As the major equity indices shed 10% this week on inflation concerns and the impact of the Ukraine war, the portfolios of UK retail investors have taken a hit.
Albeit not as severe a hit as you may expect due to the offsetting effect of a falling Pound. The weakening of GBP against the Dollar has provided a cushion against any price falls of USD-denominated securities.
Still, the majority of UK investors focus on domestic equities, as represented by the FTSE 100 and FTSE 250 indices, where this foreign exchange cushion is less apparent.
This article asks the question of which stockbrokers will thrive in this falling market?
The competitive landscape of the best UK stockbrokers has undergone several waves of evolution over the last ten years. The most recent phase was the explosion in zero-commission trading apps that blossomed through boredom and lock-down savings while the pandemic raged. Notably, eToro (read our eToro review) and more recently, AJ Bell’s Dodl app, have courted younger investors who want to bag big brand names without paying the costly commissions needed to manage a portfolio of shares.
How does investor behaviour change in a falling market?
To anticipate the impact on stockbrokers and investing apps, we need first to understand what retail investors do differently during a bear run in the markets.
- Trading volume initially spikes during down days
- Older, conservative investors exit the market completely
- Some investors hesitate and cut off their direct debit regular investments
- Bolder investors increase their investment
Volume spikes won’t benefit who you think
Trading volume spikes around the high volatility because headline-making index movements reach the ears of retail investors and this prompts them to make trading decisions.
“Should I pull out now before it falls further?”
“Should I buy more at a lower price?”
These aren’t questions a regular investor would ordinarily ask themselves, as they will have largely automated the process of investing month on month.
The brokers that will capitalise on such trades will be the zero-commission brokers such as eToro. With no trading commissions for buying or selling equities, investors will have fewer barriers to entering or exiting positions in response to the news.
However, due to the lack of trading commissions, higher trading volumes won’t necessarily translate into a bonanza of revenues for these brokers. In fact, it will be the traditional brokerages with £8 – £11 dealing fees that will reap the rewards of higher activity on brokerage accounts.
Conservative investors may flee to safety
In times of crisis, older investors approaching retirement may be forced to reassess their retirement portfolio in light of recent market movements.
While no financial adviser would recommend selling equities during a downturn, some retirees feel they have little choice as they cannot afford to lose anything further without suffering a hit to their quality of life.
On reflection, these investors should have never had equities in their retirement portfolio and perhaps kept the equity allocation as a legacy from their younger years when their risk tolerance was higher.
What is making this particular economic period difficult for retirees is the issue of inflation. Retirees are attracted to low-risk investments such as savings accounts, government bonds and corporate bonds, but these low-yield investments are offering little protection against a soaring inflation rate which is currently close to 9%.
This offers retirees are painful choice: risk heavy losses from falls in equity markets, or see the spending power of your cash fall by 10% even in a ‘safe’ bank account.
Due to this dilemma, retirees are keeping more of their cash in equities than perhaps they otherwise might if inflation had been ticking along at 2%.
The stockbrokers that cater to passive investors are benefiting from investors remaining in equities for longer. Platform fees are usually higher on funds than on cash balances, so the longer retirees remain invested in the market, the more stable income the stockbroker will enjoy.
Hesitation will reduce regular investment inflows
Although it is counterintuitive, many retail investors when asked would prefer to invest in a slowly rising market over time, rather than invest after a market crash.
This isn’t a logical response, because investing after years of successive rises implies that the purchase price for stocks is at a historic high. On the other hand, investing after a sizeable crash provides some assurance that you’re buying at a bargain price.
Traditional brokers such as Hargreaves Lansdown (Read our Hargreaves Lansdown review) depend upon the direct debits of their established client base to continue to add money to the platform and increase their assets under management. Therefore it’s brokers like HL and AJ Bell YouInvest that may suffer from this hesitation.
Bolder investors will add to their portfolio
Investing in a contrarian fashion when markets are down is known as ‘buying the dip’ in the online vernacular. It’s a phrase used with energy, bravado (and a little bit of wisdom).
It’s emblematic of the reckless exuberance that characterised the rise in retail trading during lockdown, and this culture of ‘doubling down’ on investments has not subsided.
Having witnessed a peaky equities market drive ever upwards over the last couple of years, many young traders may relish at the opportunity to buy at better Price-to-earnings ratios.
Apps such as Robinhood, Trading212 and other free shares apps like Freetrade will be ready to take young investors’ money as they make these bets.