Small Investors Play Safe, But Will Time Prove Them Right?

The Age

Tuesday April 19, 2005

MALCOLM MAIDEN

THE Australian sharemarket fell by more than 50 points as soon as trading began yesterday, and brokers that deal on behalf of small investors led the charge. Buying by the big investment funds then pushed the market slightly higher until the final hour, when nervousness about Wall Street's resumption of trading overnight took over. The presence of small investors was best signalled by the CBA's broking subsidiary Commonwealth Securities, which specialises in online trading for smaller shareholders.

CommSec was twice as busy as usual, handling over 40,000 buy and sell transactions. It accounted for 6.7 per cent of the $3.8 billion total trade, putting it ahead of larger rivals including Credit Suisse First Boston, JP Morgan, ABN Amro and Morgan Stanley, and it was a net seller.

The big investors traditionally sell shares to small investors when prices are near their peak, and buy back in when prices are in the gutter - but it wasn't obvious yesterday who made the best call.

Fears of a global economic slowdown are driving the correction, but the economic evidence is not overwhelmingly negative. One of the triggers for Wall Street's selling last week was weak US retail sales in March, for example, but they still grew in the month, by 0.3 per cent. US consumer sentiment is also still relatively firm.

Markets are sensitive to economic statistics, but company profits are literally the bottom line, and the outlook for earnings, in the US in particular, is likely to be decisive.

The selling will dwindle if profits are confirmed or only lightly trimmed, because at current share prices earnings are fairly valued.

But if companies continue to warn that profits are being squeezed by softer demand, higher interest rates and more expensive business inputs including oil, the sell-off will continue - and the small shareholders who exited yesterday will have posted a rare market-timing victory.