Meteoric rise sets scene for NZX pullback

Photo / Kenny Rodger

After several months of "mind boggling" gains from March's dismal lows, equity markets around the world, including the NZX, are due for a correction, say stock watchers.

After losing more than 2 per cent on Monday, the NZX-50 looked set to give up a similar amount of ground yesterday after US, Europe and and Asian markets suffered sizeable losses.

Monday's session saw US stocks suffer their worst loss in seven weeks on weak economic data from Japan and disappointing commentary from retailer Lowe's.

The Dow Jones industrial average shed 2 per cent, the S&P 500 dropped 2.43 per cent, and the Nasdaq Composite Index lost 2.75 per cent.

However, while the New Zealand market lost close to 2 per cent in the first hour of trading, it clambered off its lows during the session to end the day just 0.47 per cent lower at 3071.58.

The sharp fall and subsequent recovery was seen in top stocks like Fletcher Building which was down 23c to $7.41 early on but closed 16c up at $7.80 and Contact Energy which fell 14c to $6.15 and ended the day just a cent lower than its open at $6.28.

First NZ Capital research manager Barry Lindsay said the markets' gains from their March post-credit crunch lows, when investor confidence was at its lowest ebb, had been "absolutely mind boggling".

Between that time and last week, the NZX-50 had gained 24 per cent, and other markets, including Japan's Nikkei and Wall St's S&P 500, were up almost twice that.

"We'd been expecting some kind of correction - prices can't keep going up forever.

"You have to ask whether too much good news has been built into prices and I think we have, in the short term, reached a bit of an overbought position hence the correction which was quite sharp overnight in Europe and the US.

"In the scheme of things, however, 2 per cent off after gains of 40 per cent and more is hardly anything to get worked up about. The recovery we've seen is all linked to the brightening prospects for the global economy and I feel that still remains the case, the prospects have not dimmed." In fact yesterday's session saw buyers entering the market, Lindsay said.

"We would suggest that any pullback is going to provide the opportunity for people who haven't already set themselves for recovery to select the companies that are poised to do better."

Keith Poore, head of investment strategy at New Zealand's second largest private sector fund manager AXA, said his firm was "still seeing value in offshore and domestic markets even though the rally has been spectacular and we don't expect it to continue at the same pace it has over the last few months".

AXA is overweight in emerging, developed and Australian equity markets, and slightly underweight in the local market based on the belief that having fallen further, offshore markets will recover further.

In addition, AXA believed Australia's exposure to the Chinese market meant its stocks, particularly in the resource sector, were well positioned to benefit from a recovery.

Meanwhile, the weakness in equity markets saw the return of risk aversion as a major factor on foreign exchange markets. The kiwi dollar closed at US66.89c, a sharp fall from Friday's 11 month high of US68.86c.

"You've got to remember the New Zealand and Australian dollars have had a bit of a meteoric rise in the last couple of weeks, I don't think it could really continue, we expected to see a pullback and it's happened," said Derek Rankin of Rankin Treasury Services.

But he didn't believe the fall marked the start of a downtrend and stuck to the view that the US Government's quantitative easing would continue to devalue the greenback.

DUE FOR A BREATHER

Equity market index gains from March to last week:

* NZX50: 24 per cent
* S&P: 50044 per cent
* Nikkei: 47 per cent
* FTSE 100: 33 per cent
* ASX all ords: 41 per cent