Social media: investors' friend or foe?
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While Morningstar's methodology of buying superior businesses based on long-term fundamentals is the most effective way to generate wealth in the share market, it may also pay to keep an eye on social media.
US President Donald Trump's love for Twitter has had investors scrambling to keep up, with automakers, defence, and pharmaceuticals companies among those to suffer the share price impact.
But social media also has its benefits, particularly for smaller listed companies, according to recent Australian research.
Morningstar's head of equities research, Peter Warnes, has warned of a "higher-risk world" in 2017, with "risk-on" investments performing strongly since Trump's election victory.
Yet the billionaire businessman-turned-politician's penchant for tweeting his daily thoughts already has market watchers on edge.
According to The Los Angeles Times, sophisticated traders with automated programs are using computer algorithms to capture Trump's tweets and trade on the results.
In one example, a Trump tweet caused Toyota's US-traded shares to drop by nearly 1 per cent, losing US$2 billion (A$2.6 billion), after he expressed his displeasure that the Japanese automaker planned to build Corolla cars for US sale at a new plant in Mexico.
"NO WAY!" Trump tweeted. "Build plant in US or pay big border tax."
In another case, shares in US aircraft manufacturer Boeing dived by US$2 before market opening after Trump commented: "Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!"
However, shares have moved upwards on Trump's tweets too, including Japanese telecommunications firm Softbank, which gained 5.5 per cent on Trump's praise of its reported plan to invest US$50 billion in the United States.
Investors seeking to trade on these tweets could use one of the smartphone apps already developed to monitor Trump's tweets. However, swift action could be vital, since most of the stocks affected quickly recovered their losses.
"If you decide to make a strategy on [Trump's] tweets, you better make it a buy strategy--because [Trump's criticism] clearly hasn't had any lasting effect," CNBC markets analyst Jim Cramer said.
Trump is not the first public figure to move markets, however. US biotech stocks dived in September 2015 after then US presidential candidate Hilary Clinton tweeted about her plans to take on "price gouging" in the specialty drug market.
Past tweets by billionaire US investor Carl Icahn and Tesla Motors chief executive Elon Musk have also hit share prices in the stocks they mentioned.
While Trump's tweets have hit the headlines, a recent Australian study has pointed to the broader significance of social media for stock investors.
According to Victoria University's Dr Maria Prokofieva, ASX-listed companies that tweet corporate news can affect their share prices, even if their social media posts contain no new information beyond that already available via the stock exchange.
Based on a study of 3,516 corporate announcements made by companies over the period from 2008 to 2013 via the ASX, Dr Prokofieva found that information provided via social media can "unintentionally influence" investor decisions.
"While a common belief is that prices in the market reflect all available information, the reality is far from this. Individual investors are limited in time and resources and are unable to track all securities and release of all new information," she told ABC News.
"So, companies that put extra effort to reach their investors are rewarded; they are able to grab the investors' attention and lead them closer to the decision to invest."
She said the benefit was greatest for smaller companies that have less analyst and media coverage, but which could use platforms such as Twitter to reach investors.
A 2013 report by BRR Media found that 78 per cent of ASX 200 companies were using at least one social media channel. LinkedIn was their favourite platform, used by 58 per cent, followed by Twitter at 47 per cent.
However, social media has also been used against ASX companies. Market rumours spread over social media against then listed retailer David Jones and miner Whitehaven Coal (ASX: WHC) caused a significant hit to their stock prices.
Significantly, US research has shown that online search activity can predict price movements in stock markets, and even in the residential property market. The greater the search intensity, the greater the price effect, according to Costas Milas, a finance professor at the University of Liverpool.
For Australian investors, Morningstar's philosophy of buying shares in superior businesses based on their long-term fundamentals and allowing them to compound over time is considered the most effective way to generate wealth in the stock market.
But it might also pay also to keep an eye on those companies, corporate and political leaders that are most active on social media, since the rest of the market will be too.
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Anthony Fensom is a Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind. Opinions expressed herein are subject to change without notice and may differ or be contrary to the opinions or recommendations of Morningstar as a result of using different assumptions and criteria. The author does not have an interest in the securities disclosed in this report.
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