SIM: Investors remain nervous about SA equity markets

Although South African investors increasingly believe that the SA equity market offers value, they indicated that they were more concerned about the possibility of a market crash. This was according to the latest Sanlam Investment Management Investor Confidence Index, a monthly survey of investor sentiment conducted in mid September. Furthermore, investors indicated a lack of confidence in the market’s ability to bounce back on a day after a big decline in the market. Contrary to the findings in the last survey, investors were also more bearish on the outlook for short-term expected returns.

Frederick White (pictured), head of research at SIM, the asset manager within the Sanlam Group said that the concern about a possible market crash was the worst it has been since inception of the survey (June 2007). “Institutional investors were especially bearish on this account, placing the average probability of a crash at 26 percent, a more than one-in-four chance that the markets will crash,” he said.

“This is probably not that surprising given the news flow at the start of the survey, which saw the collapse of the more than 150 year old Lehman Brothers, the buy out of Merrill Lynch to prevent it from going under, and talks of more struggling US bell-weather stocks.

White says, “What was also of interest this time was that 40 percent of respondents expected the market to decline further on a day following a three percent decline – the highest number of respondents to express this sentiment since the inception of the survey.”

However, White thinks that this could have been influenced by the movements seen in the first half of the survey period, where the market experienced a number of severely negative days in a row.

The survey for the SIM Investor Confidence Index was conducted during possibly one of the most volatile weeks in the history of global equity market, but prior to the unusual political developments that have recently unfolded.

For the week ending 19 September, the average daily move in the MSCI world equity index was three percent and in the S&P500 index it was almost four percent. During that week the S&P500 index first declined by 7.6 percent and then recovered by 8.5 percent in two days.

“The returns investors expected from the equity market have declined for most of the periods measured in the survey. The one month return has fallen even further to negative 1.4 percent, the three month return has fallen back to almost zero and the six month return has reduced to only three percent.”

Only the one-year expected return increased slightly to eight percent, although with mixed views between respondents, institutional investors were actually less optimistic than before and reduced their one year expected return down from 8.6 to 6.3 percent.

A very small percentage of respondents (ten percent) still believed the market was too expensive, while 42 percent considered it to be too cheap, which reflected the best ‘cheap to expensive’ ratio since inception.

“Given the severity of the fall in the markets both prior to the survey and during the first half of the survey, this is a very rational response and illustrates that investors are awaiting the right buying opportunity once they are comfortable that the risks in the markets have subsided somewhat. However, from their expected returns discussed above, it doesn’t seem like they think the time to buy is very near.

“But with the type of news flow hitting the markets at the moment, that sentiment could probably change very quickly,” he says.

“And in light of the unusual volatility during the survey period, one cannot but wonder how much the results of the survey have been influenced by the timing of responses and by the severe global market movements and the news flow accompanying them. I’m very interested to see the next set of results to determine any trends that the current results might suggest,” he concludes.