Volatility hits small investors

Retail investors appear to be ducking for cover as the sharemarket ends a period of strong growth.

NZX operating figures for May show the number of market transactions declined for the second month in a row, despite the value continuing to rise.

Chief executive Mark Weldon said smaller investors were becoming less active as the sharemarket went through a more variable period.

"What you've seen, as the market has started to have a little bit more volatility, is the professionals get pretty excited and probably trade a bit more," he said.

"So when there is a bit of bad news and retail [investors] sells, that's when professionals start buying."

Since being launched in March 2003, the NZSX-50 rose steadily until it peaked in March this year, increasing in value by 66 per cent.

It hit 3238 on March 9, but has since dropped as low as 2900. It closed yesterday at 3068.

Weldon said that as the market bounced around during the past two months some retail investors put more money into cash. Anecdotal evidence suggested they were now starting to return to the market.

"When you look at investments over the longer term, you expect there to be occasional flat patches. That's how markets work," Weldon said.

The total number of transactions in May was 50,875. That was up 7 per cent on May 2004 but down from 53,689 in April and 56,1868 in March.

The value of NZSX transactions for the month was $2.6 billion - up from $2.4 billion in April. The May figure was up 15 per cent on the same month a year earlier.

ABN Amro research head James Miller said a drop in retail investor activity was probably inevitable, given the amount the market had dropped in the past two months.

"If anything I'm surprised at how well it has held up," he said.


Most retail investors tended to take a pretty black-and-white approach to the market. "Either it's going up or I'm not there. They all like to be there in a bull market run."

But the decline in small investor funds was just a drop in the bucket compared with the value of institutional trading.

The market capitalisation of the NZSX was $62.3 billion - down from about $64 billion in January but still up 13 per cent on May 2004.

The market capitalisation of the NZAX - the alternative market for smaller companies - also fell in May. It was valued at $430 million last month, compared with $441 million in April. The May 2005 figure was still 25 per cent up on May 2004.

Weldon said there were other positives in this month's statistics.

While capital raising was more focused on debt markets than IPOs this year, it was tracking at about the same rate as last year.

"So companies are still raising investment capital," he said.

The international demand for data about the NZX markets had also continued to improve.