Record-high trading on the country’s dominant online share-trading platform and timely surveys paint a radically different picture of retail investors to the derogatory stereotype.
There are a couple of things worth noting about Australia’s seven million retail share investors – they invest for the long term and they are smarter than you think.
Chanticleer was reminded of these traits when sifting through the latest data about retail investor sentiment and retail share-buying activities during the coronavirus market turmoil.
Share trading by the so called “mum and dad” investors reached extraordinary levels over the past month, according to data from online share-trading platform CommSec, which is a good proxy for retail investor activity thanks to its 50 per cent market share.
In March, CommSec experienced the 15 busiest days in its 25-year history as measured by trading volume. During the global financial crisis CommSec had 90,000 to 100,000 trades on peak days.
Over the past few weeks, CommSec has recorded almost 500,000 trades on the busiest day, with volume averaging between 300,000 to 400,000 trades a day.
Richard Burns, who is executive general manager of CommSec, says the existing active customers have been trading and customers who had not traded for some time have come back into the market.
Younger investors have been using the bank’s new CommSec Pocket App to trade shares.
“We have seen people looking to enter the market in a sensible manner by adopting a diversified portfolio approach rather than focus on a single stock or a couple of stocks,” Burns says.
“That is helping them to manage their investments in a balanced way, which also helps to smooth out the volatile swings we have seen in the market.”
Fifteen years ago, the average trade on CommSec was about $3500; these days it is about $5000. When you take into account inflation, it’s clear retail investors haven’t become more aggressive.
Following in institutional investors’ footsteps
But the increased volume of share-trading activity since the coronavirus hit points to the desire of retail investors to take advantage of market corrections, just as institutional investors have done.
Both institutional and retail investors have been ploughing into the market either to average down the price of existing holdings or buying stocks previously regarded as too expensive.
Mike Blomfield, who is chief executive of research house Investment Trends and former head of CommSec, takes the pulse of retail investors every week with a survey that gives insights into their sentiment towards share investing.
Investment Trends asks for views on the market for the coming 12 months. It asks: What are your return expectations excluding dividends for the S&P ASX All Ordinaries Index?; What are your dividend return expectations (yield)?; and Will the market finish higher or lower in 12 months’ time?
The expected return from last Saturday’s survey was 6.4 per cent, the highest level since the global financial crisis a decade ago. This expected return is up from 5.2 per cent on March 14, 1.3 per cent on March 21, 2.8 per cent on March 28 and 1.4 per cent on April 4.
Last Saturday’s survey found 66 per cent think the market will go up over the next 12 months.
Blomfield says the data provides three useful insights. First, the volatility of return expectations is high, but as a segment retail is not of the view that the sky is falling.
Second, there appears to be an understanding among retail investors that dividends are going to be reduced in the near term and, third, right through the last seven weeks, in only one week did retail investors believe the market would be lower in 12 months’ time – they are medium- and long-term believers in Australian equities.
This fits with the data collected about retail investors on the share registers of the top 20 Australian companies. This shows the average retail investor has been on the register for more than 10 years.
Bottom still to come
Over the past three weeks Investment Trends, which has just done a new study of share ownership for the ASX, has been asking a simple yes/no question about whether or not the Australian market has reached its bottom yet.
Last Saturday’s survey found 24 per cent believed it had bottomed, compared to 20 per cent on March 28.
This view puts retail investors in the same camp as institutional investors judging from comments made on Thursday by John Coombe, who is principal consultant at JANA.
Coombe is arguably the most influential asset consultant in Australia given that he advises on the asset allocation of about $600 billion in superannuation fund assets.
He told investors on the Future Generation Australia market briefing that it would be a mistake to think the market has bottomed.
“All the bad economic data isn’t out there yet,” he says. “I reckon the market’s going to freak out when it sees how bad it really is.
“I could be wrong. But I think it’s gonna be horrendous. You don’t put this many people out of work, shut down businesses, stall the world economy and think the most the market is going down is 20 per cent.
“It just doesn’t feel right. As one of my trustees said to me, and he shall remain nameless, people are believing politicians and believing in their ability to deliver on all of those promises and yet every time there’s some harsh economic news, the market sells off.”
In a note to clients this week, JANA highlighted the dangers of trying to pick the bottom of the market with the publication of two charts of the performance of the S&P 500 after the dotcom crash and the global financial crisis. In both cases, the index had two big rallies before further large sell-offs over two-year periods.
After the dotcom crash, the S&P 500 fell 27 per cent, rose 19 per cent fell 26 per cent, rose 22 per cent and then fell 33 per cent. After the global financial crisis the index fell 18 per cent, rose 12 per cent, fell 47 per cent, rose 25 per cent and then fell 27 per cent.
When Investment Trends asked investors if they had changed their holdings of Australian equities in the past two weeks, it found retail investors had remained buyers for the long term and were more likely to buy in a correction than they were to sell.
On Saturday, April 11, a third of those in the survey said they had increased their holdings, 61 per cent said they had maintained their holdings and 10 per cent reduced their holdings. The figures were similar for the week ending March 28.
Finally, to get an idea of what retail investors intend to do next, Investment Trends asked if they intended to change their holdings of equities in the next two weeks.
For the fortnight ended April 11, a third said they would increase their holdings, just over two-thirds said they would maintain their holdings and only 3 per cent said they would reduce them. On March 28, almost 40 per cent said they would increase their holdings.
One way of explaining the likelihood retail investors will continue to buy Australian equities is the imminent round of share-purchase plans, which are an integral part of market-wide capital raisings.
It would seem the dumb retail investor is a myth. In fact, retail investors are quite astute and not inclined to panic during times of crisis.
By Tony Boyd