Can you have a bad year and still be optimistic? Turns out you can!
We asked our Australian retail investors how they feel about the year-long bear market and it turns out not so bad. In our survey, we asked 1,000 investors across 13 countries and three continents about the impact the bear market has had on their mindset, and more than half (54.6 per cent) of respondents are either positive or ambivalent, while the remainder (45.4 per cent) say their investing appetite has been dented to some extent.
2022 has been the first major bear market for many less experienced retail investors, yet the data shows that it is older investors with shorter retirement time horizons who are feeling the strain the most. More than three in five (62.2 per cent) Australian 18-34-year-olds feel positive or indifferent about the downturn, compared to just 26 per cent amongst over-55s (see chart). Across all age groups, the younger the investor, the more upbeat they are about the 2022 bear market – challenging the perception that younger investors are more short-term driven.
Why the optimism? Long term investing
That is the question. One possible explanation is that these investors judge the markets over years and decades and therefore a short downturn will not have a major effect on the way they invest. When thinking in the long term, they believe history is on their side. First, consecutive down years are rare for equities and bonds, and there is an average 18 per cent S&P 500 annual gain following big falls. Moreover, for those with longer time horizons, the back end of 2022 offered the opportunity for Australian investors to buy companies at lower valuations, improving the outlook for long term returns.
Confident in their portfolios
There has also been an uplift in sentiment, with 77 per cent of Australians feeling confident about their portfolios. Whilst still a relatively low figure compared to some of our past surveys, it is an 11 percentage point quarter-on-quarter increase, while confidence in other areas of life such as income and job security also improved.
One explanation is that the ASX200 was one of the standout market performers of 2022 amid a torrid year – that’s why we are likely seeing 77 per cent of Australians feeling confident about their portfolios. Australia is known for its economic strength setting records of GDP growth and avoiding a recession during the GFC, providing investors with more confidence in their local economy than other consumers globally.
A second explanation for this is that the perceived threat of inflation – considered one of the biggest investment risks in six of the last seven quarterly surveys – is gradually falling. At the end of Q3, 18.4 per cent of Australian investors saw inflation as the single biggest threat to their portfolio over a three-month period, with this dropping to 17.5 per cent at the end of Q4. When asked about the biggest risk across the whole of 2023, those citing inflation dropped to 15.7 per cent, with more (23.7 per cent) seeing a global recession as the main threat.
Feeling a recession
In preparation for this recession risk, many Australians are adjusting their portfolios defensively whilst also preparing for future opportunities. These investors believe that inflation is still yet to peak in Australia and is well above the RBA’s target. So although the RBA might still be able to navigate a soft landing, investors know that most experts and the World Bank are predicting at least a mild global recession, and many are repositioning accordingly, with more looking into defensive stocks as well as moving to cash in Q4.
The proportion holding cash assets (e.g. savings account) jumped from 59.7 per cent in Q3 to 79.1 per cent at the end of Q4 – a 32.5 per cent increase. Meanwhile, two traditional defensive sectors – healthcare and utilities – both saw a rise in investors of more than 10 percentage points, while other defensive plays in the current climate – staple consumer goods and energy – also saw an investor percentage point rise of more than 10 points.
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