First in and first out - China as the vanguard for COVID-19 recovery
China’s path to normalisation offers guidance for other countries’ exit from the lockdown. Where are the opportunities for investors?
Nov 9, 2020
While financial markets and traded instruments have become increasingly complex in recent decades, at heart they remain a product of their human participants. In everyday life, human instinct can be helpful, but it can be incredibly unhelpful in a financial setting. For example, fear of regret nudges investors to jump on bandwagons (or ‘herding’), while fear of loss often outweighs the desire for gain.
These behavioural traits are illustrated by recent market volatility. Loss aversion initially drove markets lower as COVID-19 struck, only to be replaced by fear of missing out which subsequently led to significant rallies.
Such volatility and trend reversals make it difficult for investors to assess what is and will be enduring. This is where we believe the combination of a structured process and in-depth focused fundamental research has benefits for investors. Exploiting and understanding behavioural bias enables investors to tune in to see where prices may be distorted and turn off the noise to objectively weigh up the opportunities. In this viewpoint, we explain the ones that we believe are prevalent in markets today and how we aim to avoid and exploit behavioural bias.