Behavioural economists will tell you that big, round numbers (like 7,000) can have a large influence on investor emotion and behaviour. Round number bias is described as the human tendency to pay special attention to numbers that are “round” in some way. As the ASX200 approaches the 7,000 point level, it will likely trigger some investors to review their portfolios, causing them to become more active when it comes to investing. In reality, there isn’t much difference between the ASX200 at 6,995 and 7,005, but 7,000 could represent an emotional trigger point to some investors. Academic research shows that market-wide attention-grabbing events can lead investors to sell equities as they perceive that the level of the equity market is high. And at an individual portfolio level, it can result in investors selling high-performing equities, while holding on to underperforming companies as they hope to recoup some losses. As a result, we often see a few lacklustre trading sessions in the days following attention-grabbing events.
So does the number matter? Well it does (in the very short-term) and it doesn’t (in the long-run). While conditions remain constructive for the Australian equity market it’s certainly not without risk. For lack of a better word the ‘populism’ based politics that seems to be sweeping the world is very anti-growth in its approach. Populist policies like protectionism (trade wars), anti-immigration and government intervention are all anti-growth in nature and are likely to continue to put downward pressure on the already sluggish one to two percent economic growth range in most developed economies. Global equity markets have performed well YTD, the direct result of a perception in markets that the aforementioned geopolitical risks have abated to some extent.
We are still positive on the Australian equity market this year, and we think that investors should retain their exposure, especially in a world of record-low interest rates. We’re in the unusual position of having tailwinds from both monetary and fiscal policy. Having pretty much used up all monetary policy ammunition, governments are now being asked to step up with fiscal policy to help economies break free of this very low growth world. This will likely come via significant infrastructure development which should be good news as low interest rates combined with fiscal stimulus is normally a positive environment for equity returns.