Investors have nothing to fear but fear itself

By Jack Derwin

October 27 2016
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In a low-interest, high-volatility environment, investors are feeling more anxious than ever but this may be a self-perpetuating cycle, according to economists.

Investors have nothing to fear but fear itself

While there are some legitimate concerns, the digital age’s bombardment of information on investors may be doing more harm than good, says AMP chief economist Shane Oliver.

“The nominal return potential from most asset classes are lower than they used to be. Global growth is slower than it was pre-GFC and the world seems awash in geopolitical risks,” Mr Oliver said.

“A concern is that the combination of a massive ramp up in information combined with our natural inclination to zoom in on negative news is making us worse investors – more fearful, more jittery and more short-term focused,” he explained.

It’s become an enduring trend in markets, with Principal Global Investors chief economist Bob Baur saying that fear is only having a negative effect on economic growth.

“The ongoing emotional and financial trauma of the last eight years has made fear of relapse the habitual reaction to even normal risks that arise from time to time. But, negative feedback from habitual fear is part of the reason why current growth is so slow,” Mr Baur said.

This has had a visible effect, encouraging short-termism among both investors and companies.

“In the current environment, markets reward companies that return cash to shareholders through stock buybacks or dividends. This prompts managers to delay capital spending and look for short duration projects, mergers and acquisitions. Less investment means slow economic and productivity growth,” Mr Baur said.

Coupled with interest rates at historic lows in Australia, these concerns can often worsen the market factors they stem from.

“Super low interest rates have raised the cost of retirement. Households worry about not having enough money, so savings rates go up, spending growth slows, consumption is delayed and economic growth slips even more,” Mr Baur said.

However, despite this, there may be light at the end of the tunnel, with some long-anticipated factors likely to allow investors to breathe a collective sigh of relief.

“Can the negative feedback loop be broken? Yes, [with] time, a rate hike and faster wage growth. There’s been enough time already and the other two are coming,” Mr Baur said.

“The Conference Board’s measure of the ease of finding a job is the highest since August 2007, suggesting robust wage growth ahead. Job openings are solid and payroll gains are strong.”

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