Easy-access share market
far from straightforward
In my March column I closed with the Warren Buffet quote, "be fearful when others are greedy and greedy when others are fearful". At that time, I was focusing on the second part of the quote and referencing the buying opportunities that are created when the market is falling and investors can only see a bleak future. We now know that investment markets bottomed out around the 23rd of March. Most markets have staged some form of recovery since then, with some even posting all-time highs.
The question I am now asking myself is: has the world improved so much that the COVID-19 - induced economic uncertainty is now behind us?
It is true that unprecedented levels of government support and central bank action means that the world is unlikely to suffer a 1930s style economic depression. But is the global economy really resuming 'business as usual'? Because this is what the recovery of these markets seems to be saying. The term 'irrational exuberance' comes to mind.
Historically, one of the measures of markets becoming overheated is an increase in the capital that flows into share markets from retail investors, so called 'mum & dad' investors.
One of the more recent developments in investment markets is the growing popularity of online share trading platforms such as Sharesies in New Zealand and Robinhood in the United States. These trading platforms provide an entry into share trading for a large, usually younger, population of otherwise inexperienced investors. Sharesies' customer base increased by 75,000 to 166,000 since the onset of COVID-19.1
The pattern of trading in a market can say a lot about the participants. The graph below shows the average number of monthly trades on New Zealand's Exchange (NZX) vs the average value of those trades over the last 14 years. In the last 18 months we have seen a dramatic increase in the number of trades (increasing around ten-fold) while at the same time the average value of those trades reduced by around 75%. A change of this type is suggestive of retail speculation. The same trend has also been observed in the US share markets.
I must stress that platforms like Sharesies have an important role to play in improving access to investment markets. Ideally they will help a new generation to understand the long-term wealth that can be accrued through share ownership.
However, I am worried that short-term speculation on share markets, with little thought towards an investment strategy, diversification or risk profile, means some retail investors are investing akin to betting at the casino. This is evidenced by the share prices of some highly volatile and troubled companies being pushed higher by retail investors. The immediate risk is that the winning streak will come to an end and, with it, the wealth of many thousands of inexperienced speculators will decline sharply. A longer-term risk is that we could create another generation of New Zealanders that are permanently frightened out of share ownership, as happened following the 1987 share market correction.
These online platforms often also provide access to managed funds as well as exchange traded funds (ETFs). The diversification that these investments offer may go some way to reducing the specific risk associated with investing in a single share. However, in the absence of advice, I suspect that historic fund performance will be the primary selection criteria. And no matter how often it is repeated, investors tend to forget that "historic performance is not a good indicator of future performance".
Some platforms offer risk assessment tools and general guidance on portfolio construction. This can allow a motivated individual to create a rudimentary plan that connects the type of investments held with their goals and time frame. But it takes a highly motivated person to work through these processes on their own.
Some financial advisers may see such platforms as a business threat. In my view they provide advisers with an opportunity to differentiate their services and highlight the sophistication of their offering. Helping investors navigate the volatility of a post COVID-19 investment world and achieve their financial goals requires much more than just picking funds, or single shares, from an online menu.
The question I am now asking myself is: has the world improved so much that the COVID-19 - induced economic uncertainty is now behind us?
It is true that unprecedented levels of government support and central bank action means that the world is unlikely to suffer a 1930s style economic depression. But is the global economy really resuming 'business as usual'? Because this is what the recovery of these markets seems to be saying. The term 'irrational exuberance' comes to mind.
Historically, one of the measures of markets becoming overheated is an increase in the capital that flows into share markets from retail investors, so called 'mum & dad' investors.
One of the more recent developments in investment markets is the growing popularity of online share trading platforms such as Sharesies in New Zealand and Robinhood in the United States. These trading platforms provide an entry into share trading for a large, usually younger, population of otherwise inexperienced investors. Sharesies' customer base increased by 75,000 to 166,000 since the onset of COVID-19.1
The pattern of trading in a market can say a lot about the participants. The graph below shows the average number of monthly trades on New Zealand's Exchange (NZX) vs the average value of those trades over the last 14 years. In the last 18 months we have seen a dramatic increase in the number of trades (increasing around ten-fold) while at the same time the average value of those trades reduced by around 75%. A change of this type is suggestive of retail speculation. The same trend has also been observed in the US share markets.
I must stress that platforms like Sharesies have an important role to play in improving access to investment markets. Ideally they will help a new generation to understand the long-term wealth that can be accrued through share ownership.
However, I am worried that short-term speculation on share markets, with little thought towards an investment strategy, diversification or risk profile, means some retail investors are investing akin to betting at the casino. This is evidenced by the share prices of some highly volatile and troubled companies being pushed higher by retail investors. The immediate risk is that the winning streak will come to an end and, with it, the wealth of many thousands of inexperienced speculators will decline sharply. A longer-term risk is that we could create another generation of New Zealanders that are permanently frightened out of share ownership, as happened following the 1987 share market correction.
These online platforms often also provide access to managed funds as well as exchange traded funds (ETFs). The diversification that these investments offer may go some way to reducing the specific risk associated with investing in a single share. However, in the absence of advice, I suspect that historic fund performance will be the primary selection criteria. And no matter how often it is repeated, investors tend to forget that "historic performance is not a good indicator of future performance".
Some platforms offer risk assessment tools and general guidance on portfolio construction. This can allow a motivated individual to create a rudimentary plan that connects the type of investments held with their goals and time frame. But it takes a highly motivated person to work through these processes on their own.
Some financial advisers may see such platforms as a business threat. In my view they provide advisers with an opportunity to differentiate their services and highlight the sophistication of their offering. Helping investors navigate the volatility of a post COVID-19 investment world and achieve their financial goals requires much more than just picking funds, or single shares, from an online menu.
1. FMA cautions new investors against piling into the NZX if they haven't done their homework, as its Aussie counterpart proves retail investors trying to time the market are failing miserably, Tibshraeny, Jenee, 8th May 2020, interest.co.nz.
Source: NZX.
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This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
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First published in the Otago Daily Times on 14 July 2020, as 'Easy-access sharemarket far from straightforward.'
