NEW Zealand shares plunged 3.7 per cent amid signs that some local institutions are reducing their exposure to the market in the aftermath of an inconclusive national election. The NZSE-40 capital index closed down 76.83 points at 2,013.75. Volume was a heavy 37.2 million shares valued at NZ$102.5 million. Short-term bonds yields rose sharply yesterday in line with the dive in equities, but the New Zealand dollar remained steady, traders said. Kevyn Rendell, a broker with C.S. First Boston, said there were signs some local institutions were reducing their equities holdings after neither major party secured a majority of parliamentary seats in Saturday's national elections. The final vote tally is not expected until next week when absentee votes are counted. The outstanding votes could change the outcome in several close districts. Mr Rendell said there was also evidence in the market that some investors were hunting for bargains after this week's declines. The market plunged 6.3 per cent on Monday but rebounded 2.1 per cent on Tuesday. The index has dropped 7.8 per cent since the election. ''I expect we are in for continued volatility until the outcome of the election is known after special votes are counted next week,'' he said. ''While one could say that the bull market was over for the time being, there will be plenty of bounces in the market to provide interest in the near future,'' he said. Mr Rendell said some institutions had decided to sell and use the money to invest offshore. He said sentiment was not helped by a Morgan Stanley recommendation that investors reduce their overall exposure to both Australia and New Zealand. Selling by local institutions would be of concern only if offshore institutions decided to follow suit, he said. Market sources said an internal document from Morgan Stanley had recommended a re-weighting of Australian and New Zealand portfolios, changing its advice from ''slightly over-weighted'' to ''neutral''. ''I still see a little further downside. It may be a bit of an over-reaction to the political situation but it's feeding on the uncertainty, really,'' said Hendry Hay McIntosh broker Jeremy Ashcroft. ''I don't see any upside before Christmas,'' he said. Neville Todd at Doyle Paterson Brown said $102.5 million volume was again heavy. ''In this market, every day there will be another reason, but the underlying thing is that if we don't have buying orders on the day, then the market is going to drift off like this,'' Mr Todd said. ''It may be a matter of a day down, a day up, but the trend in the near term is probably going to be for the market to drift off,'' he said. Mr Todd said economic and corporate profitability fundamentals had not changed. ''It's sentiment that's really driving the issues,'' he said. Among blue chip stocks, forestry group Carter Holt Harvey fell 17 cents to $3.45, despite announcing a 47 per cent lift in half-year profit to $165.3 million. Analysts at C.S. First Boston and Doyle Patterson Brown said the result was in line with expectations, although one said it was not as good as some had predicted. Telecom Corp, the utility controlled by US phone companies Bell Atlantic and Ameritech, fell 16 cents to $4. Turnover was heavy at 6.6 million. Energy and forestry group Fletcher Challenge closed down 13 cents to $4. Company officials told shareholders at the annual general meeting on Tuesday that profit in the year ending next June 30 was expected to be flat, but they expressed confidence about the company's future.