Is retail investor surge cause for caution?
It’s an old investment cliché that when your taxi driver starts giving you share tips, it’s time to sell.
As someone who has been on the receiving end of cabbie investment advice during both the dotcom and – more recently - bitcoin bubble, I can attest to there being an element of truth to the old adage.
Perhaps the Covid-19 lockdown equivalent is when I read some of the comments below articles on news websites, and often see people saying that maybe they should buy Amazon shares given the number of deliveries everyone is getting.
Amazon – and indeed the other FAANGs (Facebook, Apple, Netflix and Google) – have led the sharp market recovery since the Covid-19 collapse, taking their valuations back to elevated levels. Amazon’s share price rose 52% since 23 March to 4 June, during which time the S&P 500 index of shares has gained 42%.
Retail investors may have played no small part in this almighty market rebound. Online brokers saw a huge increase in new client accounts in March as retail investors saw an opportunity to invest in household names whose share prices had been pummelled. Retail trading activity on the main platforms has quadrupled. Robinhood, the stock trading app apparently favoured by millennials, saw a staggering 3 million new accounts opened in the first quarter.
The so-called “accidental saver” effect may be playing a part in this. Research has shown that many employed people in Covid-19 lockdown have found their disposable income increase significantly, as the costs of commuting, holidays, eating out and socialising have all but disappeared. As a result, many of these people have been saving - and investing – more of their spare cash.
It wasn’t just the household names like Facebook, Amazon and Netflix that retail investors were buying either. Many were taking a deep value approach and snapping up airlines whose very existence had been brought into question as their share prices plummeted.
Retail investors are sometimes disparaged as being unsophisticated - buying high and selling low. But this behaviour appears to dispute that, as they were taking advantage of market falls to pick up shares at a discount to their previous price.
This is why I would not compare this most recent retail activity to the “irrational exuberance” and euphoria we saw during the dotcom bubble. However, I would sound a note of caution.
Economic data is dreadful, and although we may see a short-term bounce in economic data as lockdowns are eased, we remain concerned about the economic outlook for the next 6-12 months.
Until there is a vaccine, subdued economic activity is the only way to contain the virus, and the second order impacts on business and employment are yet to be seen.
Combined with civil unrest in the US, and continued tensions with China, we could see more volatile conditions over the summer for professional and retail investors alike.
With this backdrop, we continue to favour investment grade corporate bonds. Here, we think overall valuations look relatively attractive compared to other asset classes, especially considering the actions of major central banks which we think will provide considerable support for the sector.
Meanwhile, we are still slightly cautious on equities, and have a preference for those areas where growth is less dependent on the economic cycle. We think that many companies may struggle to maintain their profits as a result of Covid-19, and the market will reward those that can weather the shock to demand.
This is likely to accentuate the trend of “quality growth” shares (those investors are willing to pay a premium for on account of their growth prospects) outperforming “value” (those trading at a discount to their true value), at least in the near term.
If that’s the case, those new investors in the likes of Amazon will have cause for cheer. But they may also want to keep an eye on those online comments and, lockdown permitting, pay attention when the taxi driver is talking.
Johanna Kyrklund is the Chief Investment Officer and Global Head of Multi-Asset Investment at Schroders