Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 513

Investors remain remarkably defensive during bull market

More than three years have passed since February 2020, a once-in-a-century month that saw economists, governments and healthcare leaders brace for impact as the COVID-19 global pandemic took hold. Shortly after, many global borders closed and markets tumbled.

To the world’s surprise, the acute market fallout quickly reversed. Australian equities climbed almost 60% to all-time highs, with Big Tech and ETFs dominating headlines. But fast forward three years to today, the rebound is not so clear-cut. Global economic and political events – including the war in Ukraine, rising energy costs and persistent inflation – have created challenges for investors.

For the average Australian retail investor, 2023 has already delivered its fair share of financial challenges. The Reserve Bank of Australia’s 12 interest rate rises in response to inflation has further driven up the cost of living and the average family now pays $7,102 per month just to live and pay bills.

When it comes to equities, retail investors not only have less free cash available to invest, but are also weighing up increasingly competitive cash and fixed interest products such as fixed income, term deposits and savings accounts. As Wall Street forecaster Jim Bianco said, rightly or wrongly, “Cash is no longer trash… you are going to get two-thirds of the long-term appreciation of the stock market with no risk at all”.

So how are today’s equity investors positioning their portfolios compared with how they invested several years ago?

Fintech platform, Openmarkets, recently assessed the portfolios and trading behaviours of almost 100,000 sponsored accounts between February 2020 and today. We’ve noted a number of interesting themes.

Today’s equity investors have a low risk appetite

Australia’s equity investors are the most defensive they’ve been in some time, focusing their trading on large cap companies with large cash reserves and minimal exposure to inflationary pressures in their supply chains.

According to our Investor Defensiveness Index, which ranges from -10 (defensive) to +10 (offensive), Australians were defensive in February 2020 as investors weighed up the market implications of closed borders and global lockdowns. By 2021, a year where hype stocks and finfluencers dominated the press, this cohort shifted to an offensive mindset who were more likely to take on risk. This offensiveness remained in 2022 through the Russia-Ukraine war and the beginning of interest rate rises, before rapidly reducing in 2023. Today, investors have adopted a stance significantly more defensive than at the start of the COVID-19 pandemic.

Fig 1. Openmarkets Investor Defensiveness Index Feb 2020 - May 2023 (Openmarkets data)

From a company size perspective, the past 12 months saw the highest volume of large cap ASX equities traded compared with the prior three years. Interest in higher risk small caps has fallen from a peak in 2021 to 42% of total equities traded. These findings point to a reduction in appetite from investors to take on risk in current market conditions.

Fig 2. Trading by market cap in Feb 2020 vs May 2023 (Openmarkets data)

Diversification is on the decline in 2023

Despite Australian equity investors focusing on lowering risk, our data shows that not all investment behaviours are defensive.

Over the past 12 months, we have seen a surprising decline in the number of equities held by the average sponsored account holder. Portfolio diversity on average has fallen between 4.3% and 5.6% depending on age bracket, with Generation Y and Z showing the greatest portfolio reductions to hold an average of 4.5 stocks.

Baby Boomers reduced their ETF holdings by 7.4%, while Gen Y and Z reduced their ETF holdings by 3.3%.

Despite this decrease, Baby Boomers remain the age group with the most diversified holdings. The average Boomer holds nine stocks in their portfolio, compared with Gen X who hold six and Gen Y and Z who hold 4.5 stocks.

Fig 3. 1-year change in average number of holdings by generation (Openmarkets data)

Selling materials while navigating tech sector price swings

Throughout the pandemic, materials was our cohort’s most bought sector, topping buying activity in both 2020 and 2021. Materials buying stayed strong in 2023 until Q2, where concerns of stagnating economic growth in China have now driven a major reversal in sentiment. The subsequent selling in Q2 has led to a flip in materials to become the most sold sector over 12-months. The most sold stock is Mineral Resources Ltd (ASX: MIN) and the most bought is Iluka Resources Limited (ASX: ILU). Back in February 2020, it was Fortescue Metals (ASX: FMG) that saw the highest buying activity.

Despite this sentiment reversal, it barely compares with the magnitude of price swings that Australia’s technology sector has seen since February 2020. Tech was famously prized in 2021 and 2022 as investors recognised skyrocketing demand for online cloud-based and remote working services. The ‘tech wreck’ followed in early 2023; a period where many sold their tech holdings off the back of poor US third quarter earnings performance, staff cuts and a general shift away from growth stocks. Now, in May 2023, we’ve seen appetite rebound as the transformative potential for generative artificial intelligence (AI) is recognised. In February 2020, our most bought Australian tech stock was Link Administration Holdings (ASX: LNK) but today, it’s TechnologyOne (ASX: TNE), an enterprise SaaS software developer that uses AI in its products.

Financial advisers and wealth managers have a vital role to play

Volatile market conditions will likely prevail heading into the next quarter. Markets are now expecting a mild US recession and possibly a recession in other major markets. Australian households will continue to feel the impact of higher interest rates, putting more pressure on household budgets and creating less free cashflow with which to invest. Despite this, we expect trading activity will remain steady in the period ahead.

In these conditions, wealth management and financial advice providers have a critical role to play in ensuring their clients’ portfolios have robust risk management approaches in-place, such as via diversification, exposure to defensive sectors and balancing resilient income with capital growth.

 

Note: The Investor Defensiveness Index measures the buy/sell ratio of low beta (defensive) stocks relative to high beta (volatile) stocks. We consider -10.0 to 0.0 to be defensive, and 0.0 to +10.0 to be offensive.

The investor defensiveness calculation is:

  1. Over the measured period (May 2023 for example), each trade across all ASX stocks is allocated to one of seven groups based on the beta of the underlying asset. Each of group has an approximately equal number of trades.
  2. The buy/sell ratio of each group is calculated and converted into an index based on the historical buy/sell ratio of that group (the greater the value, the higher the buy/sell ratio is now relative to historical data).

A linear regression is conducted on the sentiment index against beta, with the negative slope of the line-of-best-fit being the Investor Defensiveness Index. 

 

Dan Jowett is CEO at Openmarkets Group. This article is general information and does not consider the circumstances of any investor.

 


 

Leave a Comment:

     

RELATED ARTICLES

Are demographics destiny for the stock market?

The problem with concentrated funds

Where to find value in a multi-asset portfolio

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Latest Updates

Investment strategies

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Economy

US election implications for investors and Australia

The return of Donald Trump to the US presidency brings the prospect of more US tax cuts and deregulation, but also more tariff hikes, trade wars and policy uncertainty. Here's what it means for markets going forward.

Retirement

The rising tension between housing debt and retirement balances

Australians are taking more mortgage debt into their 60s than ever before. Retirement planning assumptions haven’t adapted and could result in future income projections that ultimately disappoint retirees.

Investment strategies

Why megatrends can deliver big upside (and downside)

The magnitude and duration of society's most important trends are often underestimated. While these trends are usually touted as a tailwind, one in particular could have dark consequences for many assets.

Property

Fixing the construction industry house of cards

Australia needs to build new homes like never before but construction firms keep going belly up. Unless regulators act now, consumers will continue to carry the can.

Investment strategies

How investor portfolios have become riskier versus history

Risk in portfolios has dramatically increased as time horizons have shortened and investors have piled into equities. It's resulted in a growing disconnect between what investors need and what the financial industry is delivering.

Shares

The abacus, big data and a brief history of indexing

Equity indices have evolved over time, led by step-changes in our ability to manipulate data. Despite the rise of passive investing, they weren't initially meant to be investment tools.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.