Australian Retail Investors And The Market Turmoil

It’s not just Australia where reports are emerging that retail investors are jamming brokers with orders as shares shed record highs and expensive valuations across markets.

Undoubtedly, initial scepticism and fear caused heavy selling in the equity markets worldwide amidst spread of contagious coronavirus. Panic and short-sightedness dominated investors’ portfolio management strategy

However, earlier this month, a Singapore based media house noted that retail investors have been pumping a lot of money into the markets as shares entered bear territory last month. As per SGX data, individuals have pumped SGD 2 billion in March, up 50% from the previous month.

Global media has reported that brokerages in Australia, India, Singapore, South Korea have signed up a massive number of new customers. It was also reported that Australia’s largest retail broker, CommSec, had experienced a fourfold increase in new account openings in March.

It is also believed that Australian retail investor often invests for the long term, and moments like a market crash could be one of the most desired events for long term investors.

A sharp rise in volumes also suggests that retail investors might be rebalancing portfolios as COVID-19 implications are yet very much uncertain. At the same time, the growing level of sophistication among investors could be one of the reasons for high participation as well.

Moreover, rational investors are trying to tap the burgeoning investment opportunities thrown by the market correction. They are keenly eyeing businesses relatively immune to the pandemic, including players in healthcare space, digitisation driven technology sector, education sector, growth-driven blue chips, etc. Businesses that are able to strengthen/maintain their balance sheet, secure cash flow, adopt cost-effective strategies and outline strategic business plan amidst market turmoil are considered lucrative by the market participants.

Retail Investment Landscape

Australian retail investors have been a vital part of the capital markets ecosystem of the country. It is also believed that dividends by Australian blue-chips are bread and butter to many elderly Australians, especially the ones that didn’t have superannuation systems during their times.

Australian Stock Exchange notes that it has been profiling Australian investors since 1986. In 2017 Investor Study, the exchange found that roughly 7 million Australian adults invest on a securities exchange, equating to 37%.

Of this 37%, just less than a third held investments in shares, 7% held derivatives and 11% invested in other on-exchange investments. It was also found that 24% of the investors fell in the age bracket of 18-24 years compared to 10% in 2012.

Investors between 25-34 years constituted 39% compared to 24% in 2012. Given the relatively young investor base, it also indicates that a large part of Australian investors withstand the short term volatility and accumulate wealth over a long term horizon.

Also Read: Setting your own equity investment guidelines in this crisis

The study also highlighted the lack of diversification among the Australian investors and noted that retail investors do not well understand diversification.

Only 40% of the investors had a diversified portfolio, 15% didn’t know diversification, and 40% didn’t have a diversified portfolio. Roughly 75% of share market investors only invested in Australian shares.

Among the top financial goals of next generation investors, most of them intended to accumulate wealth, followed by saving for a home deposit and saving for travel. Around 81% of the investor base wanted guaranteed or stable returns with an expected average return of 8.2%.

The study suggested that 37% of next generation investors seek financial advice for investment ideas, tailored solutions, diversification and risk management. Meanwhile, 42% of next generation investors were trading online, a 36% through full-service broker and 24% were trading through a financial planner.

KPMG’ Retail Investor Findings

In September 2019, KPMG published a study on retail investors. It was highlighted that Aussie retail investors, apart from returns, require portfolio companies that exhibit transparency and honesty. They also expect portfolio companies to have quality product and services and ethical businesses practices.

It was also revealed that 57% of the Australian retail investors were willing to accept lower financial returns from portfolio companies if companies are operating ethically towards customers, employees and community.

Retail investors tend to prefer the reputation of the business over dividends. Around 72% of investors wanted to invest in a reputable business, while 69% preferred companies with recent dividend.

Also Read: Guide to Invest in 2020 Bear Market

Australian retail investors pay close attention to executive remuneration, and around 38% cited excess pay to executives as a selling trigger point. Other selling triggers included poor financial performance, lack of transparency, poor regarded management, and business ethics.

It was also found that young investors pay more attention to the trust factors, and middle-aged investor emphasises on the financial performance of the stock while conducting due diligence.

The study also suggested that female investors pay additional attentional to transparency and honesty factors. Also, many female investors consider non-financial matters of the business before investment decisions.

Retail investors prefer reading annual reports of the businesses, apart from financials, they like to read about the future plans of the business, ESG strategies and remuneration of leadership.

Interestingly, only 10% of the Australian retail investors chose not to study the annual reports, while 16% of the investors noted that they read annual reports of the business in detail.

Bernard Salt of KPMG noted that the investor community is increasingly becoming educated. It is due to a range of factors, including wealthier Australian middle class, superannuation guarantee, and the rise of self-managed super funds.

Mr Salt stated that baby boomers are likely to hunt for yields, while older boomer need reasons to invest and rationale to divest. Meanwhile, the most educated investors are likely to be the millennials, who are the kids of baby boomers with interest in saving and superannuation.

Although current equity market scenario is quite volatile, however, effective understanding of the market dynamics and cherry-picking lucrative and potentially profitable opportunities for a long term perspective may be considered as the safest and the best investment strategy at the moment.

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