The changing market sentiment and investing attitudes of SMSF trustees.

Equities markets at home and abroad have recorded strong gains in 2019, shrugging off the sharp correction in December 2018. As stocks hit record highs and many key metrics such as low unemployment and healthy consumer spending continue to keep the doomsayers at bay, one would naturally expect these positive indicators to have a positive impact on the way investors are feeling. 

Investment Trends has been tracking investor sentiment monthly since 2011 and while it typically sees investor sentiment moving up and down alongside the ebb and flow of the markets, it has observed a systemic shift in outlook in recent years. 

Even as this equities bull market continues to charge forward, the underlying confidence and sentiment of Australian retail investors does not appear as resilient. The rising market has not translated into higher optimism; rather, Australian investors appear increasingly pessimistic.

In recent years we have observed a growing divergence between market performance and investor sentiment. Australians are gradually adjusting their return expectations downwards despite markets going from strength to strength. This trend is consistent across all segments of the investing population – be it SMSF trustees, high-net-worth individuals, active equities investors, clients of financial advisers or self-directed investors.

SMSF trustee lower return expectations

The latest Investment Trends data shows that the average trustee expects the All Ordinaries Index to grow only by 0.7 per cent over the coming 12 months, excluding dividends (see chart 1, below). 

SMSFs expect the broad-based index, and to a similar extent their portfolio of domestic stocks, to remain flat in the short term. This is vastly less bullish than the 4 per cent levels consistently observed in previous years.

More concerningly, the return expectations of SMSF trustees turned negative for the first time on record in March 2018 and have breached sub-zero levels on three separate occasions since. 

Not only are trustees increasingly bearish in their investing outlook, their sentiment appears increasingly volatile, as shown by the large swings in monthly return expectations over the past few years.

The wavering confidence in domestic equities among SMSF trustees is largely driven by their concerns about uncertainties in global markets rather than domestic issues (as similarly observed in all other investor segments we track). 

While the ongoing US-China trade conflict is a major concern, SMSFs’ top worries have evolved significantly over the past year, particularly as a significant proportion (34 per cent) have become concerned about negative interest rates (see chart 2). 

With many SMSF trustees close to retirement (average age of 59) and a third in retirement, the current low-rate environment – and the concern that rates could fall even further – has had a profound effect on their portfolio allocations as they face the challenge of generating a sustainable income stream. 

In a world where the quantum of negative rate debt on issue exceeds $US17 trillion globally, many SMSFs are genuinely concerned a similar situation could arise in Australia, further compounding their challenge. 

A softening market outlook has led some trustees to adopt a more defensive investment position, with 21 per cent saying they rotated into defensive assets or increased their allocation to cash in the past 12 months. The rest have opted to remain calm and stay on course with their initial game plan. Because of this steadfast approach, the SMSF population continues to maintain a large allocation to equities.

Of their total investment portfolio inside and outside super, the average SMSF trustee allocates 58 per cent of their portfolio to equities, with 48 per cent in domestic equities and 10 per cent in international equities (see chart 3). SMSFs predominantly favour blue-chip ASX-listed stocks for their equities exposure, but ETFs are fast rising in popularity.

The average SMSF currently holds about 20 individual stocks in their portfolio, but they also realise the importance and benefits of diversification. 

As more trustees have recognised the ability of ETFs to provide low-cost, diversified exposure to domestic and international assets, the number of SMSFs holding ETFs has more than doubled from 63,000 to 135,000 in the past five years alone. This growth makes ETFs the fastest-growing investment product in the SMSF sector. 

Perhaps surprisingly, and despite their already significant exposure to equities, SMSFs want even greater exposure to equities. In the year ahead they would ideally like to increase their international equities holdings from 10 per cent of their portfolio to 16 per cent (see chart 3) while maintaining their allocation to domestic equities (48 per cent to 47 per cent). 

Clearly, the desire for international diversification is strong among SMSF trustees. Because of their poor outlook for domestic stocks, more trustees are looking to offshore equities to satisfy their investment objectives on their journey towards retirement.

As we approach a new decade, retail investors – SMSFs and non-SMSFs alike – will be hoping for a smooth road ahead where global trade tensions are quickly resolved and negative interest rates do not become a local reality. 

In the meantime, Australian investors will need to stay vigilant, balancing their subdued outlook with their need and desire to stay invested.