J.P. Morgan Fund Manager

Behavioural finance in the post-Brexit world

Anthony Lynch discusses the fact that powerful emotions and rational decision-making rarely go hand in hand.

Go to the profile of Anthony Lynch
Oct 30, 2017
0
0
Upvote 0 Comment

Whichever way you voted in the Brexit referendum, it’s been emotional. But powerful emotions and rational decision-making rarely go hand in hand. As people—and as investors—we’re instinctively drawn to popular decisions, seizing on that popularity as confirmation of our choice. After all, if our decision turns out to be wrong, at least we’re not on our own. 

The four types of behavioural bias

This behavioural bias comes in four classes types. The first is anchoring. When analysts make an earnings estimate, they tend to stick to it, even if new information changes things. The second is herding, where analysts follow the crowd on consensus and guidance. The third is overconfidence. We sometimes see this when management teams allow their peripheral businesses to divert focus away from their successful core business. And fourth there’s loss aversion. When negative newsflow causes a company’s share price to underperform, the fear of locking in losses often prompts investors to cling on in the hope that the stock will bounce back, rather than getting out quickly. 

The path of least resistance

So how do herding and anchoring work in practice? Take sell-side research analysts, who cluster around consensus estimates for profit figures. If one analyst believes the true figure lies nowhere near the estimates of his peers, the easiest option is to rein back his numbers closer to consensus. This means that if he’s right, he looks clever; and if he’s wrong, he’s not that wrong. So analysts tend to gradually revise up their estimates—over and over again—with experience teaching us that once an upgrade happens, there’s a 70% chance of another one.

At a sector level, if we compare the number of houses built since 2008 against the average number of houses needed based on household formation growth rates, it’s clear to see that we have created a structurally undersupplied market. The introduction of the Help to Buy scheme has also introduced greater certainty of mortgage availability for first time buyers, providing a steady stream of buyers for product regardless of short-term market conditions. But the planning process is time-consuming and complex, making it difficult for new entrants to break into the market, despite the high margins to be made. 

A huge sell-off based on emotion, not fact

So how did the Brexit vote affect housebuilders? In the immediate aftermath of the referendum, there was a significant sell-off: for example, Redrow was down over 75% intraday [Source: Bloomberg as at 30 September 2017] - a purely emotional price that had nothing to do with the actual market. Gradually, people became more comfortable with the reality of the market and began to see it as a buying opportunity. Meanwhile, the big developers  continued to grow volumes and increase selling prices, resulting in better than expected earnings and a recovery in their share prices. Around Brexit, analysts were slashing their numbers because they were scared, but then had to revert to their original numbers after Bellway’s reporting showed that nothing had really changed. 

The UK Equity Core Fund

Specially designed to aim at capitalising on the market inefficiencies created by behavioural bias, our UK Equity Core Fund is built on a proprietary, bottom-up investment approach. Read more about the fund: 

UK Advisers 

For Professional Clients only – not for Retail use or distribution

This is a promotional document and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the product(s) or underlying overseas investments. Both past performance and yield may not be a reliable guide to current and future performance. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment product(s), there can be no assurance that those objectives will be met.

J.P. Morgan Asset Management is the brand name for the asset management business of JPMorgan Chase & Co and its affiliates worldwide. You should note that if you contact J.P. Morgan Asset Management by telephone those lines may be recorded and monitored for legal, security and training purposes. You should also take note that information and data from communications with you will be collected, stored and processed by J.P. Morgan Asset Management in accordance with the EMEA Privacy Policy which can be accessed through the following website http://www.jpmorgan.com/pages/privacy.

Investment is subject to documentation which is comprised of the Prospectus, Key Investor Information (KIID) and either the Supplementary Information Document (SID) or Key Features/Terms and Conditions, copies of which can be obtained free of charge from JPMorgan Asset Management Marketing Limited. Issued by JPMorgan Asset Management Marketing Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Registered in England No: 288553. Registered address: 25 Bank St, Canary Wharf, London E14 5JP. 854118d0-b7e1-11e7-95a0-005056960c8a


Go to the profile of Anthony Lynch

Anthony Lynch

Portfolio Manager, J.P. Morgan Asset Management

No comments yet.