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Stock market recovery – the important role of retail investors

George Trefgarne looks at how retail investors have contributed to the recent stock market recovery and why companies shouldn’t ignore them.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

George Trefgarne

Published on 25 June 2020

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

This article is not personal advice. If you’re unsure whether an investment is right for you, please seek advice. All investments fall as well as rise in value, so you could get back less than you invest.

One under-reported feature of the dramatic stock market recovery since March is the influential contribution that individual, or retail investors have made.

Retail stockbrokers and investment platforms have reported record trading volumes, together with strong new business numbers. ShareSoc, the UK Individual Shareholders’ Society, claims that during March and April, 20% of the trading volume in the FTSE All Share index came from retail shareholders – of which 60% were buy orders.

While many individual investors have been eager to try and profit from a potential market recovery by “buying the dip”, this recent growth has also been the continuation of a trend.

According to the Office for National Statistics, the proportion of UK shares owned by individuals, which hit a historic low of 10.2% in 2008, had risen to 13.5% in 2018.

This is a long way off the 54% it hit in 1963. Since then individuals moved towards investing in diversified, pooled vehicles such as closed or open ended funds, rather than individual companies.

Retail investors have held their nerve

While the media or other investors might have been panicking during the pandemic, individuals have seemingly held their nerve. Hargreaves Lansdown regularly surveys investor confidence among its clients. In the latest, gathered between 1 June and 8 June, the confidence index rose six points to 87 (see below). In the survey, clients are asked whether they believe markets will move higher or not over 6 months, one year and three years – a greater weighting is given to answers about the nearer term.

Investor Confidence Survey - UK

Source: Hargreaves Lansdown

Investors’ confidence in the outlook for growth in the UK economy has improved by three points to 60. Although the so-called “Boris bounce” has diminished, there might be a British equivalent of “If you own the stock market, you will grow with America”, the rallying cry of John Bogle, the late founder of the Vanguard mutual fund business in the United States. Investors want to participate in any sort of economic recovery.

That said, UK individual investors in the survey are most confident about Asia Pacific (101) and Japan (94), rather than the UK (87). Despite the prominent success of some US companies during recent months, such as Amazon, the US confidence score is slightly lower at 82.

The most popular fund sectors have been Global, North American and Technology.

Companies shouldn’t ignore retail investors

Throughout the crisis, UK listed companies have been raising equity in large amounts to shore up their balance sheets or put themselves in a better position for growth. A good example is the online supermarket Ocado. Its shares have risen 66% from 2 January to 15 June. Remember past performance isn’t a guide to the future though.

This month it raised £1 billion of new capital to invest in growth prospects, including £657m of new equity, this included a small portion sold to retail shareholders.

Other large companies have also recently allowed retail investors to take part in share placings, including the caterer Compass and the serviced-office group, IWG.

Under the terms of the EU Prospectus Directive, €8 million can be allocated to retail investors without a new prospectus being issued. That was raised from €5 million in 2018. With the completion of Brexit looming, it could be changed again. This could mean we see retail investors playing an even more important role in the raising of money for companies in the future.

Whatever the outlook, current trends suggest that individual investors are a growing force in the UK stock market.

Remember to diversify

While those with particular expertise or understanding of a sector, or of an individual company could be attracted to investing in specific stocks, it’s important to remember to diversify.

By holding a mix of investments it means you’ll always have something working well – a good way of doing this could be through funds.

Is your portfolio diversified enough?

George Trefgarne is CEO of Boscobel & Partners, a political consultancy. Hargreaves Lansdown may not share the views of the author.

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