KEY POINTS:
David Sheriff heard about Wednesday's global stockmarket shock from his mum.
"I was talking to my mother and she said shares had plummeted," said the 50-year-old Aucklander. "Well, they hadn't plummeted, they were down like 3 per cent or something and when you heard the reason, it was only a little political thing in China.
"I thought it was a storm in a teacup," said self-employed Sheriff, who holds blue chip stocks.
Other retail investors agree.
Saumil Kapadia - a 42-year-old financial analyst with less than $100,000 invested locally - said listening to radio news about the slump while driving to work caused some concern.
But after investigation on the internet his fears quickly subsided.
"What happened in China was based on rumours and people started to realise the fundamentals are still strong long-term," he said. "In fact, I think this is a better time to buy some good stock."
Kapadia said the events of the week certainly had not changed his attitude to investing.
Based on the performance of the NZX in the past two days - it has regained nearly all of Wednesday's losses - Sheriff and Kapadia are not alone in their views that the global shock was a false alarm.
But although the China crisis with its odd political undertones may now look like a storm in a teacup, it has put the spotlight on some real reasons for investor caution. And those reasons have their roots much closer to home than Wednesday's events.
The New Zealand market faces a slowing domestic economy, further interest rate rises and a stubbornly high dollar that will offer no respite for exporters. And the four-year bull run has left the NZX significantly overvalued, said Jason Wong, an economist with brokers First NZ Capital.
The local market was trading on a price/earnings multiple of 16.7, he said. That is more than the average multiple for the rest of the world, which sits at about 14.5.
Price/earnings multiples are one of the key formulas brokers use to work out the value of companies and markets.
The multiple is the share price divided by earnings per share.
So it effectively calculates how many times the market is prepared to pay for the current profits of a company. A high multiple usually indicates that good future growth prospects are being factored.
Basically the NZX is now a low-growth market trading on a high-growth multiple, Wong said.
"We should normally be trading at about 13 to 13.5. So there is a disconnect."
Ricky Ward, domestic equities manager at Tyndall, also sees a growing disconnect between the equity markets and the economy.
"The NZX has risen by about 20 per cent in each of the past four years.
Earnings haven't grown by anywhere near that extent," he said. "So what we saw on Wednesday was the market got the jitters."
New Zealand markets aren't linked to China to any great extent but after such a strong run, any sign of anything negative will be seen as a good time to take a profit, Ward warned.
"I think it's due for a breather. That doesn't mean it's going to go down. It might stagnate for a period."
But that does mean investors shouldn't count on getting 20 per cent returns again this year.
"I didn't expect to see it do 20 per cent last year and if it hadn't been for the influence of private equity you wouldn't have seen it," Ward said.
Private equity remains the X factor on the local scene.
Mark Lister at ABN AMRO Craigs said the mergers and acquisitions theme was not going to go away.
"What happened on Wednesday hasn't all of a sudden made all these private equity firms decide they're not interested any more."
But what it does mean is there is "extra froth" in the market.
"So there is a bit more room for things to fall if earnings results are not up to expectations."
And the market was falling, even before Wednesday's shock. The earnings season had been a disappointing one, so much so that the NZX-50 had already shed nearly 3 per cent in the three weeks before Tuesday's close.
Overall earnings growth - averaging between 6 and 8 per cent - was not so bad, Wong said.
"But the highlights were few and far between and there were many disappointing reports that led to a large number of downgrades to forecasts."
First NZ analysts have downgraded their view on 34 stocks and upgraded only 11.
The stronger NZ dollar accounted for more than half of the downgrades. Other factors were weakening domestic demand and tighter margins.
Before the earnings season we were looking for 5 per cent earnings per share growth for the year ahead, Wong said. But growth of 3 per cent now looked more realistic.
"Basically we're going to remain overvalued. There will be a natural limit where the market becomes so expensive people don't push it further."
He said we were close to that limit already. "So there is probably an argument for the market not making stellar returns."
But that does not mean New Zealand is headed for a crash. There are some structural reasons why the market is still riding high.
It is still deficient on the supply-side of the equation, with not enough new equity stocks coming on to keep up with demand.
And the demand side remains strong, thanks largely to Australian baby-boomers who were legislated into saving hard for their retirement by the compulsory superannuation system introduced in 1992 by the Keating Labor Government.
Nearly 15 years on, Australian workers have close to $1 trillion in superannuation assets. Australians have more money invested in managed funds per capita than any other economy.
Much of that cash is invested with the private equity funds that now grab headlines as they seek to invest in New Zealand.
Lister said the market would slow down. "We don't expect the sort of momentum it has had in the last few years to continue."
On that basis he didn't find Wednesday's slump particularly surprising. "The great run we're having has got to come to an end and things will normalise. Part of when things normalise is a bit of a correction.
"You are going to have more of these down days.
"The dollar's still above 70c so there is still no respite for exporters, growth is going to slow and interest rates will remain high.
"We're all holding more cash in our portfolios and we're really sticking to those high-quality companies in the defensive sectors," he said.
Auckland retiree Noel Thompson has been investing on the local stock market for "40 odd-years" and was largely unfazed by the action - he had survived the 1987 crash, after all.
"I saw this as a bit of a blip. Nothing too serious."
But the 68-year-old former accountant - who has a sizeable portion of his retirement savings in the local market - will be adopting a more cautious outlook this year. "It makes you think that maybe I should look at something a bit more defensive, like Contact or the airport. The high price/earnings companies are the ones that take a big knock."
Looking back on the wildest trading day New Zealand has seen for several years, his views reflect those of many investors whose eyes stay firmly focused on the stocks they hold.
"I was probably more concerned about SkyCity's and GPG's result."
What the experts say ...
Where should people put their money in the current market?
Arthur Lim
Macquarie Equities' investment director says in volatile markets head for higher ground.
"Investors really shouldn't be playing speculative type stocks," Lim says.
"They should be looking at the defensive high-quality stocks ... like in the New Zealand market the Auckland International Airport, Contact Energy, the Vectors of this world."
Bernard Doyle
The Goldman Sachs JBWere strategist says holding cash looks like a pretty good option for the next couple of months.
"With what's going on internationally and a rate rise in the offing, this is a good time to sit back and just see how things unfold."
However, it isn't necessarily a time to head for safer stocks, he says.
"I think the interesting stocks in New Zealand at the moment are ones that have already been a bit punished.
"In that camp you would say are stocks that are exporters like Fisher & Paykel Healthcare ... Pumpkin Patch, Fisher & Paykel Appliances, GPG - as a group they've all been hurt because of the high currency."
Stephen Wright
The head of advisory at ASB Securities says despite the week's events it was business as usual.
"I always say 20 per cent downturn in the shorter term is your biggest risk and if they can't take that they shouldn't invest in shares. If you go for the most conservative end then you go for the Auckland Airports, Contacts, Vectors, etc."
