of recent acquisitions, and slowdown in digital spending.

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Investment Outlook February 2021

Toyota Motor (7203.JP) Price ¥7,528 Rating: Outperform

Why? We think Toyota is shoring up its position as a leader in the electric vehicle (EV) market.

Investment thesis? Following a decline in global auto demand from 2018 to 2020 that was subsequently worsened by Covid-19, we expect the industry to return to growth estimating +10% growth in 2021. We expect solid recoveries in the US and China, while maintaining a cautious stance on Europe. We also believe that Covid-19 pushed auto electrification into a full expansion phase following stricter environmental regulations and stimulus measures taken by a number of countries to promote the sale of electric vehicles. As an inflection point, electric vehicles sales (which include both hybrid and electric vehicles) have significantly outpaced auto demand in core markets since mid-2020. We believe Toyota has a competitive edge in the commercialisation of EVs, the development of autonomous technologies, and in sustainable supply chain capacity. Catalysts? Further news of Toyota’s hydrogen fuel cell vehicle strategy and a detailed update on the company’s upcoming generation EV launch. Key risks? Weaker-than-expected sales due to a slow recovery in emerging markets and yen appreciation.

Unilever (ULVR.LN) Price £43.77 Rating: Outperform Why? Unilever has been a perennial underperformer for a number of years, but we believe improved execution and a higher exposure to Asia will see revenue growth converge with its peers, eroding the valuation discount at which the company trades. Investment thesis? We see several factors emerging that support a better performance in 2021. In emerging Asia (35% of group sales), we see potential for a significant economic rebound. Unilever tends to outperform its peers during cyclical upswings due to more robust supply chains than local competitors and a strong balance sheet. While a significant revival of Unilever’s competitiveness in developed markets is not expected, we do not anticipate the recent market share loss to repeat as it was likely caused by an ambitious restructure which proved a distraction. With that now behind Unilever and the consumer belt tightening on spending, we expect price to resonate more and therefore benefit Unilever’s developed market portfolio which is skewed more to the value proposition than its peers. Furthermore, management’s appetite for acquisitions appears to have subsided. In our view, Unilever’s current valuation discount to its close peers, Nestle and Procter and Gamble, will be harder to justify if Unilever can achieve a similar growth rate as we expect.

Catalysts? The next scheduled data point will be the FY20 result in early February.

Key risks? A worsening of the Covid-19 pandemic and further currency weakness in emerging economies.

UnitedHealth Group (UNH.US) Price US$343.11 Rating: Outperform

Why? UnitedHealth occupies a unique position within the US healthcare delivery system, not only as a dominant payor of scale (in commercial, Medicare, and Medicaid markets) but also as a large and growing presence in local care delivery (physicians and ambulatory via OptumHealth), in pharmacy benefits management (OptumRX), and a fast- growing consulting business leveraging its own data warehouse (OptumInsight). Investment thesis? The growth engine for UnitedHealth is Optum which is set to account for more than half of its operating profit in a year. As Optum continues to grow, UnitedHealth will increasingly be considered as a healthcare system and operation

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Investment Outlook February 2021 management company instead of a medical insurance company. Despite its large size, the company is expected to deliver double-digit earnings growth while returning capital to shareholders over the next three to five years. Perhaps more importantly, is the movement underway to shift the US healthcare reimbursement model away from fee-for-service, benefiting payors more than providers. This shift should manifest itself by driving slower medical cost growth and lower volatility of medical loss ratios with higher sustainable valuations for payors. Given the pandemic and economic backdrop, there are risks for commercial enrolment and the tailwinds from Medicare and Medicaid growth. As a market share leader in every product segment in which it competes, UnitedHealth’s scale allows it to leverage its cost base, which as a health insurer is a key driver of margin gains.

Catalysts? Quarterly results, updates on Covid-19, return of elective/deferrable procedures.

Key risks? Any deterioration in Medicare enrolment and margins and an unexpected increase in healthcare utilisation, along with any regulatory changes.

Walt Disney (DIS.US) Price US$169.56 Rating: Outperform Why? Disney has established itself as a front runner in the direct-to-consumer space as a leading streaming service provider with the successful launch of Disney+. Investment thesis? While revenues from its Theme Parks, Experiences and Products division (18% of total revenues) plummeted 61% in FY20 and are likely to continue plaguing 2021, fortunately its direct-to-consumer division, which includes the hugely successful Disney+, but also ESPN+, and Hulu (all totalling 137 million subscribers), has fuelled an incredible recovery in its share price which finished 2020 up 25%. Disney projects its streaming services to hit 300-350 million total subscriptions by fiscal 2024. The positive outlook is largely driven by the expansion of fresh content across its portfolio, with Disney+ set to release more than 100 titles per year. Despite the impressive run in Disney's share price, we still believe it offers compelling value and remains our preferred exposure relative to Netflix with 195 million subscribers. This reflects Disney’s rapidly expanding platforms, the company's diversification, international exposure, and brand recognition (including Pixar, Marvel and Starwars). Catalysts? Subscriber updates, progress on original content and 2021 launch of a general content app called Star. Key risks? Streaming execution, popularity of content, and recession.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 25

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Jarden Securities Limited is an accredited NZX Market Participant and a broker disclosure statement is available free on request. Investment Outlook February 2021

New Zealand Equities Valuation Metrics and Ratings

Security Issuer As of 28 January 2021 Name Gross Dividend Yield (%) AFT AFT Pharamaceuticals AIA 10.5% AIR Air NZ 10% APL Asset Plus ARG Argosy Property 9% ARV Arvida ATM A2 Milk 8% CEN Contact Energy CNU Chorus 7% CVT Comvita DGL Delegat Group 6% EBO EBOS Group ERD EROAD FBU 5% FPH Fisher & Paykel FRE Freightways 4% FSF Fonterra GMT Goodman Property 3% GNE Genesis Energy GTK Gentrack 2% HGH Heartland Bank IFT Infratil 1% IPL Investore Property KMD Kathmandu KPG Kiwi Property Group 0% IPL IFT PFI AIA TLT ZEL FSF AFT MCY Mercury NZ APL SKL THL SCL SEK SPK TRA PCT VCT FRE NZX FBU NZK STU CVT FPH MHJ VHP ARV SKC NZR POT PPH MFT SAN MEL DGL KPG SPG CEN EBO NZM GNE ARG CNU OCA KMD HGH TPW GMT MCY RYM SUM WHS PGW MEL Meridian Energy NZ50 MFT Mainfreight MHJ Michael Hill International P/E Ratio (x) MPG Metro Performance Glass NZK NZ King Salmon NZM NZME 80 NZR NZ Refining 75 NZX NZX 70 OCA Oceania Healthcare PCT Precinct Properties 65 PEB Pacific Edge 60 PFI Property for Industry PGW PGG Wrightson 55 POT Port of Tauranga 50 PPH Pushpay Holdings 45 RBD Restaurant Brands RYM Ryman Healthcare 40 SAN Sanford 35 SCL Scales Corporation SEK Seeka 30 SKC SkyCity 25 SKL Skellerup 20 SKO Serko SKT Sky Network TV 15 SML Synlait Milk 10 SPG Stride Property 5 SPK Spark NZ STU Steel & Tube 0 SUM Summerset IFT IPL PFI ZEL FSF THL SKL APL AFT SCL SKT TRA FBU SEK SPK NZK CVT FRE STU PCT VCT NZX FPH VGL MHJ MFT ARV SAN SML DGL SKC PPH VHP POT MEL KPG EBO SPG RBD ATM CEN ERD NZM CNU OCA ARG GNE HGH KMD SUM TPW RYM GMT MCY MPG WHS PGW THL Tourism Holdings NZ50 TLT Tilt Renewables TPW Trustpower Underperform Neutral Outperform TRA Turners AIR AIA GMT CVT ARV ATM APL AFT PPH VCT Vector ME L POT CEN CNU ERD ARG KMD ZE L VGL Vista Group International VHP Vital Healthcare Property RYM PFI FSF DGL FBU EBO MFT WHS Warehouse Group STU VCT GNE FPH HGH IFT MHJ ZEL Z Energy GTK FRE MCY MPG SCL IPL KPG SPG NZR SKC NZ50 NZ Equity Market NZM NZK OCA SUM Source: Jarden NZX PCT PEB TLT The P/E ratios and Gross Dividend SAN PGW SKL Yield use earnings and dividends SEK RBD THL forecasts for the next 12 months SKT SKO TR A SML SPK VGL VHP TPW WHS

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Investment Outlook February 2021

Australian Equities Valuation Metrics and Ratings

Security Issuer As of 28 January 2021 Name Cash Dividend Yield (%) AGL AGL Energy 7.5% ALD 7% ALL AMC 6% ANZ ANZ Banking Group APA APA Group APT Afterpay 5% ASX ASX AZJ BHP BHP Group 4% BXB Brambles CBA 3% COH Cochlear COL CPU 2% CSL CSL Ltd DXS FMG Fortescue Metals 1% GMG GPT GPT Group IAG* IAG 0% IAG

JHX AZJ RIO ORI ALL S32 TLS LLC TCL JHX SHL ALD CSL AGL APA ANZ ASX BXB DXS GPT MPL COL NAB BHP CBA SYD STO SGP SUN QBE CPU RHC WPL SCG FMG AMC TWE COH WES NCM ORG WBC MGR MQG GMG LLC Lend Lease WOW MGR Group ASX200 MPL Private MQG P/E Ratio (x) NAB 287x NCM 224x ORG 145x ORI 50 QAN QBE* QBE Insurance RHC RIO 40 S32 South 32 SCG SGP Group 30 SHL STO SUN* Suncorp SYD Sydney Airport 20 TCL TLS Corporation TWE Treasury Wine WBC 10 WES WOW Woolworths WPL XRO 0 IAG RIO AZJ ORI S32 ALL LLC TLS JHX TCL APT SHL ALD CSL ANZ AGL BXB ASX APA STO GPT BHP DXS NAB MPL CBA COL QBE SUN SGP CPU RHC QAN WPL SCG XRO FMG AMC TWE COH NCM ORG WES WBC MGR MQG GMG

ASX200 Australian Equity WOW Market ASX200

Source: Credit Suisse, Bloomberg. Underperform Neutral Outperform The P/E ratios and Dividend Yield AGL ASX ALD APA AMC APT ALL QAN use earnings and dividends SYD TCL ORI CPU AZJ BXB ANZ QBE forecasts for the next 12 months TW E SGP FMG CBA COL BHP SUN GMG LLC CSL COH GPT ORG DXS IAG JHX RHC MGR WOW MQG MPL RIO NAB STO NCM XR O S32 SCG SHL TLS WBC WES WPL

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Investment Outlook February 2021

Global Equities Valuation Metrics and Ratings

Security Issuer Name As of 28 January 2021

0939.HK CCB Cash Dividend Yield (%) 1288.HK Agri. Bank of China 2330.TW TSMC 5930.KS Samsung 700.HK Tencent 7% 7203.JP Toyota Motor AAPL.US Apple 6% ABI.BB Anheuser-Busch ABT.US Abbott Laboratories 5% ADBE.US Adobe AMZN.US Amazon 4% ASML.NA ASML Holdings BA.US Boeing 3% BABA.US Alibaba Group BAC.US Bank of America C.US Citigroup 2% CMCSA.US Comcast CSCO.US Cisco 1% DIS.US Disney FB.US Facebook 0% GOOGL.US Alphabet J&J Visa JPM SAP CCB P&G Intel Cisco AT&T HD.US Home Depot Apple LVMH Nestle TSMC Roche Oracle Disney MXWD L'Oreal Verizon Novartis Unilever Chevron PepsiCo Comcast Citigroup

INTC.US Intel Samsung Coca-Cola ExxonMobil JNJ.US Johnson & Johnson Co & Merck MasterCard UnitedHealth Toyota Motor Toyota

JPM.US JPMorgan Holdings ASML Bank of America of Bank Anheuser-Busch Schneider Electric Schneider Agri. Bank of China of Bank Agri. KO.US Coca-Cola Laboratories Abbott MA.US MasterCard MC.FR LVMH P/E Ratio (x) MRK.US Merck & Co 153x MSFT.US Microsoft 60 NESN.SW Nestle NFLX.US Netflix NOVN.SW Novartis 50 NVDA.US NVIDIA OR.FR L'Oreal ORCL.US Oracle 40 PEP.US PepsiCo PG.US P&G ROG.SW Roche 30 SAP.GE SAP SCHN.FP Schneider Electric T.US AT&T 20 TSLA.US Tesla ULVR.LN Unilever UNH.US UnitedHealth 10 V.US Visa VZ.US Verizon WMT.US Walmart XOM.US ExxonMobil 0 J&J Visa JPM SAP CCB P&G Intel Tesla Cisco AT&T Apple LVMH Netflix TSMC Nestle Roche Adobe Oracle Disney MXWD L'Oreal NVIDIA MXWD MSCI ACWI Index Verizon Novartis Unilever Amazon Walmart PepsiCo Chevron Tencent Comcast Alphabet Citigroup Microsoft Samsung Facebook Coca-Cola ExxonMobil Merck & Co & Merck MasterCard Home Depot Home UnitedHealth Toyota Motor Toyota Alibaba Group Alibaba

Holdings ASML Bank of America of Bank Anheuser-Busch Schneider Electric Schneider Abbott Laboratories Abbott *MRK.US is not covered by Credit Suisse therefore consensus Underperform Neutral Outperform estimates used. L'Oreal Boeing Apple Anheuser-Bu. Abbott Lab. Amazon Alibaba Cisco AT&T Novartis Adobe JPM Alphabet Tesla Exxon P&G Agri. BOC Mic r os of t ASML Source: Credit Suisse, Bloomberg. Nestle Roche BOA NV IDIA UnitedHealth The P/E ratios and Dividend Yield Netflix CCB PepsiCo Walt Disney use earnings and dividends Verizon Chevron Samsung forecasts for the next 12 months Citigroup Schneider Coca-Cola Toyota Motor Comcast TSMC Facebook Unilever

Home Depot Intel LVMH

MasterCard Oracle SAP Tencent Visa Walmart

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 29

Investment Outlook February 2021

Interest Rates – Coming to the End of the Road

Key Takeaways In the wake of the damage ravaged by the pandemic central banks have cut interest rates to near zero percent or below and engaged in large-scale asset purchases and other • Low interest rates unconventional measures. However, the emergence at the end of September of three to remain as may effective Covid-19 vaccines has considerably brightened prospects for the global take some time for economy from the second half of 2021. This will likely moderate the pace of further full confidence to monetary policy easing in the large Covid-afflicted economies such as the US, Europe, and return the UK. In New Zealand and Australia, better than expected recoveries, housing market • Inflation rising to buoyancy, and control over Covid-19 likely spell the end of monetary policy easing. 2-3%, although may take at least Interest Rates to Remain Accommodative two years to eventuate However, central banks are highly unlikely to materially reverse their ultra-accommodative policies in the foreseeable future. The roll out of Covid-19 vaccines will take some time.

Sufficient vaccination rates to enable a return to more normal life in the world’s largest But continue to expect economies are not likely to be achieved until towards the end of 2021. Most country low interest rates to borders will likely remain largely closed until that point. Although there will likely be further prevail for the economic improvements from then, it may take some time for full confidence to return. foreseeable future Therefore, economies may not return to pre-pandemic levels of activity until at least early 2022.

In addition, many central banks have made it clear that they will tolerate higher rates of inflation than their mandated targets of around 2% to make up for persistently low inflation in recent years. The US Federal Reserve has formalised this direction by instituting an

average inflation target whereby previous periods of below 2% inflation will be countered with targeting higher than 2% inflation in the future. The Reserve Bank of New Zealand and Reserve Bank of Australia have echoed this approach in a less formalised way. This means central banks will keep low interest rates and accommodative monetary policy settings until there is clear evidence of achieving 2% inflation and, even then, will be careful about

removing stimulus too soon.

Investment Implications

With the resolve of central banks to maintain ultra-accommodative policies to achieve their Shorter-maturity inflation and employment targets, interest rates for shorter-maturity (1-5 years) debt interest rates likely to securities are likely to remain well anchored at current historically low levels. We see stay well anchored, exceptionally loose monetary policies supported by massive government fiscal spending while longer-maturity ultimately being successful in raising inflation to 2-3%, although this may take at least two interest rates could lift years to achieve. Interest rates on longer-maturity securities will, therefore, likely rise moderately over a 12-month horizon as investors glimpse higher inflation ahead.

Credit spreads have Credit spreads should be supported by similar factors that are supporting equities in the room for further medium-term – an improving economic outlook post-pandemic and accommodative narrowing monetary and fiscal policies. There is unlikely to be significant issuance of new debt by New Zealand banks given plentiful funding, which will also help to support spreads. On the flipside, demand from investors is likely to be dampened by the unattractiveness of debt securities in a low interest rate environment. On balance, we see further scope for a gradual

narrowing of credit spreads.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 30

Investment Outlook February 2021

NZ Debt Security Opportunities The heat map below highlights what we believe to represent the best (green) and worst (red) value debt securities in New Zealand. For specific security recommendations, contact your Jarden adviser.

most 10 9 7 6 4 3 1 0 least

Higher AA rated 5.500 6.500 6.500 5.500 5.000

AA- rated 4.000 5.000 6.000 n/a n/a

AA- rated (term 7.000 6.000 5.000 n/a n/a deposit) Debt Securities A rated 5.500 6.000 6.500 5.000 n/a Preferences Credit Quality A rated (term Source: Jarden 6.500 5.500 4.500 n/a n/a deposit)

BBB rated 6.000 5.500 6.000 6.500 6.000

Unrated (indicative

6.000 5.500 6.000 6.500 6.500 BBB rated)

Unrated (indicative

7.000 6.500 6.000 6.000 5.500 Lower BB rated) < 2 years 2-3.5 years3.5-5 years 5-6 years >6 years Term to Maturity

New Zealand Dollar– Well Supported

Key Takeaways US Dollar Softness

• The US dollar is The main feature of global foreign exchange in recent times has been a weakening US likely to continue dollar against most major currencies. A key driver of this depreciation has been the US weakening in the Federal Reserve’s massive injection of cash into the US economy, which has dwarfed even foreseeable the unprecedented money printing of other large central banks such as the European future. Central Bank (ECB) and Bank of Japan.

• Improving Market expectations that the incoming Biden administration will stoke the domestic commodity prices economic boilers has also weakened the US dollar. Increasing government spending is should see the expected to further blow out the US external and government budget deficits (the so called New Zealand “twin deficits”). To entice investors to fund these deficits, it will require a weaker US dollar. dollar well supported against Looking forward, we expect forces to continue pushing in the direction of a weaker US most major dollar. With US interest rates likely to be anchored by the US Federal Reserve, higher currencies. inflation will lower real (inflation-adjusted) interest rates. Falling US real interest rates relative to European real interest rates has tended to lead to a lower US dollar against the euro, as

the chart on the next page shows. Therefore, lower US real interest rates will likely exert further downward pressure on the US dollar relative to the world’s next largest currency. Forces favour a This effect will likely dominate, despite the likelihood that the Fed will start to gradually weaker US dollar taper its massive asset purchases by the end of 2021.

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Investment Outlook February 2021

30% 4% Change in US 20% 3% Dollar–Euro Exchange Rate 10% 2% and US-Europe 0% 1% Real Interest Rate Differential -10% 0%

Source: Refinitiv -20% -1% 2007 2009 2011 2013 2015 2017 2019 Annual change in US dollar - euro exchange rate (LHS) US - Europe real interest rate difference (RHS)

The Kiwi Takes Flight

The New Zealand dollar (Kiwi) has appreciated around 24% against the US dollar since its recent low in March 2020. It is now at its highest level against the US dollar in almost three years. The main drivers of the Kiwi dollar’s strength have been higher prices for New Zealand’s export commodities and improving financial market risk sentiment. 0.90 14.0 New Zealand 0.85 11.0 Dollar-US Dollar 0.80 8.0 Exchange Rate 0.75 5.0 and New Zealand 0.70 2.0 Index Terms of Trade 0.65 -1.0 Source: Bloomberg 0.60 -4.0 0.55 -7.0 2014 2015 2016 2017 2018 2019 2020 2021 NZD-USD (LHS) Terms of trade (RHS)

Expected US dollar weakness will mean that the New Zealand dollar will likely strengthen against this currency in the foreseeable future. The New Zealand dollar will also be propelled by expected continuing improvements in prices for New Zealand’s main export commodities. This is based on an anticipated increase in global consumer and industrial activity as vaccinations start to free people to go about their normal business, which should boost demand for commodities.

We expect rising demand from Chinese consumers for New Zealand’s export commodities should be especially supportive for the New Zealand dollar. Therefore, it should remain elevated, not just against the US dollar but also against the euro and the yen. Good management by New Zealand of Covid-19’s spread, generous government fiscal An end to further support, accommodative monetary policy, and a rapid rise in house prices has softened RBNZ monetary policy the blow of earlier lockdowns and the closure of the border on New Zealand’s economy. easing should also Consequently, we expect the Reserve Bank of New Zealand is unlikely to further lower the underpin New Zealand Official Cash Rate (OCR) below 0.25% or engage in other monetary policy easings. This will dollar strength be another factor that underpins New Zealand dollar strength.

The one major currency the New Zealand dollar is unlikely to strengthen against is the . Like the New Zealand dollar, the Australian dollar will be lifted by a weaker

US dollar and higher global commodity prices. Also, like New Zealand, Australia has been relatively successful in containing Covid-19 and protecting Australian jobs. The Reserve Bank of Australia is unlikely to engage in further monetary policy easing. These factors will New Zealand dollar underpin a relatively robust Australian dollar. appreciation will be a A stronger New Zealand dollar against the US dollar and other major currencies will be a headwind for global headwind for New Zealand dollar returns on global equities. Despite this hurdle, we still equity returns in New generally favour global equities over New Zealand equities on a 12-month basis, as Zealand dollar terms discussed in the Asset Allocation section.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 32

Investment Outlook February 2021

To Rebalance or Not to Rebalance?

Key Takeaways It is a Matter of Risk

• Managing Investment portfolio rebalancing can happen at two levels: investment 1. At the asset class level when the asset allocation has drifted away from the portfolio risk desired asset allocation. requires periodic 2. At the security level when the exposure to a particular equity, investment fund or portfolio debt security has drifted away from the desired percentage of the portfolio. rebalancing. • Rebalancing can be At both levels, a failure to rebalance will see the level of risk in the portfolio drift away triggered by (either increase or decrease) from the desired level. A material divergence from the portfolio exposure desired level of portfolio risk will either jeopardise the investors long term investment limits being goals or result in the investor exceeding their financial capacity or comfort to take risk. breached or more The chart below shows how the risk of a Balanced portfolio (a mix of 40% income assets sophisticated risk and 60% growth assets) would have increased over the past 10 years if no rebalancing metrics being had been done. exceeded.

Portfolio Risk Increases With No Rebalancing Source: Jarden

Clearly some fluctuation in portfolio risk is acceptable. However, an increase from 7.1% to 9.0% should ring alarm bells. The change in portfolio composition can be even more dramatic when looking at a security level. For example, a portfolio of Australian equities which started out with Xero at The change in portfolio 5% at the end of 2015 would now have 21% of the portfolio in Xero due to the 51%pa composition can be return from Xero compared to the Australian equity market’s 9%pa return over the same dramatic at the security period. Clearly having 21% of a portfolio in one equity is much riskier than 5%. level Rebalancing to Control Risk

Rebalancing a portfolio is all about controlling the risk in the portfolio. The simplest risk control measure is to monitor the proportion of the portfolio in a particular asset class or a maximum percentage a single company makes up of the portfolio. Asset allocation is

generally controlled by setting tactical asset allocation ranges. These ranges place an A breach of the upper upper and lower bound on the proportion of the portfolio in a particular asset class. A and lower bounds breach of these upper and lower bounds results in the portfolio being rebalanced to results in the portfolio bring the proportions back within the specified tactical asset allocation ranges. being rebalanced Many investors will actively manage the exposure to different asset classes by increasing or decreasing the exposure to a particular asset class while staying within the tactical asset allocation ranges. In this way the portfolio’s performance can benefit from

expectations on the relative performance of different asset classes. Vanguard researchers found that rebalanced portfolios produce more return per unit of risk (also known as the Sharpe ratio) than non-rebalanced portfolios. This can be seen in the following chart where the bell curve of portfolio outcomes has shifted right (i.e. better risk-adjusted

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 33

Investment Outlook February 2021

outcomes) when rebalanced quarterly.

20

No Rebalancing 15 Comparing Quarterly Rebalancing Rebalanced versus 10 Non-Rebalanced Portfolios 5 Source: Vanguard

(%) outcomes of Percentage 0 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 Sharpe ratio To ensure that the tactical asset allocation is appropriately reflected in the portfolio, we typically look to rebalance when the asset allocation drifts away from the desired tactical asset allocation by more than 2%. The maximum percentage of a security in a portfolio representing an asset class (e.g.

New Zealand equities, Australian equities, or New Zealand debt securities) will depend on the size of the portfolio. In most cases we would expect a maximum exposure per security to be set around 10%. Hence in the example of Xero above, we would have started to reduce the exposure to Xero in 2019 which is when the proportion in the portfolio would have first exceeded 10%.

Managing Risk by Rebalancing is not Free

While managing the risk in a portfolio is important, it should be noted that it comes at a

cost, both in terms of transaction costs to buy and sell securities and the spread cost (this The cost associated is the difference between the price investors are willing to buy and sell a security). Spread with rebalancing costs can be large and are often overlooked by investors. Therefore, good execution of includes transaction transactions to buy and sell securities at the best possible prices is important. and spread costs Furthermore, it is important to rebalance only when necessary. In many cases day to day portfolio activity will give the opportunity to rebalance the portfolio. For example, when cash is added to or taken out of a portfolio, or when the proceeds from a company takeover or a maturing debt security need to be reinvested. Rebalancing can both enhance or detract from the investment return. Typically, this depends on whether the asset class or security being adjusted is trending in price either Rebalancing can both up or down, or whether it is largely trading sideways. Constantly trimming the investment enhance or detract from in a company that is trending upwards will result in a lower return than letting it run. the investment return Conversely reinvesting in a company that is trending down will result in a lower return than not increasing investment to it, or better still removing it from the portfolio. Companies whose share prices trend sideways but with volatility, conceivably offer the potential to add to the holding when the price falls and decrease it after a price rise. Inevitably this is much easier said than done.

Reminder – New Regulation on its Way

The new Financial Services Legislation Amendment Act comes into force on 15 March 2021. One of the major changes in the new regime is to remove the distinction between ‘class’ and ‘personalised’ advice. In light of this, we have repositioned our ‘class advice’ service to meet the requirements of the new Act. Clients in our class advice service may have received an email from your adviser which outlines our new Transactional Advice Service, along with our other services. If you have not yet done so, please read and respond to the email so we can transition you to our new service, or another service if this is more suitable. The regime also introduces new disclosure standards. We will be providing updated disclosure statements to all clients before March 2021.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 34

Investment Outlook February 2021

Importance of Being Independent

Key Takeaways Good Corporate Governance is Crucial

• Companies with The company’s board represents the highest governing authority of a company. The strong corporate board is instrumental in delivering good corporate governance (the system of internal governance controls and procedures by which individual companies are managed). The early 2000’s typically produce and global finance crisis highlighted deficiencies in corporate governance through the superior investment high-profile collapse of companies such as Enron Corporation, Worldcom, Lehman performance. Brother Holdings and Northern Rock. Furthermore, many academic studies show that • Strong independent companies with strong corporate governance typically produce stronger profitability board chairs and and investment performance than comparable companies. directors are critical in achieving good Good corporate governance means: corporate 1. The board acts in the best interests of shareholders and increasingly these days governance wider stakeholder groups, including staff, society, suppliers, and customers.

2. All shareholders are treated fairly.

3. The company acts lawfully and ethically. 4. Appropriate controls and procedures over management activities. 5. Governance, operating and financial activities are all reported well. 6. The board and its committees act independently of management and entities/individuals that have control over management.

Independence is Critical

Independent directors are crucial in achieving points 1, 2 and 6. In New Zealand, the second of the NZX Corporate Governance Code’s eight principles highlights director …to ensure an effective independence – “Board composition and performance – to ensure an effective board board there should be a there should be a balance of independence, skills, knowledge, experience and balance of perspectives”. It is widely recognised that independent views add value to a board’s independence, skills, … operation. This reflects independent directors being more likely to constructively challenge each other and management. With no vested interests, independent directors can put the interests of the company before other interests including those of management, individual shareholders, or other parties with a vested interest (for example a major supplier or customer), even if that means going against them.

While executive directors and those directors representing major shareholders are clearly not independent, determining the independence of other directors can be more difficult. The NZX provides a comprehensive list of factors which impact a director’s independence (refer Recommendation 2.4 of Principle 2 of the NZX’s Corporate Directors often must be Governance Code). Even directors who meet these criteria must be strong willed to be strong willed to be truly truly independent and not capitulate to the pressures of entities/individuals with vested independent. interests.

Good boards should have independent chairs, committees dominated by independent directors and have a majority of independent directors. Having an independent chair reflects the benefit of separating those managing the company from those responsible for overseeing management. The chair also needs to lead and facilitate the contribution from all directors.

From the outside looking From the outside looking in, the activities of independent directors are often difficult to in it is often difficult to observe. Key exceptions are during takeovers (such as, the takeover of Metlifecare by observe the activities of EQT Infrastructure IV Fund and the current takeover proposal by AustralianSuper for independent directors Infratil) or significant acquisitions (such as, Kathmandu’s acquisition of Ripcurl).

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 35

Investment Outlook February 2021

Jarden in the Community - Surfing for Farmers

In late 2020, Jarden became a premiere sponsor of Surfing for Farmers, an initiative helping improve mental health and wellbeing in New Zealand’s rural communities.

With mental health being a significant issue in New Zealand, and the particularly high rates of burn-out and stress in our rural communities, Jarden wanted to support those helping farmers cope with the many pressures they face.

Recent years have seen many challenges, alongside the often-isolated nature of the job - including droughts, earthquakes, floods, farm debt burdens, and mycoplasma bovis.

Surfing for Farmers aims to ease this stress by getting farmers to spend a couple of hours a week off the farm and in the surf. It operates for about 13 weeks during the summer period.

About 1,400 farmers have so far participated in the programme, which has a strong focus on a safe and supportive environment and is designed for all skill levels. The goal for the current summer is for farmers to complete 3,000 surfs.

Surfing for Farmers founder Stephen Thomson says that sponsors are fundamental to the operation of the programme.

“We are now covering 16 locations across New Zealand and creating the opportunity for more than 350 farmers per week to unwind and step away from what can be a very consuming and stressful business. We’re thrilled to be in part, improving so many people’s lives. None of this is possible without our sponsors, and we are so grateful to the team at Jarden who have stepped up this year as one of our four premium sponsors.” Jarden CEO James Lee says the partnership has been made in the spirit of giving back to the community and recognising an important cause.

“Mental wellbeing is vital for all in our communities, and an initiative like Surfing for Farmers makes a large impact at a grassroots level. Its running requires the ongoing support of its sponsors, and we feel privileged to contribute to the programme’s meaningful work.”

Farmers looking for details of sessions in their area should visit the Surfing for Farmers Facebook page at www.facebook.com/surfingforfarmers or their website at www.surfingforfarmers.com.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 36

Investment Outlook February 2021

Calendar Major Events: February – April 2021

Economic Events Central Bank Decisions │ Political Events

China PMI 1 Feb ● EU Unemployment Rate US Manufacturing PMI 2 Feb ● EU GDP 2 Feb ● Australia RBA Interest Rate Decision NZ Unemployment Rate 3 Feb ● US Non-Manufacturing PMI 4 Feb ● NZ Business Confidence 5 Feb ● UK BoE Interest Rate Decision US Unemployment Rate 6 Feb ● Australia Business Confidence 9 Feb ● UK Trade Balance 10 Feb ● UK GDP EU Industrial Production 12 Feb ● Japan GDP 15 Feb ● NZ Net Migration 16 Feb ● EU GDP Japan Trade Balance 17 Feb ● UK CPI US Retail Sales 18 Feb ● EU PMI 19 Feb ● Japan PMI EU Consumer Confidence ● 24 Feb ● RBNZ Official Cash Rate NZ Business Confidence 25 Feb ● EU Consumer Confidence US GDP 26 Feb ● NZ Consumer Confidence NZ Trade Balance ● EU PMI China PMI 1 Mar ● US Manufacturing PMI 2 Mar ● 2 Mar ● Australia RBA Interest Rate Decision US Non-Manufacturing PMI 4 Mar ● EU Unemployment Rate US Unemployment Rate 6 Mar ● Japan GDP 8 Mar ● NZ Business Confidence 9 Mar ● Australia Business Confidence EU GDP ● 11 Mar ● European Central Bank Meeting UK Trade Balance 12 Mar ● EU Industrial Production NZ Net Migration 15 Mar ● US Retail Sales 17 Mar ● Japan Trade Balance NZ GDP 18 Mar ● 18 Mar ● US FOMC Meeting 19 Mar 19 Mar ● UK BoE Interest Rate Decision ● Japan BoJ Interest Rate Decision NZ Trade Balance 24 Mar ● Japan PMI UK CPI ● EU PMI EU Consumer Confidence 25 Mar ● US GDP 26 Mar ● EU Consumer Confidence 30 Mar ● NZ Business Confidence 31 Mar ● UK GDP NZ Consumer Confidence 1 Apr ● China PMI US Manufacturing PMI 2 Apr ● US Unemployment Rate 3 Apr ● US Non-Manufacturing PMI 6 Apr ● EU Unemployment Rate 6 Apr ● Australia RBA Interest Rate Decision NZ Business Confidence 8 Apr ● 9 Apr ● IMF Spring Meetings UK Trade Balance 12 Apr ● Australia Business Confidence 13 Apr ● China Trade Balance NZ Net Migration 14 Apr ● EU Industrial Production 14 Apr ● RBNZ Official Cash Rate US Retail Sales 16 Apr ● China GDP China Industrial Production ● Japan Trade Balance 19 Apr ● NZ CPI 21 Apr ● UK CPI 22 Apr ● European Central Bank Meeting EU Consumer Confidence 23 Apr ● Japan PMI EU PMI ● 27 Apr ● Japan BoJ Interest Rate Decision Australia CPI 28 Apr ● NZ Trade Balance 29 Apr ● NZ Business Confidence 29 Apr US FOMC Meeting EU Consumer Confidence US GDP 30 Apr NZ Consumer Confidence EU Unemployment Rate EU GDP

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Investment Outlook February 2021

Your Local Jarden Team

Auckland Auckland Freephone 0800 805 584 Le ve l 32, P wC Towe r, 15 Customs S tre e t We st, Je re my Ashc roft 09 307 5724 Phil Picot 09 307 5717 P O Box 5333, Auc kla nd Ama nda Che n 09 302 5582 Ma rtin P o u ls e n 09 307 5725 Tony Connolly 09 307 5721 Da vid P re torius 09 302 5576 Victoria Park, Auckland Ma rk Ga twa rd 09 307 5718 S imon Ra ve nsc roft 09 302 5594 Unit 55a, 95 Union Street, Freemans Bay, Murra y Gra ha m 09 307 5714 Roy S a va ge 09 302 5529 P O Box 5333, Auc kla nd Rob Ha wkins 09 302 5574 Willia m S a va ge 09 307 5713 Jo Hika ka 09 307 5722 Da vid S omme rville 09 302 5567 Cambridge Andre w Horton 09 307 5732 Bre tt S te ve n 09 307 5705 30 Gillies Street Lory Luo 09 307 5739 Stephen Wright 09 307 5733 Cambridge 3434 Kris ta n Mine s 09 307 5744 James Young 09 307 5731 S imon Myhre 09 307 5715 Have lock Nor th Le ve l 1, The Villa ge Exc ha nge , 1 Ha ve loc k Roa d, Victoria Park, Auckland Phone 09 307 5702 P O Box 28153, Ha ve loc k North P a tric k Mc Ca rthy 09 307 5749 Sean Poulton 09 302 5561 Brian Moss 09 307 5712 Chris White 09 302 5596 Wellington Le ve l 14, ANZ Ce ntre , 171 Fe a the rston S tre e t, Have lock Nor th Freephone 0800 562 543 P O Box 3394, We llington Andre w Atkinson 06 871 5882 Ben Petro 06 871 5883 Brent Greig 06 871 5889 Tobia s Ta ylor 06 877 9074 Ne ls on Sam Howard 06 871 5887 Adria n Woodha ms 06 871 5888 Le ve l 1, 6 Ake rste n S tre e t, De bora h Murdoc h 06 871 5881 P O Box 114, Ne lson Wellington Freephone 0800 800 968 Christchurch Andre w Aus tin 04 496 5320 James Malden 04 474 4013 Le ve l 1, 148 Vic toria S tre e t, Kyle Edmonds 04 474 4019 Angus Ma rks 04 496 5321 PO Box 25258, Christchurch Scott Fowler 04 474 4039 Richard McCadden 04 474 4402 Mic h a e l G ra c e 04 474 4454 Graham Nelson 04 496 5318 Timaru Jonathan Glass 04 496 5363 Graham Parlane 04 496 5348 Le ve l 1, 49 Ge orge S tre e t Ralph Goodwin 04 496 5317 Brya n S he phe rd 04 474 4014 Tima ru 7910 Ma rk Ha ywa rd 04 474 4062 Sam Stanley 04 474 4436 Simon Hogg 04 474 4015 Anton va n de r Wilt 04 496 5333 Que e ns tow n Philip Hunter 04 496 5312 Chris West 04 496 5314 Le ve l 3, 36 S hotove r S tre e t Peter Irwin 04 496 5316 Glenn Wilson 04 496 5332 Queenstown 9300 Greg Main 04 474 4061

Dune din Ne ls on Freephone 0800 502 828 Le ve l 1, 218 Ge orge S tre e t Francis Gargiulo 03 548 8319 Aa ron S hie lds 03 548 8319 Dune din 9016 Greg Lillico 03 548 8319

Christchurch Freephone 0800 123 053 Johnny Coc hra ne 03 366 5370 Be va n O'S ulliva n 03 336 5382 Ia n Da lle y 03 336 5374 Stuart Thomas 03 336 5371 Ha nna h Dona lds on 03 336 5372

Que e ns tow n Cambridge Anna Bola nd 03 441 8404 Johna tha n Ba yle y 07 834 2712 Ma tth e w Ro s e 03 336 5378 S te iva n Juva lta 07 834 2713

Dune din Fixe d Incom e Tony Conroy 0272412738 Jo Hika ka 09 307 5722 James Hunter 03 588 0356 S e lwyn S mith 03 588 0354

Re s e ar ch Tim Aga r 04 474 4438 Peter Irwin 04 496 5316 John Carran 04 496 5369 John Norling 04 496 5343

Website www.ja rde n.c o.nz Em ail [email protected]

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Investment Outlook February 2021

Limitations and Disclaimer

This publication has been prepared by Jarden The levels and bases of taxation may change. The Copyright: Jarden Securities Limited for distribution to clients of value of any tax reliefs will depend on investors’ Securities Limited and Jarden Securities Limited on the basis that no part circumstances. Investors should consult their tax its related companies, of it will be reproduced, altered in any way, adviser in order to understand the impact of transmitted to, copied to or distributed to any other investment decisions on their tax position. Where 2021 All rights person without the prior express permission of an investment is denominated in a foreign currency, Jarden Securities Limited. The information, changes in rates of exchange may have adverse reserved investment views and recommendations in this effect on the value, price or income of the publication are provided for general information investment. The market in certain investments may purposes only. To the extent that any such be unavailable and/or illiquid meaning that information, views and recommendations investors may be unable to purchase, sell or realise constitute advice, they do not take into account any their investments at their preferred volume and/or person’s particular financial situation or goals and, price, or at all. Jarden Securities Limited, its accordingly, do not constitute personalised employees and persons associated with Jarden financial advice under the Financial Advisers Act Securities Limited may (i) have held or hold 2008, not do they constitute advice of a legal, tax, securities mentioned in this publication (or related accounting or other nature to any person. We securities) as principal for their own account, (ii) recommend that recipients seek advice specific to have provided investment advice or other their circumstances from their adviser before investment services in relation to such securities making any investment decision or taking any within the last twelve months, and (iii) have other action. financial interests, including as a shareholder of the Jarden group of companies (“Jarden Group”), in This publication does not, and does not attempt to, the matters mentioned herein. Investors should contain all material or relevant information about assume that Jarden Securities Limited, its related the subject companies or other matters herein. The companies and affiliated persons and Credit Suisse information is published in good faith and has been Group, with whom Jarden Group has a strategic obtained from sources believed to be reliable, alliance, do and seeks to do investment banking accurate and complete at the time of preparation, business with companies covered in its research but its accuracy and completeness is not reports. Specific additional disclosures will be made guaranteed (and no warranties or representations, in relation to companies where Jarden Group has a express or implied, are given as to its accuracy or transaction role and publishes research. This completeness). To the fullest extent permitted by publication is intended for distribution only to law, no liability or responsibility is accepted for any market professional, institutional investor and retail loss or damage arising out of the use of or reliance investor clients in New Zealand and other on the information provided including without jurisdictions to whom, under relevant law, this limitation, any loss of profit or any other damage, publication lawfully may be distributed. It may not direct or consequential. Information, opinions and be distributed in any other jurisdiction or to any estimates contained herein reflect a judgement at other persons. the date of publication by Jarden Securities Limited and are subject to change without notice. Jarden Jarden Securities Limited is a NZX Firm. Securities Limited is under no obligation to update or keep current any of the information on this A Disclosure Statement is available on request, publication. Research may include material sourced free of charge. from Credit Suisse Group. To the fullest extent permitted by law, Credit Suisse Group shall have no liability to Jarden Securities Limited or clients or prospective clients of Jarden Securities Limited or any other person in relation to such research material. All investment involves risk. The bond market is volatile.

Bonds carry interest rate risk (as interest rates rise, bond prices usually fall, and vice versa), inflation risk and issuer and credit default risks. Lower quality and unrated debt securities involve a greater risk of default and/or price changes due to potential changes in the credit quality of the issuer. The price, value and income derived from investments may fluctuate in that values can go down as well as up and investors may get back less than originally invested. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance or investment returns. Reference to taxation or the impact of taxation does not constitute tax advice.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 39

Investment Outlook February 2021

Investment Outlook February 2021

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 40