KEY POINTS:
The New Zealand market stood firm in the wake of the Chinese equity slump which sent shockwaves around the world yesterday, but market players warn more volatility is likely.
Indeed, the 1.5 per cent fall in the NZX50 index - one of the smallest drops around the world - could be a healthy dose of medicine for a market which, while fundamentally sound, was in danger of getting ahead of itself, NZX watchers say.
"This is a non-panic situation and that's reflected in the fact that stocks are starting to recover," the head of equities at ABN Amro, James Miller, said yesterday afternoon. "In actual fact, a small correction to bring valuations back to more prudent levels is probably a good thing."
Miller said New Zealand stocks were likely to be shielded from the worst of any falls in China.
"With China falling back, that immediately pulls down resources stocks, but we don't have that many in New Zealand that are exposed to that."
Stephen Wright at ASB Securities said the relatively benign local reaction, which saw the NZX-50 drop 62 points to 4037.1, was a sign local investors were getting smarter about such global events.
There was a lot of talk and plenty of people ringing in but that had not translated to an extraordinary number of trades, he said. "Turnover of $145 million is not a huge day. $100 million is sort of the benchmark."
But those who had been determined to get out sold into a market with few buyers, he said. That saw stocks drop sharply at the opening, with the NZX-50 index falling as much as 3.3 per cent before recovering through the rest of the day.
Remarkably few people sold yesterday, he said.
"I think its a pretty fair result. We were up 20 per cent last year and a few per cent this year and at the end of the day we've given back 1.5 per cent. After one day that's not a trend."
Chinese stocks plunged 9 per cent overnight on Tuesday, amid fears authorities would clamp down on the speculative trading that has driven the market to record highs in the days leading up to the plunge.
Goldman Sachs JBWere strategist Bernard Doyle said New Zealand shares could suffer over the next couple of months.
A catalyst like the Chinese weakness just laid bare other things that had been bubbling below the surface.
"We were well overdue for a correction anyway," he said. "We've just come off the back of a fairly mediocre earnings season, so you haven't got the earnings growth that we've become used to and then you throw in one, maybe two rate rises and what could be ongoing international market jitters. I think even though we are doing okay today we might have a rough couple of months."
But it would probably only take one decent mergers and acquisitions announcement in New Zealand to turn sentiment again, he said.
The recovery in Chinese stocks late yesterday helped stabilise New Zealand shares, said Jason Wong at First NZ Capital.
"The risk was it would fall another 10 per cent and it hasn't," he said. "That sends the market a pretty clear message that it was just a one-off."
"Having said that, over the coming months it could easily tumble again ... it's just at an outrageously high level."
Some stocks had actually surprised on the upside, said Mark Lister at ABN Amro Craigs in Tauranga.
"One of the the big stocks up here was Fisher & Paykel Healthcare [which rose 6c] and the only big stock that was up over the ditch was Woolworths," Lister said. "I guess that just shows that defensive quality stocks are the ones that are going to weather the storm better than the smaller more speculative stocks."
Other major stocks to rise included GPG, Ryman Healthcare and Air New Zealand, which dropped 11c to $2.12 before soaring back to close up 11c at $2.34, a five-year high.
Philip Houghton-Brown, chief investment officer for ING NZ, said with hindsight, such events could be positive.
"A good example was in the April-May period last year when we had a 10 per cent step back in global equity markets." That was followed by a rise of 25 per cent from July through to a few days ago, he said.
ING had been moderating exposure to equity markets over the past year, he said.
"Valuations are still reasonable and businesses are still in pretty good shape globally," he said, "so we do see this as just another relatively short term episode."
How it happened
* On Tuesday night the Shanghai Composite Index fell nearly 9 per cent amid rumours of a Government crackdown on illegal share trading and fears about accelerating inflation.
* The slump was exacerbated in the US by weaker than expected economic data and predictions of a recession by former Federal Reserve boss Alan Greenspan.
* New York's Dow Jones index dropped 4 per cent in minutes sparking panic, before recovering slightly.
* In New Zealand the market fell 3.3 per cent shortly after opening but recovered to close down 1.5 per cent - one of the steadiest performers in the world.
