Investment columnist for the NZ Herald

Brian Gaynor: US protest vote has echoes elsewhere

Many citizens have lost faith in the political and business establishment

Donald Trump's election, and the recent UK Brexit vote, demonstrates that there is considerable dissatisfaction with the political and business establishments in a number of countries.

A large percentage of the US and UK middle class, particularly white males outside the major cities, believe the system is rigged and they don't have a voice.

New Zealand is fortunate because our MMP electoral system gives minorities a voice. Meanwhile, a number of our large companies, including Spark and Z Energy, are planning to reduce the voice of shareholders by moving to online annual meetings.

The latter development is small fry compared with the US presidential election, but it should be vigorously opposed by shareholders.

Trump's success was more of a protest vote against the close relationships between the insiders in Washington and New York than a clear endorsement of his policies.

Trump listened to the electorate in Michigan, Wisconsin and Iowa, who believe they have been neglected by the political and business establishments, and unexpectedly won these states.

Meanwhile, the Clintons have had a damagingly close relationship with Goldman Sachs, with Hillary Clinton receiving US$675,000 for delivering three speeches at Goldman events after she left the State Department.

There have been a large number of close relationships between Wall Street and Washington - for example, Hank Paulson leaving the top job at Goldman to become Treasury Secretary in 2006.

Robert Rubin, Treasury Secretary in Bill Clinton's Administration, had been a Goldman employee for 26 years. He became chairman of Citigroup after leaving Washington and received more than US$126 million in cash and shares before his bank was bailed out by the US Treasury in the global financial crisis.

Voters in the rust belt, mid-west and conservative South believe they have no voice in the Washington/Wall Street insider game. Trump says he will radically change the rules of the game, but a number of his policies suggest otherwise.

These include:

• Reducing the corporate tax rate from 35 to 15 per cent

• The repatriation of corporate profits held offshore, subject to a low one-off 10 per cent tax

• Repealing death taxes

• Giving massive tax credits to companies to encourage infrastructure spending

• Reducing regulation and the size of government.

These policies would give Wall Street a huge boost, but we don't know whether Trump will prioritise these initiatives ahead of other policies. The problem is that Trump is a complete unknown as far as policy implementation is concerned and we don't know if he will appease the interests of his middle-class white voters or the Republican business community.

Trump's success was more of a protest vote against the close relationships between the insiders in Washington and New York than a clear endorsement of his policies.

Investors are undecided, but Tony Schwartz, ghostwriter of Trump's business memoir The Art of the Deal, is quite clear. Schwartz, who spent considerable time with Trump, told The New Yorker: "If Trump is elected President, the millions of people who voted for him and believe that he represents their interests will learn what anyone who deals closely with him already knows - that he couldn't care less about them."

There is growing worldwide political dissatisfaction with the establishment and the next votes to watch are in Italy on December 4 and France, Germany and New Zealand next year.

The Italian referendum, which was proposed by Prime Minister Matteo Renzi and his centre-left Democratic Party, is a vote to approve a dramatic reform of the Italian constitution. Renzi is considered to be an establishment politician and his constitutional reforms are strongly opposed by anti-establishment parties.

At this stage, the French presidential elections in April and May look like a battle between incumbent socialist Francois Hollande, Republicans Alain Juppe and Nicolas Sarkozy and the far-right Marine Le Pen. The latter is performing very well in the polls.

Germany goes to the polls in the second half of 2017, with Angela Merkel's poll ratings continuing to slide. She received a further blow last Sunday when her centre-right Christian Democrats lost ground to the far-right Alternative for Germany (AfD) in three important state elections.

The AfD received between 12.5 and 24 per cent of the vote in these states, the best result for a far-right party since Adolf Hitler.

These anti-establishment far-right movements are a major concern and will be watched closely by investors in the months ahead.

Meanwhile, Spark chairman Mark Verbiest told shareholders that the company intended to stop holding annual meetings in person, mainly to save money. This indicates that Spark is hopelessly out of touch with growing anti-establishment sentiment, which is partly based on voters and other stakeholders not having the opportunity to have their voices heard.

A move to online meetings will create an additional wall between establishment directors and retail shareholders, as physical annual meetings are their only opportunity for regular face to face engagement.

A few months ago the Business Herald published an article by a senior Z Energy executive expressing a similar view about her company's annual meeting. She wrote that annual meetings "are expensive, inconsistent with environmental sustainability, time consuming and - now - of little interest to shareholders".

She went on to say that Z Energy's 2016 annual meeting was "heavily over-catered and the lamingtons and sausage rolls were mostly eaten by the late night crew who unpacked the venue".

Z Energy argues that its shareholders are happy, but what happens if the company's performance deteriorates? How can shareholders hold directors accountable through online meetings?

The Spark and Z Energy directors need to read the commentary on recent developments in the US, Italy, France and Germany. Voters are supporting far-right parties partially because they believe their voices are not being heard by the establishment.

Air Future

Air Future's crowdfunding proposal merits attention because the company, which was formerly known as IndraNet Technologies, has been a regular fund raiser for nearly two decades. The company has already raised $20.5m of equity but still has no revenue.

This raises the question: should Air Future, and other research-based companies, be allowed to raise equity from the public when they do not achieve their earlier projections?

Air Future was established in Christchurch in May 1998 with six directors, four of whom remain on the board: chairman Russell Fitts, Dan Hilgendorf, Mick Kain and Peter Macaulay.

This column first wrote about the company in March 2001 because of its extensive advertising campaign during a $5m capital raising from the public at $1 a share. The investment statement, which was complex and difficult to understand, described the company as a supplier of "software and equipment that are being designed to establish, operate and maintain large networked communication systems".

The 2001 Business Herald column concluded: "At $1 a share the company has a market value of more than $190 million, a remarkable figure for a company that has yet to earn $1 of revenue."

Air Future has procured new equity through three public prospectuses and four short form prospectus and is now trying to raise a further $250,000 through crowdfunder Pledgeme. The offer is behind a Pledgeme security wall.

According to Fitts, Air Future is now "commercialising air powered engines, developed in France by Motor Development International SA, with a focus on our licence region of Australia, New Zealand and the Pacific".

The value of Air Future, before the current capital raising, is $15.6m. This is a long, long way from the $190m valuation 15 years ago.

- NZ Herald

Brian Gaynor is an executive director of Milford Asset Management which holds shares in Spark and Z Energy on behalf of clients.

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Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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