Investors hold steady as disasters strike

Published in the Zurich Financial Services Australia, May 2011

Nuclear fallout, civil unrest, earthquakes and tsunamis: 2011 has already been marked as a year of crises. 

Markets have fallen, oil prices have risen and some commentators have remarked gloomily that all this turbulence could put paid to the post-GFC economic recovery.

Janine Cox, a Senior Analyst with Melbourne finance education group Wealth Within, says the market is more volatile since the GFC and becomes more so after a disaster. 

"I think a lot of investors have taken a ‘wait-and-see' approach to markets this year," she says.

"Trading volumes have been lower recently. 

After such a big slide down into the 2009 low, you have to expect any further big news is going to have an impact on the risk appetite of investors."

Zurich Investments Senior Investment Specialist Patrick Noble agrees that "scars from the GFC remain". 

He continues, "Investor sentiment appears to still be bouncing along the bottom.

A strong rally in both global and local equity markets has not been sufficient to encourage investors away from cash. 

Indeed, the local market has pretty much range traded over the past 12 months."

Noble says Japan hasn't rated as too much of a concern for investors but civil unrest in oil-producing regions such as Libya has. 

Less dramatic, but no less powerful, factors keeping sentiment low are sovereign debt concerns, a lack of faith in the global economic recovery, policy tightening in Australia and China and "sound but not spectacular" Australian profits.

"There's a trend towards passive investments for those who want equity exposure," Noble notes. 

"We do worry that some investors are missing the point between cost and equity risk."

The inaugural Australian Investor Sentiment Survey for March, released by FNArena and the Australian Investors Association (AIA), has also shown a dip in bullishness this year.

The AIA Investor Confidence Index (where 0 is low and 100 is high) is a mid-range 54.

Nick Lloyd, Principal at Sydney-based ITL Financial Planning, believes every crisis can seem like the end of the world leaving clients struggling to understand the impact on the investment market: 

"People find it hard to distinguish between what's media sensationalism and what's the truth, particularly having gone through the GFC where the falls kept on going."

However, Lloyd's clients have proved resilient; he hasn't received any calls from those concerned about recent market falls.

"I think they're more used to volatility so there hasn't been any panicking. 

With a bit of guidance, they could see that what's happened in Japan, the Middle East and North Africa was unlikely to impact long-term on their investments," he says.

"With Japan, I was also sending out information about what has happened in the past, what it might mean for Australia and the potential for increased demand for oil and gas, coal and iron to help rebuild. 

The people who did panic and sell would be kicking themselves and trying to buy back at inflated prices."

Omniwealth clients have been a little uneasy but also largely resilient to the market shake-up, according to the CEO of the Sydney-based organisation, Aaron Greaves.

"We had more clients asking questions about the Queensland floods than the situation in Japan," he says. 

"I think Australians like to worry about their own stuff rather than what's happening in the rest of the world."

However, Greaves has noticed a shift in investor sentiment towards the hesitant. 

"Pre-2008, the philosophy was ‘I can't miss out and I have to invest everything'. Clients had less resources to take advantage of the market correction," he says.

"Clients are much more cautious now.

The biggest thing we've seen is an increase in the amount of time they take to make an investment. 

Before it was almost immediate; now it takes a couple of weeks for them to decide on anything."

Noble's assessment is that people are reluctant to invest additional money in shares. 

He advises a "re-basing of risk appetite" rather than "shying away from equities forevermore".

For now, the share market has repaid the confidence of investors who have sat tight as it has recovered from the lows experienced after the Japanese earthquake.

Cox notes: "I think sentiment will start to change in the short-term. 

Investors will need to see a gradual rise in the market to feel more comfortable but that doesn't mean there won't be more shocks coming from international markets. 

There's still the global debt situation to be concerned about."

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