Private investors are putting their money back into the stock market, demonstrating increased confidence in the strength of UK companies.
Research by Capita Registrars, the UK’s largest share registrar, shows that in February and March private investors added close to £800m-worth of shareholdings. The last time net investment reached such levels was in late summer 2007, before the crisis at Northern Rock alerted shareholders to the extent of the sub-prime mortgage meltdown.
In total, private investors have ploughed £1.6bn back into stocks and shares over the past six months, almost completely reversing their withdrawal of £1.9bn in the previous half-year and indicating a renewed enthusiasm for stocks and shares.
Overall, the level of investment means that individuals have put back in nearly one third of all the money they removed from the market since the start of 2007.
Michael Kempe, operations director of Capita Registrars, says there appears to be growing optimism that the worst is over and that shares will once again offer good returns. “The return to equities is gathering pace and seems part of the wider trend towards increased saving,” he said.
Ahead of the recession, private investors sold equity holdings aggressively, removing £4.5bn from the stock market from the beginning of 2007 and opting for safer investments such as cash or government bonds.
But, now, the move back into equities is seeing investors favour cyclical stocks over defensive holdings – and cyclicals made up two thirds of investments in the two months. Even financial stocks, which investors had previously avoided, have benefited from an additional, albeit modest, investment of £77m of retail money.
Capita points out that, because stock markets have continued to fluctuate, the value of private investor portfolios has remained low. Although investments made in the past two months have coincided with a rise in the FTSE All Share of around 15 per cent, share valuations are 20 per cent off their September 2008 level.
Poor share performances in recent months have kept the overall value of private shareholdings similar to that of 1979, adjusted for inflation.
Capita said the percentage of direct private share ownership has risen slightly. But private shareholders still own less than 10 per cent of UK-listed companies and remain dwarfed by institutions.
A number of stockbroking firms say they have also seen increased confidence from their retail clients who are unwilling to accept poor returns from savings accounts, some of which pay out just 0.01 per cent. Investors have returned to equities in the hope of finding better returns in dividend yields as well as the possibility of capital growth.
“There has definitely been a increased degree of optimism from clients,” says Mark Dampier, head of research at Hargreaves Lansdown. “But the low interest rates are really driving people to re-evaluate what they have and the degree of risk they are willing to take.”
Dampier believes that the UK’s 0.5 per cent interest rate is the real reason for the resurgence in equity investment. “In the 1980s, when the markets crashed, the phones just didn’t ring,” he says. “This time it’s different because now interest rates are so low.”
In the 1980s, investors who sold out of stocks could obtain double-digit returns in a bank account because of rising inflation. In contrast, investors who sold their equity holdings six months ago have seen the returns available in cash accounts dwindle.
Dampier believes private investors have retained a degree of caution and are opting to stagger their investments in equities to ride out market volatility – a strategy he says is understandable.
Hugo Shaw, business manager at Bestinvest, agrees that sales appear to show greater investor appetite for risk. However, he cautioned that investor sentiment was likely to remain very fragile for some time.
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