Capita Registrars: Private investor watch 2006 review

Private investors cash in on their 2006 stock market winnings, taking home £14.5bn.

Since the end of January, private investors have cashed in on the rising value of the stock market. Over the period they have sold a net £8.8bn, equivalent to 4.4% of their holdings. Despite this selling, private investor holdings rose by £5bn as positive market movements outstripped the value of shares they sold. At the end of November, private investors owned £203bn of equities, 11.4% of the market, and equivalent to £3,459 for every man, woman and child with the UK.

Over the course of the year, private investors traded £29bn of stock, equivalent to almost 15% of their holdings but they became more active as the year progressed. In the six months to the end of November, they traded one eighth of their portfolios (12.3%), compared to just one fiftieth (2%) in the preceding four months. Between August and November, they both bought and sold in enthusiastic two-way trading, in contrast to the first half of the year when they sold all the way. In October and November they turned over £10.2bn of stock, ten times more than the £1bn traded in April and May.

John Roundhill, Director of Capita Registrars commented: “Private investors have had a good year. Not only have they released cash from the market as it has risen, but they have also received almost £6bn in dividends. This £14.5bn total means on average, £560 for each household in the UK and may have contributed to the slowdown in consumer borrowing this year. On top of that they have enjoyed another £5bn of capital gains.
2006 was a boom year for mergers and acquisitions and that has stimulated some of the buying and selling. However the increased buzz in the stock market also seems to be stirring investors to review their holdings more actively.”

Did private investors make the right decisions in 2006? Yes.

Capita Registrars measured the success of private shareholder investment activity in in each two month period. Over the course of 2006, private investors correctly timed the market twice (the market fell once following their selling and rose once following their buying) and timed it incorrectly twice, a success rate of 50%. However, they were more successful with their sector choices. 20 sector choices were successful, while in only 12 instances did the market move against them.

John Roundhill commented: “Private shareholders did well with their sector investments, correctly predicting the short term direction of the share prices in each sector two thirds of the time. Of course private investors tend to take a long-term view when buying shares, so looking only at the immediate results does not give the full picture.”

Sector Activity During 2006

Despite financials being the largest sector in the index, consumer services saw the heaviest selling in 2006. This sector includes retailers, leisure and travel stocks. Consumer goods by contrast were the most popular sector and saw over £2bn net buying in 2006.

John Roundhill concluded: “Defensive sectors like healthcare and consumer goods were popular with investors in 2006, while cyclical sectors like consumer services and financials were out of favour. This reflects the change in the interest rate environment – higher interest rates pushed investors into sectors less affected by the economic cycle.
There is anecdotal evidence that some parts of the retail sector had poor Christmas trading. Added to this the travel industry has been hit by high fuel prices, the impact of new security measures and the recent announcements of higher airline taxes. This seems to justify private investors’ decision to avoid the consumer services sector.”