Be wary of the ‘vibes’: positive investor sentiment doesn’t necessarily match the true value of stocks
Uncertainty gripped the market and eroded investor sentiment, only for markets to bounce back and finish the year on a high.
- Uncertainty gripped the market and eroded investor sentiment, only for markets to bounce back 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.
- Rather, a large body of academic literature shows market-wide sentiment can cause prices to depart from their true values.
Measuring market sentiment
- Market sentiment refers to the overall attitude of investors.
- Several studies show investor sentiment predicts stock returns and can be used as a contrarian signal 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.
2024 forecast for the NZ equity market
- 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.
Why investor sentiment matters
- In general, investor sentiment affects the demand (buying) and supply (selling) of stocks.
- At the same time, policymakers should monitor and include investor sentiment in their decision-making to reduce undue market volatility.
- Research has shown 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.
Prof Jedrzej Bialkowski is a member of the American Finance Association (AFA), European Finance Association (EFA), Financial Management Association (FMA), Western Finance Association (WFA) and Institute of Finance Professionals New Zealand (INFINZ).
Moritz Wagner is a member of the American Finance Association (AFA), European Finance Association (EFA), Financial Management Association (FMA), Institute of Finance Professionals New Zealand (INFINZ) and the Nez Zealand Shareholder Association (NZSA).