Institutional investors lose some confidence in the market

The second Sanlam Investment Management (SIM) Investor Confidence Index – which measures sentiment among South Africa’s equity investors on a monthly basis – has shown a decline in the confidence of institutional investors, especially with respect to the short term outlook, most likely in response to the continued sub prime fall-out and decline in US growth. Notably, 30 percent of institutional investors now believe there is a bigger than 10 percent chance of a stock market crash, while in October this figure was at zero percent. In marked contrast, confidence among financial planners remained largely unchanged from the October 2007 index, while short term confidence among this group actually improved.

The SIM Investor Confidence Index was launched last month in conjunction with the Institute of Behavioral Finance to survey the sentiment of South Africa’s equity investors. It is conducted among 80 to 120 anonymous fund managers – both independent and from investment houses – and financial intermediaries.

Frederick White, head of research at SIM, the asset management company within the Sanlam Group, said that the latest index was conducted during a time of weakening global equity markets. “The decline in the short-term confidence of institutional investors was consistent with the mounting uncertainty about the sub prime fall-out and rising risks to future earnings growth due to a worsening outlook for the US economy. Institutional investors probably expect that it will take between three and six months before there will be more clarity on how these market uncertainties will unfold.”

White added that, in contrast, the one-year outlook had remained largely unchanged from October. “This is consistent with the fact that the JSE was largely flat between the October and November 2007 survey periods. No respondents felt the market was cheap but slightly more than last month now felt it was fairly priced.”

Cobus du Plessis, marketing director of the Institute of Behavioral Finance said the November results showed that financial advisors looked at the market, saw a recent spate of positive returns (prior to the survey period), and expected it to continue in that way. “In contrast, institutional investors have more in-depth experience of the share market and this often leads them to over predict reversals,” said du Plessis.

White said that over time the index would allow this divergence in the views of institutional investors and financial planners to be monitored. “Institutional investors have the benefit of in-house economists and up-to-date market research and are often much closer to breaking news. Advisors, on the other hand, know that good news sells and have an incentive to err on the side of optimism. Only time will allow us to draw conclusions as to which group is a more accurate predictor of real change in markets.”

Who, then, should the individual investors turn to for help? Du Plessis said that “a happy medium somewhere between the optimists and pessimists” was the wise way to go.