Liam Dann: A2 plunge highlights market risk

Geoff Babidge, managing director and CEO of a2 Milk. Photo / File

A2 Milk's dramatic 20 per cent plunge today has laid bare a vulnerability of the local stock market.

The big fall of New Zealand's largest stock dragged down the NZX-50 down more than two per cent erasing a month of solid gains.

It would be disheartening were it not also a reminder of how much A2 has inflated the top 50 index this year.

The NZX-50 has outperformed the ASX and Wall Street indexes so far this year.

Some of that may reflect fundamentals like New Zealand's stable economic growth but its clear A2's rapid rise has played an important part.

A2 remains a highly volatile stock – despite the company's best efforts to focus attention on long term progress.

It's success in Australia and China has captured the imagination of speculative investors across the Tasman.

A2 shares soared from $3.43 a year ago to a high above $14 in March.

It's nine month result and an outlook yesterday was impressive by any normal measures.

The latest plunge doesn't spell doom for the company or sensible long term investors.

But it does highlight the imbalance that the dominance of one highly traded stock can cause on a relatively small exchange.

As we saw with Xero, when local stocks hit the international spotlight the hype and demand can quickly accelerate away from any meaningful correlation with the fundamentals of the underlying market.

These stocks are great for traders and aggressive fund managers but not so good for long term savers seeking for the stability of an index fund.

Xero has since departed the NZX to list solely on the larger ASX.

From a local perspective that's not a great solution to the problem of course.

It would be far better to see the NZX grow the weighting of more mature, stable stocks so that it could accommodate the volatility of more fashionable market darlings like Xero, A2 and whatever the next smart listed kiwi company is.

Unfortunately that looks like an increasingly difficult task for all involved.