Asset Management confidence falls, despite record equity indices

A survey released by EY today, indicates that confidence in the asset management industry fell again in the second quarter of 2014, despite the local stock market hitting new record territory throughout the quarter.

This is the 46th quarterly survey conducted to measure confidence in the asset management industry, and the research is conducted by the Bureau for Economic Research in Stellenbosch.

Overall confidence fell from 77 index points in the first quarter to 66 currently. The weaker confidence was once again solely attributable to the sentiment of large managers. Asset manager confidence levels remain below long-term average levels, and asset managers are no longer the most confident in the financial services sector.

EY Asset Management Confidence : JSE ALSI Index

Chris Sickle, Asset Management lead director at EY points out that the decline in confidence is driven solely by the large asset managers, who continued experiencing slower inflows in the second quarter. “Inflows slowed sharply in the first three months of 2014, and this continued into the second quarter of the year. The large managers were most impacted, with small fund managers still largely immune to this trend.”

The survey found that small asset manager confidence was stable, marginally down from 85 index points to 84 index points in the last quarter. Large manager confidence, by contrast, fell from 74 points to 60, its lowest reading in over two years.

Sickle points out that although our local stock market continues to hit new record territory on a frequent basis, there is concern that the market is expensive, and there is very little upside potential going forwards. He says, “Asset managers are still enjoying strong equity gains, but at the same time, they are starting to see investors hold back on committing additional funds. Investors are concerned that the equity market is overvalued, and are therefore anxious, perhaps even taking profits and building up cash reserves.”

Sickle further adds, “There is another factor at play here. Strong equity markets are not in sync with the local economy, which has been under pressure for a while now, and which actually contracted in the first quarter, with expectations that third quarter growth will be equally sluggish. Whilst corporate earnings have held up well in this climate thus far, and although African earnings are driving some of the profits growth, in the longer term, it will be difficult for corporate earnings to grow at the rates we have seen thus far in 2014. This is another indicator that markets may be expensive, and provides additional reason for asset managers to adopt a more cautious approach and therefore less confident.”

Other survey findings include:

Large firms experienced net outflows more visibly than their smaller peers.
Net profits growth slowed on the back of weaker income growth.
Sharply higher expenses played a strong role in contributing to the lower profits growth too – expenses increased at a record high pace during the 2nd quarter.

Sickle concludes, “Until recently, asset managers were able to largely ignore the slow economic growth impacting the country. However, it now appears that the reality of a slow growth environment is impacting asset managers, who are in turn, far less confident about their prospects than what they were through the previous few quarters. Corporate earnings are unlikely to grow at the strong pace recorded thus far, and consumer facing sectors are likely to be particularly hard hit. Identifying shares with strong growth potential in this environment has become a lot more difficult. We are not surprised that confidence is lower than we have experienced in a while.”