Analysis: New Zealand barely blinked as markets fell globally, but it doesn’t exist in isolation and the potential for volatility might be around for a while yet.

Investors (and journalists) had a rude awakening on Tuesday, with headlines declaring global share market bloodbaths as the Nasdaq, Nikkei and ASX shed billions as a result of a confluence of bad news.

Weak employment data out of the United States, the return of positive interest rates in Japan (its negative and neutral interest rates were a major source of cheap funds globally), a dramatic downturn in high-growth tech stocks, and lowered earnings forecasts from big internationals were met with anxiety by investors.

There’s probably more to the story, with volatility commonplace ahead of American elections and the backdrop of an escalating conflict in the Middle East.

The falls were significant - Japan’s Nikkei 225 dropped 12.4 percent in a day before staging a recovery.

On Tuesday the S&P500 index, which tracks the 500 largest companies on the US stock exchange, closed three percent down in a day. Trading will have resumed on publication of this article.

New Zealand’s stock exchange was also painted red but fared well by comparison, with the S&P NZX 50 index (which follows the 50 biggest stocks on the NZX) closed down just 0.15 percent in the day. That follows a 1.5 percent drop on Monday.

There’s a pretty clear reason New Zealand didn’t suffer the same fate as the US markets.

Our listed companies are largely defensive in nature - the likes of utilities and property, while America’s market is dominated by tech companies that have taken a punishing.

Tech firms and big hopes for artificial intelligence (or AI) have driven market growth over the past two years, with fears that the amount of cash being funnelled into what is still a speculative and very juvenile product could lead to a damaging financial bubble.

Information technology companies make up the largest slice of the S&P500 at 31.4 percent, while just 1.6 percent of the NZX 50 fits into that category.

Much of that is made up of the key tech stocks: Intel, Nvidia, Apple, Microsoft, Amazon and Meta.

New Zealand’s index is dominated by industrials (27.7 percent), healthcare (25.7 percent) and utilities (17.7 percent), asset classes which should - or at least can - perform well in challenging economic conditions.

That’s not to say New Zealand’s tech companies aren’t facing difficulties.

Alex Gordon, a partner at Wellington-based tech analysis firm Clare Capital, says the tech crash has hit across the board.

The firm produces a quarterly Cloud Index, tracking firms from New Zealand, Australia and the US that operate predominantly cloud services.

※Looking at the companies in this set, about 95 percent are down over the last couple of days. We are seeing the same trends for the Australia/New Zealand tech shares as we are with the US ones,§ Gordon says.

NZX tech decliners on Tuesday included Trade Window Holdings (down 2c/eight percent) and Rakon (down 3c/3.75 percent).

It wasn’t just tech firms that fell, with medical tech innovator TruScreen down 11 percent and a wide range of industries also showing red.

There were also some big gainers - NZ Herald owner NZME was up four percent while recent additional Santana Minerals, a dual-listed gold miner, was up 5.97 percent.

Gordon says it’s too early to tell where this all goes for the tech market.

※While there’s been a significant movement in a short space of time, there is always a certain level of day-to-day volatility in markets.

※We think it’s too early to see how much of this is short-term driven compared to a more underlying trend.§

It’s tempting to relate the slump in AI to the dot-com crash of the early aughts when overinflated and overhyped internet companies came crashing down, causing a protracted decline in the S&P500.

By and large, AI businesses have a stronger foundation than internet companies that could be started by any average Joe.

Gordon says the current tech market probably isn’t a bubble about to pop. ※We’ve seen multiples for Cloud Index companies stabilise at a level well down from the highs of a few years ago - so don’t see a big risk that this is a ＆bubble’ bursting in the market.§

The AI stabilisation isn’t the only factor at play, with US employment market troubles and the Japanese yen shakeup driving international markets down.

The Japanese market was quick to bounce back after its substantial fall, but that doesn’t mean the shock is one and done.

Clare Capital aren’t the only analysts keen to remind everyone of the wider picture.

In a research note on Tuesday, Harbour Asset Management said investors shouldn’t lose sight of the fact despite some significant falls, global equity markets were still in positive territory in the year to date. ※That likely reflects the fact that in broad terms, corporate earnings are still performing well.§

Harbour’s analysts didn’t see why the shock had been so intense. For instance, while it came earlier than expected, the Japanese rate rise followed on from the country’s central bank abandoning negative interest rates in March.

While some investors may have been over exposed to Japan, Harbour said the end of deflation there and normalisation of policy would ordinarily be good signals for investors.

While New Zealand’s share market stood strong, what’s bad for the global economy will inevitably be bad for the local stock exchange.

And Wednesday is a new day, bringing with it a chance for more volatility to seep in, with quarterly labour market statistics due out in the morning.

The general expectation is unemployment has loosened further, hitting mid-pandemic heights. If this is how the unemployment data plays out, it will heap more pressure on the Reserve Bank to cut interest rates - a shot in the arm for the markets in usual circumstances.