Investment Outlook August 2019

Taking a Deep Dive

NZ Equities Australian Equities Global Equities

BUY Kathmandu BUY Aristocrat BUY Amazon, Mainfreight, Metlifecare, Lend Lease, QBE Insurance, Mastercard, Unitedhealth Z Energy South32 Group, Walmart

- Page 21 -Page 24 -Page 27 Investment Outlook August 2019

Jarden Overview

August 2019 Interest rates have dived to extremely low depths as economic growth indicators turned down due to trade concerns and tensions between Iran and the US and its allies. Globally central banks have reacted to this by taking a more stimulative stance, including lowering interest rates. The interest rate falls have caused investors to flock to dividend yield equities, resulting in significant share price appreciation. This has been particularly apparent in New Zealand, which has a high proportion of dividend yield stocks. With dividend yield equities doing so well we have provided readers with an overview of the New Zealand electricity sector, which has a very high proportion of dividend yield equities and some interesting longer term dynamics.

Looking forward, we see early signs that economic growth is starting to improve which suggests that interest rates are likely to bottom out before rising modestly. Probably the most significant risk to these “green shoots” is a deterioration in trade negotiations between China and the US. As we go to press, President Donald Trump has surprised us yet again by imposing a 10% tariff on the US$300 billion of goods from China that are currently tariff free. The market reaction has been swift with the oil price down nearly 8%, the gold price up US$32/ounce (reflecting the growing interest in gold assets we review the outlook for gold and associated investment options), a modest rise in the Japanese yen, and the US Treasury 10-year interest rate falling under 1.7%. While this has clearly dented investor and business confidence and makes it more likely that central banks will continue to reduce policy interest rates, we retain our view that a broadly positive resolution will emerge from the current trade negotiations. This reflects our expectation President Trump wants to be re-elected in the November 2020 presidential election, in which case he will want to be able to trumpet some success in the trade negotiations and avoid putting the US economy into recession. Historically, no sitting US president has been re-elected when the US economy is in recession.

We acknowledge that the current economic cycle is mature and the economy is probably closer to a recession than it has been for many years. However, at this time there is no definitive evidence of an economic recession in the foreseeable future.

Finally, we welcome two new advisers to the Jarden Wealth Management team, Greg Main in Wellington and Anna Boland in Queenstown.

John Norling, Director, Head of Wealth Research

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 2 Investment Outlook August 2019

Contents

Taking a Deep Dive ...... 4 Asset Allocation ...... 8 Infratil CEO - Marko Bogoievski ...... 11 Introducing Ted Tsui – Global Equity Strategist ...... 13 Global Direct Equity Portfolio ...... 14 New Zealand Electricity Sector 101 ...... 15 New Zealand Equities ...... 21 Australian Equities ...... 24 Global Equities ...... 27 New Zealand Debt Securities ...... 31 The Future of E-Payments ...... 32 Gold Rising ...... 34 Jarden in the Community - Cystic Fibrosis NZ ...... 35 Compass by Jarden ...... 36 Calendar ...... 37 Your Local Jarden Team ...... 38

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 3 Investment Outlook August 2019

Taking a Deep Dive

Key Takeaways Bad News is Good News  Equity markets Equity markets have continued to power ahead, particularly in high dividend yield bounce hard on a markets such as New Zealand and, to some degree, Australia. Over the past 6-9 months rosier outlook Purchasing Manager Indices (timely indicators of economic growth) have declined  Economic activity is globally suggesting economic growth has recently softened. This is a reflection of likely to accelerate increased uncertainty from the US-China trade dispute, numerous threats by the US to after a lack lustre impose tariffs, growing tensions in the Middle East involving Iran, and lesser issues such March quarter as Brexit and Italian budget and debt problems. From the US perspective, over three  The net result of a years of Federal Reserve (Fed) interest rate rises have probably also taken a toll. The more positive increased uncertainty has seen gains in safe-haven assets, such as gold (discussed on outlook is higher page 34), US government bonds and, to a modest degree, the Japanese yen. No doubt interest rates the dive in 10-year US government bond yields from 3.2% to 1.7% also reflects muted  The RBNZ’s bank inflation pressures and an expectation by bond investors that the Fed needs to lower its capital review is Funds Rate from its current 2.0-2.25% band. Other central banks, such as the Reserve likely to result in Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA), also face softer higher lending rates economic growth and subdued inflation, and have either cut interest rates or indicated over time an intention to do so. A common thread amongst central banks appears to be the desire

to avoid having their currencies appreciate. Hence, there is a domino effect when large central banks, such as the Fed, cut interest rates.

While central bank actions to stimulate economic growth in the face of subdued inflation

appears logical, it shouldn’t be overlooked that extremely low interest rates limit the

responses available when a recession arrives and can produce unintended consequences. These include the adverse impact on savers income resulting in pressure to save more to achieve the same level of future income, pressure on investors to take on more risk to maintain the same level of investment income, and downward pressure on bank earnings as net interest margins compress. Bank profitability is important in order to have a sound banking system. 18

16

Very Low Interest 14

Rates Drive Up the 12

Savings Rate 10 Source: Bloomberg 8

6

4

2 0 1962 1972 1982 1992 2001 2011

US 10 Year Interest Rate US Savings Rate

Historically, it has taken around a 5% interest rate reduction to resuscitate economic growth from recession. With central bank official rates in developed economies being at most 2.5%, or in most cases much less, the scope for this sort of stimulus is limited. The next weapon in the arsenal is quantitative easing (QE), a policy which arguably has had only moderate success in stimulating economic growth in the face of structural

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 4 Investment Outlook August 2019

challenges. However, it has successfully inflated asset prices. The lack of success is

exemplified by the Bank of Japan, which as a result of QE owns over US$5 trillion of assets (mainly bonds, but also 4% of the Japanese equity market). Despite this, inflation is only 0.7% and economic growth a poultry 1.1%. With monetary policy struggling to have an impact, the next recession will almost certainly require Government’s to increase spending to bring it to an end.

“There Is No Alternative”

When considering how much investors should allocate to equities numerous commentators have concluded that “There Is No Alternative” (TINA). To date, apart from bouts of short-lived equity price volatility, investors have enjoyed the benefits of taking on greater risk in their investment portfolios. Investment income has been maintained or increased and there have been capital gains to boot.

What happens if interest rates rise? Examining history, we observe that interest rate moves tend to impact the prices of dividend yield equities (dividend yield equities are those that pay a reliable and generally above average dividend yield).

10.5 5.0 Dividend Yield 4.5 Equity Prices 9.5 4.0 Benefit From Lower 8.5 Interest Rates, But 3.5 3.0 the Converse is Also 7.5 True 2.5 Source: Bloomberg 6.5 2.0 Percent % Percent% 5.5 1.5 1.0 4.5 0.5

3.5 0.0 May 15 Nov 15 May 16 Nov 16 May 17 Nov 17 May 18 Nov 18 Spark Vector Contact Energy Genesis Energy Mercury Energy Meridian Energy Kiwi Property Precinct Property Goodman Property Auckland Airport (RHS) 10 Yr Interest rate (RHS)

While lower interest rates result in falling dividend yields and higher equity prices, the converse is also true.

So are interest rates likely to rise or fall over the next twelve months? The RBNZ has reduced the Official Cash Rate to 1.0%. Current pricing in the overnight indexed swap (OIS) market suggests that the RBNZ’s Official Cash Rate (OCR) will fall another 0.25% over the next year and the US Fed Funds Rate will fall a further 0.75%. Following the recent interest rate cuts, we think further larger falls are unlikely to materialise. We expect that the risk of higher future inflation, caused by a tight labour market and importantly an improving economy will see the large decline in US interest rates implied by the OIS market unwind. Consequently, the balance of probability favours a moderate increase in interest rates on longer term bonds, unless US/China trade relations deteriorate further. As shown on the following page, indications of an improvement in economic growth

include a bottoming of composite Purchasing Manager Indices globally.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 5 Investment Outlook August 2019

Composite 59 Purchasing 58 Manager Indices 57 Indicate Green 56 Shoots 55 Source: Bloomberg 54 53

52 51 50 49 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19

US UK Europe NZ Australia

With the New Zealand 10-year government bond interest rate at a historically large 0.5% below the US 10-year government bond interest rate, we expect any rise in US interest rates to push local interest rates up. Should this come to pass, some of the recent capital gains experienced by dividend yield stocks are likely to be lost.

When Bad News is Bad News

In recent times, bad news has been received by equity investors as good news because it increases the chances that the Fed will lower interest rates. However, if a recession was to occur, then this bad news would in fact be bad news for equity markets. In this case, the fall in interest rates would be associated with falling company profits and a decline in equity valuation multiples as investors demand higher investment returns from risky assets. Even companies with highly certain profits may suffer from reductions in earnings and dividends during a recession.

140

120

Dividend Variability 100 Post Global Financial Crisis 80 Source: Bloomberg 60

40

20 2007 2008 2009 2010 2011 2012

Spark Auckland Airport Vector Contact Kiwi Property Precinct Property Goodman Property

The good news is that while the probability of a recession has increased (based on the difference between interest rates on long and short maturity bonds, the Federal Reserve Bank of New York calculates the probability of a US recession as 33%) the three indicators of a recession that we use are not flashing recession in unison (all three indicators are needed to avoid the risk of a false reading). However, we concede that

they are all much closer to that point now. Looking at each indicator in turn:

1. The US 10-year interest rate is now below the 3-month interest rate, which is the only indicator to suggest a recession is imminent. 2. The Fed Funds Rate is 2.1% which is slightly below the current neutral interest

rate estimate of 2.3%, which uses the mid-point of the Federal Reserve Bank of New York’s range of the estimated neutral rate plus inflation as measured by the Personal Consumption Expenditures Price Index. 3. The Conference Board US leading economic indicator is still up 1.6%.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 6 Investment Outlook August 2019

Key Questions for 2019 - Progress Report

In the February Investment Outlook, we posed a number of questions that were likely to be important for the direction of markets in the medium-term. We give a progress report below. Can the oil price recover to US$70/barrel? In the June quarter the Brent oil price rose to over US$74/barrel as supply reductions played out. It is now hovering around US$66/barrel with extra US supply weighing on the price. However, should tensions with Iran in the Strait of Houmas erupt, it could spike higher. Will a recession occur in 2019? Despite softer economic growth so far in 2019, the year is well advanced and no recession is in sight. Could the New Zealand dollar fall below US$0.60? Despite the RBNZ reducing the OCR, the New Zealand dollar continues to trade in a range of US$0.64-0.69. Will the US/China trade dispute be resolved? Short term yes, long term uncertain. Will financial markets experience the same elevated levels of uncertainty as in 2018? To date, financial market uncertainty has been relatively subdued due to dovish central banks and an easing of trade tensions between the US and China. Will President Trump be impeached? Unlikely, although the Democrats continue to search for an angle for impeachment. Can inflation finally exceed 2%? Inflation remains subdued with New Zealand headline inflation for the year to 30 June 2019 being 1.7%. Will New Zealand house prices fall in value? Housing fundamentals remain soft, but not enough to cause nationwide house prices to fall. The demise of the capital gains tax proposal, robust inward migration and lower interest rates are expected to support the housing market. Will equity prices rise or fall? The 20%+ New Zealand equity market rise since 1 February has trounced our expectation of a modest rise. We did not expect interest rates to fall and, therefore, didn’t anticipate the sharp appreciation of dividend yield equities. Forecasts Economics As at 1 August 2019 Fiscal Balance % GDP GDP Growth % Inflation % 3 month Libor % 10 Year Government % 2018A 2019F 2020F 2018A 2019F 2020F 2018A 2019F 2020F Spot 3mth 12mth Spot 3mth 12mth New Zealand 1.1 0.7 0.5 2.8 2.5 2.6 1.6 1.6 1.9 1.5 1.3 1.3 1.4 1.6 1.8 Australia -0.5 -0.2 0.3 3.0 2.0 2.5 1.9 1.6 2.0 1.0 0.8 0.8 1.2 1.3 1.5 US -4.1 -4.4 -4.7 2.9 2.5 1.9 2.4 1.8 2.1 2.3 2.1 2.3 1.9 2.2 2.4 Japan -3.8 -3.5 -3.0 0.7 0.7 0.6 1.0 0.7 1.0 -0.1 0.0 0.0 -0.1 -0.1 0.0 Europe -0.7 -1.0 -1.0 1.8 1.2 1.4 1.7 1.3 1.4 -0.4 -0.4 -0.4 -0.5 -0.3 0.0 United Kingdom -1.5 -1.5 -1.7 1.4 1.2 1.3 2.5 1.9 2.0 0.8 0.8 0.9 0.6 1.0 1.2 China -4.1 -4.4 -4.3 6.6 6.2 6.0 2.1 2.4 2.3 2.6 2.6 2.5 3.2 3.0 2.8 Source: Jarden, Bloomberg 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 Month Past Year USD NZD Australia – ASX 200 6,789 6,500 - 7,200 2.1% 8.2% Spot 12mth Spot 12mth Emerging Markets 1,025 1,060 - 1,180 -3.7% -5.7% NZD 0.66 0.68 - - Europe – Stoxx 600 388 390 - 430 0.0% -0.6% AUD 0.68 0.72 0.96 0.95 Japan - Topix 1,567 1,540 - 1,700 0.9% -11.4% EUR 1.11 1.15 0.59 0.59 New Zealand – NZX 10,861 10,500 - 11,600 4.1% 22.6% JPY 107.4 107.0 70.4 72.8 UK – FTSE 100 7,585 7,400 - 8,100 1.2% -0.9% GBP 1.21 1.28 0.54 0.53 US – S&P 500 2,954 2,970 - 3,280 -0.4% 5.0% CNY 6.90 6.95 4.52 4.73 Oil Brent USD/bbl 61 60 - 66 -7.0% -16.4% Source: Jarden, Bloomberg, IRESS Gold USD/Oz 1,445 1,340 - 1,490 4.4% 18.9% Source: Jarden, Bloomberg

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 7 Investment Outlook August 2019

Asset Allocation

Key Takeaways Global Equities

 Given risks and Over the next twelve months or so, we see reasonable support for global equities. We the late stage of expect company earnings to improve somewhat in the near-term as global economic the investment growth tentatively rises toward the end of 2019. Short-term interest rates probably have a cycle, we are little further to decline before stabilising. Gradually rising longer-term interest rates are circumspect on unlikely to be much of a headwind for equities if earnings are increasing. equities.  Low interest Global equity valuation ratios, such as the price-to-earnings (PE) ratio, have risen this year provide some and are now slightly above their longer-term historical average. However, they are not support for NZ extreme and don’t give too much guidance on the near-term direction of equity markets. equity prices. Low interest rates, improvements in earnings and easing economic uncertainties are likely  Flatter yields to be more influential on the direction of equity prices in the near-term. reduce our appetite for NZ debt securities. 26 24 22 Long-term average PE ratio Global Price-to- 20 Earnings Ratio 18 Source: Bloomberg, Jarden 16

PERatio x 14

12

10

8 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Balancing the positive near-term signs we see for global equities, we are more cautious on Slight caution on a longer horizon. This investment cycle has been a long one and vulnerabilities, such as equities as reward-to- elevated debt levels, are building. We are aware that we are closer to the end of the risk trade-off investment cycle than the beginning. For this reason, the reward-to-risk trade-off has diminished somewhat diminished somewhat.

New Zealand Equities

New Zealand equities have been star performers in recent times. New Zealand dividend yield equities have benefited from the global search for yield in a low and falling interest rate environment. As a result, valuations have been driven up to very high levels, both

compared to history and relative to the rest of the world. As the following chart suggests, higher New Zealand valuations are potentially justified given where interest rates have tracked so far. While low interest rates are supportive we observe the limited number of observations at current low interest rates (refer to graph on following page), which leaves us less convinced regarding what the data is currently showing. Regardless of this, the New Zealand dividend current high valuation ratios are most likely only sustainable if interest rates do not rise yield equities will be much from current levels. Given how far and fast valuations have risen, it’s possible that sensitive to even New Zealand’s dividend yield equities will be sensitive to even modest lifts in 10-year modest lifts in 10-year interest rates. This will be a headwind for their total returns, even accounting for the interest rates dividend income that is derived from them.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 8 Investment Outlook August 2019

28.0 26.0 Low Interest Rates 24.0 Support High NZ 22.0 Equity PE Ratios 20.0 18.0 Source: Bloomberg, Jarden earnings earnings ratio - 16.0 As at 31 Jul to - 14.0 12.0

Price 10.0

8.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0

10-Year Bond Yield

New Zealand Property

Another area that has benefited from low interest rates to a significant degree is New Zealand listed property, which like a good proportion of New Zealand equities, provides sustainably high dividends. Consequently, valuations in the sector have also risen significantly above historical averages as capitalisation rates have followed interest rates down.

New Zealand property valuations are likely pricing in the expectation that the interest rate Higher interest rates on a 10-year government bond will remain at its current low level for a considerable period may cause New into the future. If, as we expect, longer-term interest rates gradually rise as the year Zealand listed progresses, then listed property equity prices will likely stutter. High income yields on property to stutter property equities may not be enough to prevent sector underperformance compared to the rest of the market.

New Zealand Cash and Fixed Interest

The chart below illustrates how far interest rates have declined over the past three months

to the end of July, particularly for the longer terms to maturity and lower credit quality debt

securities (BBB and BB rated securities). In combination with our expectation that longer term interest rates will likely come up for air into the end of the year, the investment return from cash (short-term securities) appears relatively more attractive. We acknowledge that should investor confidence be dented, by events such as a deterioration in US/China trade negotiations or an increase in tensions between the US and Iran, then both long and short

term interest rates could dive further in the interim.

5.0% A Precipitous Fall in Longer Term 4.5% Interest Rates 4.0% -1.0% Source: Bloomberg, Jarden 3.5%

3.0% -0.6% 2.5%

2.0%

1.5% 0.3 1.0 2.0 3.0 4.0 5.0 6.0

BBB 3 Months Ago BBB Now BB 3 Months Ago BB Now

As a result of lower interest rates and the outlook, we modestly reduce the allocation to New Zealand debt securities, and modestly increase the allocation to cash.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 9 Investment Outlook August 2019

Asset Allocation August 2019

Based on the Asset Allocation discussion on pages 8-9, we have reduced the exposure to NZ Debt Securities by 1% and increased Cash by 1%. 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). We have retained the overweight exposure to Global Equities and underweight exposure to NZ Equities and Property.

% Strategic Allocation Tactical Deviation % Income Assets Growth Assets Conservative

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

Balanced/Conservative

Cash 11 +1 NZ Debt Securities 44 +1 Property 5 -2 -3 NZ Equities 12

Australian Equities 6 +3 Global Equities 18 Alternative Strategies 4

Balanced

Cash 8 +1 NZ Debt Securities 32 +1 Property 6 -2 -3 NZ Equities 16

Australian Equities 8 +3 Global Equities 25 Alternative Strategies 5

Balanced/Aggressive

Cash 7 +1 NZ Debt Securities 23 +1 Property 6 -2 NZ Equities 20 -3 Australian Equities 10 Global Equities 29 +3 Alternative Strategies 5

Aggressive

Cash 5 +1 NZ Debt Securities 15 +1 Property 6 -2 NZ Equities 23 -3 Australian Equities 12 Global Equities 34 +3 Alternative Strategies 5

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 10 Investment Outlook August 2019

Infratil CEO Marko Bogoievski

Marko wears many hats, one of which is as the Chief Executive Officer (CEO) of Infratil. His other key role is as CEO of H.R.L Morrison & Co, the manager of Infratil. Before taking up these roles Marko had a significant breadth of business experience.

The Early Years As a boy Marko grew up in the Hutt Valley suburb of Petone, attending local schools, playing football, and supporting the Petone Rugby Club. Somewhat unusually Marko skipped his last year of secondary school, instead opting to attend Victoria University where he graduated with a BCA in accounting and economics. Fresh out of university he joined the Price Waterhouse audit team. Back then, the “Big-8” offered employees attractive options to gain experience offshore. This saw him hit the streets of New York at Marko Bogoievski 23, joining Price Waterhouse’s Transaction Services team, which involved the comprehensive appraisal of businesses on behalf of prospective buyers. The experience of living in New York had a significant impact on Marko, and in his words, caused him to Key Takeaways “harden up”. Gaining experience in new areas appear to be a hallmark of Marko’s career.  Life in New York Consequently, after a couple of years at Price Waterhouse he took up a role as financial and a Harvard MBA controller with one of their clients, Elders IXL subsidiary, Elders Finance US. There he learnt were key factors first-hand about trading and merchant banking. Problems at Elders IXL saw this job come shaping a young to an end and what followed was two years at the Harvard Graduate School of Business man from Petone, where he earned an MBA. The highly competitive environment of Harvard and the need to New Zealand work fast (three real-world business case studies to prepare each night for the following  Marko has overseen day) and be thorough while reaching robust conclusions (the key person associated with a period of the case study was often in attendance at the class discussion) has been a great asset. significant growth and investment Attracted by the leadership development program offered by Lion Nathan, Marko returned performance at to New Zealand in 1994 with his American wife and two boys to take up a role as sales Infratil and Morrison director in the NZ Wines and Spirits business. A few years later, Marko was back in the US & Co working for Dispatch Management Services Corp, a start-up company, which ultimately  Within Infratil’s listed on the NASDAQ stock exchange. The aim of the company was to provide a same- portfolio, Marko day delivery service through the amalgamation of a large number of courier companies. believes Longroad Unfortunately to make this concept work required computer and communications and Canberra Data technology, which wasn’t cheap or reliable back then. Over 20 years later, Fedex, Amazon Centres offer near- and Wal-Mart are still working on how to provide consistent same day delivery services to term valuation their customers. upside H.R.L. Morrison & Co and Infratil What followed was eight years as Chief Financial Officer of Telecom Corporation of NZ, which subsequently became Spark. Marko thoroughly enjoyed the people, the diversity of the role and working through the significant strategic issues faced by Telecom at that time. At the end of his tenure, Marko was approached by the late Lloyd Morrison to join H.R.L Morrison & Co, the manager of Infratil. At that time Morrison & Co had less than twenty staff and their main client was Infratil. Rolling forward twelve years Morrison & Co has 130 staff,

approximately $15 billion of funds under management (of which IFT is around one third) across a number of clients and offices in five countries including New Zealand. The advantage for Infratil of Morrison’ & Co’s growth relates to the greater number of investment professionals that can be used to identify opportunities for new investment. This increases the reach of the organisation across the globe, sectors and investment themes that Morrison & Co specialises in. The management style engendered by Marko is a collaborative environment, where employees are given a lot of autonomy and

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 11 Investment Outlook August 2019

encouraged to allow investment ideas to be developed in a fluid way rather than by following a rigid process. As with many successful people, Marko works hard to achieve a balance between the time dedicated to his work and his family, which includes his wife, two sons and parents who continue to live in the family home in Petone.

Invest in ideas that Morrison & Co’s mantra is to “Invest in Ideas that Matter”, a concept that has been applied matter to Infratil. Recently, this has seen Infratil reset its investment portfolio to be focused on renewable energy, data, and communications infrastructure. This has seen divestment activity around NZ Bus, ANU student accommodation, and Perth Energy, and the

acquisition of 49.9% of Vodafone New Zealand for $1.029 billion (representing around 20% of Infratil’s assets) and Canberra Data Centres’ (CDC) acquisition of the Eastern Creek data centre campus for around A$100 million. In Marko’s eyes IFT is an “absolute return” fund, which provides steady returns over time while paying a regular distribution to investors. Over the years it has been one of the best performers in the NZ equity market producing a compound total shareholder return of approximately 17%pa over the past 20 years.

So which of Infratil’s assets is Marko most excited about? Time will tell with Vodafone; in the near term CDC and the dark horse in the stable, Longroad, are likely to offer the biggest performance gains.

Canberra Data Centre (CDC)

Inside a Data A data centre is a large group of networked computer servers typically used by Centre organisations for the remote storage, processing or distribution of large amounts of electronic data. Key attributes of a data centre are:

1. Data integrity – Systems should exist to ensure that data is stored and retrieved exactly as it was received from customers. 2. Availability – The data needs to be available when it is required, so absolute reliability is key. Therefore electricity supply, communication connections and air conditioning must be fool proof. 3. Security – Measures need to be put in place to prevent unauthorised access to and alteration of information held on the data centre’s computer servers. Source: Infratil 4. Scalability – Data centres need to be able to scale up to meet the changing needs of customers, without interrupting their current business operations. 5. Capacity – Data centres need to be able to efficiently store and process large and rapidly growing data volumes. Data centre capacity is measured in megawatts (MW).

CDC (IFT ownership 48%) currently has 60MW at two sites in Canberra with another

25MW to be completed by the end of the year. At Eastern Creek in Sydney there is 7MW with the potential to grow up to 120MW. While the contracts at Canberra are generally for

3-4 years with options to extend, the Sydney contracts are for 15 years with revenue

locked in at the rate of inflation.

Longroad Wind Longroad Turbines Longroad (IFT ownership 40%) is a developer of utility-scale wind and solar electricity generation projects in North America, which it then on-sells to long term investors such as pension and insurance funds. Longroad is developing multiple projects of which it has sold two projects totalling 553MW. In 2019, Longroad is developing four projects totalling over 800MW. Many investors will also get Longroad to provide long-term management services for the assets after a sale. Longroad currently services 1,732 MW of electricity capacity. It is estimated that north America requires 100,000MW of new renewable Source: Infratil electricity generation capacity by 2030.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 12 Investment Outlook August 2019

Introducing Ted Tsui - Global Equity Strategist

Joining Jarden in early 2018 Ted brings with him a wealth of experience from his time in Asia working in a range of equity and fixed income research and investment management positions. Although Ted was born in Shanghai, he spent most of his youth in Singapore and completed his tertiary education in Hong Kong. Singapore, in particular, has shaped his careful and disciplined way of researching and analysing companies. Singapore maintains an army of 1.2 million soldiers, with all male Singaporean citizens being required to serve a period of compulsory military service. Consequently, Ted served Ted Tsui two and a half years on a full-time basis in the Singapore Armed Forces, where he

learned the importance of paying attention to details in addition to a standard set of Key Takeaways basic military and survival skills. He was discharged with a unit best soldier award in a coastal defence brigade in 2002.  Robotics engineer turned investment analyst with a On leaving the military, Ted returned to Hong Kong and commenced university. CFA designation Spurred on by an interest in robotics and artificial intelligence, Ted completed a  A prudent, bottom-up, rigorous bachelor degree with honours in automation and computer-aided fundamental and engineering. Right before the 2007 global financial crisis, Ted embarked on a methodological significant career change focusing his attention on the investment industry. This shift investment specialist came with a decision to undertake a further three years of part-time study, which saw  A youthful look belies him achieve the globally recognised Chartered Financial Analyst (CFA) designation. years of extensive Ted’s early years in the investment industry saw him undertake a number of roles, in knowledge and equity and credit research, at various firms in Hong Kong. His professional experience experience includes working for a Geneva-based family office, Sumitomo Mitsui Banking

Corporation and the Asian arm of a European asset management firm, La Francaise

Group. He found his niche as a fundamental-driven and bottom-up investment analyst in managing more than USD 500 million of institutional and high-net-worth client assets. His years of prudent investment experience were built with interviewing top company officials, visiting factories, attending investment conferences, cross- checking ground information with industry experts, scrutinising company disclosures and building complex financial models to draw up various company business scenarios. Analysing companies fascinates Ted, giving him knowledge of what particular companies do, which in turn generates a better insight into how the world operates behind the scenes. Ted, a self-described “infomaniac”, enjoys researching anything from global macroeconomic data to prices at the Albany Pak’nSave. This allows him to form a longer-term and deeper understanding of the country and the industry in question. At Jarden, Ted continues to use the bottom-up and analytical approach he honed in Asia. There is no doubt that Ted’s youthful looks belie his years of experience and extensive knowledge. The evidence of this can be seen in the impressive performance of the Jarden Global Direct Equity model portfolio, which relies heavily on Ted’s expertise and is explained by Ted on the following page.

Away from the office Ted enjoys do-it-yourself (DIY) projects at his North Shore home, cycling and exploring the New Zealand countryside with his wife.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 13 Investment Outlook August 2019

Global Direct Equity Portfolio

Key Takeaways The Global Direct Equity Portfolio commenced on 30 June 2018, with the aim of providing investors with a model portfolio of enduring international businesses. On  Direct ownership of average, the portfolio targets outperformance of the MSCI All-Country World Index enduring (ACWI) by 2% per annum. In its first year, the portfolio generated a total return of 9.4% international businesses in New Zealand dollars (NZD), which was 2.1% more than a passive ACWI portfolio.  A concentrated but The success of the portfolio, in a highly volatile equity market environment, was largely well diversified due to the favorable results of our bottom-up stock selection process. When selecting portfolio of 14-16 a company for the portfolio, detailed analysis of comparable companies is conducted companies in order to identify those that offer superior business performance. A heavy emphasis  Strict risk is placed on the company’s track record to generate a sustainable level of free cash management flow over past economic cycles to ensure that it can indeed create economic value for controls with investors. At the same time, a discounted cash flow valuation is conducted to estimate Investment a reasonable value range for the business. Committee oversight In addition, it would be impossible to deliver good investment performance without observing various risk management rules. The portfolio is highly concentrated, comprising 14 to 16 companies (domiciled outside Australasia) from various sectors and geographic regions. To manage portfolio risk, each company represents between

4% and 10% of the portfolio. At the same time, the aggregate exposure to each sector Disney’s Key Businesses and geographic region is allowed to vary from the proportions in the ACWI by no more than 14%. The portfolio is constantly monitored and reviewed monthly by an investment committee, which consists of Jarden investment professionals across a range of disciplines with many decades of experience. This also ensures that the portfolio’s objectives and risk management restrictions are strictly observed. In line with the portfolio’s aim to adopt a longer-term investment view and keep transaction costs down, a 12-month rolling turnover budget of 50% is observed. Walt Disney (DIS)

Walt Disney (Disney) is one of the better-performing stocks in the portfolio (annual NZD return of 36.6%) and serves as a good illustration of the characteristics we look for when selecting a company for the portfolio.

Although investors may perceive Disney as a company focused only on cartoons and theme parks, it has evolved tremendously in recent years to become one of the three largest media companies in the world. In addition to the traditional cartoon and theme park businesses, Disney has expanded horizontally and vertically into television, film and video-on-demand businesses (i.e. Hulu and Disney+). Through owning a diversified media distribution network and a portfolio of high-quality content beyond cartoons, Disney’s ability to raise prices and generate a growing stream of free cash flow over the past economic cycle has been nothing less than spectacular.

When we added Disney to the portfolio, we were anticipating the creation of an even larger high-quality content portfolio after the acquisition of 21st Century Fox. With the ultimate launch of its own video streaming services in November this year, Disney will further monetise their enlarged content portfolio in multiple ways and deliver unparalleled synergies that are nearly impossible to replicate by its competitors. Disney has executed its strategy well and is on its way to becoming the largest and most competitive media company in the world. We believe Disney’s competitive advantage will continue to stand the test of time and deliver superior returns to investors.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 14 Investment Outlook August 2019

New Zealand Electricity Sector 101

Key Takeaways In New Zealand, a large number of sectors are represented by a single listed company.  Instantaneous However, there are seven sectors comprising three or more companies. Over the electricity coming quarters we plan to provide an overview of each of these sectors and the production and common factors that affect the companies within each sector. We decided to start with consumption the largest sector being the electricity sector which accounts for 19% of the New creates interesting Zealand equity market’s total market capitalisation. Adding to the sectors intrigue is the dynamics recent strong investment returns from long-term interest rates collapsing and changing  Construction and dynamics brought by climate change resulting in a push to reduce carbon dioxide operating costs, emissions. asset life, and capacity utilisation Reported Market Forecast FY20 Dividend Investment Return Carbon vary materially Company Ticker Capitalisation Yield between generation Emissions ($ billion) (CO2e t) types Net Gross 1 Year 5 Year (pa)  Electricity is Contact Energy CEN 5.7 4.9% 6.2% 45.5% 17.1% 1,186,122 expected to Genesis Energy GNE 3.5 5.1% 6.5% 45.6% 24.7% 1,480,180 increasingly Meridian Energy MEL 12.4 4.1% 5.0% 60.3% 48.1% 3,588 displace fossil fuels. Mercury NZ MCY 6.5 3.3% 4.0% 44.4% 23.5% 346,698  The sector could be TILT Renewables TLT 1.2 0.4% 0.4% 34.6% n/a n/a upset by the smelter Trustpower TPW 2.4 4.5% 6.2% 46.3% 19.0% n/a closure or lower Vector VCT 3.8 4.3% 6.0% 23.6% 15.7% 399,015 electricity prices Source: Bloomberg, Jarden, company reports

Electricity is an interesting commodity in that it is consumed immediately after it is generated. This creates a dynamic where electricity generators have to produce electricity to meet demand, which fluctuates significantly during the day (with heavy demand in the early morning and evenings, and limited demand overnight) and at different times of the year (higher demand in the winter than in the summer). As it is undesirable for the lights to go out, different forms of generation have to be brought in and out of production at relatively short notice to meet demand.

The electricity price is determined on a half-hourly basis by electricity generators submitting offers into the market and large electricity consumers and retailers (purchasers) submitting bids to buy electricity. The electricity market is operated by the Electricity Authority.

The electricity sector can be broken down into five distinct parts, which fit together as shown in the diagram below. New Zealand’s Electricity System Source: Electricity Authority

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 15 Investment Outlook August 2019

1. Electricity Generation

Electricity is generated from four energy sources – hydro, wind, geothermal, and thermal (by burning gas or coal). As can be seen from the charts below, hydro generation dominates the New Zealand electricity market with production coming predominantly from four generators.

Hydro Meridian 5%3% 11% New Zealand’s 8% Contact Electricity Sector 16% Geothermal 31% Genesis Broken Down by Thermal 13% 59% Mercury Generation Type and 17% Wind Generator 16% 21% Trustpower Source: Electricity Authority Other Other

Hydro

Hydro electricity is generated from water flowing through a penstock and turning a turbine. While there is some potential to store water behind a dam for future use, water storage in New Zealand is relatively limited. The maximum storage in any year equates to 10% of total electricity production. Consequently, most hydro generation is “run of river”, which means that the electricity is generated as the water naturally flows down the river. This forms base load generation, while water stored behind dams can be

used to meet peaks in demand. Unfortunately, during dry years there is less water Construction Cost: high flowing down rivers to generate electricity and, therefore, less hydro-electricity Life: 100 years + generation. The capital cost of building hydro electricity generation is very high as Capacity utilisation: 65% dams are very expensive, although the key factor preventing further hydro development is the difficulty in getting resource consent as much as construction costs. Once built, hydro generation lasts a very long time (100 years plus) and the cost of generating electricity is low as water costs nothing. Consequently, when there is a lot of water available wholesale electricity prices are low. However, when there is a lack of water, electricity prices rise reflecting the cost of having to generate electricity from

more expensive energy sources.

Wind

Wind generation is relatively expensive to build (around $2 million per megawatt), but not as expensive as building a dam. Once built, the cost of generating electricity is low as wind doesn’t cost anything. However, the maintenance costs on wind turbines are higher as the variability of wind speeds and direction is tough on the turbines. This also means that they don’t last as long as hydro dams, with a typical life of 25-30 years. Based on the current costs of constructing and operating wind generation, it is the most economic form of new electricity generation and thus sets the long-run cost of Construction cost: $2 electricity in New Zealand used to value electricity generation assets. A key issue million/ megawatt associated with wind farms is that they only generate electricity when the wind is Life: 25-30 years blowing. Hence, wind farms have to be located in areas that have reliably consistent Capacity Utilisation: 40% wind conditions. Due to the day-to-day variability of wind in New Zealand, wind farms typically operate at 40% capacity utilisation. Geothermal Geothermal electricity uses geothermal steam as a heat source to turn a turbine. Building a geothermal generation plant is relatively expensive, involving the drilling of a number of geothermal wells and connecting them up to a generation plant. While the geothermal steam is free, it is hard on the plant, which means maintenance cost are high. Geothermal generation has the advantage that the steam comes out of the ground consistently and is unaffected by weather conditions. It thus represents

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 16 Investment Outlook August 2019

Construction cost: $4 baseload generation. It is worth noting that geothermal generation results in million/ megawatt greenhouse gas emissions that are released as the geothermal fluid is extracted from Life: 30 years the reservoir. Capacity Utilisation: 98% Thermal

Finally, there is thermal generation, which is typically fuelled through burning gas or coal. The construction costs of a thermal generation plant are relatively low. However, the cost of fuel, gas or coal, is high. The advantage of a thermal plant is that fuel sources can be stored and used as required. Consequently, thermal electricity generation is often used to meet peaks in electricity demand or when other types of generation are not producing electricity. Burning coal and gas creates a significant amount of carbon dioxide. Hence, as the cost of producing carbon dioxide rises so Construction cost: $1-1.5 does the cost of producing electricity from thermal generation. Currently the carbon million/ megawatt cost is capped at $25/t. However, it could easily rise to $50/t or much higher based on Life: 30 years various academic studies. Capacity Utilisation: 90% Solar

Apart from a modest number of solar panels on roofs the amount of solar generation in

New Zealand is very small. The largest solar electricity plant is currently being built by

New Zealand Refining in Whangarei (capacity 26MW, covering 31 hectares). This

development is expected to have a very low capacity utilisation of only 15%.

2. Electricity Transmission

Once the electricity is generated it has to be transported from the point of generation to the point of consumption. The first part of this transportation process is undertaken by The high voltage the high voltage network, otherwise known as the National Grid (Grid), which is owned network (National Grid) and operated by Transpower (100% government owned). The Grid is capable of is owned and operated transporting electricity from one end of New Zealand to the other. As the Grid is a by Transpower monopoly the amount that it can earn from transporting electricity is regulated. The regulation is overseen by the Commerce Commission and pricing is reset every five years. The flow of electricity through the Grid is managed by the Independent System Operator which is owned by Transpower, but operates independently.

3. Electricity Distribution

Once the electricity exits the Grid it is transported to its final destination for Low voltage networks consumption via low voltage networks. The low voltage networks are owned by lines are owned by lines companies of which there are 30 in New Zealand. As the lines companies have companies of which monopolies in the areas serviced by their networks, the amount they can earn is there are 30 regulated. As with Transpower, the regulation is overseen by the Commerce Commission and pricing is reset every five years. The largest lines company is Vector (VCT), which serves Auckland. VCT also owns an electricity metering business. Metering is not a monopoly, which means that VCT can set its own prices for providing metering services.

4. Electricity Retailers

Electricity consumers buy electricity off electricity retailers who buy the electricity off

electricity generators. In New Zealand, it is common for companies to both generate

and sell retail electricity. However, there are an increasing number of niche retail

electricity companies which purchase electricity off the generators to supply their

customers. The electricity price is extremely volatile, often rising or falling by 20% or

more on a weekly basis.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 17 Investment Outlook August 2019

100

Electricity – The 80 Most Volatile Commodity Known 60 to Man 40 Source: Bloomberg 20

0

-20

-40 eekly Electricityeekly Price Change (%)

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Jul 18 Sep 18 Nov 18 Jan 19 Mar 19 May 19 Jul 19

Typically, electricity retailers sell electricity to households based on a fixed tariff, which includes the electricity generation, transmission and distribution costs, plus a profit margin. The electricity retailer, therefore, absorbs the electricity price fluctuations. When electricity prices are low they make large profits and when electricity prices are high they make losses, which averages out over time. Furthermore, as most retailers are also generators, during times of high prices the generation division does well at the expense of the retailing division, and the opposite occurs when electricity prices are low. Many of the smaller electricity companies provide electricity at prices that reflect the volatile wholesale price. In the long term, their customers should make savings. However, their electricity bills will fluctuate significantly from month-to-month, not only due to the amount of electricity used, but also due to price of electricity.

5. Consumers Electricity consumers range from households, small-to-medium sized industrial and commercial users, through to large users such as the Kawerau pulp and paper mill, NZAS consumes 13% of Glenbrook steel mill and New Zealand’s Aluminium Smelter (NZAS - which consumes the country’s electricity 13% of the country’s electricity production annually). For some time now, growth in annually electricity demand has been around 0.5%pa. Domestic demand is driven by the growth in the number of households. However, while there are more households, the use of more efficient appliances (e.g. heat pumps and LED light bulbs) results in a gradual fall in electricity usage per household. Growth in industrial and commercial demand is influenced by similar factors.

Being a key commodity in today’s modern world the electricity price is always a potential target for politicians if prices rise too quickly. This has seen the recent publication of the 2018-2019 Electricity Price Review.

The Energy of the Future

Looking forward there is a major drive towards reducing carbon emissions in an effort to keep the level of global warming to no more than 1.5-2.0°C above pre-industrial Electricity demand levels by 2050. As a result, renewable electricity demand growth is likely to increase growth is expected to from the current 0.5%pa to around 2.0%pa over the coming decades. It is expected that increase from the electricity generated by renewable sources (wind and geothermal) will displace fossil current 0.5%pa to fuels both in industrial processes (e.g. milk powder driers) and transport (vehicles). The around 2.0%pa extent of the extra generation capacity needed in New Zealand will be partially impacted by whether NZAS continues to operate its smelter at Bluff. At this stage, there is no imminent sign that they may close down the smelter having just re-energised their fourth pot line. Its current supply contract with Meridian Energy expires in 2024. At this time they may decide not to renew their contract and shut the smelter down. We expect negotiations on a potential new contract to commence in 2022-2023.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 18 Investment Outlook August 2019

While the majority of the new generation is expected to be from renewable sources, there is always likely to be a small amount needed from thermal electricity generation in New Zealand to ensure continuity of supply in extreme climatic conditions

Electricity Sector Outlook

The electricity sector faces a dynamic outlook driven by a step up in electricity demand

and the construction of new generation following an extended period of no new

development. In addition, there are two events that could have a material impact on the

electricity price and, thus, the value of electricity generation assets. They are the

potential closure of the NZAS’s Tiwai Point smelter and potential change in the

economics of wind generation should cheap capital become freely available. The

availability of cheap capital is a real possibility on the back of low interest rates and the low returns needed to satisfy foreign investors (e.g. sovereign wealth funds) looking to invest in long-term stable assets such as electricity generation assets. Under this scenario the real electricity price could reduce from our expected $80/MWh to $60/MWh in the mid-2020s. While a lower electricity price would be negative for electricity generation asset valuations, this would be offset to varying degrees through

the use of a lower capital cost.

Valuation Under Valuation Under Company Ticker Share Price Target Price * Company Target Scenario 1 ** Scenario 2 *** Prices and Potential Valuations Contact Energy CEN $7.92 $7.01 $6.02 $7.80 Source: Jarden Genesis Energy GNE $3.42 $2.17 $1.85 $1.92 Meridian Energy MEL $4.83 $3.22 $3.23 $4.32 Mercury NZ MCY $4.79 $3.47 $3.11 $3.92 TILT Renewables TLT $2.65 $2.34 n/a n/a Trustpower TPW $7.59 $5.39 $4.72 $6.98

Vector VCT $3.86 $3.27 n/a n/a * Base Case: 8.05% cost of capital, $80/MWh electricity price ** Scenario 1: Tiwai closes in January 2021, $80/MWh electricity price by 2027 *** Scenario 2: Low cost of capital (6.0%), $60/MWh electricity price by 2023 Sector Preferences

Contact Energy (CEN) We regard CEN as well positioned to be relatively safe from regulatory and electricity supply/demand disruptions through its adoption of a cost-light, fast-follower retail strategy. In addition, CEN has strong opportunities to participate in renewable electricity growth and industrial electrification.

Mercury NZ (MCY) MCY has a fairly stable earnings path, the most natural competitive advantages, fewest moving parts, and least negative exposures within the sector. Its predominately upper

North Island portfolio offers a degree of insulation from a potential NZAS exit in the future. MCY is a 100% renewable generator, trading effectively in the wholesale market and continues to be an excellent retail operator, despite the high level of competition.

TILT Renewables (TLT) TLT develops, owns and operates wind farms in Australia and New Zealand. It currently has two sizeable projects (Dundonnell and Waverley) being developed. It also has development options totalling around 2,700MW (with approvals) positioned for eventual development. Furthermore, TLT has significant upside potential from the sell- down of existing windfarms to third parties which are prepared to pay high prices and accept low investment returns.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 19 From: [email protected] To: [email protected]

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Given clearer dividend guidance, our analyst has retained a ‘Neutra l’

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This is what true wealth management looks like. Available on application. Investment Outlook August 2019

New Zealand Equities Share prices as at 1 August 2019

Kathmandu (KMD)

Price $2.11 KMD’s share price has retraced 7% since releasing its 1H19 profit in late March, in an Target Price $2.75 equity market which is up circa 13%. The material underperformance appears to Rating Outperform reflect slower underlying growth in the core Australasian business and adverse climatic conditions (mild autumn/winter in both New Zealand and Australia) that have weighed on investor sentiment given the importance of the winter selling season and the previous build-up of inventory that occurred in 1H19. However, while we are also cautious on gross margins and operating expenses which have resulted in earnings downgrades for the company, we believe the current share price more than adequately factors this in. KMD is now trading on a price-to- earnings (P/E) multiple of circa 9x, despite continuing to guide towards earnings growth, having a strong balance sheet and attractive capital light growth options through the expansion of its global wholesaling activities and Oboz footwear business. We expect KMD to maintain a strong free cash flow profile over the medium term which should support its attractive forecast dividend yield of 10-11%.

Mainfreight (MFT)

Price $42.01 MFT’s FY19 profit in May signified a defining moment for the company with strong Target Price underlying profit growth across all regions it operates in, resulting in group earnings Rating Under Review growth of 19.3%. The US and Europe were the key growth contributors with 30% and 24% earnings growth respectively in 1H19, largely due to margin expansion that was well ahead of expectations due to lower costs in both regions and better utilisation in the US. With MFT achieving sufficient network intensity, the resulting operating leverage gives us greater confidence that these businesses will be able to achieve a return on invested capital in excess of that required. This backdrop provides the potential to unlock significant valuation upside if management can successfully execute. Further upside exists if MFT can increase market share in these growing markets. Following the rise in share price, MFT now trades on a 26x PE ratio, suggesting investors have already begun to recognise MFT’s improved growth profile. That said, MFT remains a high quality, growth company.

Metlifecare (MET)

Price $4.37 MET has been a perennial underperformer in a sector combatting a slowing Target Price $7.00 housing market, particularly in Auckland where MET has around 64% of its current Rating Outperform units located and 98% of its development pipeline. Consequently, MET reported softer than expected 1Q19 sales which included declining resale gains yet to be seen in the other listed retirement village operators. While we acknowledge MET has an older, less diversified portfolio and is yet to demonstrate the development capability of its peers, the 37% discount to our valuation and its own net tangible asset (NTA) value appears overdone. Supporting our view of undervaluation is MET’s land bank which has increased to provide over 5 years of development opportunities (representing $1.70/share of our valuation). This underpins our expectation that new sales will ramp up from the underwhelming 56 units sold in 1H19 as the build rate increases with 145 units forecast in FY19, 200 in FY20 and 230 in FY21. Importantly, current development margins remain robust at 33%. Trading on a PE ratio of 10.9x, most visible concerns appear all but factored in. Consequently, we feel MET offers good value in an equity market which appears expensive.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 21 Investment Outlook August 2019

Port of Tauranga (POT)

Price $6.18 We view POT as a high quality infrastructure asset that is very well positioned to Target Price benefit from structural change as New Zealand’s container trade progressively Rating Under Review moves towards a hub and spoke model. That said, its high valuation multiples (a near record high 23x EV/EBITDA ratio for a business delivering mid-single digit earnings growth) remain the limiting factor to a more positive view on POT. Further earnings upside appears limited with slower world trade, a normalisation in container transhipments growth and pressure on log exports given the recent 25% decline in log prices (every 1 million tonnes of log exports generates around $5 million of earnings). POT’s underlying business remains robust with the market share of its container business having increased to just under 60% in a market expected to grow at 6%pa over the forecast horizon. Any relocation/downsizing of Ports of Auckland could accelerate the upside for POT, although it would come with additional capital expenditure requirements. While no growth in log export volumes

is expected over the next two years, FY21 should mark the start of the “wall of wood” which will see a significant rise in tree harvesting and log exports over the remainder of the decade. Consequently, POT appears well-positioned longer term.

SkyCity Entertainment (SKC)

Price $4.05 In FY21, SKC’s earnings are expected to be driven by Auckland 81%, Adelaide 10% Target Price $3.85 (post a A$330 million casino redevelopment), Hamilton 7% and Queenstown 2%. Rating Neutral The Auckland casino asset is relatively mature and hence has relatively low earnings growth. Earnings from the Adelaide casino are expected to jump materially in FY21 following the redevelopment of the casino, which should see it increase its share of the South Australian gaming market. A review of gaming legislation in South Australia may see note acceptors allowed on the main gaming floor. SKC’s management has a cautious outlook reflecting the challenging domestic and international environment. Consequently, forecast earnings and dividend growth over the next 2-3 years is negligible. SKC has a share buy-back of up to $125 million in operation over 2019 and forecast 6.2% gross dividend yield which should support the share price. SKC trades on a FY20 PE multiple of 17x, while Crown is on 22x (inflated by the Crown Sydney development) and Star Entertainment is on 16x (depressed by Crown’s Sydney development). While forecast earnings growth is limited there is modest upside potential from introducing note acceptors in

Adelaide and Adelaide redevelopment completion in FY21.

Z Energy (ZEL)

Price $6.51 The market appears sceptical on ZEL as a dividend yield stock. The company has Target Price $6.30 reaffirmed dividend guidance of 48-54 cents per share for FY20. At the midpoint of Rating Neutral range this implies a gross dividend yield of 11%. Despite the high dividend, ZEL’s share price has lagged the re-rating other high yielding NZ stocks have enjoyed as interest rates have declined in recent months. Consequently, investors must either be questioning the sustainability of the dividend or the company in general. On the first point, we believe the dividend is sustainable with future initiatives expected to add up to $30-40 million per year. This is forecast to offset the margin erosion from independent retail competitors such as Waitomo and Gull expanding to the lower North Island and South Island, where the incumbents have enjoyed high fuel margins. In terms of the “sunset industry” ZEL operates in, valuations can vary

substantially depending on how quickly electric vehicle penetration is expected to

occur. Our ZEL valuation assumes there are 1 million electric vehicles in NZ by Photos source: company presentations 2036, which represents 20% of the NZ light vehicle fleet. This is expected to reach 45% by 2050. The draft release of the Commerce Commissions’ retail fuel market study in August-September will be an important milestone for ZEL. We expect a relatively benign outcome and remain comfortable with ZEL’s risk/reward proposition.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 22 Investment Outlook August 2019

New Zealand Equities Valuation Metrics and Ratings

Security Issuer As at 1 August 2019 Name Gross Dividend Yield % AFT AFT Pharmaceuticals AIA Auckland Airport 14.1% AIR Air New Zealand 12% APL Asset Plus ARG Argosy Property ATM The a2 Milk Company 10% AUG Augusta Capital CEN Contact Energy CNU Chorus CVT Comvita 8% DGL Delegat Group EBO Ebos Group ERD EROAD FBU Fletcher Building 6% FPH F & P Healthcare FRE Freightways FSF Fonterra GMT Goodman Property Trust 4% GNE Genesis Energy GTK Gentrack HGH Heartland Bank 2% IFT Infratil IPL Investore Property KMD Kathmandu KPG Kiwi Property Group 0% MCY Mercury NZ IFT IPL PFI AIA AIR TLT ZEL FSF APL SKL SKT SCL STU SPK FBU NZX SEK FRE VCT PCT NZK FPH VGL MHJ NZR SKC MEL VHP SAN GTK POT DGL MFT CEN SPG KPG EBO MET ATM GNE ARG AUG CNU OCA KMD HGH TPW GMT MCY SUM RYM WHS MEL Meridian Energy NZ50 MET Metlifecare MFT Mainfreight P/E Ratio x MHJ Michael Hill International MPG Metro Performance Glass NZK NZ King Salmon 50 468x NZM NZME 89x NZR NZ Refining 59x 45 58x NZX NZX OCA Oceania Healthcare POT Port of Tauranga 40 PCT Precinct Properties PFI Property for Industry 35 RBD Restaurant Brands RYM Ryman Healthcare 30 SAN Sanford SCL Scales Corporation 25 SEK Seeka SKC SkyCity Entertainment 20 SKL Skellerup SKT Sky Network TV SML Synlait Milk 15 SPG Stride Property SPK Spark NZ 10 STU Steel & Tube SUM Summerset 5 TLT Tilt Renewables TPW Trustpower 0 VCT Vector IPL IFT PFI AIA AIR TLT ZEL FSF SKL APL AFT SKT SCL STU FBU SPK NZK FRE NZX SEK CVT PCT VCT FPH VGL MHJ MFT SAN SML SKC DGL VHP GTK POT MEL MET SPG EBO KPG RBD ATM CEN ERD NZM OCA AUG ARG GNE CNU KMD HGH SUM RYM TPW GMT MCY MPG WHS VGL Vista Group International NZ50 VHP Vital Healthcare Property WHS Warehouse Group Underperform Neutral Outperform ZEL Z Energy AIA ARG CNU AIR ATM APL AFT NZ50 NZ Equity Market GNE CEN CVT FBU FRE AUG ERD NZM DGL EBO FSF IFT KMD Source: Jarden PFI FPH GTK HGH NZK MET RBD GMT IPL KPG OCA MHJ The P/E ratios and Gross Dividend Yield use earnings and dividends RYM MCY PCT NZR SKL MPG forecasts for the next 12 months SML MEL WHP NZX STU SAN TPW MFT SKC TLT SEK VGL POT SPG ZEL SKT SCL WHS SUM SPK VCT

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 23 Investment Outlook August 2019

Australian Equities Share prices as at 1 August 2019

Aristocrat Leisure (ALL)

Price $30.44 Industry data suggests that ALL’s business is maintaining strong momentum. ALL is Target Price $30.00 outperforming its peers in Australia with new slot machine games bringing its total to Rating Outperform 47,000 machines, which represents about a quarter of the country's total. This bodes well for ALL’s North American strategy to grow market share as ALL is currently the smallest of the three operators and is underrepresented in a number of key US states. We estimate that a 1% lift in ALL’s market share increases revenue US$60 million. On the digital side, ALL’s businesses have experienced mixed results, although in aggregate are growing strongly. Social gaming is growing strongly (around 30% revenue growth), while social casino revenue growth is more tepid (around 5% revenue growth). The success of Lighting Link in casinos should assist future social casino growth. It is important to note that social casino profit margins are twice those of social gaming margins. Social gaming and social casino industry growth is around 10% per annum.

Cleanaway (CWY)

Price $2.41 CWY is a leading provider of waste management and environmental services in Target Price $2.15 Australia. CWY’s share price is up 48% year-to-date with revenue and earnings Rating Neutral improvement driven by the Toxfree acquisition, organic growth (major contract wins) and realisation of synergies from strategically significant infrastructure assets improving CWY’s vertically integrated model. We remain positively disposed to CWY given its high level of earnings visibility, underpinned by growing waste volumes per capita, improving waste recovery rates and industry consolidation. A conservative balance sheet (net debt/EBITDA of 1.5x) and undemanding dividend payout ratio (50%) allow growth options to be pursued. Offsetting this optimism somewhat is CWY’s high price/earnings multiple of 29x. If CWY can continue to deliver double digit earnings growth, the ratio should fall back to the low-20s in FY22. Longer term,

CWY remains well placed to benefit from structural changes in waste management with higher regulatory imposts creating higher barriers to entry and a growing

requirement to provide sustainable waste solutions.

CSL (CSL)

Price $228.90 Within CSL’s core business we believe it remains the best placed amongst its peers Target Price $199.00 to benefit from increased demand for immunoglobulin (IG) products. CSL’s Rating Neutral competitors have been slow in rolling out new plasma collection centres. We expect CSL to grow IG sales by 13% in FY20 and by 12% in FY20. CSL’s vaccine business, Seqirus, is the world’s second largest influenza business which partners with governments around the world to provide a broad range of influenza vaccine products. The business has moved from a loss in FY16 to generating what we expect to be US$1.3 billion in sales in FY20 at a profit margin of circa 20%. Seqirus remains a highly attractive part of CSL that is well placed to benefit from both volume and price growth in the future. However, given the recent rally in CSL’s share price back to $230/share (34x PE ratio, relative to a two year average of 31x), it appears most of these positives have been priced in. This implies little margin for error while risks are present, specifically the need to receive Chinese regulatory approval for Albumin and the significant expense of Phase 3 trials relating to the

much anticipated CSL112 for potential use in treating cardiovascular disease.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 24 Investment Outlook August 2019

Lend Lease Group (LLC)

Price $14.57 LLC is an international property and infrastructure group with operations in Target Price $16.20 Australia, Asia, Europe and the Americas. Its core business is developing, Rating Outperform constructing, and owning/co-owning assets. LLC’s offshore exposure offers substantial growth opportunities, especially in the area of urban regeneration. One recent example is the deal with Google to undertake a A$21 billion residential development. Earnings should materialise from FY21 and could add $1.50- 1.90/share to LLC’s valuation. LLC’s development pipeline is now approaching $100 billion, providing a strong earnings profile over the medium-to-long term. This helps explain the relatively elevated 13x PE ratio LLC trades on. A key catalyst for LLC is the exit from of its problematic engineering construction business of which the outcome could be announced with its FY19 profit in mid-August. Expectations are that it will cost LLC more than the $0.5 billion provision and $0.2 billion cash drag from problematic development projects to exit this business. A net neutral-to- positive outcome would likely be seen as positive for LLC. As a developer, LLC is prone to certain risks. Current risks include apartment settlement risks, delays on multi-year projects and its UK developments which could be adversely affected by Brexit or a potential change in government.

QBE Insurance (QBE)

Price $12.52 QBE's underlying business is moving in the right direction, but falling bond yields Target Price $12.55 have created a headwind for its fixed income portfolio, with the estimated running Rating Neutral yield declining 0.4% to 2.8%. This appears to be weighing on its share price, which is down 3.4% over the past 3 months relative to the 9% gain of the Australian equity market. We believe the market’s view of future interest rates is too pessimistic, and we see potential for a less dovish US Federal Reserve and consequently modestly higher interest rates over the second half of the year. The broader insurance industry is still seeing greater insurance premium rate increases than expected. While QBE is on track to achieve the top end of its Combined Ratio Target (claims and operating costs against premium income) of 94.5%-96.5% in FY19, this should fall to 94.4% in FY20. For QBE, the premium rate momentum is beginning to spread to liability products where QBE has a greater exposure. The risk for QBE is a difficult crop insurance season in the US that creates some second-half profit risk, despite a generally benign period for natural disasters over the first-half.

South32 (S32)

Price $3.10 S32’s share price has recently been a laggard in the resource sector, reflecting Target Price $3.50 weaker base metal prices, specifically aluminium, alumina and manganese, while Rating Outperform having no exposure to the very strong iron ore price. Hence, investors appear justifiably concerned about the company’s short-term earnings. However, we see limited downside risk to S32’s commodity prices. Furthermore, S32 had a solid finish to FY19 operationally and still has a number of self-help and restructuring initiatives designed to improve its profit performance. These include the acquisitions of Arizona Mining (potentially a $2 billion US mining project) and Eagle Downs (a fully permitted, partially developed metallurgical coal project in the US) and the creation of an exploration portfolio comprising 18 greenfield exploration projects. In addition, S32 is attempting to offload its poor performing South African coal business and is considering selling, closing or suspending its smelters in Australia. S32 is going through a period of reduced investment allowing for capital returns whilst maintaining a strong balance sheet (remains in a net cash position) for potential opportunistic acquisitions. Consequently, we believe S32 represents an interesting

Photos source: company presentations investment opportunity, especially given the near term catalysts, being the expected extension of its share buy-back programme by $150-200 million (increasing value

per share of 3.0-3.5%) at its August 22 profit result and the sale of the South African coal business later in the year.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 25 Investment Outlook August 2019

Australian Equities Valuation Metrics and Ratings

Security Issuer As at 1 August 2019 Name Cash Dividend Yield % AGL AGL Energy ALL Aristocrat Leisure 14% AMC Amcor 7% AMP AMP ANZ ANZ Banking Group 6% APA APA Group ASX ASX AZJ Aurizon 5% BHP BHP BXB Brambles CBA Commonwealth Bank 4% COH Cochlear COL Coles CPU Computershare 3% CSL CSL CTX Caltex Australia FMG Fortescue Metals 2% GMG Goodman Group GPT GPT Group IAG Insurance Australia Group 1% JHX James Hardie Industries LLC Lend Lease MGR Mirvac Group 0%

MPL Medibank Private IAG RIO AZJ S32 ORI ALL LLC TLS TCL JHX SHL CSL ANZ AGL APA CTX ASX BXB VCX NAB BHP CBA SYD GPT MPL COL STO SGP SUN QBE CPU SCG AMP WPL QAN OSH RHC FMG AMC TWE COH ORG WES NCM WBC MGR MQG GMG MQG Macquarie Group WOW NAB National Australia Bank ASX200 NCM Newcrest Mining ORG Origin Energy ORI Orica P/E Ratio x OSH Oil Search QAN Qantas 59x QBE QBE Insurance 40 48x RHC Ramsay Health Care 44x RIO Rio Tinto 35 S32 South 32 SCG Scentre Group SGP Stockland Group 30 SHL Sonic Healthcare STO Santos SUN Suncorp 25 SYD Sydney Airport TCL Transurban 20 TWE Treasury Wine VCX Vicinity Centres WBC Westpac 15 WES Wesfarmers WOW Woolworths 10 WPL Woodside

5 ASX200 Australian Equity Market 0 IAG RIO S32 ALL AZJ ORI LLC TLS JHX TCL SHL CSL ANZ AGL CTX BXB ASX APA STO NAB VCX BHP CBA GPT COL MPL SYD SGP QBE SUN CPU AMP QAN SCG OSH WPL RHC FMG AMC TWE COH ORG WES NCM WBC MGR MQG GMG Source: Credit Suisse, Bloomberg. WOW The P/E ratios and Dividend Yield ASX200 use earnings and dividends forecasts for the next 12 months Underperform Neutral Outperform ANZ COH AGL AMC BHP CTX ALL ASX COL AMP CPU BXB GMG AZJ MPL IAG APA FMG QBE LLC JHX NCM OSH CBA GPT SUN MQG S32 SGP RHC CSL NAB WBC ORG SCG SYD RIO MGR ORI QAN WPL TCL SHL TLS STO TWE WES WOW VCX

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 26 Investment Outlook August 2019

Global Equities Share prices as at 1 August 2019

Alphabet (GOOGL)

Price US $1,211 GOOGL is the largest and the most competitive internet search engine company in the Target Price US $1,500 world. The company ranks amongst the top in the areas of internet advertising, Rating Outperform smartphone application distribution, video streaming and cloud computing.

GOOGL’s profit margins have declined in recent years as it responded swiftly to a number of content, privacy and antitrust issues concerning various areas of its business. While the company is still subject to an anti-trust investigation in the US and is very likely to face a fine, core profitability seems to have stabilised as shown in the June quarter profit result. In the quarter, GOOGL’s total revenue rose 19% to US$39 billion, driven by a 40% increase in GOOGL’s other revenues to US$6.2 billion as a result of higher demand for Google Cloud and apps in Google Play. GOOGL’s advertising revenue increased an impressive16% to US$32.6 billion. On the other hand, key cost

items including research and development, and sales and marketing only grew by

17%, which was a slower pace than revenue growth. This boosted GOOGL’s operating

profit margin and may signal a bottom in profitability. We believe the company will emerge strong after the anti-trust investigation and continue to maintain an irreplaceable position in the internet industry. Amazon (AMZN)

Price US $1,855 AMZN is the largest e-commerce company in the world with heavy e-commerce and Target Price US $2,225 cloud computing exposure. Similar to Alphabet, the company also faces anti-trust Rating Outperform investigations by US regulators. While it will likely face a fine in the near term, its recent profit results highlight that the company is at an inflection point in terms of future free cash flow growth.

In 2Q19, AMZN’s revenue grew by 20% (or US$11 billion) to US$63 billion. While AMZN continues to incur a high non-cash depreciation expense that limits profitability, quarterly cash flow from operations actually increased at a faster pace than revenue of

22% (or US$1.7 billion) to US$9.1 billion. We believe that the company has now passed its peak investment phase. Therefore the company’s future free cash flow generation profile should continue to improve. Specifically, investment in core operating assets should be lower than the depreciation expense. We believe the potential fine will only hurt AMZN’s pride and not its long term competitiveness. We believe short term share price weakness provides a good opportunity to accumulate AMZN shares.

Caterpillar (CAT)

Price US $126.79 CAT is one of the largest construction and earthmoving machinery companies in the Target Price US $165.00 world. Consequently, it should have benefited from an increase in infrastructure Rating Outperform construction, especially that generated from emerging economy stimulus. However, competitive price pressure in China negatively impacted CAT’s most recent quarterly profit results. This came as a surprise as smaller Chinese competitors reported a doubling in profits. We are concerned that CAT’s 2019 profit guidance may prove to be too optimistic. Specifically, the company expects a strong demand recovery in the North American oil and gas industry and expects CAT dealers to increase sales and thus reduce inventory. Furthermore, CAT’s business in China may continue to be under pressure. As such, the shorter term upside in CAT’s share price may be limited unless

developments in these areas turn out to be more favourable.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 27 Investment Outlook August 2019

Intel (INTC)

Price US $49.50 INTL is a world-leading computer chip maker who is well-positioned to capture the Target Price US $58.00 increasing computing demand. INTL recently announced a good quarterly profit result. Rating Outperform Management expects demand in 2H19 will likely be stronger on the back of higher computing needs. Specifically, INTL revised up their 2019 profit guidance due to healthy PC and data centre demand ahead. At the same time, selected business segments of INTL are well-positioned to capture the growing demand in network infrastructure, internet-of-things and autonomous driving. Revenue in these areas has been growing at a double-digit rate. In the near-term, the sale of INTL’s 5G smartphone modem business to Apple for US$1 billion crystalises a financial gain for INTL. It also allows INTL to maintain access to critical intellectual properties so it can focus on its 5G network infrastructure business. With the launch of INTL’s new 10 nano-metre products in 3Q19 and a potential normalisation of the China-US trade relationship, we believe INTL will continue to benefit from the long term structural increase in data

processing demand.

MasterCard (MA)

Price US $274.16 MA is a direct competitor of Visa in the payment processing industry with 2.1 billion Target Price US $292.00 cards in circulation. In the year ending 31 March 2019, MA handled US$6.0 trillion Rating Outperform worth of transactions. Compared to Visa, MA has a higher proportion of credit card transactions, with 51% of MA’s transaction amount done through credit cards and 49% done via debit cards.

Last year MA’s total number of cards increased 12% which was a faster pace than Visa. Total transaction volume also grew at a faster pace, growing 19% to 94 billion transactions. As a result, MA’s revenue grew 14% to US$22 billion, while net profit was up by 16% to US$12 billion. MA’s net profit margin improved from 32% to 41%.

Just like Visa, MA will benefit from the rising trend of electronic payments (e-payments). While MA’s business largely mirrors that of Visa’s, it is smaller in size and has a higher

exposure outside North America. While MA may be exposed to more risk in emerging

markets, this exposure and MA’s smaller size may help MA grow at a faster pace than

Visa.

Morgan Stanley (MS)

Price US $42.93 MS is one of the world’s largest investment banks with a global presence. The Target Price US $55.00 company recently announced a mixed quarterly profit result characterised by a Rating Outperform declining trend in return on equity and a more cautious business outlook. We are becoming increasingly concerned with MS’s ability to further improve its profitability on the back of a slowing global economy and flat yield curve. In 2Q19, MS’s net revenue fell 2% to US$10.2 billion. The decline was mainly driven by poor performance in its Investment Banking and Trading business units, which account for 42% of MS’s total revenue. MS also failed to keep costs under control which saw its efficiency ratio (calculated as expenses divided by net revenue) increase from 71% to 72%. Management also highlighted that faster-than-expected interest rate cuts will likely have a more negative impact on the company’s future profits. Consequently, we believe MS’s share price offers limited upside given the more negative outlook.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 28 Investment Outlook August 2019

UnitedHealth Group (UNH)

Price US $249.25 UNH is the largest healthcare insurer and services provider in the US. UNH directly Target Price US $293.00 serves 44 million Americans through its medical facilities and insurance unit. It also Rating Outperform indirectly handles 95 million patients’ records, referrals, and prescriptions as well as the operations management for a group of external healthcare providers through its self-

developed medical information system called Optum.

UNH recently announced a good quarterly profit and upgraded its full-year profit outlook due to growth in its client base. In 2Q19, UNH revenue was up by 8% to US$47 billion while net profit was up by 13% to US$3.3 billion. Given its strong financial performance and dominant position within a growing industry, we believe UNH will continue to benefit from the rising long-term need for better and more comprehensive healthcare services in the US.

Visa (V)

Price US $179.17 Visa is the largest pure payment processing company in the world with 3.3 billion cards Target Price US $203.00 in circulation. In the past year, Visa handled US$11.5 trillion worth of transactions of Rating Outperform which 44% was done through credit cards and 56% via debit cards.

Although the total number of cards only increased by 3%, total transaction volume grew at a much faster 12% to 135 billion transactions. This helped Visa grow its revenue by 11% to US$22 billion. Furthermore, net profit was up 14% to US$12 billion and the net profit margin was up from 48% a year ago to 53%.

Visa should continue to benefit from the theme of rising e-payment popularity and provide investors with stable growth.

Walmart (WMT)

Price US $109.38 WMT is the second largest e-commerce retailer in the US after Amazon and has Target Price US $103.00 benefited from the rising popularity of online shopping. Rating Neutral WMT recently announced a profit that beat market expectations, partly due to better than expected e-commerce sales growth. In 1Q20 (WMT’s fiscal year ends in January), WMT’s US e-commerce sales were up 37% due to better growth in Grocery as well as products under the Home and Fashion categories. Overall, WMT’s 1Q20 core earnings per share grew by a strong 14%. WMT is expected to generate US$15.3 billion of free cash flow in the coming year and has net debt of US$54 billion. Based on current market expectations, WMT’s free cash flow generation is forecast to fall by 11% in FY20 before growing by 4-5%pa in the following two years.

While WMT is currently trading above its target price, we expect with further in-store improvement that WMT’s share price can continue to increase in value.

Photos source: company presentations

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 29 Investment Outlook August 2019

Global Equities Valuation Metrics and Ratings

Security Issuer Name As at 1 August 2019

MMM.US 3M Cash Dividend Yield % 1288.HK Agri. Bank of China 1299.HK AIA Group 6.9% 6% AIR.EU Airbus SE 6.4% GOOGL.US Alphabet AMZN.US Amazon 5% ASML.EU ASML Holding T.US AT&T BAC.US Bank of America Corp. 4% BASF.EU BASF BA.US Boeing BP.LN BP 3% CAT.US Caterpillar 0939.HK China Construction Bank 0941.HK China Mobile 2% C.US Citigroup CMCSA.US Comcast 1% XOM.US ExxonMobil Corporation FB.US Facebook GE.US General Electric 0% GS.US Goldman Sachs BP 3M J&J Visa CCB ICBC AT&T HD.US Home Depot BASF ASML LVMH Nestle Airbus Inditex Oracle Boeing Comcast Citigroup ITX.EU Inditex SoftBank Agri. BOC Agri. JPMorgan Caterpillar Intel Corp. Intel AIA Group AIA PetroChina ExxonMobil Merck & Co Merck MasterCard Wells Fargo Wells Walt Disney MSCI ACWI MSCI

1398.HK ICBC UnitedHealth China Mobile China Pacific Union Toyota Motor Toyota Schlumberger Mitsubishi UFJ Mitsubishi Morgan Stanley Morgan NextEra Energy NextEra Goldman Sachs Goldman Electric General INTC.US Intel America of Bank JNJ.US Johnson & Johnson JPM.US JPMorgan Chase LVMH.EU LVMH P/E Ratio x MA.US MasterCard 74x MRK.US Merck & Co*. 40 60x MSFT.US Microsoft 43x 8306.JP Mitsubishi 35 MS.US Morgan Stanley NESN.EU Nestle NFLX.US Netflix 30 NEE.US NextEra Energy ORCL.US Oracle Corporation 25 0857.HK PetroChina SLB.US Schlumberger 9984.JP SoftBank 20 DIS.US Walt Disney 7203.JP Toyota Motor 15 UNP.US Union Pacific UNH.US UnitedHealth Group V.US Visa 10 WMT.US Walmart WFC.US Wells Fargo 5

MXWD MSCI ACWI Index 0 BP 3M J&J Intel Visa CCB ICBC AT&T BASF ASML LVMH Netflix Airbus Nestle Oracle Inditex Boeing Amazon Walmart Comcast Alphabet Citigroup SoftBank Microsoft

Source: Credit Suisse, Bloomberg. Facebook Agri. BOC Caterpillar JPMorgan AIA Group PetroChina ExxonMobil Merck & Co MasterCard Wells Fargo Walt Disney MSCI ACW I Home Depot UnitedHealth China Mobile Union Pacific The P/E ratios and Dividend Yield Toyota Motor Schlumberger Mitsubishi UFJ Morgan Stanley NextEra Energy Goldman Sachs General Electric use earnings and dividends Bank of America forecasts for the next 12 months *Consensus forecasts Underperform Neutral Outperform Nestle PetroChina Cisco HSBC Roche Microsoft Comcast CCB PepsiCo Disney Apple Wells Fargo Verizon Amazon Netflix Home P&G Toyota McDonald's J&J ICBC L'Oreal Novartis Coca-Cola Oracle JPM ABC At&T Walmart Exxon Abbott SAP China Anheuser BoA Tencent LVMH UnitedHealth Facebook Medtronic Intel Boeing MasterCard Citigroup Alphabet Unilever Chevron Samsung Visa Shell

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 30 Investment Outlook August 2019

New Zealand Debt Securities

Key Takeaways Term deposits offered by the major banks remain compelling investment opportunities relative to other New Zealand debt securities, with interest rates 1.0% above comparable  We see good reason securities with shorter terms to maturity. Consequently, investment portfolios often hold to hold longer term, a historically high proportion of term deposits. If the terms to maturity are predominantly term deposits short term, say less than 12 months, material reinvestment risk occurs when short term  Should New deposit interest rates fall and the proceeds from early term deposits need reinvesting. Zealand banks issue This has the potential to cause a material shift in the income generated by a debt more senior bonds portfolio, which may be an unwelcome adjustment for some investors. This is why we at current levels, we advocate a “laddered” maturity structure in debt portfolios created by having staggered would expect term maturity dates. Consequently, in the current environment we see good reason to hold deposit rates to term deposits with terms to maturity of say 2-4 years in a well-diversified portfolio. As term decline further deposits lack liquidity, investors naturally need to monitor the proportion of term  Spreads at which deposits in a debt portfolio to ensure appropriate liquidity in the portfolio is retained. lower credit securities trade What could shift term deposit rates lower? have compressed dramatically In Australia and New Zealand, the banking regulators are in the process of increasing the proportion of equity capital the banks must hold. Therefore, they will have less demand for debt capital, including term deposits. Term deposits contribute a meaningful proportion of banks’ Core Funding Ratios, which in New Zealand must be maintained above 75%. Recently, Westpac NZ issued an impressive $900 million of senior five year debt at 2.22%pa. On the back of Westpac’s success other New Zealand banks are likely to follow suit with their own senior debt issuance. This debt is much cheaper than term deposit funding (on average around 0.75%pa below term deposit interest rates). Consequently, we expect term deposit interest rates to fall from current elevated levels.

Lower Quality Spread Compression The recent decline in interest rates has pushed yield seeking investors into lower quality debt securities. As a result, the spreads at which lower credit securities (BBB, BB and subordinated hybrid securities) trade have compressed dramatically. Consequently, we believe many of these securities have become less appealing investments. Should the economic environment deteriorate, it is these spreads that are likely to widen significantly, which will adversely affect the value of these securities.

In the heat map below we highlight what we believe to represent the best (green) and worst (red) value fixed interest securities in NZ. For more specific security recommendations, contact your Jarden adviser.

most 1 0 9 7 6 4 3 1 0 least Debt Securities

Preferences Higher AA rated Source: Jarden 4 .0 0 0 4 .5 0 0 5 .0 0 0 4 .0 0 0 2 .00 0 AA- rated n/a n/a

5 .0 0 0 5 .5 0 0 5 .5 0 0

AA- rated (term n/a n/a deposit) 8 .0 0 0 7 .0 0 0 6 .0 0 0

A rated

Credit 4 .5 0 0 5 .0 0 0 5 .5 0 0 4 .5 0 0 3 .00 0 Quality A rated (term n/a n/a deposit) 7 .5 0 0 8 .0 0 0 7 .0 0 0

BBB rated 5 .5 0 0 6 .0 0 0 6 .5 0 0 7 .0 0 0 5 .00 0 Unrated (indicative BBB rated) 5 .0 0 0 5 .0 0 0 5 .0 0 0 5 .5 0 0 4 .00 0

Unrated (indicative n/a BB rated) Lower 6 .5 0 0 4 .5 0 0 5 .5 0 0 5 .5 0 0 < 2 years 2-3.5 years 3.5-5 years 5-6 years >6 years Term to Maturity

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 31 Investment Outlook August 2019

The Future of E-Payments

Key Takeaways Various forms of electronic payment (E-payment) systems have gained increasing popularity in recent years, allowing non-cash payment volumes to grow at an even  Non-cash faster pace. While we believe the trend of increased payment digitalisation will not transactions continue to gain change in the foreseeable future and will continue to be fairly insulated from the crests popularity globally and troughs of economic cycles, it is important to understand the characteristics of incumbents and new entrants in the industry to identify who will triumph.  The sustainability of cryptocurrency is The Pie is Getting Bigger untested  Payment processing According to the World Payment Report 2018, global non-cash transaction volumes companies offer grew by 10.1% in 2016. As a result of favourable government policies (especially in investors the best emerging markets, where expected growth is three times that of developed markets), exposure to the E- and the convenience offered by new ways to make payments, the rate of growth is payments theme estimated to accelerate to 12.7% per annum between 2016 and 2021.

876 Annual Growth 900 Rate (2016-2021*) 763 52 800 Global 12.7% 672 49 131 700 Non-Cash 598 47 106 Latin America 5.1% 600 536 45 87 251 Transaction Growth 483 20.2% 42 73 193 CEMEA

500 21.6% is Exponential 40 61 150 400 52 116 80 Emerging Asia 28.8% Developing 91 73 Source: World Payments 71 67 } 55 61 300 50 151 9.9% Report 2018, Capgemini, BNP 132 141 Mature Asia-Pacific 116 124 cash Transactions (Billions) 109

- 200 Paribas Europe (including Eurozone) 6.8% 6.7%

Non 212 100 161 170 180 190 201 M ature North America 5.6% 0 } 2016 2017 2018 2019 2020 2021 *Annual growth rates are based on forecast numbers.

In addition to wider adoption, the growth in total non-cash transactions should also be propelled by long-term economic growth, rising consumer spending power, and higher prices for goods and services.

An Invincible Alliance

Banks and payment Incumbents in the payment industry, largely banks and payment processing processing companies companies, have long-established competitive positions. These two incumbent types have long-established each play a unique role in payment transactions that is difficult to replicate. competitive positions In addition to making the actual fund transfers between financial institutions, banks often function as short-term liquidity providers to finance transactions. Contemporaneously, payment processing companies act as hubs connecting all parties in transactions and handling authorisations, clearing, and settlements between parties. In a typical card transaction, the consumer would authorise the transaction at the point of sale. However, the funds are not transferred from consumers to merchants directly. Instead, the card issuing banks receive instructions and send it to payment processing companies to link up with the banks that provide the merchant

transactional banking services. Gross proceeds are matched, cleared, and settled through payment processing companies, receiving a fee from the merchant along Payment processing with both banks. Typically, the fee is about 2–3% of the gross proceeds. Contrary to companies, like Visa and common belief, payment processing companies like Visa and MasterCard do not take Mastercard, do not take credit risk in the case of payment defaults. The issuing bank bears the credit risk and, credit risk therefore, collects late charges and interest income from card holders. The beauty of

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 32 Investment Outlook August 2019

this network is it reduces the total number of connections between various parties as

everyone can easily be connected to a small handful of payment processing companies globally. In this way, communication and procedures can be standardised

to reduce transaction costs.

New payment initiatives As the payment system is now well established, new payment initiatives have to have to partner with the partner with the payment processing companies. For example, Apple has recently payment processing announced the launch of the Apple Card credit card. Under this initiative, Apple companies functions as a customer acquirer, who refers Apple device users to Goldman Sachs, which is the bank, while payment processing is handled by MasterCard. Apple will likely only earn a very thin profit margin out of this business. However, the credit card service should help Apple to retain customers and not have them switch to Android.

Cryptocurrency: A Bombastic Name for A Token that May or May Not Store Value

In recent years, numerous cryptocurrencies have been created as potential

replacements of fiat (coin and note) currencies issued by governments around the world. Despite the complex technical way in which each cryptocurrency is created, they all essentially aim to serve two functions: as a medium to transact and an asset to store value. To perform these functions, a cryptocurrency has to be durable, portable, divisible, fungible, and scarce. While the first four characteristics can be easily

achieved, the concern with cryptocurrencies is creating scarcity. Cryptocurrency scarcity is maintained through either artificial scarcity, or by being backed by another asset.

Facebook’s Libra will be The famous Bitcoin uses artificial scarcity to maintain its value. However, Facebook’s an asset backed Libra will be an asset-backed cryptocurrency (also referred to as a stablecoin). Its cryptocurrency value is backed by a proportional amount of assets or other cryptocurrencies. The key issue with stablecoins is the trustworthiness of the organisation that oversees the pegging process. Unlike Governments, private organisations don’t have the perpetual backing of government tax revenues, and may collapse thus putting stablecoin holders’ wealth at risk. While the chance of that happening may be slim, it cannot be ignored due to the adverse impact on the coin holder’s wealth. In the case of Facebook’s Libra, it is still at the early stage of its development. It needs to be approved by regulators and then become popular enough to become a medium to store wealth. While it may help to bind Facebook users more tightly to the social media platform, it is questionable whether Libra can generate a meaningful profit for Facebook based on the information available .

Preferred Exposures to the Non-Cash Payment Theme

In spite of publicity about new ways to make payments and potential new ways to store value, we believe payment processing companies rather than banks or the creators of cryptocurrencies offer the best exposure to the growth of non-cash transactions. We review the world’s two largest payment processing companies, Visa

(V.US) and Mastercard (MA.US), in the Global Equities section on pages 28 and 29.

While customer acquirers like Apple or Facebook may lose popularity over time, a A payment processing payment processing network is always needed to function as the backbone linking network is always multiple parties together in a standardised and secure way to complete transactions. needed Although banks may continue to play a vital role in handling transactions, the fee and interest income earned typically accounts for only a small part of banks’ profits. As a result, banks are not a “pure play” to this investment theme.

The creators of cryptocurrencies currently lack sufficient regulatory oversight and have yet to stand the test of time. It is also unclear whether the cryptocurrency creators can profit from their creations.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 33 Investment Outlook August 2019

Gold Rising

Key Takeaways The price of the yellow precious metal has surged almost 13% since the end of May. The global price of gold currently sits at around $US1,480 per troy ounce, which is the  The gold price has highest it has been since early 2018. The resurgent gold price is drawing the gold-bugs been resurgent recently. out and bringing along a few new disciples as well. What’s driving the latest popularity of gold and is it likely to continue?  An increase in economic Different Drivers at Different Times uncertainty and central bank buying Like any financial asset, there can be a multitude of different drivers operating at different have been the main times and under different circumstances. In the early 1970s, many investors looked to drivers of recent gold as a way to hedge against erosions of currency purchasing power caused by high gold price rises. and rising price inflation. However, with the taming of the inflation bogey, economic  Gold can provide uncertainty and central bank gold buying have become the dominant drivers of the gold diversification to price. These two factors have been to the fore recently. portfolios, but the price is volatile and Economic policy uncertainty has ratcheted up since the end of 2018 as the US- there is a cost drag instigated trade war has intensified. At the same time, geopolitical tensions have on returns. increased, in particular between the US and Iran. The chart below indicates that gold price gains have coincided with a rise in uncertainty, as it did over much of 2016 when factors such as the rise in European populism, Brexit referendum and the surprise election of Donald Trump as US President kept many investors on edge.

0.3 350 Geopolitical and 0.2 300

economic 0.1 250 uncertainty give 0.0 200 gold a boost Source: Refinitiv, Baker, Bloom, and -0.1 150 Davis Economic Uncertainty Index Annual Annual %change -0.2 100

-0.3 50 2014 2015 2016 2017 2018 2019 Economic Uncertainty Index

Annual Change in Gold Price (LHS) Economic Policy Uncertainty Index (RHS)

According to the World Gold Council, since early 2018 there has been a marked increase in gold buying by central banks in non-western aligned countries such as China, Russia, and Turkey. It’s likely much of this demand is due to a desire to reduce reserve exposures to the US dollar assets in a climate of growing antagonism between the US and other nations.

Where to from Here?

A small gold exposure may provide some hedge should geopolitical and economic uncertainty worsen. However, like the prices of most commodities, gold prices can swing

sharply. In addition, there is an inherent drag on gold returns from the cost of moving and storing the metal. Investors can get direct exposure to gold via iShares Gold Trust (IAU.US), or indirectly through investment in a gold miners fund such as VanEck Gold Miners (GDX.US) or gold mining companies such as Evolution Mining (EVN.AU), Alacer Gold Corp (AQG.AU – with operations in Turkey AQG faces political risk) or Newmont Goldcorp Corp (NEW.US).

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 34 Investment Outlook August 2019

Jarden in the Community - Cystic Fibrosis NZ

Cystic fibrosis is a genetic disorder which results in an abnormally thick layer of mucus in the lungs and intestines instead of the normal thin layer for lubrication purposes that most of us have. This leads to blockages of the pancreatic ducts, intestines and the lungs bronchi. Consequently, sufferers are highly susceptible to repeated chest infections that can develop into serious complications and poor weight gain from malnutrition.

Established in 1968

Led by Denis Currie and Professor Bob Elliott, Cystic Fibrosis NZ commenced in 1968 Nebulisers are key with the aim of providing support for parents of children suffering from cystic fibrosis. equipment for treating Today, there are twelve branches across New Zealand that benefits over 500 cystic fibrosis individuals and their families annually. The support is multifaceted, including advice, newsletters, conferences, fact sheets, financial grants, and assistance from field workers. A number of New Zealanders have contributed to scientific research, which has benefited those afflicted by cystic fibrosis. Of note, Professor Elliot’s research established the Guthrie’s heel prick in new born babies to test for cystic fibrosis and other genetic diseases. Early detection helps reduce damage to affected organs. Since its inception, the outlook for children with cystic fibrosis has materially improved, both in terms of quality of life and life expectancy. In 1968, most sufferers did not live beyond the age of five, whereas now life expectancy is over forty years in a number of countries. Source: Cystic Fibrosis NZ Jarden’s Connection with Cystic Fibrosis NZ

While providing support to parents of children with cystic fibrosis remains the key aim, Cystic Fibrosis NZ funds research, advocates for those afflicted by this disorder, and

runs an endowment fund, which is managed by Jarden adviser, Brent Greig. This st fund gifts a financial endowment to each person with cystic fibrosis on their 21 birthday. Brent and the Havelock North team’s relationship with Cystic Fibrosis NZ extends to the management of another fund spanning around 15 years. In common with other Jarden clients, the service offered covers not only funds management and

associated reporting, but also advice on fund governance and documentation of the

fund’s objectives and investment policy. Kalydeco is not yet funded in New Zealand Outlook Improving the lives of people with cystic fibrosis is a combination of many small things. Amongst these, physiotherapy remains the cornerstone of treatment. Others include organ donation and the development of new drugs. In this regard, gaining government funding in New Zealand for Kalydeco and Orkambi would be an important step forward.

Anyone wishing to learn more about cystic fibrosis, the activities of Cystic Fibrosis NZ, Source: Cystic Fibrosis NZ fund raising events, or to make a donation should visit the website www.cfnz.org.nz.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 35 Investment Outlook August 2019

Compass by Jarden

Key Takeaways Compass is the new name for Jarden’s Discretionary Investment Management Service (historically referred to by us as DIMS). The name Compass reflects the goal  Compass gives clients of this product, which is to orientate a client’s portfolio to give them the best more control over how opportunity to achieve their financial objectives. As such portfolios are tailored to and what they invest in meet each client’s specific circumstances and preferences. In contrast, investing in a  The service tailors a Managed Investment Scheme (fund) lacks flexibility and is much more akin to “one suitable investment size fits all”. approach that reflects the clients goals and In order to help clients achieve their financial goals we place the utmost importance appetite for risk on:  Jarden advisers analyse and select  Understanding each client’s specific financial needs and aspirations. suitable securities for  The type of investment journey that the client is comfortable with, which will investment within each reflect the level of risk taken in their investment portfolio. asset class  The security of client’s assets which are held by an independent custodian, FNZ Custodians Limited.

Many investors have certain types of investments that they are uncomfortable

investing in for ethical reasons or simply have no reason to invest in. We can incorporate these investment restrictions into the portfolios construction.

Compass is delivered to clients by an adviser team, of at least two advisers supported

by an associate. This ensures service continuity at all times, constant peer review and introduces a broader skill set than can be achieved by a lone adviser. It is extremely important that Jarden’s adviser teams earn client’s trust and that client expectations are meet. Consequently, we provide a high level of transparency to clients. This includes quarterly performance reporting both in absolute terms and against benchmarks, if desired. Clients also have 24/7 access to their investment portfolio through Jarden’s digital platform. Importantly at the end of each financial year clients are provided with a comprehensive tax report covering the client’s Compass investments, which significantly simplifies the preparation of their annual tax returns.

To enable Jarden advisers to construct and run a client’s portfolio they draw upon They draw upon Jarden’s Jarden’s market leading research, as well as being able to tap into the global research market leading research expertise of Credit Suisse and UBS. The combination of Jarden’s unparalleled ability to execute trades in the market and the doors opened to various investment opportunities through Jarden’s market presence, mean Jarden advisers are extremely well supported to serve clients.

As professional advisers are managing your portfolio full-time on your behalf, your time is freed up for other commitments or pursuits.

For a more in depth explanation, please contact your Jarden adviser.

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 36 Investment Outlook August 2019

Calendar Major Events: August - October 2019

Economic Events Central Bank Decisions │ Political Events

NZ Unemployment rate 6 Aug ● Australia Trade Balance 6 Aug ● Australia RBA Interest Rate Decision 7 Aug ● NZ RBNZ Interest Rate Decision China Trade Balance 8 Aug ● NZ Net Migration 9 Aug ● Japan GDP UK GDP ● UK Trade Balance Australia Business Confidence 13 Aug ● Australia Consumer Confidence 14 Aug ● China Industrial Production UK CPI ● EU Industrial Production US Retail Sales 16 Aug ● Japan Trade Balance 19 Aug ● EU Consumer Confidence 23 Aug ● NZ Trade Balance 26 Aug ● NZ Business Confidence 29 Aug ● EU Business Confidence EU Consumer Confidence ● US GDP 30 Aug ● NZ Consumer Confidence 3 Sep ● Australia RBA Interest Rate Decision US Trade Balance 5 Sep ● Australia Trade Balance EU GDP 6 Sep ● China Trade Balance 8 Sep ● Japan GDP 9 Sep ● UK Trade Balance Australia Business Confidence 10 Sep ● NZ Net Migration 11 Sep ● Australia Consumer Confidence EU Industrial Production 12 Sep ● US Retail Sales 14 Sep ● China Industrial Production 16 Sep ● Japan Trade Balance 18 Sep ● UK CPI NZ GDP 19 Sep ● 19 Sep ● US Fed Interest Rate Decision ● UK BoE Interest Rate Decision ● Japan BoJ Interest Rate Decision EU Consumer Confidence 21 Sep ● NZ Trade Balance 25 Sep ● 25 Sep ● NZ RBNZ Interest Rate Decision US GDP 27 Sep ● NZ Consumer Confidence EU Business Confidence ● EU Consumer Confidence NZ Business Confidence 30 Sep ● UK GDP 1 Oct ● Australia RBA Interest Rate Decision Australia Trade Balance 3 Oct ● US Trade Balance 5 Oct ● Australia Business Confidence 8 Oct ● Australia Consumer Confidence 9 Oct ● UK Trade Balance 10 Oct ● EU Industrial Production 14 Oct ● China Trade Balance NZ Net Migration 15 Oct ● NZ CPI 16 Oct ● UK CPI US Retail Sales 17 Oct ● China Industrial Production 18 Oct ● China GDP Japan Trade Balance 21 Oct ●

31 Oct ● Brexit deadline

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 37 Investment Outlook August 2019

Your Local Jarden Team

Auckland Auckland Freephone 0800 805 584 Level 39, ANZ Centre, 23- 29 Albert Street, Jeremy Ashcroft 09 307 5724 Simon Myhre 09 307 5715 PO Box 5333, Auckland Amanda Chen 09 302 5582 Phil Picot 09 307 5717 Tony Connolly 09 307 5721 Martin Poulsen 09 307 5725 Victoria Park, Auckland Mark Gatward 09 307 5718 David Pretorius 09 302 5576 Unit 55a, 95 Union Street, Freemans Bay, Murray Graham 09 307 5714 Simon Ravenscroft 09 302 5594 PO Box 5333, Auckland Rob Hawkins 09 302 5574 Roy Savage 09 302 5529 Jo Hikaka 09 307 5722 David Sommerville 09 302 5567 Havelock North Andrew Horton 09 307 5732 Brett Steven 09 307 5705 Level 1, The Village Exchange, 1 Havelock Road, Lory Luo 09 307 5739 Stephen Wright 09 307 5733 PO Box 28153, Havelock North Kristan Mines 09 307 5744 James Young 09 307 5731

Wellington Victoria Park, Auckland Phone 09 307 5702 Level 14, ANZ Centre, 171 Featherston Street, Patrick McCarthy 09 307 5749 Chris White 09 302 5596 PO Box 3394, Wellington Brian Moss 09 307 5712

Nelson Havelock North Freephone 0800 562 543 Level 1, 6 Akersten Street, Brent Greig 06 871 5889 Deborah Murdoch 06 871 5881 PO Box 114, Nelson Sam Howard 06 871 5887 Adrian Woodhams 06 871 5888 John Lockie 06 871 5883 Christchurch Level 1, 148 Victoria Street, Wellington Freephone 0800 800 968 PO Box 25258, Christchurch Andrew Austin 04 496 5320 James Malden 04 474 4013 Kyle Edmonds 04 474 4019 Angus Marks 04 496 5321 Queenstow n Scott Fowler 04 474 4039 Graham Nelson 04 496 5318 The Station, 25 Shotover Street Michael Grace 04 496 4454 Graham Parlane 04 496 5348 Queenstown 9300 Jonathan Glass 04 496 5317 Bryan Shepherd 04 474 4014 Ralph Goodwin 04 496 5363 Sam Stanley 04 474 4436 Simon Hogg 04 474 4015 Anton van der Wilt 04 496 5333 Philip Hunter 04 496 5312 Chris West 04 496 5314 Peter Irwin 04 496 5316 Glenn Wilson 04 496 5332 Greg Main 04 474 4061

Nelson Freephone 0800 502 828 Francis Gargiulo 03 548 8319 Aaron Shields 03 548 8319 Greg Lillico 03 548 8319

Christchurch Freephone 0800 123 053 Johnny Cochrane 03 366 5370 Bevan O'Sullivan 03 336 5382 Ian Dalley 03 336 5374 Matthew Rose 03 336 5378 Hannah Donaldson 03 336 5372 Stuart Thomas 03 336 5371

Queenstown Cambridge Anna Boland 03 441 8404 Steivan Juvalta 021 222 9022

Fixed Income Jo Hikaka 09 307 5722 Ben Petro 04 474 4057

Research Tim Agar 04 474 4438 John Norling 04 496 5343 John Carran 04 496 5369 Ted Tsui 09 302 5569 Peter Irwin 04 496 5316

Website www.jarden.co.nz Email [email protected]

Jarden Securities Limited | NZX Firm | www.jarden.co.nz 38 Investment Outlook August 2019

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 2019 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 August 2019