What younger investors are buying

Those under 40 are taking advantage of the first bear market in more than a decade to position for future growth.

Whenever there is a major correction in financial markets, it is natural for people to seek control over their financial situation either by defending their capital position or taking advantage of growth opportunities as prices fall.

The latest share market correction is no different. Throughout the COVID-19 pandemic, we have seen an uptick in trading activity. Interestingly, younger people are accounting for a growing proportion of the trades.

Across the Bell Direct platform, the trading activity of clients under 40 more than doubled in March alone (rising 124%) as the S&P/ASX 200 Index tumbled to a four-year low. By comparison, trading by over 40s rose by a lesser 43% during March 2020.

Many traders have seen the drop in share prices and rise in volatility after the COVID-19 outbreak as an opportunity to get back into the market after sitting on the sidelines for the last few years. Others are taking advantage of the fall in prices to begin investing for the first time. They see the first bear market since the GFC as an opportunity to get ahead by buying shares at lower prices.

The surge in Australian Google searches for “How to buy shares” reached an all-time high in March. New investors are eager to get more from their savings in an environment where ultra-low interest rates have been eroding the real value of bank term deposits.

Tech stocks in focus 

One area of interest for this younger segment of new clients is the booming technology sector. Buying of tech stocks by clients under 40 nearly tripled in March from February and remains well above pre-pandemic levels, with Afterpay (ASX:APT), Zip Co (ASX:Z1P) and Kogan.com (ASX:KGN) amongst the most bought stocks in that period.

Under 40s have been quick to tap into the increased demand for the services of tech firms. The sector is benefiting from dual tailwinds: the COVID-19-related shift to online retailing and service provision; and the move toward buy-now-pay-later providers and away from credit cards.

It is not surprising the sector has been popular with younger investors. When people start out investing, it’s common to gravitate towards what they know or interact with in daily life.

As “digital natives” who were still in their teens when internet usage became widespread, this group is more familiar with (digital) business models and product applications than older generations.

Blue-chip stability balanced with growth hopefuls

Aside from the tech sector, young investors have used the downturn as an opportunity to snap up blue-chip stocks to anchor their portfolios.

During March through May, the big-four banks were consistently among the top 10 most purchased stocks, with investors attracted to buying at a significant discount. Westpac (ASX:WBC) and National Australia Bank (ASX:NAB) were the most consistently purchased bank stocks via Bell Direct’s platform.

To secure potential growth upside if a COVID-19 vaccine if found, younger investors have also been adding biotechnology stocks, such as Mesoblast (ASX:MSB). Mesoblast has featured consistently among the top 10 purchased after positive trials of its flagship stem cell product remestemcel-L to treat acute respiratory distress syndrome, the primary cause of death in COVID-19 patients.

CSL Limited (ASX:CSL), which is collaborating with the University of Queensland to develop a COVID-19 vaccine, has also been among the most bought stocks on Bell Direct’s platform.

There has also been an element of bargain hunting in recent months in sectors significantly impacted by the pandemic.

Online travel agencies Flight Centre (ASX:FLT) and Webjet (ASX:WEB) were the top two most purchased stocks in May and June by under 40s, despite being affected by travel restrictions. This suggests investors are counting on a rebound of the tourism sector over the long term.

ETF activity reflects changing sentiment

Young people have increased their buying of exchange traded fund (ETFs) during COVID-19 as a fast and efficient way of obtaining diverse exposure across markets or sectors. Under 40s more than doubled their buying of ETFs during March, and as of July buying of ETFs remains well above pre COVID-19 levels.

In the months after the COVID-19 outbreak, the purchasing behaviour of ETFs highlighted a shift from international equities and toward the familiar territory of the local market. As each country dealt with the COVID-19 ramifications in their own way, many investors took this as an opportunity to focus domestically.

There was also increased buying of gold ETFs, as investors shifted gears and sought safety. Over the last five decades, gold has predominately been seen as a place to invest in uncertain times as it offers reserve currency characteristics (gold is considered a ‘store of value’).

With the US dollar losing its appeal amid growth in COVID-19 cases, demand for gold – and its price – has risen substantially.

Since April, as global share markets rebounded and then stabilised, we’ve seen the emergence of more risk appetite with global tech stocks, geared Australian equities (that provide leveraged exposure) and even crude oil amongst the most popular ETFs purchased by younger investors.

Young people rethinking savings approach 

With interest rates at all-time lows, an increasing number of young people are entering the share market as a way to take charge of their financial future and rethink their savings approach. It’s important to remember the share market can be risky, particularly with higher market volatility set to continue for some time. It’s crucial to have a plan and a long-term investment goal.

As part of this, consider your investment timeframe, keep costs low and diversify your portfolio. A well-diversified portfolio should include a mix of growth assets such as shares and property, along with more defensive assets like fixed income and cash, and have exposure to both domestic and global markets.

By ensuring you have the right balance of asset classes, you can put your portfolio in the best position to ride out share market volatility – and achieve your long-term goals and build wealth.

This article was first published on the ASX website on 4 September 2020.