No need for sharemarket panic, analysts say

Investors have no need to panic, sharemarket analysts said today following the market's nasty 2 per cent drop yesterday -- the worst in two years.

The slump was caused by a wave of selling worldwide initiated by Wall Street on Friday. However, the US market had a more settled session last night although US blue-chips fell for the fourth session in a row.

The Dow Jones industrial average closed 16.26 points, or 0.16 per cent, down at 10,071.25 and the Standard & Poor's 500 Index rose 3.36 points, or 0.29 per cent, to close at 1145.98.

The New Zealand market was more buoyant this morning, and staged a slight recovery, led by bellwether stock Telecom.

Simon Bottherway, chief investment officer with Brook Asset Management said some sectors in the New Zealand market had shown surprising recent strength but overall the selling appeared overdone.

He said the smaller to mid-cap market had had five great years and many stocks were priced as if they were going to have another five great years.

"That's a most unlikely scenario," he told Radio New Zealand.

He said he was surprised as the indiscriminant nature of the selloff.

"In the wash over time you will see the better stocks rise back up to better levels than you are seeing today."

Ian Witters of Macquarie Equities said there were some good buys out there.

"In the New Zealand markets, clearly you are seeing some value emerging because New Zealand and Australia, both those markets have had a strong run up, and a lot of our companies here in New Zealand are defensive by nature."

He cited Auckland International Airport, Sky, Contact and Telecom against cyclical stocks such as Carter Holt Harvey and The Warehouse.

He said the retail sector was one to avoid in difficult times. It would be hit be reduced discretionary spending.

ASB Securities managing director Tim Preston told National Radio markets worldwide had had a great run and some had been trumpeting a paradigm shift of low inflation, low interest rates and good growth.

"Suddenly that new paradigm, as a lot of these paradigms in the past, proved to be just another cycle and that's reversed."

He said economies were experiencing slowing growth, rising interest rates, high oil prices and some inflation fears. There were concerns about the budget and current account deficits in the United States.

China was pushing up commodity prices but it was also a big exporter and that had inhibited manufacturers elsewhere from increasing profits.

"There's plenty exercising the mind globally," he said.

Locally, he said profit warnings from companies such as Feltex and Carter Holt Harvey had unsettled the market.

However, selling in some small stocks had been exaggerated because of illiquidity.

Mr Preston said with interest rates at around 7 per cent people should be looking for 13-14 per cent returns on equities to justify the additional risk, particularly with corporate profitability slowing.

"Corporates are obviously not going to have the good years that they have had previously even though some of their profits will still be okay. It just doesn't warrant the risk. I think the valuations really got stretched," Mr Preston said.

He said with house prices having risen, people felt wealthier and more able to take on debt and borrowing.

With the perception that house prices may retreat, there was now a negative wealth effect.

While corporate New Zealand had balance sheets in good shape the same could not be said for individuals' personal balance sheets, he said.

Sentiment had turned negative but Mr Preston added: "Definitely don't panic.

"Good companies out there that have good cash flows, good management and will continue to create those cash flows. Their balance sheets are good.

"It is not an '87, it's not a tech crash or anything. It's just a valuation adjustment to take stock of the changing environment both corporate and economic."

On Friday, the Dow Jones recorded its biggest one-day slump since May 2003 on Friday, taking the index to its lowest level in 2005.

The catalyst was computing giant IBM announcing a poorer-than-expected profit, driving technology stocks lower.

Deutsche Bank chief economist Ulf Schoefisch said poor economic indicators had had a domino effect.

"It's being driven by the less-than-convincing data coming out of the States.

"People are not sure whether the US recovery is facing some difficulties.

The March-quarter survey of business opinion by the Institute of Economic Research made public last week showed a net 28 per cent of businesspeople expect the economy to worsen, a rise of 22 per cent from the December quarter.

A One News-Colmar Brunton poll revealed an 8 per cent increase in the number of people pessimistic about the economic outlook.

Polls of consumer confidence taken by TV3 also show a similar drop.

- NZPA