What do Australian investors do in times of market volatility?

Schroders
Sebastian Mullins
Sebastian Mullins
Schroders Portfolio Manager, Multi-Asset
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Coronavirus brought a decade-long US bull market to a halt and sparked a sudden stock market collapse. We analyse the findings of the Schroders Global Investor Study to understand how Australian investors responded to market volatility compared to their global counterparts.

Faced by one of the biggest economic shocks in history, it is little surprise that the majority of investors around the world reacted by making changes to their portfolios. This trend was also observed in Australia with 62% of investors making changes to their portfolios during this time.

However, when looking at how many people stuck to their original plans, Australian investors were almost twice as likely to do so than their global counterparts.

The latest findings of Schroders’ Global Investor Study, a landmark annual survey of more than 23,000 investors from around the world, indicated that 34% of Australian investors did not make any changes to their investment portfolio during market volatility in February and March, compared to 19% globally.

The survey, conducted across 32 worldwide locations between 30 April and 15 June 2020, surveyed respondents about their actions following a period of extreme market volatility. This arose as most of the world’s major economies went into lockdown in an effort to limit the Covid-19 pandemic. Between mid-February and mid-March, world stock markets lost approximately one-third of their value*.

Almost 80% of respondents globally said they made some changes to their portfolio as a result. Interestingly, a small number - 3% globally and 4% in Australia - were unaware of the turmoil in markets, and so took no action.

Of the 78% worldwide who did change their holdings as the crisis unfolded, there was a stark divergence in their reaction. While 53% said they moved “some” or “a significant proportion” of their portfolio to lower-risk investments, 35% took contrary action, saying they moved “some” or “a significant proportion” to high-risk holdings.

However, Australian investors were more likely than their global counterparts to stick to their original plans, with 34% sticking with their original plan and not making any changes to their investment portfolio during this period.

Source: Schroders Global Investor Study 2020 

Staying the course: older investors less likely to make portfolio changes


Age or experience – or both – appear to be a factor in how investors respond to volatility. In Australia, Generation X (aged 38 – 50) were the most likely to alter their portfolios, with 78% of this group making changes to their risk profile.

The oldest cohort of investors, those aged 71 and above, were least likely to change tack with only 18% making changes to the level of risk in their portfolios.

Source: Schroders Global Investor Study 2020 

Differences between genders: male investors more likely to react to market volatility 


When looking at investment behaviour between the sexes, the study found that during times of volatility, Australian women were more likely than Australian men to stick with their investment plans (38% vs 31% respectively).

The differences between genders in Australia did not end here. When asked how often they think about their investments, 36% of men stated they think about their investments at least once a week, compared with 27% of women. These figures increased significantly when asked how regularly they think about their investments since the coronavirus pandemic began, with 56% of men and 43% of women saying they think about their investments at least once a week.

Investors are broadly optimistic about the pandemic’s negative economic impact


A majority of investors globally believe the economic effects of coronavirus will pass within two years, reflecting an optimism that’s not in line with many countries’ own official forecasts. This is consistent in Australia, with 38% of respondents stating they think the economic impacts will last between one-to-two years.

Investors’ comparatively optimistic response could be due to their experience in the past decade of healthy stock market returns – even while the world economy faced significant challenges.

Source: Schroders Global Investor Study 2020. Please note: these figures are representative of the global sample. 

Investment income: investors’ hopes are “unrealistic”


One area where investors took a more negative view was that of the investment income they would expect to receive from their portfolios over the next 12 months.

Despite the recent market disruption, people are still over-optimistic although the average income from investments they expect to receive over the next 12 months is notably less than last year.

In 2019, Australian investors expected their holdings to deliver an 11% income. Following the Covid-19 crisis, this has dropped in 2020 to 7.14%.

Although the Australian expectation is lower than the 8.8% expected by global investors for the next 12 months, it is still unrealistically high. The natural yield of most investments – such as the dividends paid to shareholders, or interest paid to bondholders – is far lower than 8.8%. And one of the effects of the Covid-19 crisis has been to push these yields even lower.

Many companies have cut or cancelled dividend payments in the aftermath of the pandemic outbreak. Bond yields have also fallen, in part due to central banks cutting interest rates and committing to keeping them at low levels.

The role of cash after Covid-19 – who’s holding it, and for what?

While 40% of Australian investors said they were moving a proportion of their portfolio into lower-risk investments, 24% said they had switched to cash.

This provides a valuable snapshot into investors’ attitude to cash. Clearly, there are investors who view cash as a safe haven in times of crisis.
 

*MSCI World fell 34% between 12 February and 23 March. Source: Refinitiv


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environments I have encountered. We had the coronavirus pandemic, we had economies shut down and monitor telephone calls for security, training and compliance purposes.

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*Source: All data as at 30 June 2018