Economic downturn spurs paradigm shift in investor behaviour, says Barclays Wealth report

This report sheds light on the common concerns and hopes encountered by HNWIs from across the globe in relation to the cyclical movement of world economies and how this is affecting investor behaviour.

Fear is preventing the wealthy from investing, even where they see opportunity

While prospects for most asset classes and the global economy remain highly uncertain, recent market rallies and wider discussion of the 'green shoots' of recovery have raised the question of whether a turn in the cycle may be imminent.

A widespread sense of caution and risk aversion highlights the extent to which wealthy investors have been chastened by the events of recent months and suggests that it may be some time before confidence returns to the market.

For instance, nearly 90% of respondents globally said that there were opportunities in the current market but, crucially, 68% of them believe that the risks of further price falls are still too high to consider them.

In general, though, there is a very strong consensus that now would be a good time to make certain investments. Yet at the same time, fear is preventing the majority of high-net worth individuals from re-entering the markets.

Soha Nashaat, Chief Executive of Barclays Wealth Middle East, said:

"High-net worth investors should not be considering what happens over the next month as important, but rather what happens over the next five, ten or twenty years. With an appropriate time horizon in mind, short-term fluctuations in market prices become less important and the real value of investment opportunities can be more objectively assessed."

21% of respondents in the United Arab Emirates feel that there are significant investment opportunities in the current market and 36% will increase their level of risk over the next 12 months, this is the second highest in ranking following UK respondents who will increase level of risk by 37%.

Again, the UK leads in willingness to make higher-risk investments at 32%, USA at 31%, and UAE at 27% compared to the remaining seven economies including, Hong Kong, Canada, Switzerland, Singapore, Monaco, India and Spain.

High-net worth investors are sticking with the status quo

Evidence of this trepidation sees the majority of surveyed investors saying that they would make no adjustments at all to the proportions that they hold across major asset classes over the next 12 months. For example, globally, 58% said that they would make no change to their allocation of domestic stocks, while 65% said that they would neither increase nor decrease their exposure to hedge funds.

Behavioural finance experts questioned for this report suggested that a pervasive 'fear of regret' is impeding more decisive action among many wealthy investors, and encouraging them to stick with the status quo until they feel they have a better understanding of the situation.

Nashaat continues, "One of the consequences of this sensitivity to loss is that investors become reluctant to make changes to their investment strategy or asset allocation. However, it is necessary to review one's asset allocation to best leverage current and predicted market conditions lest the investor miss the inevitable positive turn in the cycle."

High-net worth investors are seeking the comfort of simplicity and familiarity

The current perceived instability in the market has also driven investors to seek out simpler and more transparent investment opportunities. More than 50% of investors agree that, in the current environment, they will only invest in what they know.

Where respondents are seeking greater exposure to specific assets, it tends to be to the most straightforward, with real estate, cash, government bonds and domestic equities the most likely beneficiaries of increased allocation. The perception that complexity, in the shape of financial assets such as collateralised debt obligations, played a central role in the current crisis is only exacerbating this trend.

The survey reveals regional differences in expected changes to allocation. At 31%, respondents from the UAE are most likely to increase their allocation to real estate regionally and internationally, while those from the US are more likely to increase allocation to domestic equities.

In the case of the investors from the UAE, one can explain this tendency on the grounds of a strong preference for 'bricks and mortar' investment - despite the scale of the recent property crash in Dubai. Meanwhile, the expected increase in allocation to domestic stocks in the US reflects a longstanding faith in the equity culture that may not be as prevalent in other regions.

Transparency and quality of information are becoming watchwords for wealthy investors

A further result of the current environment of caution is of due diligence moving up the priority list for many high-net worth individuals, with almost one half of respondents saying that they intend to increase the amount of time that they spend selecting specific investments.

Equally, when choosing a financial provider, the quality and transparency of investor information is becoming much more important as a criterion for selection, along with the financial stability of the institution.

This report has focused primarily on the ways in which human behaviour can affect investment decision-making. At a time when the global economy shows some signs of stabilising, but when investors continue to face situations that they find difficult to interpret, it is all the more important to see through the fog of behaviour that can run counter to the investor's best interests and understand how it can adversely impact future prospects.

During a boom, rising markets draw investors along in their slipstream and lead to overconfidence and an underestimation of risk. Then, when markets turn, they see a mirror image in terms of investor behaviour. Risk becomes overestimated and there is a pervasive lack of confidence.

Investment often involves striking a balance between emotional and financial considerations. High-net worth individuals want their investments to perform well, but they also want to feel comfortable with their choices.

Nashaat concluded, "Behavioural economics employs our understanding of psychology to explore how human actions can often deviate from the classical 'rational' model. Rather than making self-interested decisions based on a careful assessment of cost and benefit, it suggests that individual investors are susceptible to a whole host of cognitive biases that can influence their actions. If it is indeed the case that the green shoots of recovery are now pushing through, high-net worth investors may now need to consider changes in asset allocation as financial markets typically discount a recovery four to six months before it occurs."