Trends and behaviour in financial markets

Trends in financial markets largely depend on investors’ psychology and behaviour

This is significant when it is investors themselves who decide whether to buy or sell, sometimes compulsively, because it leads to volatility in stock markets and other financial markets. This association between investors’ psychology and the behaviour of financial markets is known as behavioural finance.

One of the most interesting aspects of this effect is that the market usually does the opposite of what the public at large or the majority of investors think it will do. In this case, the reason is not quite as evident, although it does make sense if you consider the fact that when everyone has bought a specific asset, and are therefore positive about it, the demand for that asset will be very low and it will no longer be possible to benefit from the fluctuations in its price in the same way as in the past.

Effects on the markets

If we analyse the current situation of the financial markets from this perspective, it reveals some very interesting facts which, based on the above reasoning, could have a decisive impact on the performance of our investments in the coming years.

• For example, the proportion of citizens’ savings worldwide that is currently invested in equities is at an all-time high. This means that investors have spent most of their savings on buying stocks in listed companies, so it would be unusual if they continued to buy in the future and this might “weigh heavy” or have a negative influence on company valuations.

 

• Likewise, there is an almost unanimous consensus that investors should not buy bonds because the central banks are raising the reference rates and this might have a negative influence on their price. Once again, unlike the majority of investors, we believe that this fact could benefit US Treasury bonds in view of adverse movements in risk assets, such as stock markets and commodities.

Conclusion

We believe that the time may have come to contradict the consensus that reigns among all other investors, namely by reducing our exposure to equities and including elements in the portfolio that could offset a weaker performance by the risk assets.