Despite a strong reporting season so far, the effects of the market correction are still being felt, says Lee IaFrate, Executive Chairman of Armytage.

How have the first half-yearly reports been received by the market?

Investors are still spooked from the drop in the market earlier this month.

Any result that has the even slightest tinge of uncertainty is being sold off – on Friday we saw that with Star Entertainment Group that dropped from $6 to $5.40 off their latest figures.

What that tells me is that the market is pretty well priced to perfection – but it is reflective of the skittishness of investors.

Reports will set the trajectory for the months ahead.

What trends have been reported in those released so far?

A lot of the commentary from boards regarding outlooks is “steady as she goes” or “solid” and companies are wary of not coming out with huge earnings-per-share growth.

There isn’t a tone of bursting excitement and that is probably toned down given the spook. If I were a CEO I would have done the same because if you set high targets and miss then investors will be quick to turn their back.

It will be a strong reporting season but it is underwhelming in how it has been received because of the backdrop of what occurred in the start of February.

The better numbers always come out first, and as you come through the end of the February the numbers tend to get worse. Good numbers don’t take long to calculate.

What you are seeing is the initial concern and volatility in the market is just “sell, get me out”. But in the cool calm of day when the market properly absorbs it will re-rate again.

When you are seeing those swings and turnarounds, it is evidence of a highly volatile market — and it all comes back to the start of February.

Will there be long-lasting effects from the volatility we saw in early February?

The spook from February is coming through now — all the way through from the big stocks to the little ones.

It is not sector-specific but market-specific – and signals a change in the capital market thematic.

Essentially, as volatility has increased people have become skittish and are looking to other assets to sure up their value.

This goes right across from the small end to the big end. When you get this sort of thematic in the market, the smalls get hit hardest because they don’t have the dividend safety blanket in place.

In markets of high volatility, the smalls go first, and often the small resources will go the hardest then the industrials.

Tech stocks tend to not get hit as hard.

What alternatives are available to investors?

Fixed interest securities are becoming more attractive as interest rates increase.

These are now getting to the point that investors are willing to take the low interest rate to negate the capital risk.

Three months ago, you were lucky to get 2 per cent. But now they are offering closer to 2.6 per cent which is almost the price point where investors are on the verge of choice.

Ninety-day bank bills are becoming a viable alternative and when they start getting to the 3 per cent point it will be the cross-over point in equity markets.

That option is going to keep growing in the next 3-6 months til June and that’s where any little flitter of surprise will prompt investors to sell.


Lee IaFrate has been in the financial industry for over 30 years, with broad experience ranging from stock broking and funds management to principal lecturer at the Securities Institute of Australia. Lee is the Executive Chairman of Armytage.


This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.