Some say it’s better to focus on what’s on the inside, but in stock markets the opposite can also be true. Portfolio mix changes, fund flows and offshore markets are big drivers of general daily market moves.
Stocks on the ASX might rise or fall on large volumes with no obvious market-moving factor in sight.
The reasons for this can be varied. It could simply be a superannuation firm taking its funds management in-house instead of paying large fees to an external fund manager, whose performance might just be tracking the index at best.
And if matching the index is a measure of average performance, it explains the exponential rise globally in index and exchange-traded funds, which follow the moves of an entire stock exchange, such as the ASX or the Nasdaq.
These, by their nature, generally offer an average performance and a low cost. Not as sexy as high performance at a high cost, but in these times of cost cutting it’s likely to be more attractive than low performance at a high cost.
When a stock is suddenly included or excluded in an index, either domestic or global, that can also play into its price. The move to include major Australian stocks in the MSCI Global Growth Index – an index that tracks stocks with “growth-style characteristics” in 23 different countries – is a case in point.
These inclusions might trigger a share price rise as fund managers who track that index need to buy in; or conversely sell, if a stock is excluded. Their requirement to move on the stock could move the price.
Other major volume changes come when large funds change their portfolio mix to or from high-risk, medium risk, low-risk or passive (usually those are the index tracking funds.) Other times it can be a switch in the mixture of domestic to international stocks.
In those cases, investors might need to buy or sell shares regardless of their performance in order to meet the new criteria.
Making the science of stock market performance even murkier, a change in chief investment officer could trigger a major sell-off or buy-in of a stock because the new boss might just want to stamp their own influence on the fund.
There are also external factors that could impact on a share price, because of the perceived rather than definite risk into future profitability.
Chinese property sales and manufacturing can impact on Australia’s resource heavy stock-market. Many traders look at the China PMI to try predict the future resource needs of the country that accounts for about half the world’s demand for base metals.
In recent times Australian stock market traders have been keeping a close eye on US wage growth as a spike in wages could mean the US Federal Reserve will consider raising interest rates. A rise in rates has ramifications for equity markets across the globe, including Australia.
Domestically, a fall in unemployment might encourage the RBA to keep interest rates on hold or potentially trigger a rise, whereas a fall in the unemployment rate could encourage the RBA to cut rates. Movements in rates can impact on currency and bonds, which all in turn can affect the stock market.
Wage growth, unemployment and capital investment and consumer confidence indexes also can all lead to a change the investment outlook for a stock, causing a rise or fall in a stock price, even though these measures are prone to changes.
So what does it all mean? Sometimes what’s going on in the wider world might be just as important as the balance sheet of the stock you are following.
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