A breather may not be a bad thing for overheating sharemarket

The Shanghai Composite Index slumped 6.5 per cent last Thursday. We'd call that a crash. Photo / Getty Images

After a dramatic bull run the New Zealand stock market has started tracking sideways. And that's probably a good thing despite what your next KiwiSaver statement may say.

The local market needed a breather to avoid moving into bubble territory.

The NZX 50 has delivered returns of 18 and 16 per cent in each of the past two years. In fact in the six years between its post-GFC low in March 2009 and its most recent peak it has grown in value by 144 per cent.

For anyone who has been in KiwiSaver throughout this period that is a very good run indeed.

In fact it is so good that we probably shouldn't get used to it. At a time when bank deposits are closer to 4 per cent and the Government is championing a policy of slow and steady economic growth, double-digit returns on stocks were looking precarious.

For the past three months things have been more sedate. The NZX 50 capped its long bull run with a peak at 5911.4 points on March 16. Since then it is actually down about 1 per cent - as at Friday's close.

But that's still a respectable 4 per cent gain for the five months of the year to date.

The New Zealand stock market needs to retain some sort of link to the real world performance of the companies on it.

In fact all stock markets do. But in this country the dynamics for most ordinary investors - particularly those whose exposure is primarily through KiwiSaver retirement savings - mean a super-charged bull market comes with too much risk.

There are few in this country with the stomach for the kind of volatility we see in superheated markets like China's.

Last Thursday the Shanghai Composite Index slumped 6.5 per cent. We'd call that a crash. Volatility is far more normal in Chinese markets although this one did raise a few eyebrows.

In Shanghai stocks have matched the NZX 50's 144 per cent six-year gain in just over one year. That has plenty of people in China now talking about the risk of a bubble. The exchange is often described as a casino.

Last week's big drop represented the 10th largest single-day fall in 15 years, according to Bloomberg News. It also came on the eve of this week's anniversary of a major crash that few in the West even remember. Dubbed the "5/30 Catastrophe", the crash that shook Chinese markets in the week of May 30, 2007, predated the Western financial crisis by almost a year and was precipitated by regulatory moves to increase tax on stock trades

China's markets shed 70 per cent of their value in the next 12 months and took several years to recover.

In New Zealand what we've seen in the past six years no doubt includes a large chunk of post-GFC recovery. Although to be fair that has been aided by some stand-out individual performances. Air New Zealand, Fisher & Paykel Healthcare and Xero spring immediately to mind. But now we've moved beyond recovery mode it seems reasonable to expect a more moderate pace of growth.

The NZX has plenty of potential left in it yet. It added dozens of new companies in the past few years and offers a great mix of growth stocks and dividend stocks which should track positively as long as the economy does too.

It's just hard to see what would justify a return to the double-digit growth of the past two years.

Meanwhile, back in Shanghai, shares rallied 3 per cent yesterday. It doesn't look like this week is going to mirror the fateful first week of June eight years ago. Continued volatility there is probably the only safe bet.