KEY POINTS:
The worldwide stock market slump has increased the chance of a recession in New Zealand, local fund managers warned yesterday as the meltdown of another US mortgage company wiped almost $700 million off the NZX.
The NZX-50 had its fourth consecutive day of heavy losses yesterday. It shed 1.3 per cent of its value, taking its overall slump to almost 4 per cent - or $2.1 billion - since Thursday's close.
However, this morning the NZ market has opened slightly higher, possibly given a shot in the arm by the late rally on Wall Street.
US stocks rose in a last-minute rally earlier today (NZ time) as investors snapped up shares beaten down by worries over deteriorating credit conditions.
Major stock gauges zigzagged wildly throughout the session. The Dow swung between positive and negative dozens of times and the S&P 500 changed direction even more frequently.
In the final minutes of trading, the Dow shot up around 180 points and then trimmed a modest slice off that gain to close up more than 1 per cent - the mirror image of the previous day's last-minute swoon by the blue chips.
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In the previous day's trading in New York, American Home Mortgage Investment Corporation's share price tumbled after it said it might have to liquidate assets.
The company's potential collapse is viewed as serious as it holds mainly better-quality loans.
Until now, concerns had focused on companies holding "sub-prime" loans made to borrowers with poor work and credit histories.
The American jitters also affected Australia, where the benchmark index fell more than 3 per cent.
AMP Capital Investors head of equities Guy Elliffe said US problems were being felt on the local market for several reasons.
The first was that stocks were becoming more risky than their returns justified as the market became more volatile.
"In other words, the returns investors are expecting are widening. People are wanting to get paid for risk, and that causes all equity and bond assets to have a downward adjustment in price.
"Secondly, you'd have to say the probability of a US recession has increased and, if so, then the probability of a New Zealand recession has increased slightly too and that's affecting asset prices."
Elliffe said that in any market correction, "you've got to look at the level of excess in the underlying market".
In the US, those excesses were most evident in the housing market.
In New Zealand there were some excesses in consumer debt levels and spending.
Rozanna Wozniak, chief economist at fund manager Arcus, said her firm had been expecting a repricing of risk on international markets, and the US sub-prime problems had been a catalyst for that.
The repricing of risk was affecting the yen carry trade on the currency market, credit spreads, and was also reflected in the difficulties some private equity firms were having in obtaining finance.
But despite what was happening in the US housing market, many other markets around the world were still looking healthy.
"Then you look at New Zealand, and if you take away the private equity deals, what have you got left?
"You've got an economy that's looking more shaky now than six months ago, with four increases in the official cash rate, expensive looking sharemarket valuations and weak earnings growth."
Wozniak said it was too early to tell whether the events of the last week were the start of something more sustained, "or just a short-term phenomenon like we saw in February".
Elliffe said the global repricing of risk was probably at least "some reasonable way through the process".
But volatility had increased, "and I don't see any strong reason why that would dissipate".
ABN Amro Craigs broker Bryon Burke said the Wall St fallout was brought closer to home yesterday when Macquarie Bank's shares fell after it said two of its investment funds had sustained losses because of unfavourable conditions on US securities markets.
Burke said the fall on the New Zealand market was more because of a lack of buyers than aggressive selling.
Even blue chip stocks like Fletcher Building and Contact Energy were not immune this time - reflecting their large numbers of overseas investors.
Fletcher Building was down 16c to $12.34, Contact fell 5c to $9.20. Telecom also fell 5c to $4.49.
THE BIG HIT
* Over the past four days of trade the NZX-50 index has fallen by 167 points or 3.9 per cent.
* That has cut the market's total capitalisation by $2.1 billion.
* The slump has reduced the market's gains this year to 2.7 per cent.
