Don’t expect real growth from equities in the next 12 months

Results from the South African Investor Confidence Index – a monthly survey conducted by the Institute of Behavioural Finance (IBF) among institutional investors and financial advisors

Financial advisors have a more optimistic outlook on expected equity returns and the market valuation of local equities than institutional investors, according to the latest South African Investor Confidence Index.

Institutional investors who participated in the South African Investor Confidence Index survey earlier this month expect zero nominal returns from JSE equities over the next six months and negative real returns over the next 12 months. The financial advisor participants still hope for an average expected return above inflation from JSE equities over the next six and 12 month periods.

“The financial advisors expect returns to be 2.65 percent higher over the next six months and 3.45 percent higher over the next 12 months than the returns expected by institutional investors,” says Gerda van der Linde, executive director at the Institute of Behavioral Finance.

“Almost 70 percent of the institutional participants believe the market is currently expensive, while the balance sees the market as fairly priced,” she says. “Half of the financial planners view the market as expensive, while the other 50 percent believe the market is fairly priced.”

Positive feedback reflects in the Crash Confidence Index, with 73 percent of institutional participants thinking there is a less than 10 percent chance of a catastrophic market crash occurring. This is the fourth time since the inception of the survey in 2007 that at least 70 percent of institutional participants have voiced confidence in the sustainability of the current levels on the JSE, says Van der Linde.

“In analysing the results of the index, the message for South African investors may well be that financial advisors are more optimistic about the market than market signals justify,” she says.

In light of this, financial advisors’ views may differ from their clients’ expectations of equity returns over the next 12 months. She believes any major differences in views may well adversely influence financial advisors’ relationships with their clients.

A recent study by a Boston-based investment management company found that financial advisors misperceive clients’ sentiments and motivations about investment types and risk tolerance. Financial advisors should note from this study that improved communication is essential to better understand clients and clarify perceptions, she says.

“Financial advisors need to rethink how they communicate with their clients. They should focus more on asking questions and listening to their clients’ answers, as well as discussing with their clients risk tolerance and the impact of risk on investment returns over various investment periods.

“This strategy may prove to be vital in retaining clients’ trust,” says Van der Linde. “The only way for a financial planner to get the client on the same side of the table is to increase communication – and communicate even more in volatile market conditions.”

She notes that a key insight is to guard against being unduly influenced by noise from headlines while making long-term investment decisions. The average investor may be tempted to focus narrowly (myopically) on market volatility when considering investment risk.

Furthermore, the results from the index suggest that market expectations may be limited. Investors should thus not be impatient to enter the equity market.

“In the near future, the best investment strategy may well be one of phasing investments into equity portfolios. This rational investment approach will ensure one does not miss the lows in the volatile market and it reduces the impact of high prices,” says Theo Vorster, chairman of the Institute of Behavioral Finance.