NZ steady as world slides

By ELLEN READ markets writer

New Zealand equities continued to outperform global markets over the past three months.

While in the third quarter many equity markets sank to new lows - weighed down by modest global growth, corporate earnings reassessments and heightened political risks - the New Zealand market held its head up.

And the reason, according to market players, is the strong domestic economic growth over recent quarters which led to a spectacular reporting season, tempering local declines.

End-of-quarter figures show the NZSE-40 gross index declined 2.5 per cent over the quarter while the NZSE-40 capital (which doesn't include dividends) fell 3.7 per cent.

These declines compare favourably among the global figures ranging from a 7.4 per cent drop in the Australian All Ords to a 20 per cent fall in the United Kingdoms' FTSE-100.

Locally, Verizon's Telecom selldown late last week pulled the index lower for the quarter - unfairly, as the share price would have been expected to bounce back.

The 19.9 per cent stake was sold at a discount - about $4.35 - pulling Telecom's share price down to end the quarter. This week it has bounced back, a move which if included in the Q3 index data would have lessened the decline.

European equity markets have been hit by weakness in Germany, the region's economic powerhouse; Japan has been walloped by the banking sector; and in the United States, the "tech wreck" and corporate governance scandals have had their effect.

"In one way or another they've all got their own problems which we seem to have managed to avoid," said ASB Bank chief economist Anthony Byett.

The consequent global rerating process was continuing, muddied by the prospect of a war with Iraq and the risk of high oil prices, he said.

"It is not so much that global growth rates are declining but rather that they are not increasing at the rate earlier projected. This is putting pressure on corporate profitability and share prices - to the extent that faster growing profits were built into prices."

He said while New Zealand markets had not been immune to the global changes, local share price and bond rate declines had been more modest as a result of a higher domestic growth rate.

First NZ Capital economics and strategy director Jason Wong agreed that relative economic conditions played a role in New Zealand's ongoing equity outperformance.

While global analysts were busy revising down their earnings expectations for European and US companies, he said, New Zealand was enjoying one of the best reporting seasons for years, leading to many earnings upgrades.

Domestically, looking at sectoral performance over the third quarter, defensive stocks tended to outperform, Wong said.

The utilities sector performed well, reflecting the increased corporate activity in the sector - of the top five performers in the NZSE-40, Natural Gas Corporation announced that it was divesting its retail gas customers and electricity generation assets while Auckland electricity network company Vector made a takeover offer for UnitedNetworks.

At the other end of the performance chart Tranz Rail continued to plunge as its balance sheet came under the spotlight, Wong said, and insurance stocks performed poorly, a global phenomenon not helped by plunging world equity markets.