A brutal sell-off of New Zealand stocks this week could be just a taste of things to come, says a prominent market strategist.
The S&P/NZX 50 Index has fallen 4.8 per cent over the past five trading days, including a severe 2.5 per cent plunge on Monday, making it one of the world's hardest-hit indices on that day.
The benchmark index, which remains up 14 per cent in the year to date, closed down 0.5 per cent at 7210.73 last night, following on from a drop on Wall Street overnight on Tuesday.
Large-cap companies - the likes of Auckland Airport, Meridian Energy, Chorus and Fletcher Building - have copped some of the heaviest selling.
In a low interest-rate and bond-yield environment, such stocks have been in-vogue with international and local investors, for the income they provide through dividend payments.
That dynamic has helped perpetuate an equity bull market now well into its seventh year and pushed the NZX 50 to record levels.
However, fear began spreading through markets on Friday about the outlook for United States interest rates, with markets interpreting comments from a Federal Reserve staffer as suggesting a rate hike from the US central bank could come as early as next week.
Rising interest rates and bond yields would reduce the allure of the New Zealand market for many investors.
JBWere investment strategist Bernard Doyle said it was significant that the local market, which tends to be insulated from bouts of global volatility, had been hit harder than many others during the latest rout.
"Over the past few years our rule of thumb has been that New Zealand is a safe haven and [the recent sell- off] was just a glimpse of how we might behave in a sell-off that's led by rising bond yields," Doyle said.
"That suggests that our safe-haven status might be starting to look a little frayed."
Over the past few years our rule of thumb has been that New Zealand is a safe haven and [the recent sell-off] was just a glimpse of how we might behave in a sell-off.
Reports from Opec (Organisation of Petroleum Exporting Countries) and the International Energy Association, which showed that a global oversupply of oil is not likely to ease, have also contributed to equity market jitters.
But Doyle said the selling had largely been driven by markets coming to the realisation that the Federal Reserve isn't going to keep rates at low levels permanently.
A large-scale equity sell-off driven by rising interest rates and bond yields would be "far more damaging" for New Zealand's market than many others, Doyle said.
"[The NZX] is one of the most bond-like equity markets in the world."
Harbour Asset Management portfolio manager Shane Solly said a jump in New Zealand 10-year bond yields had triggered more selling yesterday of large cap NZX stocks.
Solly said foreign investors, particularly from Australia, had been having a major impact on the New Zealand market in recent months.
"That 2.5 per cent move on Monday really was [a result] of people taking some profits off the top," he said. "A heck of a lot [of capital] has pushed in through a narrow door in the last six months and what that's done is make the pricing of New Zealand market - particularly those large cap stocks - hot."
But Solly said it wasn't Harbour's current view that capital would be pulled out of New Zealand stocks en masse.
Federal Reserve governor Lael Brainard brought some short-lived calm to markets earlier in the week when she expressed caution about the risks associated with hiking rates too soon.
Wall Street rebounded strongly overnight on Monday after her speech as markets reduced their expectations for a September rate rise to 15 per cent from 24 per cent on Friday and for a December hike to 54.5 per cent from 59.2 per cent, according to Reuters.
New Zealand's Reserve Bank is expected to hold the official cash rate at a record low of 2 per cent during next week's OCR review and then cut in November.