Out of step with the world

By Peter V O'Brien

Friday 21st May 2004

The sharemarket either suddenly became immune from international developments and influences or the whole army was out of step except our Willie.

Market benchmark indices in the US, UK, Japan and Hong Kong were lower on Monday than at the end of last year.

Australia's ASX 200 and all-ordinaries indices improved respectively 1.3% and 2.7%. The Nikkei index in Japan fell 1.6%, Hong Kong's Hang Seng was down 12% and London's FTSE retreated 0.6%.

US indices also declined but had different movements, depending on the measurement. The narrow Dow Jones had a 4.2% drop, the broad Standard & Poor's 500 came back 1.5% and the technology-weighted Nasdaq shed 4.9% of its December 31 figure.

New Zealand's NZSX 50 gross index went up 5.6% in the period, although its peak of 2656.23 on April 23 was about 71 points above Monday's 2588.96.

A narrowly based market in terms of industry sectors compared with bigger countries was part of the reason for this "outperformance." For example, there was no way New Zealand's collection of technology-based companies could have an impact on the local index to the extent overseas counterparts could affect US indices, particularly the Nasdaq.

New Zealand has no general industrial companies of international size, nor the breadth of industrial activity. Telecom is New Zealand's largest company but the organisation "manufactures" virtually nothing from scratch, unlike industrialists in the US, the UK, Japan, continental Europe and Australia.

The New Zealand market is subject to influences which often can be curiously conflicting.

It has been traditional for brokers and investors to each morning check what happened overnight in the US, UK and Europe and adjust local share prices here and in Australia. That still happens, particularly in stocks that attract international investors, while based in New Zealand.

Experienced New Zealand dealers know this market is unable to shrug off cataclysmic international financial, economic and political developments but they also know many companies are small enough to be insulated against general overseas movements.

That has been seen in the domination of second and third line stocks, with capitalisations outside the top 10, in lists of performers published in The National Business Review on a quarterly, half-yearly and annual basis.

Private investors have an advantage over managed funds if they stick to smaller stocks and leave big companies to benchmark-wedded managers.

Every managed fund of significant size will hold Telecom shares, for example, levels being based on the company's capitalisation relevant to its percentage of the total sharemarket.

Telecom at any given time could be a good or poor performer in terms of profitability and consequent share price movement, but managed funds will change holdings of the stock only at the margin.

It seemed more than coincidence that Telecom's price improved 5% since December 31, compared with to 50 gross index's 5.6%, near enough to the same.

The coincidence did nothing to explain the apparent discrepancy between local equity performance and overseas markets, after taking account of the previously discussed economic and industrial structures.

All sharemarkets had to deal this year with wars, suicide bombers and other destructive individuals, concerns about statistics from major economies, interest rates, corporate profitability and, mostly, a substantial hike in oil prices.

While there is no reason Kiwi stocks, individually or aggregated in the index, should not outperform international markets, the net gaps since December were wide.

Other corporate developments could have affected investors' assessments of the basis percentages changes in the indices.

There were three apparently acrimonious takeover offers, full or partial, under way this week, people involved in each one referring matters to the Takeovers Panel.

Rubicon for Tenon, SEA Holdings for Trans Tasman Properties and Rural Portfolio Investments for Wrightson were offers which could divert attention from market statistics. Investors were also bombarded with new floats, ranging from investment companies, (Kingfish, Colville Equities and Salvus Strategic Investments) to children's clothing specialist Pumpkin Patch, which is looking for between $97 million and $113 million from institutions.

Takeovers and offers should not be accepted as sufficiently large distractions from basic assessments of market trends.

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