The Times Australia
The Times World News

.
Times Media

.

positive investor sentiment doesn’t necessarily match the true value of stocks

  • Written by Jedrzej Bialkowski, Professor and Head of Department, Economics and Finance, University of Canterbury

Global stock prices dropped across the board late last year, by between 10% and 15% in a matter of weeks[1].

Fears of a recession took hold after a series of interest rate increases, stubborn inflation and geopolitical tensions in Europe and the Middle East. Uncertainty gripped the market and eroded investor sentiment, only for markets to bounce back[2] and finish the year on a high.

Stockmarket history is full of similar periods characterised by either extreme levels or dramatic changes in stock prices. This creates patterns that are difficult to reconcile with asset-pricing models. These models are based on the assumption that prices always reflect reasonable expectations about future cash flows determined by rational investors.

But investors are not always rational. Rather, a large body[3] of academic literature[4] shows market-wide sentiment can cause prices to depart from their true values.

In an ongoing collaboration between the University of Canterbury and the New Zealand Shareholder Association (NZSA), we have developed the NZ Retail Investor Sentiment Index[5] as a representative survey of retail investors in New Zealand.

The goal is to understand the behaviour of New Zealand’s investors and how they compare with their overseas colleagues when predicting the patterns of the stockmarket.

NZX sign
The goal of a new index is to understand the behaviour of New Zealand’s investors active on the NZX stock exchange. Hagen Hopkins/Getty Images[6]

Measuring market sentiment

Market sentiment refers to the overall attitude of investors. It is commonly summarised as bullish (expecting increasing prices), bearish (expecting decreasing prices), or neutral (expecting no or only little changes in price). Such sentiment is not always based on fundamentals such as revenue, profitability and growth opportunities.

Several studies show investor sentiment predicts stock returns and can be used as a contrarian signal[7] since subsequent returns tend to be relatively high when sentiment is low and vice versa. Therefore, a contrarian investor would buy stocks when sentiment is low and sell stocks when sentiment is high.

Read more: Mood, music and money: what our Spotify playlists reveal about the emotional nature of financial markets[8]

Every week since January 2020, we asked registered members of the NZSA whether they expected the stockmarket to increase (bullish), decrease (bearish) or stay the same (neutral) over the next six months. The NZSA has about 1,200 members, a quarter of whom receive email invitations to participate in the survey.

Our index is constructed similarly to those in the United States[9] and Europe, which are often cited in the media[10] and widely used in research[11]. All these benchmarks provide insights into the mood of investors and shed light on the short-term outlook for the local equity market.

2024 forecast for the NZ equity market

During the first four weeks of this year, expectations that stock prices will rise over the next six months remained elevated at 40%. In other words, 40% of the surveyed investors believe the NZ equity market will increase in the first six months of 2024. At the same time, bearish sentiment, expectations that stock prices will fall over the next six months, fluctuated around 16%.

So, despite the mounting global and local uncertainties, retail investors are optimistic about the equity market. Bullish sentiment is stronger and bearish sentiment weaker than the historical average levels of 28% and 36%, respectively.

On the back of last year’s strong market performance and a better-than-expected economy, investor optimism carries forward.

However, since sentiment is known to be a contrarian indicator, informed investors should be cautious going further into the new year.

Why investor sentiment matters

In general, investor sentiment affects the demand (buying) and supply (selling) of stocks. At the aggregate level, this can affect stock prices and volatility.

Understanding the level and changes in the overall attitude or mood of investors therefore has important implications for investors to make better investment decisions.

At the same time, policymakers should monitor and include investor sentiment in their decision-making to reduce undue market volatility. Research has shown[12] sentiment as a determinant of stock prices is driven by rational factors, such as inflation, overall market return and dividend yield, and less rational factors.

Read more: It's the 'vibe' of the thing: the critical art of measuring business and consumer confidence[13]

Regulators typically focus on the former, which by extension contributes to maintaining stability in sentiment and associated price volatility induced by fundamentals.

But changes in sentiment unrelated to fundamentals[14] are just as important. They can occur without warning and spread widely through the market. This has been found to play an important role for price run-ups and corresponding corrections that can have negative impacts on the functioning of the financial market[15] and asset price bubbles and monetary policy[16].

Considering the importance of investor behaviour for the wider economy, the patterns identified by our index give us a road map to better understand the ups and downs of the New Zealand stock exchange.

References

  1. ^ 10% and 15% in a matter of weeks (www.nasdaq.com)
  2. ^ bounce back (fortune.com)
  3. ^ large body (onlinelibrary.wiley.com)
  4. ^ academic literature (www.journals.uchicago.edu)
  5. ^ NZ Retail Investor Sentiment Index (www.nzshareholders.co.nz)
  6. ^ Hagen Hopkins/Getty Images (www.gettyimages.com.au)
  7. ^ can be used as a contrarian signal (www.aeaweb.org)
  8. ^ Mood, music and money: what our Spotify playlists reveal about the emotional nature of financial markets (theconversation.com)
  9. ^ United States (www.aaii.com)
  10. ^ media (www.nasdaq.com)
  11. ^ research (doi.org)
  12. ^ Research has shown (doi.org)
  13. ^ It's the 'vibe' of the thing: the critical art of measuring business and consumer confidence (theconversation.com)
  14. ^ changes in sentiment unrelated to fundamentals (doi.org)
  15. ^ functioning of the financial market (www.sec.gov)
  16. ^ asset price bubbles and monetary policy (www.federalreserve.gov)

Read more https://theconversation.com/be-wary-of-the-vibes-positive-investor-sentiment-doesnt-necessarily-match-the-true-value-of-stocks-223861

The Times Features

Game of Influence: How Cricket is Losing Its Global Credibility

be losing its credibility on the global stage. As other sports continue to capture global audiences and inspire unity, cricket finds itself increasingly embroiled in political ...

Amazon Australia and DoorDash announce two-year DashPass offer only for Prime members

New and existing Prime members in Australia can enjoy a two-year membership to DashPass for free, and gain access to AU$0 delivery fees on eligible DoorDash orders New offer co...

6 things to do if your child’s weight is beyond the ideal range – and 1 thing to avoid

One of the more significant challenges we face as parents is making sure our kids are growing at a healthy rate. To manage this, we take them for regular check-ups with our GP...

Joykids Australia Presents the Joykids Family Rave: A Weekend Adventure Like No Other

Get ready to kick off the first day of summer and the festive season with an unforgettable family adventure! Joykids Australia is excited to announce the Joykids Family Rave—an...

New study suggests weight loss drugs like Ozempic could help with knee pain. Here’s why there may be a link

The drug semaglutide, commonly known by the brand names Ozempic or Wegovy, was originally developed[1] to help people with type 2 diabetes manage their blood sugar levels. How...

Maintaining Your Pool After a Marble Interior Upgrade

After upgrading your pool with a marble interior, it’s crucial to understand that maintenance is key to preserving its elegance and longevity. You’ll want to regularly skim for d...

Times Magazine

Take Advantage of Cloud Accounting Software to Unlock Maximum Efficiency

In today's fast-paced business environment, it's critical to have access to real-time financial information. A cloud accounting solution provides a cost-effective, secure, and efficient way to manage your business's financial activities, regardless...

Take Extra Care Through the Help of iPhone Camera Repairs

As technology continues to advance at a breakneck pace, it's becoming increasingly important to know how to repair your Apple iPhone camera. With the rise of social media and the importance of capturing life's moments, having a functioning camera on ...

6 Reasons Why Perfume Gift Sets Make an Ideal Present

Perfume gift sets are the perfect way to show someone you care. Whether you're looking for a special treat for a loved one or want to give yourself a luxurious gift, perfume gift sets are a great choice. They come with a variety of different scents...

Mastering the art of food photography by Kirsty Owen, WOW Pictures

Food photography is the ultimate in visual storytelling.  From the crispy, delicate croissant to be indulged at daybreak,  the glistening cocktail set against the sunset, to the appetising cheese on offer at a regional food festival, food photograp...

Ensure Healthy Ponds Through Effective Filter System Solutions

Definition of a Pond Filter System A pond filter system is a device that is used to keep the water in a garden pond or other body of water clean and free from debris and pollutants. The filter works by passing water through various layers of mater...

The nitty gritty: 7 cell phone booster for rural area FAQs answered

Cell phone signal boosters have long been a lifesaver for people living in rural Australia. Think about it: our wide, sunburned land is famous (or infamous) for its isolated stretches, the kind in which you might not see a single soul for days. ...