How investor behaviour has transformed over the last two decades

Tectonic Shifts

The global financial landscape has undergone a profound transformation since the 2008 financial crisis, catalysing significant changes in investor behavior and market dynamics. The collapse of the housing market and the bankruptcy of Lehman Brothers triggered a devastating financial crisis, characterised by widespread panic in the markets and a drastic erosion of investor confidence.

A notable example of the market’s volatility during this period can be observed in the performance of the Bombay Stock Exchange Sensex. In 2008, it plummeted from approximately 21,000 points to around 8,000 points. This dramatic fall was a result of the widespread panic and market uncertainty that gripped the world at that time. 

A similar pattern of volatility was witnessed in 2020, when the COVID-19 pandemic led to unprecedented market fluctuations. The Sensex dropped from 46,000 points to 26,000 points within a single month, primarily due to the implementation of lockdown measures. However, the recovery in the aftermath of the pandemic was notably more rapid, facilitated by government interventions, an increase in global liquidity, and a quicker adoption of digital technologies. 

Despite the rapid recovery, the current market conditions continue to be characterised by various factors that are contributing to the market’s weakness. These include the economic slowdown, anticipation of increased interest rates, geopolitical tensions, inflationary pressures, disappointing corporate earnings, and a general sense of uncertainty among investors.

The analysis suggests that this drag on the market could persist for a couple more months, as investors continue to grapple with these challenges, and hence strategising investments and trade will remain extremely crucial.

Over the past two decades, particularly since 2008, stock markets have undergone significant transformations, driven by various factors such as technological advancements, regulatory changes, shifts in investor behavior, and changing market dynamics. These developments have fundamentally altered the methodologies employed by individual and institutional investors in their trading and investment strategies, enhancing market accessibility while introducing new risks and dynamics. 

One of the most notable trends since 2008 has been the rise of algorithms and high-frequency trading (HFT). This has enabled firms to execute trades at unprecedented speeds and volumes, leading to increased market efficiency and heightened concerns regarding market volatility during periods of stress.

The past two decades have also seen a marked surge in the use of retail investors, who have entered the market through online brokerages and trading platforms. The rise of commission-free trading has further democratised access to stock markets for individual investors, facilitating more frequent trading and emphasising convenience and accessibility.

Moreover, the proliferation of mobile banking and trading applications has further enhanced the accessibility of stock markets for individual investors. Robo-advisory platforms, which provide automated investment management services, have also emerged as a significant phenomenon since 2008. These platforms typically employ algorithms to create and manage diversified portfolios tailored to individual risk profiles, offering low-cost investment solutions. Simultaneously, the availability of financial data has surged, equipping investors with sophisticated tools for data analysis and financial modeling. Investors now have access to professional-level research and analytics through various platforms, enhancing their decision-making capabilities. 

However, the evolution of the stock markets has not occurred in a vacuum. Geopolitical tensions, global pandemics, and economic uncertainties have influenced shifts in investor sentiment and trading behavior, leading to increased market volatility.

Another notable phenomenon that has garnered significant attention since 2008 is Environmental, Social, and Governance (ESG) investing. A growing number of investors are considering a company’s ESG practices when making investment decisions, significantly impacting corporate operations and reporting practices.

Moreover, contemporary investment methodologies, such as exchange-traded funds (ETFs), have gained popularity as low-cost, diversified investment options, contributing to a shift towards passive investing strategies as opposed to traditional active management.  

In conclusion, the dual crises of 2008 and 2020 have catalysed substantial shifts in stock market dynamics and investor behavior, paving the way for a more complex and interconnected financial ecosystem.

As stock markets continue to evolve, investors need to remain adaptable and informed to navigate the challenges and opportunities presented by these changes.

(The author is COO & CDO, HDFC Securities)