This content is produced by The Australian Financial Review in commercial partnership with IG.

Australia's army of online traders has surged to its highest-ever levels, passing 700,000 people for the first time. Within that, the number of frequent traders has also pushed to record levels and these traders are extending their activity both offshore, into international shares, and in instruments, with cryptocurrency increasing in popularity.

Tempering this surge into the market is the indication that Australian investors' share market return expectations have turned negative, for the first time since the global financial crisis, as the potential concerns mount.

According to Investment Trends, the number of active Australian retail online share traders (those who have placed at least one trade within the last six months) was in the 600,000-650,000 range for most of the period between 2010 and 2017 – with the exception of a slump to 530,000 in 2013. But in the most recent instalment of the firm's biannual survey, in May 2018, the number had jumped to a record level of 720,000 people, a 12 per cent spike from the 645,000 in December 2017.

"Far fewer people stopped trading in the most recent six-month period, dormant clients came back, and we had a healthy number of new investors coming to the market," says Recep Ill Peker, research director at Investment Trends. "Over the six months to May 2018 we say that 72,000 people had started trading within the last six months, and a further 67,000 traders came back to the market."

As at May 2018 there were 58,000 "frequent" traders in Australia – those who make more than four trades in a six-month period – up 7.4 per cent from 54,000 in 2017. Back in 2013, there were 44,000 traders in this category.

Downturn in sentiment

In addition to the healthy growth – in overall trader numbers, and in "frequent" traders – what traders invest in is also changing. "As you would expect, Australian shares are still a key part of that activity – about 97 per cent of people say that they hold or trade Australian shares," says Peker. "Exchange-traded funds (ETFs) are growing: 22 per cent of the online trader population say they use ETFs, up from 19 per cent a year ago. Trading international direct shares is also growing: in May 2017, 16 per cent of online traders said they used international listed shares, that rose to 19 per cent in May 2018."

The frequent traders also say they invest in cryptocurrency (10 per cent); derivative instruments (8 per cent); and leveraged products (5 per cent), mostly contracts for difference (CFDs).

"The growth in the frequent trader population, to reach the highest level ever in 2018, is substantial given the lukewarm performance of the Australian share market over the past few years," says Peker. "While domestic shares are the core of what they do, the top traders in Australia are broadening the range of investments they use, particularly by investing directly in shares listed overseas."

But the cloud overshadowing the surge in trader numbers is a downturn in sentiment among the investor population in general. Last month, Investment Trends found that Australian investors' share market return expectations had turned negative, for the first time since the GFC. This is just eight months after the February 2018 survey, in which, when asked to rate their level of concern with the situation in the world's financial markets, the average investor was the least concerned since the GFC.

"The forward-looking return expectations of Australian investors fell sharply in October, in line with the performance of the market. Aussie retail investors are now expecting a negative return over the next 12 months – the first time return expectations have gone negative in Australia since we began tracking this in 2009," says Peker. "Investors now believe we're in a bear market, on average expecting domestic markets will be lower in 12 months' time than where they are today."

Major global issues

While October's volatility – which saw the volatility gauges of both the US and Australian stock markets double at one stage in the month – played a role in driving this pessimism, investors were more concerned about major global issues.

Geopolitical events are casting a darker shadow over investors' outlook than domestic issues, with investors most concerned about the current White House administration (46 per cent); trade tension between the world's major economies (40 per cent); global debt levels (33 per cent) and a China slowdown (32 per cent). "Investors and traders are more worried about what's underpinning the volatility than the volatility itself," says Peker.

"Whether directly or indirectly, Australians are concerned about the economic outcomes of the current White House administration and the trade policies being implemented both by the US and in response to them," he says.

Kevin Algeo, chief executive officer, IG Australia and New Zealand, says investors and traders are aware that "they've only seen the beginning" of the long process of global central banks readjusting monetary policy toward a more "normal" interest-rate setting.

"Interest rates went so low, and stayed there for so long, that investors started to see that as a kind of new normal," he says. "But it wasn't, it was an extreme emergency interest-rate setting, in response to the GFC, that happened to stay in place for much longer than anyone expected."

Coordinate their activity

As the process of "normalisation" of interest rates proceeds over the next few years, there are "bound to be hiccups along the way," says Algeo – and traders are very wary of that. "It was always going to be the big juggling act for central banks – they have to carefully adjust rates while making sure that they support growth.

"But I don't think they're going to do anything silly: central bankers are always looking at the broader economy and trying to coordinate their activity with that. They're well aware of the effect that higher interest rates could have in certain areas. It's not normally a linear process – central bankers will pause or even reverse the process if they think that it's affecting the outlook for growth or employment, depending on the mandate of each central bank," says Algeo.

After some of the shocks that markets – and their users – have absorbed in recent years, such as the election of Donald Trump as US President, the Brexit vote, missile crises in North Asia and differences between the US and China flaring up into trade hostilities (if not yet a fully declared trade war), traders "should know full well that market confidence is fragile," says Algeo.

"There are some general themes of concern, globally: debt, and Chinese debt in particular; and geopolitical concerns never really go away," says Algeo. "After the last few years, I think that traders are very aware of the opportunities that can come along, but also of the need to monitor and manage their risk constantly."