Volatility in the New Zealand dollar, uncertainty over issues faced by Telecom and falling interest rates appear to have prompted an exodus by foreign institutional investors, according to ABN Amro Craigs broker Peter McIntyre.
"There's too much movement for it not to be institutionals heading back offshore," Mr McIntyre said.
Telecom opened at $3.03 yesterday and traded down to a low of $3 before closing up at $3.03, but on high share volumes worth $63.4 million - almost half the total NZX's turnover of $131 million yesterday.
Telecom remains at the head of the NZX Top 10 companies by market capitalisation at $5.6 billion.
However, Contact Energy is heading towards the top spot with recent gains and a market cap of almost $5.2 billion.
The see-sawing kiwi, itself near two and a-half year lows around $US66.5c, had prompted foreign investors to flee Telecom stock, believing they could buy back in when the kiwi sank lower, Mr McIntyre said.
"Telecom has a raft of problems at present. The regulatory risk [three-way break-up of the business], questions over its dividend payments and all the capital expenditure required in the next few years creates a level of uncertainty," Mr McIntyre said.
Earlier in the year, investors had shunned the jittery global equities markets facing the first repercussions of the global credit crunch and instead turned to the commodity markets and high-interest, high-risk currency markets, including the New Zealand dollar, for alternate investments.
However, Mr McIntyre said recent economic downturns in the United Kingdom and European economies had prompted a price weakening in commodities, compounded by worsening unemployment figures in the United States, which has driven investors back to equities markets.
"It doesn't help that in all the Western countries New Zealand will be the first country to go into technical recession this month," when two consecutive quarters of negative growth were confirmed, Mr McIntyre said.
Mr McIntyre said Reserve Bank Governor Alan Bollard could opt to drop the interest-driving official cash rate (OCR) today, not by 0.25 basis points as widely predicted but by 0.50 basis points to 7.50%.
"We may well see a more aggressive stance to OCR cuts," he said.
While a 7.5% OCR would remain one of the highest rates in the developed world, foreign investors such as those in Japan are seeing an erosion in returns and withdrawing investments from New Zealand, preferring the equities markets elsewhere, Mr McIntyre said.
New Zealand's current account deficit, which is funded by overseas investment as the economy spends more on imports than it earns from exports, is one of the highest in the developed world at 8% of gross domestic product.
"This is cause for alarm as the funding of our current account deficit comes from overseas where the cost of credit has increased dramatically. This will add further pressure to [kiwi] currency weakness and to the overall current account deficit itself," Mr McIntyre said.
